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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: June 30, 2002
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: 1-13542
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
(Exact name of Registrant as specified in its charter)
IRSA INVESTMENTS AND REPRESENTATIONS INC.
(Translation of Registrant's name into English)
REPUBLIC OF ARGENTINA
(Jurisdiction of incorporation or organization)
BOLIVAR 108
(C1066AAB) BUENOS AIRES
ARGENTINA
(Address of principal executive offices)
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SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
GLOBAL DEPOSITARY SHARES, EACH REPRESENTING NEW YORK STOCK EXCHANGE
TEN SHARES OF COMMON STOCK
COMMON STOCK, PAR VALUE ONE PESO PER SHARE NEW YORK STOCK EXCHANGE*
-----------------------------
* Not for trading, but only in connection with the registration of Global
Depositary Shares, pursuant to the requirements of the Securities and
Exchange Commission.
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO
SECTION 12(g) OF THE ACT: NONE
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO
SECTION 15(d) OF THE ACT: NONE
The number of outstanding shares of the issuer's common stock as of
June 30, 2002 was 207,411,988
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the Registrant has
elected to follow.
Item 17 [ ] Item 18 [X]
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TABLE OF CONTENTS
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
Page No.
--------
Disclosure Regarding Forward-Looking Information..................................................... 4
Certain Measurements and Terms....................................................................... 4
Presentation of Financial and Certain Other Information.............................................. 5
Market Data.......................................................................................... 7
PART I
Item 1 Identity of Directors, Senior Management and Advisers.................................. 8
Item 2 Offer Statistics and Expected Timetable................................................ 8
Item 3 Key Information........................................................................ 8
(a) Selected Financial Data.......................................................... 8
(b) Capitalization and indebtedness.................................................. 13
(c) Reasons for the offer and use of proceeds......................................... 13
(d) Risk Factors..................................................................... 13
Item 4 Information on the Company............................................................. 36
(a) History and Development of IRSA.................................................. 36
(b) Business Overview................................................................ 37
(c) Organizational Structure......................................................... 66
(d) Property......................................................................... 69
Item 5 Operating and Financial Review and Prospects........................................... 69
(a) Consolidated Operating Results................................................... 69
(b) APSA's Results of Operations..................................................... 96
(c) Research and development, patents and licenses, etc............................ 111
(d) Trend Information................................................................ 111
Item 6 Directors, Senior Management and Employees............................................. 113
(a) Directors and Senior Management.................................................. 113
(b) Compensation..................................................................... 115
(c) Board Practices.................................................................. 118
(d) Employees........................................................................ 118
(e) Share Ownership.................................................................. 119
Item 7 Major Shareholders and Related Party Transactions...................................... 120
(a) Major Shareholders............................................................... 120
(b) Related Party Transactions....................................................... 122
(c) Interests of Experts and Counsel................................................. 125
Item 8 Financial Information.................................................................. 125
2
(a) Consolidated Statements and Other Financial Information.......................... 125
(b) Significant Changes in Interim Period............................................ 127
Item 9 The Offer and Listing Details.......................................................... 129
(a) Offer and Listing Details........................................................ 129
(b) Plan of distribution............................................................. 131
(c) Markets.......................................................................... 131
(d) Selling Shareholders............................................................. 135
(e) Dilution......................................................................... 135
(f) Expenses of the Issue............................................................ 135
Item 10 Additional Information................................................................. 135
(a) Share Capital.................................................................... 135
(b) Memorandum and Articles of Association........................................... 135
(c) Material Contracts............................................................... 140
(d) Exchange Controls................................................................ 140
(e) Taxation......................................................................... 141
(f) Dividends and Paying Agents...................................................... 147
(g) Statements by Experts............................................................ 147
(h) Documents on Display............................................................. 147
(i) Subsidiary Information........................................................... 148
Item 11 Quantitative and Qualitative Disclosures About Market Risk............................. 148
Item 12 Description of Securities Other than Equity Securities................................. 150
PART II
Item 13 Defaults, Dividend Arrearages and Delinquencies........................................ 150
Item 14 Material Modifications to the Rights of Security Holders and Use of Proceeds........... 151
Item 15 Reserved............................................................................... 152
Item 16 Reserved............................................................................... 152
PART III 152
Item 17 Financial Statements................................................................... 152
Item 18 Financial Statements................................................................... 152
Item 19 Exhibits............................................................................... 152
Signature.............................................................................. 153
3
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This annual report contains or incorporates by reference statements that
constitute "forward-looking statements," in that they include statements
regarding the intent, belief or current expectations of our directors and
officers with respect to our future operating performance. Such statements
include any forecasts, projections and descriptions of anticipated cost savings
or other synergies. Words such as "anticipate," "expect," "intend," "plan,"
"believe," "seek," "estimate," variations of such words, and similar expressions
are intended to identify such forward-looking statements. You should be aware
that any such forward-looking statements are not guarantees of future
performance and may involve risks and uncertainties, and that actual results may
differ from those set forth in the forward-looking statements as a result of
various factors (including, without limitations, the actions of competitors,
future global economic conditions, market conditions, foreign exchange rates,
and operating and financial risks related to managing growth and integrating
acquired businesses), many of which are beyond our control. The occurrence of
any such factors not currently expected by us would significantly alter the
results set forth in these statements.
Factors that could cause actual results to differ materially and adversely
include, but are not limited to:
o changes in general economic, business or political or other conditions
in Argentina or changes in general economic or business conditions in
Latin America;
o changes in capital markets in general that may affect policies or
attitudes toward lending to Argentina or Argentine companies;
o changes in exchange rates or regulations applicable to currency
exchanges or transfers;
o unexpected developments in certain existing litigation;
o increased costs;
o unanticipated increases in financing and other costs or the inability
to obtain additional debt or equity financing on attractive terms; and
o the factors discussed under "Risk Factors" beginning on page 14.
You should not place undue reliance on such statements, which speak only as
of the date that they were made. Our independent public accountants have not
examined or compiled the forward-looking statements and, accordingly, do not
provide any assurance with respect to such statements. These cautionary
statements should be considered in connection with any written or oral
forward-looking statements that we might issue in the future. We do not
undertake any obligation to release publicly any revisions to such
forward-looking statements after filing of this Form to reflect later events or
circumstances or to reflect the occurrence of unanticipated events.
CERTAIN MEASUREMENTS AND TERMS
As used throughout this annual report, the terms "IRSA," the "Company,"
"we," "us," and "our" refer to IRSA Inversiones y Representaciones Sociedad
Anonima, together with our consolidated subsidiaries, except where we make clear
that such terms refer only to the parent company.
In Argentina the standard measure of area in the real estate market is the
square meter (m(2)), while in the United States and certain other jurisdictions,
the standard measure of area is the square foot (sq. ft.). All units of area
shown in this annual report (e.g., gross leasable area of buildings and size of
undeveloped land) are expressed in terms of square meters. One square meter is
equal to approximately 10.764 square feet. One hectare is equal to approximately
10,000 square meters and approximately 2.47 acres.
As used herein:
4
o "GLA or gross leasable area", in the case of offices and other rental
properties, refers to the total leasable area of the units in each
property in which we own an interest, irrespective of our ownership
interest in such units and excluding common and parking areas;
o "GLA or gross leasable area", in the case of shopping centers, refers
to the total leasable area of the property, irrespective of our
ownership interest in such property (excluding common areas and
parking);
o "net leasable area", refers to the "gross leasable area" of the units
in each property in which we own an interest, adjusted to give effect
to our ownership interest in such units;
o "GSA or gross salable area", in the case of development properties
refers to the total area of the units or undeveloped land in each
property in which we own an interest, held for sale upon completion of
development and prior to the sale of any units, irrespective of our
ownership interest in such property (including parking areas and
storage facilities but excluding common areas);
o "GSA or gross salable area", in the case of undeveloped parcels of
land, refers to the total area of undeveloped property, irrespective
of our ownership interest in such property (including parking areas
and storage facilities but excluding common areas);
o "net salable area", in the case of development properties, refers to
the total area of the units or undeveloped land in each property in
which we own an interest held for sale upon completion of development
and prior to the sale of any units;
o "net salable area", in the case of undeveloped parcels of land, refers
to total area of undeveloped property, adjusted to give effect to our
ownership interest and includes parking areas and storage facilities
but excludes common areas.
PRESENTATION OF FINANCIAL AND CERTAIN OTHER INFORMATION
In this annual report, references to "US$" and "U.S. dollars" are to United
States dollars, and references to "Ps.", "Peso" or "Pesos" are to Argentine
Pesos. References to "R$" or "Reais" are to Brazilian reais, and references to
"Bolivars" or "Bs." are to Venezuelan bolivars.
This annual report contains our audited consolidated financial statements
as of June 30, 2002 and 2001 and for the years ended June 30, 2002, 2001 and
2000. Our consolidated financial statements have been audited by
PricewaterhouseCoopers, Buenos Aires, Argentina, independent auditors, whose
report is included herein. Our consolidated financial statements have been
prepared on the assumption that we will continue as a going concern. Our
independent auditors have issued a report stating that we were negatively
impacted by the continued deterioration of the Argentine economy, the Argentine
Government's adoption of various economic measures and the devaluation of the
Peso which raises substantial doubt as to our ability to continue as a going
concern. Our consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty. See "Risk Factors -
Risks related to our business".
We prepare our consolidated financial statements in Pesos and in conformity
with Argentine GAAP and the regulations of the Comision Nacional de Valores,
which differ in certain significant respects from U.S. GAAP. Such differences
involve methods of measuring the amounts shown in the Financial Statements, as
well as additional disclosures required by U.S. GAAP and Regulation S-X of the
SEC. See Note 19 to our consolidated financial statements contained elsewhere in
this annual report for a description of the principal differences between
Argentine GAAP and U.S. GAAP, as they relate to us, and a reconciliation to U.S.
GAAP of net (loss) income and shareholders' equity.
Also contained elsewhere in this annual report are the consolidated
financial statements of Alto Palermo Sociedad Anonima (APSA) ("APSA"), an
unconsolidated equity investee, as of June 30, 2002
5
and 2001 and for the years ended June 30, 2002, 2001 and 2000, which have been
audited by PricewaterhouseCoopers, Buenos Aires, Argentina, independent
auditors, whose report is included elsewhere herein. At June 30, 2002 we owned
49,7% of APSA.
APSA prepares its financial statements in Pesos and in conformity with
Argentine GAAP and the regulations of the Comision Nacional de Valores which
differ in certain significant respects from U.S. GAAP. Such differences involve
methods of measuring the amounts shown in the consolidated financial statements,
as well as additional disclosures required by U.S. GAAP and Regulation S-X of
the SEC. See Note 15 to APSA's consolidated financial statements contained
elsewhere in this annual report for a description of the principal differences
between Argentine GAAP and U.S. GAAP, as they relate to APSA, and a
reconciliation to U.S. GAAP of net (loss) income and shareholders' equity.
Also contained elsewhere in this annual report are the consolidated
financial statements of Brazil Realty S.A. Empreendimentos e Participacoes
("Brazil Realty"), an unconsolidated equity investee, as of June 30, 2001 and
2000 and for the years then ended. The consolidated financial statements of
Brazil Realty as of and for the year ended June 30, 2001 have been audited by
PricewaterhouseCoopers, Sao Paulo, Brazil, independent auditors, whose report is
included elsewhere herein. The consolidated financial statements of Brazil
Realty as of and for the year ended June 30, 2000, have been audited by other
auditors than PricewaterhouseCoopers, Sao Paulo, Brazil, independent auditors.
We owned 49.3% of Brazil Realty as of June 30, 2001 but sold all of such
investment in February, 2002. Brazil Realty prepares its financial statements in
Reais and in conformity with Brazilian GAAP which differ in certain significant
respects from U.S. GAAP. Such differences involve methods of measuring the
amounts shown in the consolidated financial statements, as well as additional
disclosures required by U.S. GAAP and Regulation S-X of the SEC. See Note 18 to
Brazil Realty's consolidated financial statements contained elsewhere in this
annual report for a description of the principal differences between Brazilian
GAAP and U.S. GAAP, as they relate to Brazil Realty, and a reconciliation to
U.S. GAAP of net income and shareholders' equity.
Our consolidated financial statements have been prepared on the basis of
general price-level accounting which reflects changes in the purchasing power of
the Peso in our historical financial statements using changes in the Argentine
wholesale price index, as published by the Instituto Nacional de Estadistica y
Censos, as follows:
o we have adjusted non-monetary items and consolidated statements of
income amounts to reflect the then current general purchasing power;
o we have not adjusted monetary items as such items were, by their
nature, stated in terms of current general purchasing power in our
consolidated financial statements; and
o we have recognized monetary gains or losses in our consolidated
statements of income, reflecting the effect of holding monetary items.
We have used a conversion factor of 1.9562 to restate our financial
statements in constant Argentine Pesos of June 30, 2002.
We have included the gain or loss on exposure to inflation (monetary gain
or loss) in our consolidated statements of income within total financing
results.
Since July 1, 1996, we have used the "proportionate consolidation method"
of accounting for our controlled and jointly controlled investments. We prepare
our consolidated statements of income on a proportionate consolidation basis but
do not use this method to prepare our balance sheet or cash flows. All notes in
our consolidated financial statements relating to income statement items have
also been prepared on a proportionate consolidation basis. We calculate the
proportionate consolidation method by applying our percentage ownership interest
to the historical financial statements of our equity method investments. We
consider this method to reflect more appropriately our results of operations and
the integration of our core businesses. The use of the proportionate
consolidation method has been approved by the Argentine Comision Nacional de
Valores. Although the use of the proportionate consolidation method as compared
to the equity method of accounting from a financial presentation perspective
impacts almost all areas of our consolidated statements of income, it does not
impact our consolidated
6
shareholders' equity or our net income. Note 14 to our audited consolidated
financial statements presents our statements of income for the three years in
the period ended as of June 30, 2002 reporting.
o the jointly controlled investments accounted for by the equity method,
with the earnings or losses included as earnings or losses from equity
investments, and
o minority interest in earnings or losses of controlled subsidiaries.
Certain amounts which appear in this annual report (including percentage
amounts) may not sum due to rounding. You should not construe the translations
as a representation that the amounts shown could have been, or could be,
converted into U.S. dollars at that or any other rate.
References to fiscal years 1998, 1999, 2000, 2001 and 2002 are to the
fiscal years ended June 30 of each such year.
MARKET DATA
Market data used throughout this annual report were derived from reports
prepared by unaffiliated third-party sources. Such reports generally state that
the information contained therein has been obtained from sources believed by
such sources to be reliable. Certain market data which appear herein (including
percentage amounts) may not sum due to rounding.
7
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
This item is not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
This item is not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been derived from
our consolidated financial statements as of the dates and for each of the
periods indicated below. This information should be read in conjunction with and
is qualified in its entirety by reference to our consolidated financial
statements and the discussion in Operating and Financial Review and Prospects
included elsewhere in this annual report. The selected consolidated statement of
income data for the years ended June 30, 2002, 2001 and 2000 and the selected
consolidated balance sheet data as of June 30, 2002 and 2001 have been derived
from our consolidated financial statements included in this annual report which
have been audited by PricewaterhouseCoopers, Buenos Aires, Argentina,
independent auditors. The consolidated statements of income data for the years
ended June 30, 1999 and 1998 and the selected consolidated balance sheet data as
of June 30, 2000, 1999 and 1998 have been derived from our audited consolidated
financial statements that are not included herein.
Our consolidated financial statements as of June 30, 2002 have been
prepared on the assumption that we will continue as a going concern. Our
independent auditors have issued a report stating that we have been negatively
impacted by the continued deterioration of the Argentine economy, the Argentine
Government adoption of various economic measures and by the devaluation of the
Peso, which raises substantial doubt as to our ability to continue as a going
concern. Our consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty. See "Risk Factors--Risks
related to our business."
Our financial statements are presented in Pesos. Our financial statements
are prepared in accordance with Argentine GAAP, which differs in certain
significant respects from U.S. GAAP. Note 19 to our consolidated financial
statements provides a description of the principal differences between Argentine
GAAP and U.S. GAAP affecting our net (loss) income and shareholders' equity and
a reconciliation to U.S. GAAP of net (loss) income reported under Argentine GAAP
for the years ended June 30, 2002, 2001 and 2000, and of shareholders' equity
reported under Argentine GAAP as of June 30, 2002 and 2001. The differences
involve methods of measuring the amounts shown in the financial statements as
well as additional disclosures required by U.S. GAAP and Regulation S-X of the
SEC.
Our consolidated financial statements have been prepared on the basis of
general price-level accounting which reflects changes in the purchasing power of
the Peso in the historical financial statements using changes in the Argentine
wholesale price index, as published by the Instituto Nacional de Estadistica y
Censos, as follows:
o we have adjusted non-monetary items and consolidated statements of
income amounts to reflect the then-current general purchasing power.
o we have not adjusted monetary items, as such items were by their
nature stated in terms of current general purchasing power in our
consolidated financial statements.
o we have recognized monetary gains or losses in our consolidated
statements of income, reflecting the effect of holding monetary items,
and
o we have included the gain or loss on exposure to inflation (monetary
gain or loss) in our consolidated statements of income within total
financing results.
8
We have used a conversion factor of 1.9562 to restate our financial
statements in constant Argentine Pesos as of June 30, 2002.
9
AS OF AND FOR THE YEAR ENDED JUNE 30,
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2002 2002 2001 2000 1999 1998
------------- ----------- ----------- ----------- ----------- -----------
(US$ 000) (1) (Ps.000) (2) (Ps.000) (2) (Ps.000) (2) (Ps.000) (2) (Ps.000) (2)
INCOME STATEMENT DATA
ARGENTINE GAAP
Sales................................. 55,610 211,319 339,843 361,930 393,218 338,112
Costs................................. (31,936) (121,355) (172,024) (167,689) (195,321) (176,852)
Gross profit.......................... 23,675 89,964 167,819 194,241 197,897 161,260
Selling expenses...................... (9,035) (34,332) (33,748) (36,886) (22,383) (15,771)
Administrative expenses............... (9,906) (37,643) (50,740) (55,629) (54,218) (49,150)
Loss on purchasers rescissions of
sales contracts.................... 7.11 27 (14) (1,541) - -
(Loss) gain from operations and
holdings of real estate assets,
net (3)............................ (17,094) (64,956) (6,305) (2,696) 1,037 (1,618)
Operating (loss) income............... (12,353) (46,940) 77,012 97,489 122,333 94,721
Net (loss) income in equity investments (518) (1,967) (10,323) (1,428) 7,375 3,286
Financial results, net................ (113,742) (432,220) (110,302) (58,876) (43,993) (12,387)
Other income (expenses), net ......... (2,240) (8,511) (5,653) (11,907) 9,133 (6,788)
(Loss) income before taxes............ (128,852) (489,638) (49,237) 25,278 94,848 78,832
Preacquisition earning attributable to
the former shareholders of acquired
companies.......................... - - - - - (3,607)
Extraordinary loss.................... - - (5,624) - - -
Income tax............................ (2,627) (9,981) (5,063) (13,727) (7,862) (3,225)
(Loss) income for the period.......... (131,479) (499,619) (59,953) 11,551 86,986 71,999
(Loss) income per share (4)........... (0.63) (2.41) (0.29) 0.06 0.46 0.47
(Loss) income per GDS (4)............. (6.34) (24.09) (2.94) 0.59 4.59 4.74
Average outstanding shares............ 207,412 207,412 204,189 204,652 189,058 153,282
U.S. GAAP
Sales................................. 38,542 146,458 218,152 222,894 264,902 282,398
Net income (loss) (4)................. (171,302) (650,948) 20,024 (16,898) 41,110 72,949
Net (loss) income before extraordinary
items and accounting changes....... (171,302) (650,948) (1,219) (13,412) 31,561 72,949
Basic net income (loss) per GDS(4).... (0.08) (0.31) 1.10 (0.82) 2.17 4.76
Basic net (loss) income before
extraordinary items and accounting
changes per GDS(4)................. (0.08) (0.31) (0.06) (0.65) 1.66 4.76
Weighted average common shares
outstanding........................ 207,412 207,412 204,189 204,652 189,058 153,282
BALANCE SHEET DATA
ARGENTINE GAAP
Cash and current investments.......... 16,218 61,627 100,237 81,399 86,777 303,618
Inventories........................... 18,602 70,688 92,182 129,851 154,197 126,725
Mortgages and leases receivable, net.. 3,984 15,139 104,254 120,329 140,680 137,513
Non-current investments (5)........... 138,513 526,348 699,893 819,983 573,941 451,135
Fixed assets, net..................... 89,156 338,794 419,375 451,483 506,791 446,403
Total current assets.................. 35,871 136,308 221,875 246,195 299,584 453,672
Total assets.......................... 301,241 1,144,715 1,494,549 1,665,227 1,730,556 1,769,913
Short-term debt (6)................... 148,616 564,739 352,091 197,017 247,778 180,344
Total current liabilities............. 159,489 606,060 385,661 236,344 290,212 238,533
Long-term debt (7).................... 37.37 142 28,848 208,555 204,073 321,406
Total non-current liabilities......... 795 3,021 34,497 215,863 218,322 354,999
Minority Interest..................... 19,794 75,218 114,356 112,600 85,548 80,970
Shareholders' equity.................. 121,162 460,416 960,035 1,100,420 1,109,065 1,069,458
U.S. GAAP
Total assets.......................... 279,282 1,061,273 1,436,970 1,611,242 1,700,474 1,725,195
Total shareholders' equity............ 86,708 329,492 877,931 1,024,421 1,061,687 1,022,490
CASH FLOW DATA
ARGENTINE GAAP
Net cash provided by operating
activities......................... 12,454 47,325 95,894 123,898 113,996 99,260
10
Net cash provided by (used in)
investing activities............... (4,599) (17,476) 72,755 (33,353) (185,508) (476,589)
Net cash (used in) provided by
financing activities............... (9,965) (37,867) (164,647) (104,471) (116,167) 455,454
U.S. GAAP
Net cash provided by operating
activities......................... 2,780 10,564 87,478 90,915 135,498 99,260
Net cash (used in) provided by
investing activities............... (4,929) (18,732) 71,841 (370) (207,011) (476,589)
Net cash (used in) provided by
financing activities............... (9,702) (36,867) (154,808) (104,471) (116,167) 455,454
Effect of exchange rate changes on
cash and cash equivalents.......... 478 1,818 - - - -
Effect of inflation accounting........ 9,160 34,808 - - - -
OTHER FINANCIAL DATA
ARGENTINE GAAP
EBITDA (8)............................ 22,220 84,436 120,766 94,981 123,168 132,253
Depreciation and amortization......... 5,535 21,033 23,103 26,023 21,424 17,023
Capital expenditures (9).............. 11,403 43,332 61,381 37,340 186,199 484,077
Ratio of earnings to fixed charges (10) (28.6) (28.6) 0.8 1.4 2.3 2.6
Ratio of current assets to current
liabilities........................ 0.225 0.225 0.575 1.042 1.032 1.902
Ratio of shareholders' equity to total
liabilities........................ 0.756 0.756 2.285 2.433 2.181 1.802
Ratio of non-current assets to total
assets............................. 0.881 0.881 0.852 0.852 0.827 0.744
Profitability (11).................... (0.703) (0.703) (0.058) 0.010 0.080 0.088
(1) Solely for the convenience of the reader, we have translated Argentine Peso
amounts into U.S. dollars at the exchange rate quoted by Banco de la Nacion
Argentina for June 28, 2002 which was Ps. 3.8 per US$1.0. We make no
representation that the Argentine Peso or U.S. dollar amounts actually
represent, could have been or could be converted into dollars at the rates
indicated, at any particular rate or at all. See "Exchange Rates".
(2) In thousands of constant Pesos of June 30, 2002, except for ratios and
weighted average number of shares outstanding. Includes adjustment by
inflation as of June 30, 2002. Sums may not total due to rounding.
(3) Includes unrealized gains from temporary investments in affiliated
companies with non-voting rights, capital issuance premium and loss from
write off of real estate assets for certain periods. See Note 8 to our
consolidated financial statements.
(4) We have calculated earnings per share data under Argentine GAAP and U.S.
GAAP based on the weighted average number of common shares outstanding
during the respective period. Each GDS represents ten common shares.
(5) Includes undeveloped parcels of land.
(6) Includes short-term loans, the current mortgages payable and the current
portion of the seller financing.
(7) Includes long-term loans, non-current mortgages payable and the non-current
portion of the seller financing.
(8) EBITDA is operating income before depreciation and amortization minus gain
from operations and holdings of real estate assets. You should not construe
EBITDA as an alternative to (i) net income (as defined in accordance with
Argentine GAAP) as an indicator of our operating performance or (ii) cash
flow from our operating activities (as determined in accordance with
Argentine GAAP) as a measure of liquidity. Does not include income from
subsidiaries.
(9) Includes the purchase of fixed assets and long-term investments.
(10) The ratios related to the year ended June 30, 2002 and 2001 and to the year
ended June 30, 2001 indicate less than one-to-one coverage. Consequently,
earnings for these periods were inadequate to cover fixed charges. Total
earnings of Ps. 485.2 million and Ps. 25.3 million would have been required
to attain a ratio of one-to-one determined under Argentine GAAP for the
years ended June 30, 2002 and 2001, respectively.
(11) Net Profit (Loss) / Average Shareholders' Equity (simple average between
the fiscal period's shareholders equity and the shareholders' equity for
the same fiscal period of the immediately preceding year)
11
EXCHANGE RATES
Since April 1, 1991 until the beginning of 2002, the Convertibility Law No.
23,928 was applicable in Argentina. The Convertibility Law established a fixed
exchange rate under which the Argentine Central Bank was obliged to sell U.S.
dollars to any person at a fixed rate of one Peso per U.S. dollar.
On January 7, 2002, Congress enacted the Public Emergency Law and Foreign
Exchange System Reform Law No. 25,561 ("the Public Emergency Law") whereby the
executive branch was granted the power to determine the new exchange rate
between the Peso and foreign currencies and to approve the corresponding
monetary regulations. Thereafter, the executive branch announced the devaluation
of the Peso with the establishment of a dual exchange rate system pursuant to
which certain limited transactions occurred at a fixed rate of Ps. 1.40 per US$
1.00 and all other transactions are settled at a floating market rate, depending
on supply and demand. See "Risk Factors - Risks related to Argentina".
The Public Emergency Law amends several provisions of the 1991
Convertibility Law, the most important of which are:
o the repeal of the Ps. 1.00 to US$ 1.00 fixed exchange rate established
in 1991;
o the elimination of the obligation of the Argentine Central Bank to
sell foreign currency for conversion transactions at the rate Ps. 1.00
= US$ 1.00;
o the elimination of the requirement that the Argentine Central Bank's
reserves in gold and foreign currency shall at all times be equivalent
to not less than 100% of the monetary base. However, the law only
states that the Central Bank's reserves in gold and foreign currency
will need to be at all times sufficient to support the monetary base.
Accordingly, the monetary base is not necessarily fully backed by
foreign currency-denominated reserves, which would potentially have an
inflationary effect on prices; and
o the continuing prohibition of escalation clauses and other means of
adjustment of monetary obligations in Pesos.
On January 11, 2002 the Argentine Central Bank ended a bank holiday that it
had observed since December 21, 2001. The exchange rate began to float freely
for the first time in eleven years at Ps. 1.40 per US$ 1.00. The shortage of
dollars and the desperation of the people to convert their Pesos caused the
exchange rate to rise 25%, closing at Ps. 1.75 per US$ 1.00. Since then, the
exchange rate has continued to grow, forcing the Argentine Central Bank to
intervene in the market and sell U.S. dollars in order to prevent a significant
depreciation of the Peso.
Since February 11, 2002, there has been a single free exchange market for
all exchange transactions, with the following main features:
o the rate of exchange is determined by free supply and demand,
o exchange transactions may only be carried out by entities authorized
by the Argentine Central Bank to do so,
o transfers abroad by the private non-financial sector, the financial
sector and public companies which do not depend on the state for their
budget for principal servicing of financial loans or profit or
dividend remittances will require prior approval from the Argentine
Central Bank, regardless of their method of payment. This requirement
will not apply to transfers relating to (i) debt agreements with
international agencies, (ii) debt with banks participating in the
financing of investment projects jointly financed by international
agencies, and (iii) debt agreements with official credit agencies or
debt guaranteed by them.
12
Before 1991, the Argentine currency had experienced a significant number of
large devaluations and Argentina had adopted and operated under various exchange
control policies. We cannot assure you that the executive branch will continue
its current policies or that further devaluations will not take place.
The following table sets forth, for the periods indicated, the high, low,
average and period-end exchange rates for the purchase of dollars expressed in
nominal Pesos per dollar. On November 19, 2002, the applicable Peso/dollar
exchange rate was Ps. 3.47 to US$ 1.00. The Federal Reserve Bank of New York
does not report a noon buying rate for Pesos.
NOMINAL EXCHANGE RATES
EXCHANGE RATE
---------------------------------------------------------------------
HIGH(1) LOW(2) AVERAGE(3) PERIOD END
------- ------ ---------- ----------
Year Ended December 31, 1996............. 1.0000 0.9990 0.9995 1.0000
Year Ended December 31, 1997............. 1.0000 0.9990 0.9995 1.0000
Year Ended December 31, 1998............. 1.0000 0.9990 0.9995 1.0000
Year Ended December 31, 1999............. 1.0000 0.9990 0.9995 1.0000
Year Ended December 31, 2000............. 1.0000 0.9990 0.9995 1.0000
Year Ended December 31, 2001(4).......... 1.0000 0.9990 0.9995 1.0000
Month Ended January 31, 2002............. 2.0700 1.6000 1.9100 2.0500
Month Ended February 28, 2002............ 2.1500 1.7000 2.0000 2.1500
Month Ended March 31, 2002 .............. 3.1500 2.0500 2.4400 3.0000
Month Ended April 30, 2002 .............. 3.1500 2.6800 2.8900 2.9800
Month Ended May 31, 2002 ................ 3.5500 3.0500 3.3064 3.5500
Month Ended June 30, 2002 ............... 3.8600 3.4700 3.6250 3.8000
Month Ended July 31, 2002 ............... 3.7400 3.5000 3.5709 3.6500
Month Ended August 31, 2002 ............. 3.6000 3.5200 3.5736 3.5800
Month Ended September 30, 2002 .......... 3.7000 3.5700 3.6043 3.6950
Month Ended October 31, 2002 ............ 3.7000 3.4700 3.6059 3.4700
-------------
(1) The high rate shown was the highest month-end rate during the year or any
shorter period, as noted.
(2) The low rate shown was the lowest month-end rate during the year or any
shorter period, as noted.
(3) Average of month-end rates.
(4) From December 23, 2001 through January 11, 2002 Banco Nacion did not
publish an official exchange rate due to governmental suspension of the
exchange market.
Source: Central Bank; Banco de la Nacion Argentina, Bloomberg
Fluctuations in the exchange rate between the Peso and the dollar may
affect the dollar equivalent of the Peso price of the convertible notes on the
Bolsa de Comercio de Buenos Aires. Increases in Argentine inflation or
devaluation of the Argentine currency could materially and adversely affect our
operating results.
B. CAPITALIZATION AND INDEBTEDNESS
This item is not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
This item is not applicable.
D. RISK FACTORS
You should consider the following risks with respect to an investment in
our Company and the countries in which we operate.
13
RISKS RELATED TO ARGENTINA
OVERVIEW OF ARGENTINE ECONOMIC AND POLITICAL RISKS
All of our operations and properties are located in Argentina. Domestic
demand for our rental and development properties broadly reflects prevailing
conditions in the Argentine economy. Accordingly, contraction in the domestic
economy or other adverse economic conditions may reduce demand for our
properties and their values and may adversely affect our ability to meet our
obligations. The Argentine economy has experienced significant volatility in
recent decades, characterized by periods of low or negative growth and high and
variable levels of inflation. In 1988, 1989 and 1990, the annual inflation rates
were approximately 338%, 4,924% and 1,344%, respectively, based on the consumer
price index and approximately 432%, 5,386% and 798%, respectively, based on the
wholesale price index. As a result of inflationary pressures, the Argentine
currency was devalued repeatedly during the 1960s, 1970s and 1980s, and
macroeconomic instability led to broad fluctuations in the real exchange rate of
the Argentine currency relative to the U.S. dollar. To address these pressures,
the Argentine government implemented various plans and utilized a number of
exchange rate systems during this period. At various times throughout Argentine
history, the foreign exchange market has been subject to exchange controls.
In 1991, the Argentine government launched a plan aimed at controlling
inflation and restructuring the economy, enacting Law No. 23,928 and its
Regulatory Decree No. 529/91 (together, the "Convertibility Law"). The
Convertibility Law fixed the exchange rate at one Peso per U.S. dollar and
required that the Argentine Central Bank maintain reserves in gold and foreign
currency in an amount at least equivalent to the monetary base. Following
adoption of the Convertibility Law, inflation declined steadily and the
Argentine economy experienced growth through most of the period from 1991 to
1997. In the fourth quarter of 1998, however, the Argentine economy entered into
a recession that caused the gross domestic product to decrease by 3.0% in 1999,
0.5% in 2000 and 4.9% in 2001. During the second half of 2001, Argentina's
recession worsened significantly, precipitating the political and economic
crisis described in greater detail below.
RECENT POLITICAL AND ECONOMIC INSTABILITY HAS PARALYZED COMMERCIAL AND
FINANCIAL ACTIVITIES
Following his election in October 1999, President Fernando De la Rua was
confronted with the challenges of dealing with Argentina's enduring economic
recession and obtaining political consensus on critical issues related to the
economy, public sector spending, legal reforms and social programs. However, he
lacked the support of Congress, which was controlled by the opposition Peronista
party, and the cooperation of several provincial governors who were also
Peronistas. His political strength was further weakened by infighting within his
own party which reached a peak with the resignation of the Vice-President in
October 2000.
The De la Rua administration failed to address adequately the growing
public sector deficit, both at the federal as well as at the provincial level.
As tax revenues dropped as a result of the recession, the public sector relied
increasingly on financing from local, and to a lesser extent, foreign banks,
effectively foreclosing private sector companies from bank financing. As the
public sector's creditworthiness deteriorated, interest rates increased to
record highs, bringing the Argentine economy to a virtual standstill. The lack
of confidence in the country's economic future and its ability to sustain the
Peso's parity with the U.S. dollar led to massive withdrawals of deposits from
the financial system. Despite prior assurances to the contrary, on December 1,
2001, the Argentine government enacted Decree 1570/2001 by which it effectively
froze bank deposits and introduced exchange controls restricting capital
outflows. Some of these measures, known as the "corralito," included
restrictions on rights to withdraw deposits from financial institutions and the
prohibition of transfers of money abroad. These measures caused social
discontent to increase, triggering the looting of stores throughout Argentina on
December 19, 2001, and the resignation of Minister of Economy, Domingo Cavallo.
On December 21, 2001, after declaring a state of siege, President De la Rua
resigned in the midst of an escalating political, social and economic crisis.
Following the resignation of an interim President only one week after his
appointment, on January 1, 2002, the Legislative Assembly elected Peronista
senator Eduardo Duhalde as President to serve for the remaining term of former
President De la Rua until December 2003. On July 2, 2002, President Duhalde
announced that presidential elections would be held in March 2003 instead of
October 2003 and that the new president would assume his mandate in May 2003
instead of December 2003. On November 18, 2002, an agreement between provincial
governors was signed so as to postpone presidential elections until April 27,
2003, with the new president assuming his mandate in May, 2003. Since his
appointment on January 2,
14
2002, President Duhalde and the current Argentine government have undertaken a
number of far-reaching initiatives including:
o ratifying the suspension of payment of almost all of Argentina's
sovereign debt declared by the interim President;
o ending the Peso-U.S. dollar Parity set forth in the Convertibility Law
and the resulting devaluation of the Peso;
o converting certain dollar-denominated debts into Peso-denominated
debts at a one-to-one exchange rate;
o converting, with limited exceptions (financial and commercial),
dollar-denominated bank deposits into Peso-denominated bank deposits
on an exchange rate of Ps. 1.4 per U.S. dollar;
o restructuring bank deposits and continuing restrictions on bank
withdrawals and transfers abroad;
o enacting an amendment to the Argentine Central Bank's charter to allow
it to print currency in excess of the amount of the foreign reserves
it holds, make short-term advances to the federal government and
provide financial assistance to financial institutions with liquidity
constraints or solvency problems;
o requiring that, beginning on June 26, 2002, the general exchange
positions of financial entities cannot exceed 5% of the value of their
assets are available to pay their liabilities (a minimum of US$
1,000,000 for banking institutions and US$ 500,000 for non-banking
financial institutions), as registered in November, 2001; and
o allocating Argentine government bonds to financial institutions in
compensation for their obligation to both convert all
dollar-denominated loans into Peso-denominated loans at a one-to-one
exchange rate and convert all U.S. dollar-denominated bank deposits
into Peso-denominated deposits at an exchange rate of Ps. 1.40 per
U.S. dollar.
At this time, the degree of internal and external support for the Duhalde
administration still remains unclear. Widespread political protests and social
disturbances are continuing on an almost daily basis, and to date the
International Monetary Fund and other multilateral and official sector lenders
have indicated their unwillingness to provide financial aid until a sustainable
economic program has been presented. It is unclear whether President Duhalde
will be able to finish his mandate, whether he will have the necessary support
to implement the reforms required to restore economic growth or whether he will
even be able to remain in power. The rapid and radical nature of the recent
changes in the Argentine social, political, economic and legal environment, and
the absence of a clear political consensus in favor of the new Argentine
government, or any particular set of economic policies, have created an
atmosphere of great uncertainty. This uncertainty is aggravated by the
increasing tension between the executive branch and Congress. As a result,
virtually all commercial and financial activities have been paralyzed, further
aggravating the economic recession which precipitated the current crisis.
These conditions have had and can be expected to have a material adverse
effect on our financial condition and results of operations as they have
paralyzed, and we expect will continue to paralyze, investment and consumption
decisions, thus causing a reduction in retail sales, sales of real estate and
demand for office and commercial space.
ARGENTINA'S INSOLVENCY AND RECENT DEFAULT ON ITS PUBLIC DEBT HAS DEEPENED
THE CURRENT FINANCIAL CRISIS
As of December 2001, Argentina's total gross public debt was approximately
US$ 137.0 billion. On December 23, 2001, former interim President Rodriguez Saa
declared the suspension of payments on certain of Argentina's sovereign debt,
and President Duhalde ratified this measure on January 2, 2002.
15
In addition, the principal international rating agencies have recently and
repeatedly downgraded the rating of Argentina's sovereign debt. On November 6,
2001, Standard & Poor's lowered Argentina's long-term local and foreign currency
sovereign credit ratings from "CC" to "SD" (selective default), indicating that
the Republic is defaulting on some of its obligations. The single-'C' ratings on
the short-term debt were affirmed. On December 1, 2001, Fitch IBCA and Duff &
Phelps lowered the ratings for the long term debt from "CCC" to "DDD" and the
ratings for the short term debt from "B" to "C". On December 21, 2001, Moody's
Investors Service lowered Argentina's foreign currency country ceiling for bonds
to "Ca" from "Caa3", indicating that the downgrade reflects rapidly
deteriorating economic, financial and social conditions.
Moreover, on November 14, 2002, the Argentine government defaulted on all
but a fraction of an US$ 805 million payment due on that date to the World Bank,
deepening the country's rift with the international financial establishment and
stirring concern about a new deterioration in relations between the United
States and Latin America. Countries that fail to pay official multilateral
institutions such as the World Bank risk becoming full-fledged international
financial pariahs and, though Argentina fully intends to meet its obligations
once an IMF agreement is reached, the country could fall further into economic
isolation. Eventually, the World Bank will suspend disbursements on projects
that aid the country's poor and Argentine businesses that are still receiving
loans from abroad to finance exports and imports will probably find it much more
difficult to do so.
The Argentine government's current insolvency and inability to obtain
financing can be expected to affect significantly its ability to implement any
reforms, undermining the private sector's ability to restore economic growth,
and may result in deeper recession, higher inflation and unemployment and
greater social unrest. Furthermore, the restrictions on bank withdrawals, and
the ensuing paralysis of economic activity, have caused tax revenues to drop
dramatically in recent months. As a result, our business, financial condition
and results of operations will likely be materially and adversely affected, as
paralysis of the economy and inflation negatively affect consumers' purchasing
power, which, in turn, affects retail sales, investment decisions in residential
real estate and demand for office and shopping center space.
THE ARGENTINE PESO HAS BEEN SUBJECT, AND MAY CONTINUE TO BE SUBJECT TO,
SUBSTANTIAL DEPRECIATION AND VOLATILITY
The Argentine government's economic policies and any future changes in the
value of the Peso against the dollar could adversely affect our financial
condition and result of operations. The Peso has been subject to large
devaluations in the past and may be subject to significant fluctuations in the
future.
As a result of inflationary pressures, the Argentine currency was
devaluated repeatedly during the 1960s, 1970s and 1980s, and macroeconomic
instability led to broad fluctuations in the real exchange rate of the Argentine
currency relative to the U.S. dollar. To address these pressures, the Argentine
government implemented various plans and utilized a number of exchange rates,
and prior to December 1989, the Argentine foreign exchange market was subject to
exchange controls. During the 1990s the devaluation and fluctuation of the Peso
against the dollar was controlled by the Convertibility Law, which fixed the
exchange rate at one Peso per dollar. However, the Economic Emergency Law puts
an end to ten years of U.S. dollar-Peso parity, and in recent months, the
Argentine government has authorized a free floating exchange rate for all
transactions. This has resulted in a significant devaluation of the Peso. Since
the devaluation of the Peso, the Peso has fluctuated significantly, causing the
Argentine Central Bank to intervene in the market to support the value of the
Peso by selling dollars. As of November 19, 2002, the exchange rate was Ps. 3.47
= US$ 1.00.
No assurance can be given that future policies to be adopted by the
Argentine government will be able to control the value of the Peso and it is
likely that the Peso will be subject to significant fluctuations and
depreciations in the future, which could materially and adversely affect our
financial conditions and result of operations as a consequence of the exchange
risk associated with the difference that exists between our Peso-denominated
revenues and assets and our high proportion of dollar-denominated liabilities.
16
THE RECENT DEVALUATION OF THE PESO WILL ADVERSELY AFFECT ARGENTINE ECONOMIC
CONDITIONS AND OUR FINANCIAL POSITION
On January 6, 2002, Congress enacted the Public Emergency and Foreign
Exchange System Reform Law No. 25,561 (the "Public Emergency Law"), putting an
end to ten years of U.S. dollar-Peso parity under the Convertibility Law and
eliminating the requirement that the Argentine Central Bank's reserves in gold,
foreign currency and foreign currency denominated bonds be at all times
equivalent to the sum of the Pesos in circulation and the Peso deposits of the
financial sector with the Argentine Central Bank. The Public Emergency Law
grants the executive branch the power to set the exchange rate between the Peso
and foreign currencies and to issue regulations related to the foreign exchange
market. On the same day, the executive branch established a temporary dual
exchange rate system, a fixed rate for transactions subject to Argentine Central
Bank approval, and import and export transactions at an exchange rate of Ps. 1.4
per dollar and a floating rate to be freely determined by the market for all
other transactions.
On January 11, 2002, after the Argentine Central Bank ended a banking
holiday that it had imposed since December 21, 2001, the exchange rate began to
float for the first time since April 1991. Higher demand for scarce U.S. dollars
caused the U.S. dollar to trade well over the Ps. 1.4 per U.S. dollar rate used
by the Argentine government. As a result, the Argentine Central Bank intervened
on several occasions by selling U.S. dollars to support the Peso. However, the
Argentine Central Bank's ability to support the Peso by selling U.S. dollars
depends on its limited U.S. dollar reserves and external financial assistance
from the IMF, which it has been unable to obtain. On February 3, 2002, the
executive branch announced the elimination of the dual exchange rate in favor of
a single floating rate for all transactions and on the same day another banking
holiday was imposed, preventing the conversion of Pesos until February 11, 2002.
Moreover, to allow for a period to find a solution to the continuing problem of
decreasing bank reserves, the Argentine government imposed another banking
holiday from April 22 to April 26. Since January 2002, trading in foreign
currency has been limited and involved small amounts mainly due to restrictions
imposed on bank deposits. Furthermore, the Argentine Central Bank has approved
only a limited number of transactions involving the transfer of foreign currency
abroad and has determined certain transfer of funds to be made only with its
prior approval.
The Argentine government is facing severe fiscal problems due to the recent
devaluation. Peso-denominated tax revenues constitute the primary source of its
earnings, but most of its financial liabilities are U.S. dollar-denominated.
Therefore, the Argentine government's ability to honor its foreign debt
obligations has been materially and adversely affected by the devaluation of the
Peso.
Past history prior to the adoption of the Convertibility Law raises serious
doubts as to the ability of the Argentine government to maintain a strict
monetary policy and control inflation. In the past, inflation materially
undermined the Argentine economy and the Argentine government's ability to
create conditions that would permit growth.
Since the end of Convertibility, according to numbers released by the
Instituto Nacional de Estadistica y Censos ("INDEC") the consumer price index
has increased by 39.7% in the first nine months of the year while the wholesale
price index has grown by 121.2%.
Great uncertainty exists surrounding the ultimate resolution of Argentina's
economic and political instability and actual results are unpredictable. The
Argentine economic and political situation continues to evolve and the Argentine
government may enact future regulations or policies that, when finalized and
adopted, may adversely and materially impact, among other items:
o the realized revenues we receive for services offered in Argentina,
such as rental contracts;
o our asset valuations; and
o our Peso-denominated monetary assets and liabilities, which could be
affected by the introduction of different inflation adjustment
indexes.
17
THERE IS RISK THAT THE ARGENTINE FINANCIAL SYSTEM WILL COLLAPSE
Although the amount of deposits in the Argentine banking system has been
decreasing during the last few years, during the last quarter of 2001 a
significant amount of deposits were withdrawn from Argentine financial entities
as a consequence of the increasing political instability and uncertainty. This
run on deposits had a material adverse effect on the Argentine financial system
as a whole. For the most part, banks suspended the disbursement of new loans and
focused on collection activities in an attempt to pay back depositors. However,
the general unavailability of external or local credit created a liquidity
crisis, which triggered numerous payment defaults which in turn undermined the
ability of many Argentine banks to pay back depositors.
To prevent a run on the U.S. dollar reserves of local banks, on December 1,
2001, the De la Rua administration restricted the amount of cash that account
holders could withdraw from banks. Subsequently, the Duhalde administration in
an attempt to stop the continuing drain on bank reserves enforced a mandatory
rescheduling of maturities and released a schedule stating how and when money in
savings and checking accounts and maturing time deposits would become available.
These restrictions, known as the "corralito", are still in effect, although
restrictions on withdrawals for banking and saving accounts have been relaxed.
In addition, on June 1, 2002, in an attempt to resolve the "corralito" problem,
the Argentine government published a decree which offers deposit holders the
opportunity to exchange their rescheduled deposits for three different types of
bonds:
o bonds due 2012: offered to holders of deposits in U.S. dollars which
had been pesified at an exchange rate of Ps. 1.40 per U.S. dollar.
These bonds are denominated in U.S. dollars;
o bonds due 2007: offered to holders of deposits in U.S. dollars or
Pesos. These bonds are denominated in Pesos with an annual interest
rate of 2% plus an inflation adjustment; and
o bonds due 2005: offered to holders of deposits in U.S. dollars or
Pesos who are over 75 years old; received the deposited amount as
indemnity or suffer from certain health problems. These bonds grant
the holder the option to exchange the original deposit into a bond in
U.S. dollars at an exchange rate of Ps. 1.40 per U.S. dollar.
These bonds can be used to purchase public goods, machinery and new cars,
to acquire properties under construction, to pay bank debts, to pay taxes due
June 1, 2001, and to invest in trust funds to finance investment projects.
Deposit holders who decide not to subscribe to these bonds will be granted a
rescheduled deposit certificate (CEDRO) with which they will be able to purchase
certain new securities and notes. This certificate may also be sold on the Bolsa
de Comercio de Buenos Aires and on other Argentine stock exchanges, or kept
until its rescheduled maturity date.
Despite the "corralito", between January 1 and July 1, 2002, approximately
Ps. 20.0 billion were withdrawn from banks due to court rulings that enabled
certain depositors to withdraw their money. This resulted in a further weakening
of the banking system. Consequently, on April 25, 2002, the Argentine government
enacted Law No. 25,587 in an attempt to stop the outflow of funds caused by
several judicial measures which forced financial institutions to return
deposited funds to their owners as a precautionary measure, pending the
resolution of claims. This new law prevents judges from adopting said
provisional measures in all proceedings against the Argentine government or any
financial institution which involve funds frozen in the financial system.
The "corralito" led to the paralysis of virtually all commercial and
financial activities and significantly diminished consumer retail spending as a
result of increased uncertainty, the inability for depositors to access their
savings and a general shortage of cash. Additionally, social unrest and protests
directed against financial institutions and the Argentine government became
widespread.
On November 24, 2002, Economy Minister Roberto Lavagna, announced that the
Government would lift the unpopular limits it had established on cash
withdrawals from savings and checking accounts as from December 2, 2002,
although fixed-term deposits would remain frozen for the time being. As the
devastating recession shows signs of levelling out and confidence in banks
slowly returns, restrictions on
18
about 21 billion pesos in deposits will be freed up. A step-by-step loosening of
the bank restrictions should free up more money for economic activity, be
popular politically, have neutral effect on the currency and please the
International Monetary Fund.
Nevertheless, the solvency of the Argentine financial system is still in
jeopardy, and the system's failure would have a material and adverse effect on
the prospects for economic recovery and political stability, thus adversely
affecting our revenue stream and our ability to access new credit or refinance
our existing debt.
THE PARALYSIS OF ARGENTINE PAYMENT SYSTEM IS ADVERSELY IMPACTING ECONOMIC
ACTIVITY AND OUR ABILITY TO OPERATE
Argentina's economy is currently suffering from a disruption in traditional
systems of payment due to a severe shortage of liquidity in the marketplace. The
current shortage is the result of several factors. Argentina has been in an
economic recession since the fourth quarter of 1998, which reduced excess cash
and access to credit. Due to mounting concern over the sustainability of de la
Rua's economic plan, large quantities of bank deposits were withdrawn from local
financial institutions and transferred abroad. This run on deposits threatened
to collapse the banking system, effectively suspending access to deposits and
credit. The former De la Rua administration imposed strict limits on withdrawals
on December 1, 2001, which are still in place in a less restrictive form. In
addition, when the Argentine government repealed the Convertibility Law on
January 10, 2002, widespread fear of major devaluations of the Peso further
increased demand for U.S. dollars, and consumers have become more reluctant to
use U.S. dollars for payments of goods and services.
The ensuing shortage of cash disrupted Argentina's payment system, which
has historically favored cash settlements. The shortage of cash and resulting
scarcity of working capital has contributed to a severe contraction of customary
trade credit which in turn has brought many commercial activities to a
standstill. The disruption of the payment system has had a particularly
significant impact on Argentina's cash-based informal economy and those who
depend on it.
A significant portion of retail sales is paid in cash and, as a result, the
scarcity of liquidity in the financial system is likely to adversely affect
tenants' sales and the overall financial condition of our tenants and, thus,
will adversely affect our ability to make cash collections.
INFLATION IS ESCALATING AND UNDERMINING PROSPECTS FOR ECONOMIC RECOVERY IN
ARGENTINA
On January 24, 2002, the Argentine government amended the charter of the
Argentine Central Bank to allow the Argentine Central Bank to print currency in
excess of the amount of the foreign reserves it holds without having to maintain
a fixed and direct relationship with the foreign currency and gold reserves, to
make short-term advances to the federal Argentine government to cover its
anticipated budget deficits, and to provide financial assistance to financial
institutions with liquidity or solvency problems.
There is considerable concern that if the Argentine Central Bank prints
currency to finance deficit spending, significant inflation will result. Through
October 31, 2002, the consumer price index and the wholesale price index had
exhibited cumulative increases of 40.0% and 123.5% respectively. Past history
raises serious doubts as to the ability of the Argentine government to maintain
a strict monetary policy and control inflation. In the past, inflation
materially undermined the Argentine economy and the Argentine government's
ability to create conditions that would permit growth. We cannot assure that the
Argentine economy will not be negatively affected by a resurgence of inflation,
which would materially and adversely affecting our financial condition and
results of operations
HIGH UNEMPLOYMENT AND OTHER LABOR DIFFICULTIES HAVE CONTRIBUTED TO THE
SOCIAL UNREST IN ARGENTINA AND MAY AFFECT OUR OPERATIONS
In October 2001, unemployment stood at 18.3%. As a consequence of the
continued recession, unemployment increased to 21.5% in May 2002. Figures are
released bi-annually in May and October, and the current unemployment rate is
believed to be significantly higher than the most recently published official
rate. Moreover, during the last few months since the devaluation of the Peso,
the labor market has
19
not only been affected by unemployment but it has also been negatively affected
by a significant decrease in real salary due to growing inflation.
Unemployment and underemployment continue to create serious social problems
in Argentina. In order to moderate the social instability arising from the labor
situation, the present administration has included in its 2002 budget, social
aid programs aimed at improving health and food provision, employment generation
and a subsidy for the unemployed. Nevertheless, such programs have yet to
mitigate the current social unrest, and if unemployment rates do not decrease
substantially, consumption of retail goods will be detrimentally affected which
in turn will adversely affect the financial condition of APSA's tenants, and
consequently, our results of operations.
RECENT AMENDMENTS TO THE "BANKRUPTCY LAW" ADVERSELY AFFECT PROPERTY RIGHTS
In February 2002, the Argentine Congress amended the bankruptcy law that
impaired certain protections afforded to creditors. Such law suspended any
foreclosure proceedings, whether in or out of court, including under mortgage
and pledge-secured loans, for a 180-day period after its enactment.
Faced with increasing pressure, the Government promulgated a new bankruptcy
law which repealed the suspension of foreclosures. However, the suspension of
such foreclosures was retained for a period of 270 days after its enactment with
respect to a debtor's dwelling, or a debtor's property dedicated to production,
trade or service provision activities. Although the period of 270 days has
expired on November 15, 2002, we cannot assure you that the Argentine government
would not concede debtors a new extension of the suspension of the foreclosures.
UNCERTAINTY REGARDING ARGENTINE AND BRAZILIAN PRESIDENTIAL ELECTIONS.
There is great uncertainty with respect to the Argentine electoral future.
It is not still clear if presidential elections will be held in April 2003, as a
consequence of a consented early resignation of President Duhalde or if they
will be postponed. The political turbulence caused by oncoming elections can
jeopardize the relative economic stability achieved during the last months of
year 2002.
The future of Argentina relies in a great extent on the policies that the
newly elected president is to implement. Investment decisions will depend on the
future government's ability to revert investors' distrust by guarantying the
fulfillment of property rights, contracts and laws. The future of the country
will as well depend on the achievement of a sustainable and solvent fiscal
situation.
Moreover, the measures that are expected to be adopted by the recently
elected president in Brazil, Luiz Inacio Da Silva, beginning in January 2003,
would also have a significant impact on Argentina's political and economic
future.
FUTURE GOVERNMENTAL POLICIES WILL LIKELY SIGNIFICANTLY AFFECT THE ECONOMY
AS WELL AS THE OPERATIONS OF FINANCIAL INSTITUTIONS
The Argentine government has historically exercised significant influence
over the economy, and financial institutions, in particular, have operated in a
highly regulated environment. Due to the current Argentine crisis, in the last
few months the Argentine government has promulgated numerous, far-reaching and
not always consistent laws and regulations affecting the economy as well as
financial institutions in particular. We cannot assure you that laws and
regulations currently governing the economy or the banking sector will not
continue to change in the future, particularly in light of the continuing
economic crisis, or that any changes will not adversely affect our business,
financial condition or results of operations as well as our ability to honor our
foreign-currency denominated debt obligations.
Due to the current social and political crisis, investing in Argentina also
entails the following risks:
o civil unrest, rioting, looting, nation-wide protests, widespread
social unrest and strikes;
o expropriation, nationalization and forced renegotiation or
modification of existing contracts; and
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o taxation policies, including royalty and tax increases and retroactive
tax claims.
RISKS RELATED TO OUR BUSINESS
UNCERTAINTIES RESULTING FROM THE CONTINUED DETERIORATION OF THE ARGENTINE
ECONOMY, THE ARGENTINE GOVERNMENT'S ADOPTION OF VARIOUS ECONOMIC MEASURES AND
THE DEVALUATION OF THE PESO GIVE RISE TO A SUBSTANTIAL DOUBT AS TO OUR ABILITY
TO REMAIN A GOING CONCERN.
Our audited consolidated financial statements have been prepared on the
assumption that we will continue as a going concern. As a result of the
continued deterioration of the Argentine economy, the devaluation of the Peso
and the Argentine government's adoption of various economic measures, as further
described in the Risk Factors discussed below, we cannot assure you that we will
be able to obtain the necessary financial resources to repay or refinance our
debt, that the restrictions imposed by the Argentine Central Bank on the
transfer of funds abroad will not prevent us from paying principal and interest
on our external debt as it comes due or that these conditions will not have a
material adverse effect on our financial condition or results of operations.
On September 9, 2002, our independent auditors issued a report stating that
we were negatively impacted by the continued deterioration of the Argentine
economy, the Argentine government's adoption of various economic measures and
the devaluation of the Peso which raises substantial doubt as to our ability to
continue as a going concern. Investors in our securities should review the
report of PricewaterhouseCoopers, Buenos Aires, Argentina, carefully. We cannot
assure you that we will be able to continue as a going concern. Our consolidated
financial statements do not include the effects of eventual adjustments and
restatements, if any, if we were required to sell our assets to pay off our
liabilities, including contingent liabilities, under any circumstance other than
in the ordinary course of our business.
THE ARGENTINE CENTRAL BANK HAS IMPOSED RESTRICTIONS ON THE TRANSFER OF
FUNDS OUTSIDE OF ARGENTINA WHICH COULD PREVENT US FROM SERVICING CERTAIN OF OUR
EXTERNAL DEBT AS IT COMES DUE, AND COULD THEREFORE RESULT IN THE ACCELERATION OF
ALL OF OUR INDEBTEDNESS AND OUR INABILITY TO REMAIN A GOING CONCERN.
Since early December 2001, the Argentine government has imposed a number of
monetary and currency exchange control measures that include significant
restrictions on the free disposition of funds deposited with banks and on the
transfer of funds abroad. The prior approval of the Argentine Central Bank is
required for all of our transfers of funds outside of Argentina before February
8, 2003 when such transfers relate to debt principal or interest payments.
Payments on our US$ 100 million convertible notes, US$ 37.4 million secured
floating rate notes and US$ 51.0 million unsecured credit facility may require
such approval. We cannot assure you that the Argentine Central Bank will
authorize principal payments to our foreign creditors pursuant to the terms of
our existing financial agreements. Even if we obtained such authorization, due
to the scarcity of dollars we may find it difficult to convert a large amount of
Pesos into dollars to make payments on our dollar-denominated debt. If the
restrictions on funds transfers remain in effect and the Argentine Central Bank
does not authorize us to remit funds abroad, current and noncurrent debt
obligations may become immediately due and payable, unless new financing is
available to us from outside Argentina or we are able to renegotiate the
indebtedness that is subject to such restrictions. Although we may in the future
undertake to obtain such financing or renegotiate our indebtedness, we cannot
assure you that such efforts would succeed and enable us to remain a going
concern.
WE ARE HIGHLY LEVERAGED AND MAY BE UNABLE TO PAY OUR DEBT
We have, and expect to have, substantial liquidity and capital resource
requirements to finance our business. As of June 30, 2002, we had approximately
Ps. 566.4 million of debt and a working capital deficiency of Ps. 469.8 million.
The amount of leverage that we have and may incur in the future could have
important consequences which include limiting our ability to refinance existing
debt or to borrow money to finance working capital, acquisitions and capital
expenditures and requiring us to dedicate a substantial portion of cash flow to
repay principal and interest, thereby reducing the amount of money available to
invest in
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operations, including making acquisitions and capital expenditures. High
leverage also places us at a disadvantage with respect to competitors who are
not as leveraged, and limits our ability to react to changes in market
conditions, the real estate industry and economic downturns.
We may not be able to generate sufficient funds from operating cash flows
to satisfy our debt service requirements or to obtain future financing. If we
cannot satisfy our debt service requirements or if we default on any of the
various financial and other covenants in our debt arrangements, the holders of
our debt will be able to accelerate the maturity of such debt or cause defaults
under the other debt arrangements. Our ability to service debt obligations or to
refinance them will depend upon future financial and operating performance,
which will, in part, be subject to factors beyond our control such as
macroeconomic conditions and regulatory changes in Argentina. If we cannot
obtain future financing, we may have to delay or abandon some or all of our
planned capital expenditures, which could adversely affect our ability to
generate cash flows and repay our obligations.
WE MAY FACE POTENTIAL CONFLICTS OF INTEREST RELATING TO OUR PRINCIPAL
SHAREHOLDERS
Our largest shareholder, Mr. Eduardo S. Elsztain, currently is the
beneficial owner of approximately 31.1% of our common shares. At October 31,
2002, this consists of:
o 15,582,057 of our common shares owned by Dolphin Fund, plc, an
investment fund in which the principal investment manager is Dolphin
Fund Management, a company where Mr. Eduardo S. Elsztain has a
controlling interest;
o 111,575 of our common shares purchased pursuant to a management
ownership plan of which 68,797 shares are held by a trust for the
benefit of Mr. Eduardo S. Elsztain;
o 43,491,866of our common shares owned by Cresud S.A.C.I.F. y A.
("Cresud"), for which Mr. Eduardo S. Elsztain by reason of his
position with Cresud, may be deemed to own all of our common shares
held for the account of Cresud; and
o 5,392,546 common shares directly owned by Mr. Eduardo S. Elsztain.
Conflicts of interest between our management, ourselves and our affiliates
may arise in the performance of our respective business activities. Mr. Elsztain
and certain other members of our board of directors and senior management also
own (i) approximately 58.9% of the common shares of Cresud S.A.C.I.F. y A., an
Argentine company that currently owns approximately 21.0% of our common shares
and (ii) approximately 7.7% of the common shares of our subsidiary APSA. In some
circumstances, our interests may not be the most important consideration to our
principal shareholders or to their affiliates with influence over our actions.
We cannot assure you that our principal shareholders and their affiliates will
not limit or cause us to forego business opportunities that their affiliates may
pursue or that the pursuit of other opportunities will be in our interest.
THE RECENT DEVALUATION OF THE ARGENTINE PESO AND THE CONTINUED
DETERIORATION OF THE ARGENTINE ECONOMY HAVE HAD, AND MAY CONTINUE TO HAVE, A
MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION
For so long as the Convertibility Law remained in effect, we had no
exchange rate risk relating to our Peso-denominated revenues and our U.S.
dollar-denominated liabilities. However, with the repeal of the Convertibility
Law on February 4, 2002, all U.S. dollar-denominated obligations, which were
within the Argentine banking sector and subject to Argentine Law, were
mandatorily converted into Peso-denominated liabilities at an exchange rate one
Peso to one U.S. dollar. Nevertheless, the majority of our liabilities as of
that date (the US$ 80.0 million syndicated credit facility, the US$ 41.2 million
floating rate notes, the loan from our partner Goldman Sachs for US$ 13.3
million and the loan granted by Bank Boston to our subsidiary Hoteles Argentinos
for US$ 12.0 million) are subject to New York law and thus have not been
converted into Pesos. Moreover, our recently issued US$ 100.0 convertible notes
are dollar-denominated.
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We realize a substantial portion of our revenues in Pesos (such as rental
contracts and seller financing) and, as a result, the devaluation of the Peso
has adversely affected the U.S. dollar value of our earnings and, thus, impaired
our financial condition. Moreover, our Peso-denominated assets (which represent
95.3% of our total assets as of June 30, 2002) have depreciated against our
indebtedness denominated in foreign currency. As of June 30, 2002, we had
outstanding debt amounting to Ps. 566.4 million, of which, 93.11% was
denominated in U.S. dollars. Any further depreciation of the Peso against the
U.S. dollar will correspondingly increase the amount of our debt in Pesos, with
further adverse effects on our results of operation and financial condition, and
may increase the collection risk of our leases and other receivables from our
tenants and mortgage debtors, most of whom have Peso-denominated revenues.
THE MANDATORY PESIFICATION OF CONTRACTS ORIGINALLY DENOMINATED IN U.S.
DOLLARS WILL ADVERSELY AFFECT OUR PROFITABILITY
Although our lease agreements and seller financing loans were denominated
in U.S. dollars, the Argentine government mandatorily converted all U.S. dollar
monetary obligations entered into between private parties prior to January 7,
2002 that are not related to the financial system into Peso-denominated
obligations at a rate of Ps. 1.00 = US$ 1.00. Although the Argentine government
sought to mitigate the adverse effects of this mandatory "pesification" by
permitting the Peso-denominated obligations to be adjusted for inflation
pursuant to an index known as the Coeficiente de Estabilizacion de
Referencia ("CER"), we cannot assure you that an adequate adjustment will apply
to amounts payable to us under our lease and loan agreements. If, as a
consequence of this adjustment, the agreement is unfair to any of the parties,
either may ask the other for a fairness adjustment. If they do not reach an
agreement, a court will make the decision. New lease agreements may be freely
entered into between parties. This new measure is likely to materially and
adversely affect our financial condition and our ability to pay our liabilities
denominated in U.S. dollars (mostly banking and financial loans), because our
cash flows will be denominated in recently devalued Pesos.
THE ARGENTINE GOVERNMENT MAY IMPOSE ADDITIONAL RESTRICTIONS ON THE LEASE,
OPERATION AND OWNERSHIP OF PROPERTY
In the past, in response to housing shortages, high rates of inflation and
difficult access to credit, the Argentine government has imposed strict and
burdensome regulations regarding leases. Such regulations limited or prohibited
rental increases and prohibited eviction of tenants, even for failure to pay
rent. We cannot assure you that the Argentine government will not impose similar
or other regulations in the future. Changes in existing laws or the enactment of
new laws governing the ownership or operation or leasing of properties in
Argentina could materially and adversely affect our operations and
profitability.
There can be no assurance that additional regulations will not be imposed
in the future. Such regulations could negatively affect the Argentine real
estate market, in general, and the rental market, in particular. Furthermore,
most of our leases provide that the tenants pay all costs and taxes related to
their respective leasable areas. In the event of a significant increase in the
amount of such costs and taxes, the Argentine government may respond to
political pressure to intervene by regulating this practice, thereby negatively
affecting our rental income.
WE HOLD POSITIONS IN ARGENTINE SECURITIES WHICH ARE MORE VOLATILE THAN
UNITED STATES SECURITIES, AND CARRY A GREATER RISK OF DEFAULT
We currently have and in the past have had certain investments in Argentine
government debt, corporate debt and equity securities. In particular, we hold a
significant interest in Banco Hipotecario S.A.("Banco Hipotecario"), an
Argentine bank that has recently suffered material losses. Although the holding
of these investments, with the exception of Banco Hipotecario, tends to be short
term, investments in such securities involve certain risks, including:
o market volatility, higher than those typically associated with U.S.
government and corporate securities; and
o loss of principal.
23
Some of the issuers in which we have invested and may invest, including the
Argentine government, have in the past experienced substantial difficulties in
servicing their debt obligations, which have led to the restructuring of certain
indebtedness. We cannot assure that the issuers in which we have invested or may
invest will not be subject to similar or other difficulties in the future which
may adversely affect the value of our investments in such issuers. In addition,
such issuers and, therefore, such investments, are generally subject to many of
the risks that are described in this section, and may have little if any value.
REAL ESTATE INVESTMENTS ARE SUBJECT TO MANY RISKS
Our real estate investments are subject to risks common to commercial and
residential properties in general, many of which are not within our control. Any
one or more of these risks might materially and adversely affect our business,
financial condition or results of operations. The yields available from equity
investments in real estate depend on the level of sales or rental income
generated and expenses incurred.
Our ability to generate income from our properties sufficient to service
our debt and cover other expenses may be adversely affected by the following
factors, among others, some of which we cannot control:
o oversupply of retail space or a reduction in demand for retail space,
which could result in lower rent prices and lower revenues for us;
o increased competition from other real estate operators which might
drive down our prices and profits;
o changes in our ability or our tenants' ability to provide for adequate
maintenance and insurance, possibly decreasing the life of and revenue
from a property;
o increases in operating expenses which could lower our profitability;
o the inability to collect rents due to bankruptcy or insolvency of
tenants or otherwise;
o the need to periodically renovate, repair and release space, the
higher costs thereof and the ability of our tenants to provide
adequate maintenance and insurance, possibly decreasing the life of
and revenue from a property; and
o the exercise by our tenants of their legal right to early termination
of their leases.
In addition, other factors may adversely affect the performance and value
of our properties, including changes in laws and governmental regulations
(including those governing usage, zoning and real property taxes), changes in
interest rates (including the risk that increased interest rates may result in
decreased sales of lots in the residential development properties) and the
availability of financing. Increases in operating costs due to inflation and
other factors may result in some tenants being unable or unwilling to pay rent
or expense increases. Certain significant expenditures, such as debt service,
real estate taxes, and operating and maintenance costs, are generally not
reduced, in circumstances resulting in a reduction in income from the
investment. The foregoing and any other factor or event that would impede our
ability to respond to adverse changes in the performance of our investments
could have a material adverse effect on our financial condition and results of
operations.
OUR FAILURE TO SELL PLANNED PROPERTIES WILL ADVERSELY AFFECT OUR FINANCIAL
CONDITION
Puerto Retiro and Santa Maria del Plata are two unique plots of land
characterized by their size and their waterfront location in the heart of the
City of Buenos Aires. We had initially intended these to become two of the
largest projects in our history, but currently we have been forced to delay
their launch due to the economic crisis in Argentina. Due to the absence of
available financing and lack of demand for such new developments, we will not be
able to resume these important projects unless a substantial economic recovery
occurs in Argentina. To date, we have invested Ps. 41.2 million in Puerto Retiro
and Ps. 103.2
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million in Santa Maria del Plata. Historically, a great part of our revenues
have been derived from the sale and development of properties, so if we fail to
develop these new projects, our future revenues would be materially and
adversely affected. Our failure to sell these properties for the prices and by
the dates initially forecasted would adversely affect our results of operations
and financial condition.
REAL ESTATE MARKET ILLIQUIDITY AND DECLINING PROPERTY VALUES IN U.S.
DOLLARS MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION
The current Argentine crisis, including the freezing of bank deposits and
the devaluation of the Peso, is deteriorating the value in a U.S. dollar basis
and increasing the illiquidity of real estate investments. As a result, it may
be more difficult for us to adjust our property portfolio promptly in response
to changes in economic or business conditions or to the factors described above.
The economic recession and the devaluation of the Peso have significantly
reduced consumer spending power, and the social unrest and ensuing political
instability together with the succession of governmental measures have adversely
affected the normal operations of banks have heightened uncertainty and eroded
confidence in the possibility of recovery. If we are forced to sell one or more
of our properties in order to cover operating expenses or to satisfy debt
service obligations, or if we were liquidated, the proceeds from such sales
might be less than our total investment in the properties sold.
OUR BUSINESS IS SUBJECT TO EXTENSIVE REGULATION
The real estate business is subject to extensive building and zoning
regulations by various federal, state and municipal authorities, which affect
land acquisition, development and construction activities, and certain dealings
with customers, as well as consumer credit and consumer protection statutes and
regulations. We are required to obtain approval from various governmental
authorities for our development activities, and new laws or regulations could be
adopted, enforced or interpreted in a manner that could adversely affect our
results of operations and levels of cash flow necessary or available to meet our
obligations. Development activities are also subject to risks relating to the
inability to obtain, or delays in obtaining all necessary zoning, environmental,
land-use, development, building, occupancy and other required governmental
permits and authorizations. We and our affiliates' operations are also subject
to federal, state and municipal environmental laws applicable in Argentina. We
believe that such laws and regulations currently do not materially affect our
business or results of operations. We cannot assure you, however, that
regulations affecting the real estate industry, including environmental
regulations, will not change in a manner which could have a material adverse
effect on our business.
ARGENTINE LEASE LAW IMPOSES LEASE RESTRICTIONS THAT LIMIT OUR FLEXIBILITY
Argentine laws governing leases impose certain restrictions, including the
following:
o lease agreements may not contain inflation adjustment clauses based on
consumer price indexes or whole price indexes. Although a lot of our
lease agreements contain readjustment clauses, these are not based on
an official index nor do they reflect the inflation index. In the
event of litigation it may be impossible for us to increase the
amounts owed under our lease agreements;
o lease agreements must be for a minimum term of two years for
residential properties and three years for retail property, except in
the case of stands and/or spaces for special exhibitions;
o lease terms may not exceed ten years, except for the leases regulated
by Law No. 25,248 (which provides that leases containing a purchase
option are not subject to term limitations); and
o tenants may rescind commercial lease agreements after the initial six
months. The exercise of such rescission rights by our tenants could
materially and adversely affect our business and we cannot assure you
that our tenants will not exercise such right, especially if rent
values stabilize or decline in the future.
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EVICTION PROCEEDINGS IN ARGENTINA ARE DIFFICULT AND TIME CONSUMING
Despite the enactment of a law amending the Argentine civil procedures that
by which the lessor may, through a security interest, obtain the immediate
eviction of the tenant, historically, the heavy workload on the courts that hear
these matters and the numerous procedural steps required have generally delayed
efforts of landlords to evict tenants. Before the enactment of the above
mentioned law, eviction proceedings generally lasted from six months to two
years from the date of filing of the suit to the time of actual eviction.
Historically, delinquency regarding office rental space has been very low,
approximately 2%, and we have usually attempted to negotiate the termination of
lease agreements with defaulting tenants after the first few months of
non-payment in order to avoid legal proceedings. Delinquency may increase
significantly in the future, and such negotiations with tenants may not be as
successful as they have been in the past. Moreover, new Argentine laws and
regulations may forbid or restrict eviction proceedings, and in such case, they
would likely have a material and adverse effect on our financial condition and
results of operation.
OUR ASSETS ARE CONCENTRATED IN THE BUENOS AIRES AREA
Our principal properties are located in the city of Buenos Aires and the
greater Buenos Aires area and a substantial portion of our revenues are derived
from such properties.
For the fiscal year ended June 30, 2002, subsequent to the sale of Brazil
Realty, 100% of our sales were derived from properties in the city of Buenos
Aires and greater Buenos Aires. Although we own properties and may acquire or
develop additional properties outside of the city of Buenos Aires and the
greater Buenos Aires area, we expect to continue to depend to a very large
extent on economic conditions in those areas, and therefore, an economic
downturn in those areas could have a material adverse effect on our financial
condition.
OUR REAL ESTATE ACTIVITIES THROUGH SUBSIDIARIES AND JOINT VENTURES ARE
SUBJECT TO ADDITIONAL RISKS
We conduct a substantial part of our real estate activities through
subsidiaries and strategic alliances with other companies. We have several
important investments in companies in which we own less than a majority of the
voting stock, the most important of which is APSA. In the future, we may
increase our real estate activities through such vehicles. As a result, we
depend to a certain extent on the successful operation of subsidiaries and
strategic alliances and upon income, dividends and other distributions from them
to maintain our profitability, liquidity and growth. Moreover, joint ownership
of properties involves additional risks. For example, our partners or
co-investors may:
o become bankrupt or insolvent;
o develop business objectives or goals which are different from ours; or
o take actions that are contrary to our instructions or requests or that
are otherwise contrary to our interests.
DEVELOPMENT AND CONSTRUCTION ACTIVITIES ARE INHERENTLY RISKY
We engage in the development and construction of office, retail and
residential properties, generally through third-party contractors. Risks
associated with our development and construction activities include the
following, among others:
o we may abandon development opportunities and renovation proposals;
o construction costs of a project may exceed our original estimates,
making a project unprofitable;
o occupancy rates and rents at a newly completed project may be
insufficient to make the project profitable;
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o pre-construction buyers may default on their purchase contracts or
units in new buildings may remain unsold upon completion of
construction;
o we may be unable to obtain financing on favorable terms for the
development of the project;
o sale prices for residential units may be insufficient to cover
development costs;
o construction and lease-up may not be completed on schedule, resulting
in increased debt service expense and construction costs; and
o we may be unable to obtain, or may face delays in obtaining, all
necessary zoning, land-use, building, occupancy and other required
governmental permits and authorizations.
OUR FUTURE ACQUISITIONS MAY BE UNPROFITABLE
We intend to acquire additional properties to the extent that they will be
acquired on advantageous terms and meet our investment criteria. Acquisitions of
commercial properties entail general investment risks associated with any real
estate investment, including:
o the risk that investments will fail to perform as expected, or
o the risk that estimates of the cost of improvements needed to bring
the property up to established standards for the market might prove to
be inaccurate.
WE MAY NOT BE ABLE TO RECOVER THE MORTGAGE LOANS WE HAVE MADE
In recent years, we have provided mortgage financing to purchasers of units
in our residential development properties. Before January 2002, our mortgage
loans were U.S. dollar-denominated and accrued interest at a fixed interest rate
ranging generally from 10% to 15% per year and for terms ranging generally from
3 to 15 years. However, on March 13, 2002, the Argentine Central Bank converted
all U.S. dollar denominated debts into Pesos at the exchange rate of Ps. 1 to
U.S. dollars 1 and imposed maximum interest rate on mortgage loans of 3.0% for
residential mortgage loans granted to individuals and 6% for mortgage loans
granted to business organizations. These modifications adversely affected the
dollar value of our outstanding mortgage loans which at June 30, 2002,
aggregated approximately Ps. 4.9 million.
We are subject to risks normally associated with providing mortgage
financing, including the risk of default in the payment of principal and
interest, which could adversely affect our cash flow. Argentine law imposes
significant restrictions on our ability to foreclose and auction properties.
Thus, if there is a default under a mortgage loan, we do not have the right to
foreclose on the unit. Instead, in order to reacquire a property, we are
required to purchase each unit at a public court ordered auction, or at an
out-of-court auction, in accordance with Law No. 24,441. We cannot assure you
that we will be able to recover any amount outstanding on any mortgage loan
through the sale of any property at such an auction.
We cannot assure you that any future inflation adjustment coefficient will
adequately reflect inflation so or that such adjustment will not increase
delinquency on our outstanding mortgage portfolio, thus reducing future
revenues.
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OUR SUBORDINATED PARTICIPATIONS IN SECURITIZED MORTGAGE LOANS MAY HAVE NO
VALUE
Additionally, in December 2001, we securitized almost the entirety of the
mortgage portfolio originated by us since late 1992, amounting to Ps. 26.6
million, through the sale of this portfolio to Fideicomiso IRSA I. Banco
Sudameris Argentina acts as trustee and collection agent for the trust.
Fideicomiso IRSA I issued four classes of participation certificates under a
scheme of complete subordination, in which each class is serviced only upon the
total payment of the preceding senior class. We hold all of the Class B, Class C
and Class D participation certificates and approximately 10% of the Class A
certificates. Class D certificates represent the most junior class, have no
fixed return and will yield the funds remaining in the trust after Classes A, B
and C and all the expenses of the trust have been completely paid for. Face
value for this class amounts to Ps. 10.7 million.
This portfolio was originally originated in U.S. dollars and mandatory
converted into Pesos in January 2002. Additionally, mortgages in the trust were
subject to inflation adjustment between February and April 2002. Following these
changes, the terms and conditions of the certificates of deposit issued by the
trust were modified to reflect changes in the underlying assets. In May,
inflation adjustment on residential mortgages on homes granted to individuals
was eliminated until next October, when adjustment will be performed according
to a different inflation index. The terms and conditions of the certificates of
deposit were modified again to reflect this new change.
The asset quality of the portfolio has declined as a result of the current
economic crisis in Argentina, and as a result we cannot assure you that the
trust will have sufficient or any funds to service initially the subordinated
certificates held by us. If it does not, the value of these bonds might be
considerably reduced or even equal to zero.
We cannot assure you that the theoretical cash flow to be generated by the
participation certificates owned by us (and included in the annual report), will
be the actual one, as successive changes in the terms and conditions of the
underlying assets have been occurring since January 2002 and additional
modifications might be introduced by fiscal authorities or the Ministry of
Finance, which could have further consequences on the respective cash flows.
WE ARE SUBJECT TO RISKS AFFECTING THE HOTEL INDUSTRY
The full-service segment of the lodging industry in which we operate our
hotels is highly competitive. The success of our hotels will depend, in large
part, upon our ability to compete in areas such as access, location, quality of
accommodations, room rate structure, quality and scope of food and beverage
facilities and other services and amenities. Our hotels may face additional
competition if other companies decide to build new hotels or improve their
existing hotels such that they are more attractive to potential guests. In this
regard, several prominent hotel chains, like Nikko, have announced that they
plan to build new hotels in the city of Buenos Aires, although they have not yet
done so.
In addition to the general risks associated with investments in Argentina
and in real estate discussed elsewhere in this section, the profitability of our
hotels depends on:
o our ability to form successful relationships with international
operators to run our hotels;
o changes in travel patterns, including seasonal changes; and
o taxes and governmental regulations which influence or determine wages,
prices, interest rates, construction procedures and costs.
WE ARE DEPENDENT ON OUR SENIOR MANAGEMENT
Our success depends, to a significant extent, on the continued employment
of Eduardo S. Elsztain, our chief executive officer, president and chairman of
the board of directors, and M. Marcelo Mindlin, our executive vice-president,
first vice-chairman of the board of directors and chief financial officer. The
loss of their services for any reason could have a material adverse effect on
our business. If our current
28
principal shareholders were to lose their influence on the management of our
business, our principal executive officers could resign or be removed from
office.
Our future success also depends in part upon our ability to attract and
retain other highly qualified personnel. We cannot assure you that we will be
successful in hiring or retaining qualified personnel, or that any of our
personnel will remain employed by us.
IF WE ARE CONSIDERED TO BE A PASSIVE FOREIGN INVESTMENT COMPANY FOR UNITED
STATES FEDERAL INCOME TAX PURPOSES, UNITED STATES HOLDERS OF OUR SECURITIES
WOULD SUFFER NEGATIVE CONSEQUENCES
Based on the current and projected composition of our income and valuation
of our assets we do not believe we were a PFIC for United States federal income
tax purposes for the tax year ending June 30, 2002, and we do not currently
expect to become a Passive Foreign Investment Company ("PFIC"), although there
can be no assurance in this regard. The determination of whether we are a PFIC
is made annually. Accordingly, it is possible that we may be a PFIC in the
current or any future taxable year due to changes in our asset or income
composition or if our projections are not accurate. The volatility and
instability of Argentina's economic and financial system may substantially
affect the composition of our income and assets and the accuracy of our
projections. If we become a PFIC, United States Holders of our shares or GDSs
will be subject to certain United States federal income tax rules that have
negative consequences for United States Holders such as additional tax and an
interest charge upon certain distributions by us or upon a sale or other
disposition of our shares or GDSs at a gain, as well as reporting requirements.
Please see "Taxation-United States Taxation" for a more detailed discussion of
the consequences if we are deemed a PFIC. You should consult your own tax
advisors regarding the application of the PFIC rules to your particular
circumstances.
RISKS RELATED TO APSA
APSA WAS NOT IN COMPLIANCE WITH CERTAIN FINANCIAL COVENANTS AND IT IS NOT
ABLE TO INCUR ANY ADDITIONAL INDEBTEDNESS FOR SO LONG AS SUCH COVENANT VIOLATION
IS IN EXISTENCE
As of September 30, 2001, APSA began not to be in compliance with certain
financial covenants with respect to the US$ 120 million secured senior notes due
in 2005 and the Ps. 85 million unsecured notes due in 2005. Therefore and
considering that this event does not entail the impossibility of regularly
performing APSA's obligations which is rather a direct consequence of the
general economic situation APSA's board of directors called a special
bondholders meeting for the US$ 120 million secured senior notes where APSA
obtained the limited waiver with respect to such covenant violations until the
submission of the financial statements dated December 31, 2002. No such waiver
was obtained with respect to the unsecured notes for Ps. 85 million, and as a
result, APSA is not able to incur any additional indebtedness for so long as
such financial covenant violation is in existence.
THE ARGENTINE CENTRAL BANK HAS IMPOSED RESTRICTIONS ON THE TRANSFER OF
FUNDS OUTSIDE OF ARGENTINA, WHICH COULD PREVENT APSA FROM SERVICING CERTAIN
PAYMENTS IN CONNECTION WITH APSA'S SWAP AGREEMENT, AND THEREFORE COULD RESULT IN
THE ACCELERATION OF ALL OF APSA'S INDEBTEDNESS
Since early December 2001, the Argentine government has imposed a number of
monetary and currency exchange control measures that include significant
restrictions on the free disposition of funds deposited with banks and on the
transfer of funds abroad. The prior approval of the Argentine Central Bank is
required for all of our transfers of funds outside of Argentina before February
8, 2003 when such transfers relate to debt principal or interest payments. APSA
entered into a swap agreement with Morgan Guaranty Trust to cover and reduce the
interest rate of the Ps. 85 million unsecured notes. Payments that could be
required under the swap agreement may require such approval. APSA cannot assure
you that the Argentine Central Bank will authorize payments to APSA's foreign
creditors pursuant to the terms of APSA's existing financial agreements. Even if
APSA obtained such authorization, due to the scarcity of U.S. dollars APSA may
find it difficult to convert a large amount of Pesos into U.S. dollars to make
payments that could be required in connection with APSA'a swap
29
agreement. If the restrictions on funds transfers remain in effect and the
Argentine Central Bank does not authorize APSA to remit funds abroad, current
and noncurrent debt obligations may become immediately due and payable, unless
new financing is available to APSA from outside Argentina or APSA is able to
renegotiate the payments that could be required and are subject to such
restrictions. Although APSA may in the future undertake to obtain such financing
or renegotiate the payments that could be required, APSA cannot assure you that
such efforts would succeed.
APSA IS HIGHLY LEVERAGED AND MAY BE UNABLE TO PAY ITS DEBT
APSA has had, and expects to have substantial liquidity and capital
resource requirements to finance its business. As of June 30, 2002, APSA had
approximately Ps. 317.3 million of debt (net of accrued interest).
The amount of leverage that APSA has and may incur in the future could have
important consequences which include limiting its ability to refinance existing
debt or to borrow money, to finance working capital, acquisitions and capital
expenditures and requiring APSA to dedicate a substantial portion of its cash
flow to repay principal and interest, thereby reducing the amount of money
available to invest in operations, including making acquisitions and capital
expenditures. High leverage also places APSA at a disadvantage with respect to
less leveraged competitors and limits its ability to react to changes in market
conditions, the real estate industry and economic downturns.
APSA may not be able to generate sufficient funds from operating cash flows
to satisfy its debt service requirements or to obtain future financing. If APSA
cannot satisfy its debt service requirements or if APSA defaults on any of the
various financial and other covenants in its debt arrangements, the holders of
its debt will be able to accelerate the maturity of such debt or cause defaults
under the other debt arrangements. APSA's ability to service debt obligations or
to refinance them will depend upon future financial and operating performance,
which will, in part, be subject to factors beyond its control such as
macroeconomic conditions and regulatory changes. If APSA cannot obtain future
financing, it may have to delay or abandon some or all of its planned capital
expenditures, which could adversely affect its ability to generate cash flows.
On February 8, 2002 we and Parque Arauco, principal shareholders of APSA,
subordinated the collection of loan receivables granted by us to APSA to the
repayment of principal and interest on APSA's US$ 120 million Senior Notes and
on its short-term debt. If APSA defaults on its indebtedness, due to
cross-default provisions in the agreements that govern our syndicated credit
facility and floating rate notes, any event of default under any of their Senior
Notes, Notes or their swap agreement would also constitute an event of default
under our financial agreements. If we and APSA are unable to reach a
satisfactory agreement with creditors and they accelerate APSA's and/or our
financial debt or otherwise exercise remedies, we and APSA will not be able to
honor payment obligations and will likely be forced to restructure our
liabilities and seek the protection of the bankruptcy courts. As of June 30,
2002, APSA's debt to us was Ps. 40.6 million. The loan was used to suscribe the
convertible notes that APSA issued on July 19, 2002.
APSA'S USE OF FINANCIAL INSTRUMENTS FOR HEDGING MAY RESULT IN MATERIAL
LOSSES
APSA uses various off-balance sheet financial instruments to reduce its
financing cost associated with its borrowings. The interest rate swaps and
foreign currency contracts are entered into for periods consistent with related
underlying exposures and generally do not constitute positions independent of
those exposures.
Nevertheless, APSA's hedging strategies may prove ineffective to address
the effects of interest rate or foreign currency exchange movements on its
financial condition. APSA has experienced net hedging losses in the past, and
could experience such losses in the future to the extent that interest rates or
foreign exchange rates shift in excess of the risk covered by hedging
arrangements. In entering into interest rate and foreign currency contracts,
APSA bears the credit risk of counterparties being unable to meet the terms of
their contracts; and APSA may be unable to recover damages from any such
defaulting counter
30
party through legal enforcement actions due to laws affording bankruptcy or
similar protection to insolvent obligors, foreign laws limiting cross-border
enforcement actions or otherwise.
On March 30, 2000, in connection with the issuance of unsecured notes for
the nominal amount of Ps. 85.0 million due April 7, 2005, APSA entered into a
swap agreement with Morgan Guaranty Trust in order to cover and reduce the
interest rate of the notes. This swap agreement initially allowed APSA to reduce
the net cost of its debt. However, due to the current situation of the Argentine
economy, the political instability and the depreciation of the Argentine public
debt, there was a negative deviation of the performance of the swap agreement
that required the modification of the original terms. Under the terms of the
revised agreement, APSA converted its Peso-denominated fixed rate debt to U.S.
dollar denominated floating rate debt for a nominal amount of US$ 69.1 million
with maturities through March 2005. As collateral for the agreement, APSA was
required to make a deposit of US$ 50.0 million with the counter party. APSA is
not required to make additional deposits until maturity. An additional payment
at maturity could be required depending on the prevailing exchange rate between
the Peso and the U.S. dollar. Thus, a continued devaluation of the Peso and/or
an increase in interest rates would increase the loss which could be material to
APSA.
As of Octoberber 31, 2002, APSA was not using any other derivatives.
THE IMPACT OF THE MANDATORY PESIFICATION AND THE POSSIBILITY OF CHANGES IN
THE ACTUAL INDEXATION SYSTEM FOR CONTRACTS ORIGINALLY DENOMINATED IN U.S.
DOLLARS MAY AFFECT APSA'S PROFIT
Although APSA's lease agreements are U.S. dollar-denominated obligations,
Decree No. 214 and Decree No. 762 mandatory converted all U.S. dollar monetary
obligations entered into between private parties prior to January 7, 2002 that
are not related to the financial system into Peso-denominated obligations at a
rate of Ps. 1.00 = US$ 1.00. Additionally, these obligations are subject to
inflation adjustment through the CER index. We cannot assure you that these
adjustment methods will exist in the future or that they will accurately reflect
inflation. If, as a consequence of this adjustment, the agreement is unfair to
any of the parties, either may ask the other for a fairness adjustment. If they
do not reach an agreement, a court will make the decision. New lease agreements
may be freely entered into between parties.
These changes have converted APSA's dollar-denominated revenues from leases
into Pesos. This conversion may materially and adversely affect APSA's financial
condition and its ability to make payment of its liabilities denominated in U.S.
dollars, because its cash flows will be denominated in devaluated Pesos.
APSA'S FAILURE TO SELL PLANNED PROPERTIES WILL ADVERSELY AFFECT ITS
FINANCIAL CONDITION
In light of the continuing political and economic crisis in Argentina, APSA
might have difficulty or fail to sell the properties of its Coto residential
project, Rosario project and Alcorta Plaza project, all of which APSA is
planning to construct. Alcorta Plaza is an office building, which APSA intends
to construct in front of Paseo Alcorta Shopping. The project's feasibility has
been approved by municipal authorities, but final approval is still pending. As
a result, APSA can not assure that such pending approval will be obtained or
that the proposed project will be completed. The Rosario project is composed of
the construction of a shopping center and a high-rise residential complex in the
city of Rosario. APSA expects to finance the main part of the fund through
working capital, and if necessary APSA is going to get debt financing in a
limited amount. A failure or a delay in selling these properties would result in
lower results of operations and have a material adverse effect on APSA's
financial condition.
APSA IS SUBJECT TO SHOPPING CENTER OPERATING RISKS THAT MAY RESULT IN LOWER
PROFITABILITY OF ITS SHOPPING CENTERS
Shopping centers are subject to various factors that affect their
development, administration and profitability. These factors include:
o the accessibility and the attractiveness of the area where the
shopping center is located;
31
o the intrinsic attractiveness of the shopping center;
o the flow of people and the level of sales of each shopping center
rental unit;
o the amount of rent collected from each shopping center rental unit;
and
o the fluctuations in occupancy levels in the shopping centers.
In the event that there is an increase in operational costs, caused by
inflation or other factors, it could have a material adverse effect on APSA if
its tenants are unable to pay their higher rent obligations due to the increase
in expenses.
Moreover, the shopping center business is closely related to consumer
spending, and, therefore, to the economy in which such customers are located.
All of APSA's shopping centers are located in Argentina, and, as a consequence,
its business has been seriously affected by the Argentine recession.
Unemployment, political instability and inflation have reduced consumer spending
in Argentina, lowering tenants' sales and forcing some of them to leave APSA's
shopping centers. This has reduced APSA's occupied space and consequently, its
revenues.
CONCENTRATION OF ASSETS
APSA's principal properties are located in the city of Buenos Aires and the
greater Buenos Aires area, and substantially all of its revenues are derived
from such properties. For the fiscal year ended June 30, 2002, approximately 98%
of its sales were derived from properties in the city of Buenos Aires and
greater Buenos Aires. Although APSA owns properties and may acquire or develop
additional properties outside of the city of Buenos Aires and the greater Buenos
Aires area, it expects to continue to depend, to a large extent, on properties
in those areas, and, therefore, an economic downturn in those areas could have a
material adverse effect on its financial condition.
THE CONCEPT OF THE SHOPPING CENTER IS RELATIVELY NEW AND IN A DEVELOPMENT
PROCESS IN ARGENTINA
The concept of the shopping center and the broad use of shopping centers by
consumers is only beginning to develop in Argentina. The first shopping center
of Argentina was inaugurated in 1987. Although there has been a considerable
expansion of shopping center properties, many retail stores in Argentina are not
located in shopping centers. Therefore, the continued success of APSA's business
plan depends to a certain extent on the continued shift by consumers from
shopping at traditional street-level retail stores to large-scale shopping
centers of the type owned and operated by APSA.
THE SHIFT OF CONSUMERS TO PURCHASING GOODS OVER THE INTERNET MAY HURT
APSA'S SHOPPING CENTER SALES
During the last two years, retail sales by means of the internet have grown
very significantly in Argentina even though the market share of internet sales
related to retail sales is still not significant. The internet enables
manufacturers and retailers to sell directly to consumers, diminishing the
importance of traditional distribution channels such as retail stores and
shopping centers. APSA believes that its target consumers are increasingly using
the internet, from home, work or elsewhere, to shop electronically for retail
goods, and that they are likely to continue doing so. If e-commerce and retail
sales through the internet continue to grow at current rates, consumers'
reliance on traditional distribution channels such as APSA's shopping centers
could be materially diminished, having a material adverse effect on APSA's
financial condition, results of operations and prospects.
APSA'S INVESTMENTS IN INTERNET COMPANIES ARE SUBJECT TO HIGH RISK
APSA's internet investments involve a high risk. Internet companies are
relatively new and there is little or no historical operating and financial
information available to analyze. Additionally, in the first years of operation,
internet companies do not generate earnings or positive cash flows, and their
losses must be covered with capital contributions from the investors. There is
no assurance that internet
32
companies will generate earnings or will be able to obtain financing once the
initial capital contributions are already used. Therefore, APSA's risks
associated with internet companies include the possibility that:
o APSA will not recover the investments already made and the one
committed.
o APSA will have to increase its capital contributions to finance the
internet companies.
APSA may also experience the following additional risks with respect to its
investment in internet companies:
o the possibility that the internet company might not maintain and/or
increase the level of traffic of the sites;
o the internet company might not adapt itself or anticipate the changes
in the market;
o the internet company may be inefficient in updating and developing the
necessary systems and organization and in hiring new or specialized
personnel;
o the chance that the world wide web will not be able to handle the site
traffic;
o the difficulty in generating expected income;
o the failure in the administration of expansion of operations; and
o the lack of efficiency to merge new lines of business to the existing
operations.
Moreover, it should be taken into account that the expected level of use
and acceptance of the internet and of online services might never be reached.
APSA IS SUBJECT TO THE RISK OF PAYMENT DEFAULTS DUE TO ITS INVESTMENTS IN
CREDIT CARD BUSINESSES
Investments in credit card businesses can be adversely affected by
delinquency on credit card accounts, defaults in payments by credit card
holders, judicial enforcement for the collection of payments, doubtful accounts
or loss of receivables. The present rates of delinquency, collection proceedings
and loss of receivables may vary and be affected by numerous factors, which
among others include:
o adverse changes in the Argentine economy;
o adverse changes in the regional economies;
o political instability;
o increase of unemployment; and
o loss of value of actual salaries.
These and other factors may have an adverse effect on present rates of
delinquency, executions and losses, any one or more of which could have a
material adverse effect on the results of operations of APSA's credit card
business. Recessionary economic conditions in Argentina have persisted for
several years and have worsened in recent months. In addition, if APSA's credit
card business is adversely affected by any one or more of the above factors, the
asset quality of APSA's securitized receivables are also likely to be adversely
affected. Therefore, APSA could adversely be affected to the extent that at such
time it holds a participating interest in any such securitized receivables.
A high percentage of credit card holders are employees. Consequently,
reductions in employment, suspensions or reductions in salaries may reduce
credit card holders' incomes, thus, adversely affecting APSA's credit card
revenue collections.
33
SELLER FINANCING
Although mortgage financing for residential property is available from
banks and financial institutions in Argentina, APSA continues to provide
seller-financing to purchasers of units in its residential development
properties by extending mortgage loans to such purchasers. APSA's mortgage loans
are U.S. dollar-denominated, currently bear interest at fixed interest rates
ranging from 9% to 17% per year and have terms ranging from one to fifteen
years. As of June 30, 2002, APSA had approximately Ps. 1.7 million in
outstanding mortgage loans.
APSA is subject to risks normally associated with providing mortgage
financing, including the risk of default on the payment of principal and
interest, which could adversely affect our cash flow. Argentine law imposes
significant restrictions on our ability to foreclose and auction properties.
Thus, if there is a default under a mortgage loan, we do not have the right to
foreclose on the unit. Instead, in order to reacquire a property, we are
required to purchase each unit at a public court ordered auction, or at an
out-of-court auction, in accordance with Law No. 24,441. APSA cannot assure you
that it will be able to recover any amount outstanding on any mortgage loan
through the sale of any property at such an auction.
Furthermore, APSA cannot assure you that any future inflation adjustment
coefficient will adequately reflect inflation or that such adjustment will not
increase delinquency on our outstanding mortgage portfolio, thus reducing future
revenues.
APSA IS CONTROLLED BY TWO PRINCIPAL SHAREHOLDERS
As of October 31, 2002, we and Parque Arauco, APSA's principal
shareholders, owned in the aggregate approximately 77.6% of APSA's capital
stock. These principal shareholders control APSA and have, and will continue to
have, significant influence on the election of its directors and the outcome of
any action requiring shareholder approval.
APSA'S FUTURE ACQUISITIONS MAY BE UNPROFITABLE
APSA intends to acquire additional shopping center properties to the extent
that they will be acquired on advantageous terms and meet its investment
criteria. Acquisitions of commercial properties entail general investment risks
associated with any real estate investment, including:
o the risk that investments will fail to perform as expected, or
o the risk that estimates of the cost of improvements needed to bring
the property up to established standards for the market may prove to
be inaccurate.
APSA IS SUBJECT TO COMPETITIVE PRESSURE
Most of APSA's properties are located in the city of Buenos Aires and
greater Buenos Aires. There are other shopping centers and numerous smaller
retail stores and residential properties within the market area of each of our
properties. The number of competitive properties in a particular area could have
a material adverse effect on APSA's ability to lease retail space in their
shopping centers or sell units in their residential complexes and on the amount
of rent or the sale price that they are able to charge. To date, there have been
relatively few companies competing with APSA for shopping center properties,
and, as additional companies become active in the Argentine shopping center
market in the future, such competition could have a material adverse effect on
APSA's results of operations.
APSA HAS A LIMITED OPERATING HISTORY AND MAY NOT BE ABLE TO MANAGE GROWTH
IN A PROFITABLE MANNER
Prior to June 30, 1997, APSA had limited operating activity as a shopping
center company. In addition, it only recently reorganized into its current
corporate structure. As a result, APSA generated a limited amount of revenues
and net income prior to such date. Accordingly, APSA is subject to all of the
business risks associated with a relatively new and growing enterprise,
including constraints on its resources (financial and other) and uncertainties
in business prospects and future sales. There can be no
34
assurance that APSA's future operations will result in a positive financial
performance or permit it to meet its obligations.
APSA's total assets have grown from approximately Ps. 157.1 million as of
June 30, 1997, to Ps. 1,019.5 million as of June 30, 2002, while at the same
time its total liabilities have grown from approximately Ps. 28.1 million as of
June 30, 1997, to approximately Ps. 403.7 million as of June 30, 2002. The
number of shopping centers in which APSA has a majority or minority interest has
grown from two as of June 30, 1997, to eight as of June 30, 2002. Such rapid
growth has required and will continue to require additional management,
operational and other resources. While APSA has hired additional personnel and
implemented financial and operational controls, no assurances can be given that
APSA will be able to successfully manage its growth.
ARGENTINE CORPORATE DISCLOSURE AND ACCOUNTING STANDARDS DIFFER FROM THOSE
IN THE UNITED STATES, AND AS A RESULT INFORMATION AVAILABLE ABOUT US MAY NOT BE
AS DETAILED OR COMPREHENSIVE AS THAT OF U.S. PUBLIC COMPANIES
There may be less publicly available information about the issuers of
securities listed on the Bolsa de Comercio de Buenos Aires, than is regularly
published by or about domestic issuers of listed securities in the United States
and certain other countries. In addition, all listed Argentine companies must
prepare their financial statements in accordance with Argentine GAAP which
differs in certain significant respects from U.S. GAAP. For this and other
reasons, the presentation of Argentine financial statements and reported
earnings may differ from that of companies in other countries in this and other
respects.
We are exempt from the rules under the Exchange Act prescribing the
furnishing and content of proxy statements, and our officers, directors and
principal shareholders are exempt from the reporting and short-swing profit
recovery provisions contained in Section 16 of the Exchange Act.
DIFFERENT CORPORATE DISCLOSURE AND ACCOUNTING STANDARDS
There may be less publicly available information about the issuers of
securities listed on the Bolsa de Comercio de Buenos Aires than is regularly
published by or about domestic issuers of listed securities in the United States
and certain other countries. In addition, all listed Argentine companies must
prepare their financial statements in accordance with Argentine GAAP which
differs in certain significant respects from U.S. GAAP. For this and other
reasons, the presentation of Argentine financial statements and reported
earnings may differ from that of companies in other countries in this and other
respects.
We are exempt from the rules under the Exchange Act prescribing the
furnishing and content of proxy statements, and our officers, directors and
principal shareholders are exempt from the reporting and short-swing profit
recovery provisions contained in Section 16 of the Exchange Act.
INVESTORS MAY NOT BE ABLE TO EFFECT SERVICE OF PROCESS WITHIN THE U.S.,
LIMITING THEIR RECOVERY OF ANY FOREIGN JUDGMENT
We are a publicly-held stock corporation (sociedad anonima) organized under
the laws of Argentina. Most of our directors and our senior manager, and a
substantial portion of our assets and of these persons are located in Argentina.
As a result, it may not be possible for investors to effect service of process
within the United States upon us or such persons or to enforce against them in
United States courts judgments obtained in such courts predicated upon the civil
liability provisions of the United States federal securities laws. We have been
advised by our Argentine counsel, Zang, Bergel & Vines, that there is doubt
whether the Argentine courts will enforce in all respects, to the same extent
and in as timely a manner as a U.S. or foreign court, an action predicated
solely upon the civil liability provisions of the United States federal
securities laws or other foreign regulations brought against such persons or
against us.
35
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF IRSA
GENERAL INFORMATION
Our legal name is IRSA Inversiones y Representaciones Sociedad Anonima. We
were incorporated and organized on April 30, 1943 under Argentine law as a
sociedad anonima (stock corporation) and we were registered with the Inspeccion
General de Justicia (Public Registry of Commerce of the City of Buenos Aires) on
June 23, 1943 under number 284, on page 291, book 46 of volume A. Pursuant to
our bylaws, our term of duration expires on April 5, 2043. Our shares are listed
and traded on the Bolsa de Comercio de Buenos Aires and global depositary shares
representing our shares are listed on the New York Stock Exchange. Our principal
executive offices are located at Bolivar 108, Buenos Aires (C1066AAD),
Argentina. Our telephone is +54 (11) 4323-7555, and our website is www.irsa.com.
Our Depositary Agent for the Global Depositary Shares in the United States is
The Bank of New York whose address is 101 Barclay Street, New York, New York
10286, and whose telephone is 001-212-815-2296.
HISTORY
Since 1991, when our current management and certain international investors
acquired substantially all of our capital stock, we have been actively engaged
in diverse real estate activities in Argentina. Following our global public
offering in December 1994, we developed our real estate activities in the office
rental market by acquiring three office towers located in prime office zones of
Buenos Aires: Libertador 498, Maipu 1300 and Madero 1020.
Since 1996, through our subsidiary APSA, we expanded our real estate
activities into the shopping center segment by acquiring controlling interests
in a portfolio of seven shopping centers: Paseo Alcorta, Alto Palermo Shopping,
Buenos Aires Design, Alto Avellaneda, Alto Noa, Abasto Shopping and Patio
Bullrich and the acquisition of minority interests in Mendoza Plaza Shopping.
Since 1996, we also entered into the residential real estate market through the
development and construction of multi-tower apartment complexes in the City of
Buenos Aires and through the development of private residential communities in
greater Buenos Aires.
In 1997, we entered the hotel market through the acquisition of a 50%
interest in the Llao Llao Hotel near Bariloche and the Inter-Continental Hotel
in the City of Buenos Aires. In 1998, we also acquired the Libertador Hotel in
the City of Buenos Aires and subsequently sold a 20% interest to an affiliate of
Sheraton Hotels.
In September 2002, we acquired the Piscis Hotel in Valle de Las Lenas, an
important ski resort in Argentina. This five-star hotel was acquired for US$ 1.4
million from Banco Rio and ICI Argentina. In the same month we acquired 30.955%
of the share ownership of, and US$ 3.7 million convertible notes due October 31,
2005 of Valle de Las Lenas S.A., for US$ 2.4 million. Valle de Las Lenas S.A. is
the operator of the ski resort.
From December 2000 to July 2002, Cresud invested approximately Ps. 113.3
million to acquire approximately 20.29% of our outstanding shares.
In December 2000, we sold to Consultoria Inmobiliaria Velutini y Asociados
all of our interest in Venezuela Invest Ltd. and Fondo de Valores Inmobiliarios,
companies through which we held our interests in Venezuela, for total
consideration of US$ 67.0 million. On February 28, 2002, we sold all of our
interest in Brazil Realty for US$ 44.2 million.
On October 15, 2002, we initiated a preemptive rights offering of rights
for 100,000,000 units consisting of US$ 100.0 million of 8% convertible notes
due 2007 and non-detachable warrants to purchase shares of our common stock. The
convertible notes may be converted into shares of our common stock after
December 13, 2002, and until maturity on November 14, 2007, at the initial
conversion price of US$ 0.5571 per common share. Each warrant will be
exercisable on or after conversion of the convertible note to which it is
attached at the same conversion price plus a 20% premium (US$ 0.6686). The
rights offering
36
to holders of our common shares and GDSs expired on November 13, 2002. Existing
shareholders have subscribed through the exercise of their preemptive rights for
US$ 66.7 million and they have exercised their accretion rights for US$ 10.7
million, adding together US$ 77.4 million. During the allocation of the
remainder new investors have subscribed the remaining 22.6 million units
completing the US$ 100 million offering. The offering was fully subscribed and
the funds have already been received by the Company. We intend to use, and we
partially used the proceeds of the offering to facilitate the renegotiation or
partial payment of our outstanding debt, to finance our working capital and
other general corporate purposes, and to acquire APSA's second tranche of
convertible notes, if offered .
CAPITAL EXPENDITURES
During the fiscal year ended June 30, 2002 we had capital expenditures of
Ps. 43.3 million. We made investments in fixed assets for Ps. 24.0 million
primarily to the acquisition of Costeros Dique IV in the office segment for Ps.
18.3 million and in undeveloped parcels of land for Ps. 3.0 million primarily in
Dique III for Ps. 2.2 million and in our subsidiaries and equity investees for
Ps. 19.3 million.
During fiscal year ended June 30, 2001 we had capital expenditures of Ps.
61.3 million. We made investments in related companies of Ps. 52.3 million
primarily in Brazil Realty for Ps. 13.8 million, APSA for Ps. 11.9 million and
LatinAmerican Econetworks for Ps. 10.2 million. We also made investments in
fixed assets for Ps. 6.8 million primarily to the acquisition of a property in
the office segment for Ps. 2.4 million and in the hotels segment for Ps. 2.5
million. We also invested Ps. 2.2 million in undeveloped parcels of land.
During fiscal year ended June 30, 2000 we had capital expenditures of Ps.
37.3 million. We made investments of Ps. 16.3 million, primarily to acquire 8.0%
of Banco de Credito y Securitizacion S.A. for Ps. 9.8 million and to acquire Red
Alternativa and Alternativa Gratis for Ps. 5.9 million. We also made investments
of Ps. 8.0 million in fixed assets, consisting primarily of Ps. 4.4 million in
the hotel segment and investments of Ps. 12.9 million in undeveloped parcels of
land, consisting primarily of Ps. 10.5 million in Puerto Madero Dock 3 and Ps.
2.2 million in Puerto Retiro.
We believe that the restructuring of our existing debt, the issuance of the
convertible notes and the sale of non-core assets, together with our cash
generating activities, will provide us with the working capital necessary to
cover our needs and invest as opportunities may rise.
In September 2002 we purchased the Piscis Hotel in Valle de Las Lenas for
US$ 1.4 million and during the first quarter of fiscal year 2003, our Company
acquired 30.955% of the share ownership of and US$ 3.7 million convertible notes
due October 31, 2005 of Valle de Las Lenas S.A. for US$ 2.4 million.
B. BUSINESS OVERVIEW
OPERATIONS AND PRINCIPAL ACTIVITIES
We are one of Argentina's leading real estate companies. We are engaged
directly, or indirectly through subsidiaries and joint ventures in a range of
real estate activities in Argentina.
Our principal activities consist of:
o the acquisition and development of residential properties primarily
for sale;
o the acquisition, development and operation of office and other
non-shopping center retail properties primarily for rental purposes;
o the acquisition, development and operation of shopping centers
properties;
o the acquisition and operation of luxury hotels; and
o the acquisition of undeveloped land reserves for future developments
or sale.
37
OVERVIEW OF PROPERTIES
As of June 30, 2002 we either directly or through our subsidiaries and
joint ventures, owned significant interests in a portfolio of 58 properties in
Argentina, located principally in Buenos Aires. The following table sets forth
certain information concerning our operation and property portfolio.
CONSOLIDATED OPERATING INCOME (1)
YEARS ENDED JUNE 30,
--------------------------------------------------
2002 2001 2000
----------------- ---------------- ---------------
(IN THOUSANDS OF PESOS)
Offices and other non-shopping center rental
properties........................................ (23.616) 28.052 31.360
Shopping centers.................................. (18.295) 32.233 23.809
Development and sale of properties................ (35.602) (4.128) 5.835
Hotels............................................ (3.351) (755) 2.868
International..................................... 33.924 21.610 33.617
----------------- ---------------- ---------------
Total............................................ (46.940)(2) 77.012 97.489
(1) We have allocated income from controlled companies and companies in which
we exercise joint control to the various lines of our consolidated
statements of income in a manner proportionate to our equity interest in
such companies.
(2) Includes Ps. 96.8 million for the writing down of certain properties.
OFFICES AND OTHER NON-SHOPPING CENTER RENTAL PROPERTIES
We are engaged in the acquisition, development and management of offices
and other non-shopping center rental properties in Argentina. As of June 30,
2002, we, directly and indirectly, owned interests in 19 office and other
non-shopping center rental properties in Argentina which comprised 129,179
square meters of gross leasable area. Of these properties, 13 were office
properties which comprised 89,409 square meters of gross leasable area. For the
fiscal year 2002, we had net sales from office and other non-shopping center
rental properties of Ps. 34.1 million.
All of our office rental properties in Argentina are located in the City of
Buenos Aires. Four of the properties are currently single tenant properties and
the remaining properties are leased to multiple tenants. For the fiscal year
ended June 30, 2002, the average occupancy rate of all of our office properties
was approximately 72%. Five different tenants accounted for approximately 64.6%
of our net revenues from office and other non-shopping center rental properties
and less than 5.5% of our total consolidated sales for fiscal year 2002. These
five office tenants are: Grupo Total Austral, Grupo Danone, Cisco Systems
Argentina S.A., Nextel Argentina S.A. and Allende y Brea.
Administration and Management. We generally act as the managing agent of
the office properties in which we own an interest. These interests consist
primarily of the ownership of entire buildings or a substantial number of floors
in a building. The buildings in which we own floors are generally managed
pursuant to the terms of a condominium agreement that typically provides for
control by a simple majority of the interests (based on the area owned) in the
building. As the managing agent of operations, we are responsible for handling
services, such as security, maintenance and housekeeping. These services are
generally contracted to third party providers. The cost of the services are
passed-through and paid for by the tenants, except in the case of our unrented
units, in which case we absorb the cost. Our leasable space is marketed through
commissioned brokers, the media and directly by us.
Leases. We generally lease space in our offices and other non-shopping
center rental properties pursuant to lease agreements with terms of three to
five years that are renewable at the option of the tenant for additional two or
three years. Our non-shopping center lease agreements are generally denominated
in U.S. dollars and, in accordance with Argentine law, their terms are not
subject to adjustment for inflation. Rents for renewal periods are based upon
projected estimates of United States inflation or other customary factors.
38
The following table sets forth certain information regarding our direct and
indirect ownership interest in offices and other non-shopping center rental
properties.
OFFICES AND OTHER NON-SHOPPING CENTER RENTAL PROPERTIES
MONTHLY BOOK VALUE
RENTAL TOTAL RENTAL INCOME FOR THE AS OF JUNE 30,
DATE DATE LEASABLE OCCUPANCY IRSA'S INCOME YEAR ENDED JUNE 30, (4) 2002
ACQUIRED BUILT AREA M2(1) RATE(2) INTEREST PS./000(3) 2002 2001 2000 PS./000(5)
-------------- ---------- ------- -------- ---------- ---- ---- ---- ----------
OFFICES
Inter-Continental
Plaza (6) .......... 11/18/97 1996 22,535 83% 67% 347 7,564 9,445 8,631 38,612
Libertador 498...... 12/20/95 1983 11,152 59% 100% 178 4,638 6,270 7,639 33,744
Maipu 1300.......... 9/28/95 1975 10,325 62% 100% 153 4,500 5,779 5,755 36,922
Laminar Plaza....... 3/25/95 N/A 6,521 95% 100% 213 4,426 5,025 3,069 25,343
Madero 1020 (7)..... 12/21/93 1995 5,056 45% 100% 60 1,886 3,617 3,656 13,755
Reconquista 823/41.. 11/12/93 1994 6,100 0% 100% 0 2,070 3,013 2,700 15,807
Suipacha 652/64..... 11/22/91 N/A 11,453 45% 100% 56 1,299 2,658 3,181 9,021
Edificios Costeros.. 3/20/97 N/A 6,399 27% 100% 41 1,353 2,034 158 21,197
Costeros Dique IV... 08/29/01 2001 5,437 63% 100% 101 1,712 -- -- 15,877
Others (8).......... 4,431 65% N/A 56 1,333 1,653 1,958 10,362
------ -- ---- ----- ------ ------ ------ -------
SUBTOTAL............ 89,409 60% N/A 1,205 30,781 39,494 36,747 220,640
------ -- ---- ----- ------ ------ ------ -------
OTHER RENTAL
PROPERTIES
Commercial
Properties (9)(10).. 6,023 99% 100% 32 2,095 4,296 7,625 5,486
Other properties (11) 33,747 100% N/A 40 1,281 1,901 2,641 4,570
SUBTOTAL............ 39,770 100% N/A 72 3,376 6,197 10,266 10,056
RELATED EXPENSES
Management Fees.... 1,134 1,291 1,123
TOTAL OFFICES & OTHER
(12) ............... 129,179 72% N/A 1,277 35,291 46,982 48,136 230,696
(1) Total leasable area for each property. To obtain the square meters
attributable to our Company this column should be multiplied by IRSA's net
ownership interest. Excludes common areas and parking.
(2) Calculated dividing occupied square meters by leasable area.
(3) Agreements in force as of 06/30/02 were computed, pro-rata our Company's
net ownership interest in each property.
(4) Total consolidated leases, as authorized by the Comision Nacional de
Valores, reexpressed as from 06/30/02. Excludes gross income tax deduction.
(5) Cost of acquisition, plus improvements, less accumulated depreciation, plus
adjustment for inflation as of 06/30/02.
(6) Through Inversora Bolivar S. A. ("Inversora Bolivar").
(7) Includes in the book value Ps. 4,730,000 corresponding to 1,716 m2 and 36
parking places, all of which are exposed in "Inventory" in our Financial
Highlights.
(8) Includes the following properties: Madero 942, Av. De Mayo 595/99, Av.
Libertador 602 and Sarmiento 517 (through our Company). Cumulative revenues
for the fiscal years 2001 and 2000 include revenues from Avenida de Mayo
701 (fully sold) Puerto Madero Dock 5 and Puerto Madero Dock 6.
(9) Includes the following properties: Constitucion 1111 and Alsina 934/44
(through our Company). Cumulative revenues include: In all fiscal years
reported, the revenues from Santa Fe 1588 and Rivadavia 2243 (fully sold).
In fiscal years 2001 and 2000, the revenues from Sarmiento 580 and
Montevideo 1975 (fully sold). In fiscal year 2000, the revenues from
Galerias Pacifico.
(10) Includes in the book value Ps. 3,767 thousand, corresponding to 1,947 m2
from the property located at Constitucion 1111, which is exposed in
"Inventory" in our Financial Highlights.
(11) Includes the following properties: the Santa Maria del Plata facilities
(former Ciudad Deportiva de Boca Juniors, through our Company - only rents
are included since book value is reflected on the Developments table) -
Aguero 596 and R. Nunez 4615 (Cordoba), plots in Carlos Gardel (through
Alto Palermo S.A), Thames, 1 unit in Alto Palermo Plaza and 2 units in Alto
Palermo Park (through Inversora Bolivar). Cumulative revenues include: In
fiscal year 2001 and 2000, the revenues from Serrano 250 (fully sold). In
fiscal year 2000, the revenues from Cervino and Terrenos Monserrat
(completely sold).
39
(12) Corresponds to the "Offices and Other Rental Properties" business unit
mentioned in Note 4 to the Consolidated Financial Statements. Excludes
gross income tax deduction..
The following table shows a schedule of the lease expirations of our office
and other non-shopping center properties for leases outstanding as of June 30,
2002, assuming that none of the tenants exercise renewal options or terminate
their lease early. Most tenants have renewal clauses in their leases.
PERCENTAGE OF PERCENTAGE OF
NUMBER OF SQUARE METERS TOTAL SQUARE ANNUAL RENTAL TOTAL RENTAL
FISCAL YEAR OF LEASES SUBJECT TO METERS SUBJECT INCOME UNDER INCOME UNDER
LEASE EXPIRATION EXPIRING EXPIRING LEASES TO EXPIRATION EXPIRING LEASES EXPIRING LEASES
---------------- -------- --------------- ------------- --------------- ---------------
(m2) (%) (Ps.) (%)
2003 28 51,598 59% 457,322 33%
2004 32 13,272 15% 329,281 24%
2005 7 5,299 6% 133,513 10%
2006+ 11 17,291 20% 462,721 33%
-- ------ -------
TOTAL 78 87,460 100% 1,382,837 100%
-- ------ ---- --------- ----
The following table shows the average occupancy rate for our offices during
the last three fiscal years ended June 30, 2002, 2001 and 2000.
FISCAL YEAR ENDED JUNE 30 (1),
2002 2001 2000
---- ---- ----
(%) (%) (%)
OFFICES
Inter-Continental Plaza.......... 83 98 96
Libertador 498................... 59 77 85
Maipu 1300....................... 62 92 96
Laminar Plaza (2)................ 95 100 100
Madero 1020...................... 45 100 100
Suipacha 652/64.................. 45 72 100
Reconquista 823/41............... 0 100 100
Edificios Costeros (3)........... 27 59 48
Costeros Dique IV (4)............ 63 -- --
Others (5)....................... 63 66 71
(1) Calculated by dividing square meters leased under leases in effect as
of June 30, 2002, 2001 and 2000 by the total gross leasable area of
offices in the same periods.
(2) Lease commenced during fiscal year 2000.
(3) Lease commenced during fourth quarter 2000.
(4) Lease commenced during first quarter 2002.
(5) Includes the following properties: Madero 942, Av. de Mayo 595/99, Av.
Libertador 602, Sarmiento 517, Rivadavia 2768/80 and Puerto Madero
Dock 5.
The following table shows the annual rent per square meter for our offices
for the last three fiscal years ended June 30, 2002, 2001 and 2000.
FISCAL YEAR ENDED JUNE 30 (1),
----------------------------------------------------
2002 2001 2000
---- ---- ----
(Ps./m2) (Ps./m2) (Ps./m2)
OFFICES
Inter-Continental Plaza............ 336 314 312
Libertador 498..................... 416 302 298
Maipu 1300......................... 436 298 285
Laminar Plaza (2).................. 679 428 425
Madero 1020........................ 373 335 323
Suipacha 652/64.................... 339 153 133
Reconquista 823/41................. 113 226 226
Edificios Costeros (3)............. 211 298 152
Costeros Dique IV (4) 315 -- --
Others (5)......................... 301 238 157
40
(1) Calculated dividing annual rents per gross leasable area of offices
according to our interest in each building.
(2) (2) Lease commenced during fiscal year 2000.
(3) Lease commenced during fourth quarter 2000.
(4) Leases commenced during first quarter 2002.
(5) Includes the following properties: Madero 942, Av. de Mayo 595/99, Av.
Libertador 602, Sarmiento 517 and Puerto Madero Dock 5.
Properties. Set forth below you will find information regarding our
principal currently owned office properties, including the names of the tenants
occupying 5% or more of the gross leasable area of each property.
INTER-CONTINENTAL PLAZA, CITY OF BUENOS AIRES. Inter-Continental Plaza is a
modern 24-story building located next to the Inter-Continental Hotel in the
historic neighborhood of Monserrat in downtown city of Buenos Aires. We own the
entire building which has floor plates averaging 900 square meters. It has 203
parking spaces. The principal tenants currently include Total Austral S.A.,
Bagley S.A., Vintage Oil Argentina Inc. Sucursal Argentina, Pharmacia Argentina
S.A. and Mercedes Benz Leasing Argentina S.A.
LIBERTADOR 498, CITY OF BUENOS AIRES. Libertador 498 is a 27-story office
tower located at the intersection of Avenida 9 de Julio, Avenida del Libertador
and Autopista Illia, three of the most important thoroughfares of the City of
Buenos Aires, making it accessible from the north, west and south of the city.
We own 20 floors with floor plates averaging 620 square meters. The building has
a singular cylindrical design and a highly visible circular neon billboard that
makes it a landmark in the Buenos Aires skyline. The principal tenants in this
building currently include Eastman Chemical Argentina S.R.L., MTV Networks Latin
America Inc., Epson Argentina S.A., Heindrick and Struggles Argentina S.A.,
Pulte S.R.L. and Farmanet S.A. Chrysler Argentina S.A. leases the billboard for
an annual rent of Ps. 120,000 through June 30, 2002.
MAIPU 1300, CITY OF BUENOS AIRES. Maipu 1300 is a 23-story office tower
located on the San Martin Plaza, a prime office zone, on Avenida del Libertador,
a major north-south thoroughfare. The building is also located within walking
distance of the Retiro commuter train station, Buenos Aires' most important
public transportation hub, connecting rail, subway and bus transit. We own the
entire building which has floor plates averaging 440 square meters. The
building's principal tenants currently include Allende & Brea, Petrolera Santa
Fe S.A. and Totalfinaelf Gas Transmission Argentina S.A.
LAMINAR PLAZA, CITY OF BUENOS AIRES. Laminar Plaza is a 20-story office
building located in Catalinas, the City of Buenos Aires' most exclusive office
district. The floor plates each measure 1,453 square meters. The main tenants,
among others, are as follows: Cisco Systems, CRM-Movicom, Chubb Argentina de
Seguros S.A., La Plata Cereal and Bank Hapoalim B.M.
MADERO 1020, CITY OF BUENOS AIRES. Madero 1020 is a 25-story office tower
located in the center of the Catalinas area, a prime office zone, with
spectacular views of the Port of Buenos Aires, the Rio de la Plata and downtown
Buenos Aires. We own 10 non-contiguous floors with the floor plates averaging
572 square meters. The building's principal tenants currently include Abeledo
Gottheil Abogados S.C. and DuPont S.A.
SUIPACHA 652/64, CITY OF BUENOS AIRES. Suipacha 652/64 is a seven-floor
office building located in the office district of the City of Buenos Aires. We
own the entire building which has floor plates unusually large, measuring 1,580
square meters on most floors. This property underwent substantial renovations
shortly after we acquired the deed in 1991 to prepare the building for rental.
The building's principal tenants currently include Procter & Gamble
Interamericas Inc.and APSA's subsidiary, Tarshop S.A. ("Tarshop").
RECONQUISTA 823/41, CITY OF BUENOS AIRES. Reconquista 823/41 is a 15-story
office tower located in the Catalinas area. We own the entire building which is
comprised of three basement levels with 56 parking spaces, a ground floor and 15
additional floors of office space. The floor plates average 540 square meters.
Until May, 2002 the entire building was being leased to Aguas Argentinas who
decided not to renew the contract at maturity.
41
EDIFICIOS COSTEROS, DOCK 2, CITY OF BUENOS AIRES. Costeros A and B are two
four-story buildings developed by us and located in the Puerto Madero area. We
own the two buildings which have a gross leasable area of 6,399 square meters
and 67 parking spaces. In September 1999 we completed their construction and in
April 2000 began to market the office spaces. The main tenants of these
properties are as follows: Leo Burnett Worldwide Invest. Inc., APSA's
subsidiary, Altocity.Com. S.A. ("Altocity.com"), Red Alternativa S.A. and
Alternativa Gratis S.A. We currently intend to develop two additional buildings
on the adjacent land but have not yet established a date to begin construction.
EDIFICIOS COSTEROS, DOCK 4, CITY OF BUENOS AIRES. On August 29, 2001 we
signed for the deed of sale of "Section C" of the office complex known as Puerto
del Centro that includes buildings "5" and "6". The property is located in
Pierina Daelessi street No. 340, over the East Side of Dock 4 of Puerto
Maderoand has approximately 5,500 square meters of gross leasable area and 50
parking lots. The building's principal tenents currently include Nextel
Argentina S.A., Patagon Internacional S.A. and Petroenergy S.A.
OTHER OFFICE PROPERTIES. We also have interests in four other office
properties, all of which are located in the City of Buenos Aires. These
properties are either entire buildings or portions of buildings, none of which
contributed more than Ps. 1.0 million in annual rental income for fiscal year
2002. These properties include Constitucion 1111 and Alsina 934.
RETAIL AND OTHER PROPERTIES. Our portfolio of rental properties includes
nine rental properties that are leased as street retail, supermarkets, a
warehouse and various other uses. Most of these properties are located in the
city of Buenos Aires, although some are located in other cities in Argentina.
These properties include Santa Fe 1588/600 and Rivadavia 2243/65.
SHOPPING CENTERS
We are also engaged in purchasing, developing and managing shopping
centers, through our subsidiary APSA. As of June 30, 2002, APSA operated and
owned majority interests in seven shopping centers, five of which are located in
the city of Buenos Aires. One shopping center is located in greater Buenos Aires
and another is in the city of Salta. APSA also owns indirectly an 18.9%
non-controlling interest in Mendoza Plaza in the city of Mendoza. In addition to
purchasing, developing and managing shopping centers, APSA owns an 80% interest
in Tarshop, a limited purpose credit card company which originates credit card
accounts to promote sales from APSA's tenants and other selected retailers.
APSA's shopping centers comprised a total of 181,085 square meters of gross
leasable area (excluding certain space occupied by hypermarkets which are not
APSA's tenants). For the year ended June 30, 2002, the average occupancy rate of
the shopping center portfolio was approximately 92%. In fiscal year 2002, net
sales from shopping centers amounted to Ps. 77.6 million.
Management and administration. As a result of the acquisition of several
shopping centers and of the corporate reorganization of APSA, we were able to
reduce expenses by centralizing management of the shopping centers in APSA. All
of our shopping centers are owned through APSA, and all of them, except Mendoza
Plaza, are managed by APSA. As manager, APSA is responsible for providing common
area electrical power, a main telephone switchboard, central air conditioning
and other basic common area services.
As of October 31, 2002 we owned 49.8% of APSA. On October 31, 2002, 27.8%
of APSA's shares were held by Parque Arauco S.A., 7.5% by Dolphin Fund Plc and
6.4% by Goldman Sachs. The remaining shares are held by the public and traded on
the Bolsa de Comercio de Buenos Aires and on the Nasdaq Stock Market in the form
of American Depositary Shares (NASDAQ symbol: APSA).
Together with Parque Arauco S.A. we entered into an agreement, dated as of
November 18, 1997, pursuant to which we both agreed, among other things:
o our board of directors would be composed of ten directors;
42
o our directors would be appointed pro rata in relation to the number of
shares owned by the shareholders and APSA's president and
vice-president would be appointed as directors; and
o as long as Parque Arauco holds at least 25% of our capital stock and
we appoint at least 6 directors, we will use our best efforts in order
to vote our shares to appoint as APSA's director a person to be
designated by Parque Arauco among the following: Jose Said, Guillermo
Said, or Salvador Said.
We have also entered into a voting agreement with Goldman Sachs, dated as
of November 18, 1997. Pursuant to this voting agreement, Goldman Sachs granted
us, subject to certain conditions, certain rights to vote the shares held by
Goldman Sachs for a period of ten years.
Leases. APSA enters into commercial leases with tenants for terms ranging
from three to ten years, with most leases having terms of no more than five
years. Lease agreements are generally denominated in U.S. dollars and subject to
rent escalation clauses. Shopping center leases generally do not contain renewal
options. Tenants are generally charged a rent which consists of the higher of
(i) a base rent and (ii) a percentage rent which generally ranges between 4% and
8% of tenant's sales. Furthermore, pursuant to the rent escalation clause in
most leases, a tenant's base rent generally increases between 4% and 7% each
year during the term of the lease. Tenants are also required to pay for the
direct expenses of their units, such as electricity, water, telephone and air
conditioning, as well as their proportion of the common area expenses. In
addition, tenants pay between approximately 12% and 15% of their base rent into
a common promotion fund. In the cases where APSA acts as manager, APSA receives
an administration fee.
In addition to rent, tenants are generally charged a key money which is an
admission fee that tenants pay upon entering into a lease and upon lease
renewal. Key money is normally paid in one lump sum or in a small number of
monthly installments. If the tenant pays in installments, it is the tenant's
responsibility to pay for the balance of any such amount unpaid in the event the
tenant terminates its lease prior to its expiration. In the event of
termination, a tenant will not be refunded its key money.
The following table shows certain information concerning our shopping
centers.
SHOPPING CENTER PROPERTIES
GROSS TOTAL RENTAL INCOME FOR
LEASABLE MONTHLY THE FISCAL YEAR PS./000(3) BOOK VALUE
DATE OF AREA M2 PERCENTAGE OUR INCOME ------------------------- -----------
ACQUISITION (1) LEASED (2) INTEREST PS./000 2002 2001 2000 PS./000 (4)
----------- --- ---------- -------- ------- ---- ---- ---- -----------
SHOPPING CENTERS (5)
Alto Palermo........... 12/23/97 18,129 92% 50% N/A 17,116 21,902 23,281 116,957
Abasto................. 7/17/94 40,476 95% 50% N/A 15,394 19,926 20,937 104,622
Alto Avellaneda
Shopping............. 12/23/97 26,701 94% 50% N/A 10,623 14,347 15,955 44,469
Paseo Alcorta.......... 6/6/97 14,909 84% 50% N/A 8,238 10,738 11,154 33,716
Patio Bullrich......... 10/1/98 11,623 91% 50% N/A 6,377 7,158 6,686 59,389
Alto Noa Shopping...... 3/29/95 18,876 88% 50% N/A 1,980 2,244 1,786 9,768
Others (6)............. 50,371 94% N/A N/A 1,676 1,860 2,379 16,839
------ ---- --- --- ----- ----- ----- ------
Fibesa and others (7).. N/A 2,334 3,592 0
Revenues Tarjeta
Shopping ............ 40% N/A 16,088 15,530 10,121
TOTAL SHOPPING CENTERS 181,085 92% N/A N/A 79,825 97,295 92,299 385,760
======= === === === ====== ====== ====== =======
--------------------------------------
(1) Total leasable area in each property. To obtain the square meters
attributable to US, this column should be multiplied by our net ownership
interest. Excludes common areas and parking spaces.
(2) Calculated dividing occupied square meters by leasable areas.
(3) Total consolidated rents, according to the Comision Nacional de Valores
(CNV). Excludes gross income tax deduction..
(4) Cost of acquisition plus improvements, less accumulated depreciation, plus
adjustment for inflation as of 06/30/02.
(5) Through Alto Palermo S.A.
(6) Includes the following properties: Buenos Aires Design and Mendoza Plaza
Shopping
(7) Includes revenues from Fibesa S.A. and Alto Invest.
(8) Corresponds to the "Shopping Centers" business unit mentioned in Note 4 to
the Consolidated Financial Statements. Excludes gross income tax deduction.
43
The following table shows a schedule of lease expirations for our shopping
center properties in place (except Mendoza Plaza) as of June 30, 2002, assuming
that none of the tenants exercise renewal options or terminate their lease
early.
PERCENTAGE OF PERCENTAGE OF
SQUARE METERS TOTAL SQUARE ANNUAL RENT TOTAL RENT
FISCAL YEAR OF NUMBER OF SUBJECT TO METERS SUBJECT UNDER EXPIRING UNDER EXPIRING
LEASE EXPIRATION LEASES EXPIRING EXPIRING LEASES TO EXPIRATION LEASES (1) LEASES
---------------- --------------- --------------- ------------- ---------- ------
(m2) (%) (Ps.) (%)
2003 428 42.456 30.17 21,669,753 43.62
2004 170 21.784 15.48 9,656,302 19.44
2005 156 21.033 14.95 8,105,122 16.31
2006 72 19.164 13.62 4,920,975 9.91
2007 14 4.735 2.26 957,963 1.93
2008+ 22 31.546 22.42 4,371,084 8.79
-- ------ ----- --------- ----
TOTAL 862 140.718 100.00% 49,681,200 100.00
=== ======= ====== ========== ======
(1) Includes only the basic rental income amount. Does not give effect to our
ownership interest.
(2) Includes vacant stores at June 30, 2002.
The following table shows the average occupancy rate expressed as a
percentage of the Gross Leasable Area for the fiscal years ended June 30, 2002,
2001 and 2000:
FISCAL YEAR ENDED JUNE 30,
------------------------------------------------------
2002 2001 2000
---------------------- ----------- ----------------
%
Abasto Shopping........................ 95.43 94.50 97.91
Alto Palermo Shopping Center........... 92.06 96.07 95.94
Alto Avellaneda Shopping Center........ 93.58 94.31 95.29
Paseo Alcorta.......................... 84.31 93.56 97.27
Patio Bullrich......................... 91.11 97.20 98.75
Alto Noa............................... 87.63 90.55 94.51
Buenos Aires Design.................... 81.31 90.15 93.62
Mendoza Plaza.......................... 97.10 96.25 97.91
Total.................................. 92.41 94.36 96.76
The following table shows the annual average rental price per square meter:
FISCAL YEAR ENDED JUNE 30, (1)
------------------------------------------------------
2002 2001 2000
---------------------- ----------- ----------------
Abasto Shopping Center................... 737.46 932.56 994.63
Alto Palermo Shopping Center............. 1,618.55 2,128.01 2,729.43
Alto Avellaneda.......................... 772.15 1,118.52 1,231.96
Buenos Aires Design...................... 661.11 552.12 741.83
Paseo Alcorta............................ 1,071.33 1,554.73 1,605.26
Patio Bullrich........................... 1,063.20 1,146.76 1,050.09
Alto Noa................................. 204.48 256.16 352.02
(1) Annual sales per gross leasable square meter reflect the sum of base rent,
percentage rent and revenues from admission rights (excluding any
applicable tax on sales) divided by gross leasable square meters.
Properties. Set forth below is information regarding our principal shopping
centers.
ALTO PALERMO SHOPPING, CITY OF BUENOS AIRES. Alto Palermo Shopping is a
155-store shopping center that opened in 1990 and is located in the densely
populated neighborhood of Palermo in the city of Buenos Aires. Alto Palermo
Shopping is located at the intersection of Santa Fe and Coronel Diaz avenues,
only a few minutes from downtown city of Buenos Aires and has nearby access from
the Bulnes subway station. Alto Palermo Shopping has a total constructed area of
64,672 square meters that consists of 18,129
44
square meters of gross leasable area. The shopping center has a two-screen movie
theatre, an entertainment center and a food court with 20 restaurants. Alto
Palermo Shopping is spread out over four levels and has a 741-car pay parking.
Tenants in this shopping center generated average estimated monthly retail sales
in nominal value of approximately Ps. 689.9 per square meter for the fiscal year
ended June 30, 2002. Principal tenants currently include Fravega, Mc Donald's,
Musimundo, Garbarino and Zara.
ALTO AVELLANEDA, AVELLANEDA, GREATER BUENOS AIRES. Alto Avellaneda is a
155-store shopping center that opened in October 1995 and is located in the
highly populated neighborhood known as Avellaneda, on the southern border of the
city of Buenos Aires. Alto Avellaneda has a total constructed area of 95,722
square meters that includes 26,701 square meters of gross leasable area. Alto
Avellaneda includes several anchor stores, a six-screen multiplex movie theatre,
a Wal-Mart superstore, an entertainment area, a bowling alley, a 19-restaurant
food court and an outdoor parking lot. Wal-Mart purchased the space it now
occupies. Tenants in this shopping center generated average estimated monthly
retail sales in nominal value of Ps. 344.2 per square meter for the fiscal year
ended June 30, 2002. Principal tenants currently include Mc Donald's, Fravega,
El Bingo, Rodo and Garbarino.
PASEO ALCORTA, CITY OF BUENOS AIRES. Paseo Alcorta is a 124-store shopping
center that opened in 1992 and is located in the residential neighborhood of
Palermo Chico, one of the most exclusive areas in the city of Buenos Aires,
within a short drive from downtown City of Buenos Aires. Paseo Alcorta has a
total constructed area of approximately 78,000 square meters that consists of
14,909 square meters of gross leasable area. The three-level shopping center
includes a four-screen multiplex movie theatre, a 24-restaurant food court, a
Carrefour hypermarket, and a free parking lot with approximately 1,500 spaces.
Carrefour purchased the space it now occupies but it pays proportional expenses
of the shopping center. Tenants in this shopping center generated average
estimated monthly retail sales in nominal value of Ps. 485.3 per square meter
for the fiscal year ended June 30, 2002. Principal tenants currently include
McDonald's, Cristobal Colon, Kartum, Musimundo y Fravega.
ABASTO SHOPPING, CITY OF BUENOS AIRES. Abasto Shopping is a 182-store
shopping center located in the city of Buenos Aires. Abasto Shopping is directly
accessible from the Carlos Gardel subway station and is located six blocks from
the Once railway terminal and a few blocks from the highway to Ezeiza
International Airport. Abasto Shopping opened in November 1998. The principal
building is a landmark building which during the period 1889 to 1984 operated as
the primary fresh produce market for city of Buenos Aires. The property was
converted into a 111,200 square meter shopping center, with approximately 40,476
square meters of gross leasable area. Abasto Shopping is located across from
Torres de Abasto residential apartment development. The shopping center includes
a food court with restaurants covering an area of 5,600 square meters, a
12-screen multiplex movie theatre, entertainment facilities and the "Museo de
los Ninos Abasto", a museum for children. Abasto Shopping is spread out over
five levels and has a 2,500-car parking lot. Tenants in Abasto have generated
estimated average monthly sales in nominal value of Ps. 284.6 per square meter
for the fiscal year ended June 30, 2002. Principal tenants currently include
Musimundo, McDonald's, Zara, Rodo and Hoyts Cinemas.
PATIO BULLRICH, CITY OF BUENOS AIRES. Patio Bullrich is a 89-store shopping
center located in Recoleta, a popular tourist zone in the city of Buenos Aires a
short distance from the Caesar Park and Hyatt hotels. Patio Bullrich has a total
constructed area of 27,811 square meters that consists of 11,623 square meters
of gross leasable area. The four-story shopping center includes a 22-restaurant
food court, an entertainment area, a six-screen multiplex movie theatre and a
parking lot with 228 spaces. Patio Bullrich is currently one of the most
successful malls in Argentina in terms of sales per square meter, producing for
tenants average estimated monthly retail sales in nominal value of Ps. 493.6 per
square meter for the fiscal year ended June 30, 2002. Principal tenants
currently include Paula Cahen D'anvers, Cipriani Dolce, Buquebus, Cacharel Damas
and Beauty Shop.
ALTO NOA, SALTA, PROVINCE OF SALTA. Alto Noa is a 91-store shopping center
located in the city of Salta, the capital of the province of Salta. The shopping
center consists of 31,836 square meters of total constructed area that consists
of 18,876 square meters of gross leasable area and includes a 13-restaurant food
court, a children's amusement center, a supermarket, an eight-screen movie
theatre and parking facilities for 551 cars. Tenants have generated estimated
average monthly sales in nominal value of Ps. 124.7 per square meter for the
fiscal year ended June 30, 2002. Principal tenants currently include Fravega, Mc
Donald's, Hoyts General Cinema, Repsol Y.P.Fand Casa Lozano S.A.
45
BUENOS AIRES DESIGN, CITY OF BUENOS AIRES. Buenos Aires Design Center is a
66-store shopping center intended for specialty interior, home decorating and
restaurants that opened in 1993. APSA owns Buenos Aires Design through a 51%
interest in Emprendimientos Recoleta, which owns the concession to operate the
shopping center. Buenos Aires Design is located in Recoleta. Buenos Aires Design
has a total constructed area of 22,790 square meters that consists of 10,004
square meters of gross leasable area. The shopping center has 11 restaurants, is
divided into two floors and has a 178-car parking lot. Tenants in this shopping
have generated estimated average monthly sales in nominal value of Ps. 170.1 per
square meter for the fiscal year ended June 30, 2002. Principal tenants
currently include Vivendi, Bazar Geo, Iluminacion Aguero, Hard Rock Cafe and
Morph.
MENDOZA PLAZA, MENDOZA, PROVINCE OF MENDOZA. Mendoza Plaza is a 137-store
shopping center located in the City of Mendoza in the Province of Mendoza. It
consists of 40,367 square meters of gross leasable area. Mendoza Plaza has a
multiplex movie theatre covering an area of approximately 3,515 square meters
with ten screens, the Chilean department store Falabella, a food court with 15
restaurants, an entertainment center and a supermarket which is also a tenant.
It is owned through APSA's 18.9% interest in Perez Cuesta.
TARJETA SHOPPING. Tarjeta Shopping is a non banking credit card issued by
Tarshop, which is a limited purpose credit card company engaged in credit card
operations and is not affiliated to any bank. Tarshop originates credit card
accounts to encourage customers to purchase goods and services from our shopping
centers. Tarjeta Shopping is currently accepted in five shopping centers, four
supermarket chains as well in approximately 2,000 retail stores.
As of June 30, 2002, Tarshop had total assets of approximately Ps. 37.2
million and shareholder's equity of Ps.6.2 million. For the fiscal year ended
June 30, 2002, Tarshop's total net sales were Ps. 540.8 million, representing
approximately 24.02% of APSA's net sales for such year, and it had a net loss of
Ps. 10.1 million, representing approximately 23.89% of APSA's net loss for such
year. As of June 30, 2002 Tarshop had approximately Ps. 62.3 million in credit
card receivables outstanding (including asset-backed securities), compared to
Ps. 72.8 as of June 30, 2001.
SALES AND DEVELOPMENT PROPERTIES; UNDEVELOPED PARCELS OF LAND
RESIDENTIAL DEVELOPMENT PROPERTIES
The acquisition and development of residential apartment complexes and
residential communities for sale is one of our core activities. Our development
of residential apartment complexes consists of the new construction of high-rise
towers or the conversion and renovation of existing structures such as factories
and warehouses. In residential communities, we acquire vacant land, develop the
infrastructure such as roads, utilities and common areas, and sell plots of land
for construction of single family homes. We may also develop or sell portions of
land for others to develop complementary facilities such as areas for shopping
in the area of the residential developments. During fiscal year 2002, net sales
from Sales and Development decreased to Ps. 45.2 million compared to Ps. 89.8
million amounted during fiscal year 2001. The decrease in this segment mainly
results from the Company's current reduced stock of units for sale, as a
consequence of the interruption, during past quarters, of the launching of new
projects, due to the deep economic recession and strong fall in demand.
Construction and renovation works on our residential development properties
is currently performed, under our supervision, by independent Argentine
construction companies that are selected through a bidding process. We enter
into turnkey contracts with the selected company for the construction of
residential development properties pursuant to which the selected company agrees
to build and deliver the development for a fixed price and at a fixed date. We
are generally not responsible for any additional costs based upon the turnkey
contract. All other aspects of the construction including architectural design
are performed by third parties.
Prior to the commencement of construction of a residential project, we
conduct an advertising program that continues after the launching of the sales
of the units. In addition, we have showcased some of our renovation projects
through Casa FOA, a highly visited fundraising exhibition where architects and
46
designers display their work. This exhibition has wide public appeal and has
been a successful marketing tool for us.
The following table shows certain information and gives an overview
regarding our sales and development properties:
47
SALES AND DEVELOPMENT PROPERTIES
GROSS TOTAL
DATE OF ESTIMATED/ LEASABLE UNITS OR OUR PERCENTAGE PERCENTAGE ACCUMULATE
ACQUISITION ACTUAL COST AREA LOTS (3) INTEREST COMPLETE SOLD (4) SALES
----------- ----------- ---- -------- -------- -------- -------- -----
(PS. 000)(1) (M2) (2) (PS. 000)(5)
APARTMENT COMPLEXES
TORRES JARDIN 7/18/96 50,348 32,244 490 100% 100% 97% 62,176
TORRES DE ABASTO (8) 7/17/94 33,079 35,630 545 50% 100% 99% 48,104
PALACIO ALCORTA 5/20/93 67,463 25,555 191 100% 100% 100% 68,152
CONCEPCION ARENAL 12/20/96 13,410 6,913 70 100% 100% 97% 10,249
ALTO PALERMO PARK (9) 11/18/97 21,348 10,654 73 67% 100% 88% 25,015
OTHERS (10) -- 38,346 23,240 178 N/A 100% 97% 42,149
------- --------- ----- --- --- -- -------
Subtotal 223,994 134,236 1,547 N/A N/A N/A 255,845
Residential Communities
ABRIL/BALDOVINOS (11) 1/3/95 97,119 1,408,905 1,273 83% 100% 85% 139,449
VILLA CELINA I, II & III 5/26/92 4,220 75,970 219 100% 100% 100% 12,391
VILLA CELINA IV & V 12/17/97 2,180 58,480 181 100% 100% 98% 8,439
OTHERS (12) 4,259 43,762 33 N/A 100% 100% 4,746
------- --------- ----- --- --- -- -------
Subtotal 107,778 1,587,117 1,706 N/A N/A N/A 165,025
Land Reserves
DIQUE 3 (PARCELA 1) (13) 9/9/99 -- 6,169 -- 50% 0% 0% --
DIQUE 3 (PARCELA 2) (14) 9/9/99 -- 7,221 -- 50% 0% 0% --
DIQUE 3 (PARCELA 3) (15) 9/9/99 -- 7,557 -- 50% 0% 0% --
CABALLITO 11/3/97 -- 20,968 -- 100% 0% 0% --
PUERTO RETIRO (9) 5/18/97 -- 82,051 -- 33% 0% 0% --
SANTA MARIA DEL PLATA 7/10/97 -- 715,952 -- 100% 0% 0% --
PEREIRAOLA (11) 12/16/96 -- 1,299,630 -- 83% 0% 0% --
MONSERRAT (9) 11/18/97 -- 3,400 -- 67% 0% 100% 3,274
DIQUE 4 (EX SOC DEL DIQUE) 12/2/97 -- 4,653 -- 100% 0% 50% 10,955
OTHERS (16) -- -- 4,441,363 -- N/A 0% -- --
------- --------- ----- --- --- -- -------
Subtotal -- 6,588,964 N/A N/A N/A 14,229
Others
HOTEL LLAO-LLAO 6/1/97 11,725 -- 0 100% 100% 50% 14,671
GALERIAS PACIFICO 4/6/99 291 -- 0 100% 100% 100% 5,869
SARMIENTO 580 1/12/94 10,404 2,635 14 100% 100% 100% 9,644
SANTA FE 1588 11/2/94 7,423 2,713 20 100% 100% 100% 7,267
RIVADAVIA 2243/65 5/2/94 7,267 2,070 4 100% 100% 100% 3,257
LIBERTADOR 498 12/20/95 4,519 1,491 2 100% 100% 100% 3,220
------- --------- ----- --- --- -- -------
OTHER PROPERTIES (17) -- 76,313 47,690 266 N/A 97% 97% 96,919
------- --------- ----- --- --- -- -------
SUBTOTAL 117,942 56,599 306 N/A N/A N/A 140,847
Subtotals -- 449,714 8,366,916 3,559 N/A N/A N/A 575,946
======= ========= ===== ==== ==== ==== =======
Interest for financing
property sales -- -- -- -- -- -- -- --
Management Fees -- -- -- -- -- -- -- --
----- --------- ----- --- --- ----- -------
TOTAL (18) -- 449,714 8,366,916 3,559 N/A N/A N/A 575,946
======= ========= ===== ==== ==== ==== =======
BOOK VALUE
AS OF (7)
ACCUMULATED SALES FOR FISCAL YEAR JUNE 30,
ENDED JUNE 30 (6) (PS. 000) 2002
---------------------------------- (PROP.
2002 2001 2000 VALUE)
---- ---- ---- ------
(PS. 000) (PS. 000) (PS. 000) (PS. 000)
1,837 4,680 6,649 617
1,784 5,314 4,577 6,394
540 -- 18 --
323 3,341 2,439 194
8,729 (1,062) 2,782 3,034
1,635 1,784 2,048 1,394
------ ------ ------ -------
14,848 14,057 18,513 11,633
11,188 30,235 19,537 15,801
(46) 6 106 39
121 2,582 5,736 9
-- -- 141 --
------ ------ ------ -------
11,263 32,823 25,520 15,849
-- -- -- 8,554
-- -- -- 10,016
-- -- -- 10,478
-- -- -- 12,120
-- -- -- 27,199
-- -- -- 103,213
-- -- -- 15,695
-- 1,069 2,205 --
-- 10,955 -- 5,483
-- -- 22,639
------ ------ ------ -------
-- 12,024 2,205 215,397
-- -- 14,671 --
-- -- 5,869 --
-- 9,644 -- --
7,267 -- -- --
3,257 -- -- --
3,220 -- -- --
------ ------ ------ -------
1,832 10,613 2,709 1,294
------ ------ ------ -------
15,576 20,257 23,249 1,294
41,687 79,161 69,487 244,173
====== ====== ====== =======
4,015 8,646 10,029 --
1,742 2,932 2,269 --
------ ------ ------ ------
47,444 90,739 81,785 244,173
====== ====== ====== =======
48
------------------------------------------
(1) Cost of acquisition plus total investment made and/or planned if the
project has not been completed, adjusted for inflation as of 06/30/02,
pro-rata to the Company's net ownership interest. In the case of the sale
of 100% of our shareholding interest in Inversora del Pacifico and 50% in
Hotel Llao-Llao the cost of sale of the shares adjusted for inflation as of
06/30/02 was considered as investment cost.
(2) Total area devoted to sales upon completion of the development or
acquisition and before the sale of any of the units (including parking and
storage spaces, but excluding common areas). To obtain the square meters
attributable to the Company, it should be multiplied by the Company's net
ownership interest. In the case of Land Reserves the land area was
considered.
(3) Represents the total units or plots upon completion of the development or
acquisition (excluding parking and storage spaces). To obtain the units or
lots attributable to the Company, should be multiplied by the Company's net
ownership interest.
(4) The percentage sold is calculated dividing the square meters sold by the
total saleable square meters.
(5) Includes only cumulative sales adjusted for inflation as of June 30, 2002,
pro-rata the Company's net ownership interest.
(6) Corresponds to the Company's total consolidated sales as authorized by the
Comision Nacional de Valores adjusted for inflation as of 06/30/02.
Excludes gross income tax deduction.
(7) Cost of acquisition plus improvement plus activated interest, adjusted for
inflation as of 06/30/02, pro-rata our Company's net ownership interest.
(8) Through Alto Palermo S.A. Includes Abasto plots and inventories related to
the Coto project.
(9) Through Inversora Bolivar.
(10) Includes the following properties: Dorrego 1916 (fully sold through our
Company) and units for sale in Alto Palermo Plaza (through Inversora
Bolivar)
(11) Directly through the Company and indirectly through Inversora Bolivar.
(12) Includes the plots of land of San Jorge Village (fully sold through
Inversora Bolivar ).
(13) Through Bs As Trade & Finance S.A.
(14) Through Bs As Realty S.A.
(15) Through Argentine Realty S.A.
(16) Includes the following land reserves: Torrre Jardin IV, Constitucion 1111,
Padilla 902, and Terreno Piliar (through our Company), and Pontevedra,
Mariano Acosta, Merlo, Intercontinental Plaza II, Land Benavidez (through
Inversora Bolivar) and Terrenos Alcorta (through APSA).
(17) Includes the following properties: Sarmiento 517 (through our Company), 1
unit of Madero 1020 (through our Company) and Puerto Madero Dock 13, Puerto
Madero Dock 5, Puerto Madero Dock 6; Av. de Mayo 701, Rivadavia 2768,
Serrano 250; Montevideo 1975 (Rosario) (fully sold through our Company) and
Art Tower 26th Floor and Cervino 3626 (fully sold through Inversora
Bolivar)
(18) Corresponds to the "Sales and Developments" business unit mentioned in Note
4 to the Consolidated Financial Statements. Excludes gross income tax
deduction.
APARTMENT AND LOFT BUILDINGS
In the apartment building market, we acquire undeveloped properties that
are strategically located in densely populated areas of the city of Buenos
Aires, particularly properties located next to shopping centers and hypermarkets
or those that are to be constructed. We then develop multi-building high-rise
complexes targeted towards the middle-income market which are equipped with
modern comforts and services such as open "green areas," swimming pools, sports
and recreation facilities and 24-hour security. In the loft buildings market,
our strategy is to acquire old buildings in disuse that are located in areas
with a significant middle and upper-income population. The properties are then
renovated into unfinished lofts allowing buyers the opportunity to design and
decorate them to their preferences.
TORRES JARDIN, CITY OF BUENOS AIRES. Torres Jardin is a high-rise
residential complex located in the Buenos Aires neighborhood of Villa Crespo,
five minutes from Abasto Shopping. The project originally included four 23-story
towers directed towards the middle-income market, however, we decided not to
construct Torres Jardin IV. Torres Jardin I, II and III have been completed and
consist of 490 one, two and three bedroom residential apartments. As of June 30,
2002, Torres Jardin I was 100% sold, II 98% and III 100%. The complex also
includes 295 spaces of underground parking
TORRES DE ABASTO, CITY OF BUENOS AIRES. Torres de Abasto is a 545-apartment
high-rise residential apartment complex developed through APSA and is located
one block from Abasto Shopping. The project consists of three 28-story buildings
and one 10-story building directed towards the middle-income market. The
apartments were completed in May 1999. The complex has a swimming pool, a
terrace, 24-hour security project also includes four retail stores on the ground
floor of one of the buildings and 310 underground parking spaces. As of June 30,
2002 99% of the apartments were sold.
PALACIO ALCORTA, CITY OF BUENOS AIRES. Palacio Alcorta is a 191-loft
residential property that we converted from a former Chrysler factory located in
the residential neighborhood of Palermo Chico, one of the most exclusive areas
of the city of Buenos Aires, which is a ten minute drive from downtown. The loft
area ranges from 60 to 271 square meters. This project is directed towards the
upper-income market and it is 100% sold. Palacio Alcorta also has seven retail
units and 165 parking spaces.
49
CONCEPCION ARENAL 3000, CITY OF BUENOS AIRES. Concepcion Arenal 3000 is a
70-loft residential property located in north-central city of Buenos Aires. Each
loft unit has a salable area of 86 square meters and a parking space. Lofts in
this building are directed towards the middle-income market.
ALTO PALERMO PARK, CITY OF BUENOS AIRES. Alto Palermo Park is one of two
34-story apartment buildings located two blocks away from Alto Palermo Shopping
in the exclusive neighborhood of Palermo. Apartments in the building are
targeted towards the upper-income market. The building is also located next to
its twin, Alto Palermo Plaza. The buildings are comprised of 3 and 4-room
apartments with an average area of 158 square meters in the case of Alto Palermo
Park and of 294.5 square meters, in the case of Alto Palermo Plaza and each unit
includes an average of 18 and 29 square meter parking/storage space,
respectively. These buildings were included in the assets we acquired from Perez
Companc S.A.
RESIDENTIAL COMMUNITIES
In the residential communities market, we acquire extensive undeveloped
properties located in suburban areas or neighborhoods near the city of Buenos
Aires to develop private neighborhoods and country clubs in which to sell vacant
lots for the construction of single family homes. In these properties we build
streets and roads, we arrange for the provision of basic municipal services and
amenities such as open spaces, sport facilities and security. We seek to
capitalize on improvements in transportation and communication around the city
of Buenos Aires, the growing suburbanization of the region and the shift of the
population moving to countryside-type residential communities.
An important factor in the trend towards living in suburban areas have been
the improvements and additions to the highways Autopista Panamericana, Avenida
General Paz and Acceso Oeste and the improvement in public train, subway and bus
transportation since their privatization which have greatly reduced commuting
time and facilitated access.
For the fiscal year ended June 30, 2002, our residential communities for
the construction of single family homes for sale in Argentina had a total of
218,386 square meters of gross salable area in the Abril and Villa Celina IV and
V, residential communities located in the province of Buenos Aires.
ABRIL, HUDSON, GREATER BUENOS AIRES. Abril, is one of our private
residential communities. It is a 312-hectare property located near the city of
Hudson, approximately 34 kilometers south of the City Buenos Aires. Abril is
being developed into a private residential community for the construction of
single family homes directed towards the upper-middle-income market. The
property plan includes 20 neighborhoods subdivided into 1,273 lots consisting of
approximately 1,107 square meters each. Abril also includes an 18-hole golf
course, 130 hectares of woodlands, a 4,000 square meter mansion and
entertainment facilities, a bilingual school, horse stables and sports centers
that were completed by the end of 1998. There is also a community shopping
center that was finished in 1999. The neighborhoods have been completed and as
of June 30, 2002, 85% was sold, 102 homes were under construction and 424 homes
had been completed.
On March 23, 2001, we signed with Pulte S.R.L. a contract of sale of plots
and a commitment for the transfer of titles of 250 plots from Abril to Pulte
S.R.L. for a total amount of Ps. 17.4 million. As of June 30, 2002 there were 44
plots pending to be signed..
VILLA CELINA, GREATER BUENOS AIRES. Villa Celina is a 400-lot residential
community for the construction of single family homes located in the residential
neighborhood of Villa Celina, on the southeastern edge of the city of Buenos
Aires, a short distance from the intersection of the Ricchieri highway and the
Avenida General Paz beltway. We have been developing this property in several
stages since 1994. The first three stages representing 219 lots, each measuring
347 square meters on average have been completely sold and the two last stages
representing 181 lots are 99% sold.
UNDEVELOPED PARCELS OF LAND
We have acquired large undeveloped properties as land reserves for the
future development of office and apartment buildings, shopping centers and
single family housing. We have acquired what we believe to be two of the largest
and most important undeveloped river front parcels in Buenos Aires, Puerto
Retiro
50
and Santa Maria del Plata, for the future development of residential and office
spaces. In addition, we have benefited from the improvement of land values
during periods of economic growth. As of June 30, 2002, our land reserve totaled
19 properties consisting of approximately 660 hectares (excluding Rosario,
Neuquen and Caballito land properties, owned by APSA).
CITY OF BUENOS AIRES
PUERTO MADERO DOCK 3. Plot "5M", located in Dique 3, east side of Puerto
Madero, comprises 20,947 square meters and is subdivided in three plots. The
plots are owned by three different companies: Buenos Trade & Finance Center S.A.
("BAT&FCSA"), Buenos Aires Realty S.A. ("BARSA") and Argentine Realty S.A.
("ARSA"). We own 50% of the capital stock of each of the companies, and the
other 50% is owned by a company named RAGHSA S.A. ("RAGHSA").
On August 16, 2002, we signed an agreement with RAGHSA for the
redistribution of the plot "5M". As a result of the redistribution, we own 100%
of the capital stock of BAT&FCSA, and have transferred our 50% ownership in ARSA
and BARSA, respectively for the benefit of RAGHSA. This agreement has also
provided the division and redistribution of the debt held with Corporacion
Antiguo Puerto Madero S.A. and the release of our obligation to construct 45,000
square meters in our new plot.
PUERTO RETIRO. Puerto Retiro is an 8.3 hectare undeveloped riverside
property bounded by the Catalinas and Puerto Madero office zones to the west,
the transportation hub Retiro to the north and the Rio de la Plata to the south
and east. One of the only two significant privately owned waterfront properties
in the city of Buenos Aires, Puerto Retiro may currently be utilized only for
port activities. We have initiated negotiations with municipal authorities in
order to rezone the area. Our plan is to develop a 360,000 square meter
financial center. The launching date has not been settled and consequently, the
estimated cost and financing method are not decided. We own 66% of our
subsidiary Inversora Bolivar, who owns a 50% interest in Puerto Retiro. As of
June 30, 2002 we had invested Ps. 41.2 million in this property.
SANTA MARIA DEL PLATA. Santa Maria del Plata is an undeveloped waterfront
property located at the southern end of Puerto Madero, adjacent to the city of
Buenos Aires nature reserve. Approval has been granted for the construction of
715,000 square meters. The development will be targeted at the high-income
market and will include different residential projects, taking advantage of the
river and related nautical activities. The plan includes three different housing
concepts: high-rise apartment buildings, smaller condominiums and neighborhoods
of single-family homes. Common areas for recreation, offices, and a hotel are
also included. We plan to seek a partner to provide development skills and
capital for the development of this project. As of June 30, 2002, we had
invested Ps. 103.2 million in Santa Maria del Plata. The master plan is pending
final authorities approval. The public forum for environment matters has already
taken place and we expect it to be approved in the short term. We currently hope
to launch this project at the end of fiscal year 2003.
CABALLITO. Caballito is a 2.1 hectare undeveloped property located in the
residential neighborhood of Caballito in the City of Buenos Aires. We are
considering several alternatives for this property including the development of
residential apartment complexes or the sale of this property as it is. Zoning
approvals for the development of residential apartments have been obtained. As
the plan has not been decided, we do not have an estimated cost and financing
method for it.
CABALLITO, FERRO PROJECT. It is a property of approximately 25,539 square
meters in the neighborhood of Caballito, in the city of Buenos Aires, which was
acquired by APSA in October 1998. APSA currently plans to utilize the property
to build a shopping center similar to Alto Palermo Shopping but at present,
municipal zoning regulations do not permit the construction of shopping centers
in the said property. APSA is analysing the way to get authorization to develop
a shopping center. There can be no assurance that APSA will actually be able to
develop this project.
ALCORTA PLAZA. On June 29, 2001, APSA acquired a plot of land located in
Figueroa Alcorta Avenue, in front of Paseo Alcorta Shopping for US$ 4.7 million.
This land is located in the neighborhood of Palermo Chico in the city of Buenos
Aires.
51
APSA intends to construct an office and residential building in that plot.
The proposed building, that will be called "Alcorta Plaza", will consist of 23
stories of 250 square meters each. The proposed project will also include the
construction of an underground parking lot. The total estimated cost for the
development is currently approximately Ps. 9.0 million, which is expected to be
financed through the anticipated sale of the units. The project's feasibility
has been approved by municipal authorities, but final approval is still pending.
As a result, we can not assure you that we will obtain such final approval or
that we will complete the proposed project.
GREATER BUENOS AIRES
PEREIRAOLA, HUDSON. We own an 83% interest in Pereiraola S.A., a company,
whose principal asset is a 130 hectare undeveloped property adjacent to Abril.
We intend to use this property to develop a private community for the
construction of single family homes targeted at the middle-income market. We
have obtained the pertinent municipal building permits. We have not yet
established the costs and financing method for this proposed project.
PROVINCE OF BUENOS AIRES
BENAVIDEZ, TIGRE. Benavidez is a 99.8 hectare undeveloped land reserve
property located in Tigre, 35 kilometers to the north of downtown of the city of
Buenos Aires. The property is easily accessible due to its proximity to
Panamericana Highway. We are considering several alternatives for this property
including the development of a residential community or the sale of this
property as it is and, therefore, we do not have a cost estimate nor a financing
plan.
PILAR. Pilar is a 74.0 hectare undeveloped land reserve property located
close to the City of Pilar, 55 kilometers to the northwest of downtown of the
City of Buenos Aires. The property is easily accessible due to its proximity to
the Autopista del Norte. The Pilar area is one of the most rapidly developing
areas of the country. We are considering several alternatives for this property
including the development of a residential community or the sale of this
property as it is and, therefore, we do not have a cost estimate nor a financing
plan.
OTHER UNDEVELOPED PARCELS OF LAND IN THE CITY OF BUENOS AIRES
Our land reserve property portfolio also includes nine land reserve
properties located in Buenos Aires and its surrounding areas. These properties
are projected for future developments of offices, shopping centers, apartment
buildings and residential communities. The principal properties include Puerto
Madero Dock 4 "block 1M" and Merlo.
OTHER PROVINCES
ROSARIO PROJECT, CITY OF ROSARIO, PROVINCE OF SANTA FE. On August 25, 1998,
together with Coto Centro Integral de Comercializacion S.A. ("Coto") our
subsidiary APSA acquired a 213,372 square meter development property located in
the City of Rosario, the third largest city in Argentina in terms of population,
in a public auction conducted by the Ente Nacional de Administracion de Bienes
Ferroviarios ("ENABIEF") an Argentine government entity within the Ministry of
Infrastructure and Housing, dedicated to the administration of the national
governments properties (subsequently ENABIEF changed its name to Organismo
Nacional de Administracion de Bienes del Estado -"ONABE"-).
The proposed project is composed of two parts. The first part involves the
construction of a shopping center with approximately 20,000 square meters of
gross leasable area and an entertainment complex, consisting of approximately
21,000 square meters, that is currently expected to include a science museum, a
railroad museum, a convention center, a restaurant area and an outside
entertainment area. The second part involves the construction of a 1,200
apartment high-rise residential complex consisting of nine towers. APSA paid US$
17.5 million (net of closing costs) for a 66.67% ownership interest in the
property.
52
On December 17, 1999, APSA obtained an exclusive title to a part of this
property upon which it plan to develop a residential complex. On the rest of the
land, which is 56% owned by APSA and 44% by Coto, APSA plans to develop a
shopping center and Coto a hypermarket.
At present, the estimated cost of the first part of the project is
approximately Ps. 37.5 million. The estimated cost of completion of the nine
residential towers is currently estimated at approximately an additional Ps.
126.0 million. The ownership of the acquired property is subject to the
accomplishment of a construction timetable.
On December 20, 2000 APSA filed a request for extension of the terms
established in the original timetable for the construction of the project, which
was approved by the ONABE by Order 747-01 on September 4, 2001. The extension,
establishes the following schedule:
o the road system, which construction was completed in March, 2002;
o the construction of the shopping center, was projected to start on
September, 15, 2002; and
o the construction of the first tower of the residential complex is
projected to start on March, 2004.
On July 10, 2002, APSA filed a request for a new extension of the terms set
forth in the last timetable approved. The request is basically based on the
economic and social emergency situation that the country is going through, which
was completely unexpected at the time of doing the offer for the property.
At the present, ONABE's resolution about APSA's request is still pending.
Agreement with National Amusement International II, Inc., for the Rosario
Project.
On October 23, 1998, APSA signed a letter of intent with National Amusement
International II, Inc. and its Argentine branch ("NAI") pursuant to which NAI
expressed an interest in leasing a portion of the property to develop and
operate a multiscreen theater in the Rosario Project. NAI has deposited US$ 4.5
million in connection with this project. The definitive agreement was signed on
June 7, 1999.
NEUQUEN PROJECT, PROVINCE OF NEUQUEN. On July 6, 1999, our subsidiary APSA
acquired a 94.6% interest in Shopping Neuquen S.A. for US$ 4.2 million. Shopping
Neuquen is the owner of approximately 50.000 square meters of land in the city
of Neuquen, which counts with pre approved plans for the construction of a
shopping center. APSA paid US$ 0.9 million on August 20, 1999, the remaining Ps.
3.3 million, was scheduled to be payable on the earlier of the opening of the
shopping center and July 5, 2001. Although APSA was negotiating the extension of
the remnant payment, the selling part has started a mediation.
Shopping Neuquen's sole asset comprises of a piece of land of approximately
50,000 square meters with preliminary governmental approval for construction of
a shopping center on the site. The project contemplates construction of a
shopping center with 135 stores, a hypermarket, a multiplex movie theater and a
hotel. The total cost for APSA is currently estimated to be approximately Ps.
20.0 million.
In June, 2001 Shopping Neuquen filed a request with the Municipality of
Neuquen for extension of the original construction timetable and for
authorization to sell part of the land to third parties for the construction by
them of the property that they will develop. The proposed new timetable
contemplates that the construction of the first stage would start on December
15, 2002 and would finish on December 31, 2004. The second optional stage would
be finished on December 31, 2006.
The extension will have to be approved by the Consejo Deliberante of the
city of Neuquen which is the municipal legislative body. In the event that the
proposal is not accepted by the local governmental authorities, the sale may be
cancelled, and Shopping Neuquen may not recover its original investment.
Although APSA is hoping for a favorable resolution to our proposal, there can be
no assurance as to the final outcome of the negotiations.
53
HOTELS
At the end of the 1997 fiscal year, we acquired the Hotel Llao Llao, our
first luxury hotel. Some months later, as part of the acquisition from Perez
Companc of the Old Alto Palermo, we acquired an indirect 50% interest in the
Hotel Inter-Continental in Buenos Aires which we own through our subsidiary
Inversora Bolivar. In March 1998, we acquired the Hotel Libertador. During
fiscal year 1999, we sold a 20% interest in the Hotel Libertador to Hoteles
Sheraton de Argentina S.A.C. ("Hoteles Sheraton de Argentina") and during the
fiscal year 2000, we sold 50% of our interest in the Hotel Llao Llao to the
Sutton group.
The following chart shows certain information regarding our luxury hotels:
HOTEL PROPERTIES
AVERAGE TOTAL SALES FOR THE YEAR
AVERAGE PRICE ENDED JUNE 30 BOOK VALUE AS
DATE OUR NO. OF OCCUPANCY PER ----------------------------- OF JUNE 30,
HOTELS ACQUIRED INTEREST ROOMS RATE (1) ROOM 2002 2001 2000 2002 (2)
------ -------- -------- ----- -------- ---- ---- ---- ---- --------
(%) (%) (Ps.) (Ps. 000) (Ps. 000) (Ps. 000) (Ps. 000)
LLAO LLAO 6/97 50 158 53 204 8,186 8,453 17,136 12,906
INTER-CONTINENTAL 11/97 50 312 40 168 10,431 16,335 22,262 33,023
SHERATON LIBERTADOR 3/98 80 200 52 149 10,846 16,083 19,668 30,365
----- -- --- -- --- ------ ------ ------ ------
TOTAL 670 48 174 29,463 40,871 59,066 76,294
===== == === == === ====== ====== ====== ======
(1) Proportional to our Company's actual interest for each period.
(2) Represents 100% of the hotel's book value including facilities and
goodwill. Proportional to the Company's interest.
HOTEL LLAO LLAO, SAN CARLOS DE BARILOCHE, PROVINCE OF RIO NEGRO. Hotel Llao
Llao is located on the Llao Llao peninsula, 25 kilometers from the City of San
Carlos de Bariloche, and is one of the most important tourist hotels in
Argentina. Surrounded by mountains and lakes, this hotel was designed and built
by the famous architect Bustillo in a traditional alpine style and first opened
in 1930. The hotel was renovated between 1990 and 1993. The building has a total
constructed surface area of 15,000 square meters, 147 rooms and 14 suites. The
hotel-resort also includes an 18-hole golf course, tennis courts, health club,
spa, game room and swimming pool. The hotel is a member of The Leading Hotels of
the World and is currently being managed by Compania de Servicios Hoteleros S.A.
which manages the Hotel Alvear, a luxury hotel located in the Recoleta
neighborhood of the city of Buenos Aires.
HOTEL INTER-CONTINENTAL, CITY OF BUENOS AIRES. Hotel Inter-Continental is
located in the downtown city of Buenos Aires neighborhood of Monserrat, adjacent
to the Inter-Continental Plaza office building. This property was also a part of
the acquisition of Old Alto Palermo from Perez Companc. The hotel's meeting
facilities include eight meeting rooms, a convention center and a divisible 569
square meter ballroom. Other amenities include a restaurant, a business center,
a spa and a fitness facilities with swimming pool. The hotel was completed in
December 1994 and has 314 rooms. The hotel is managed by the Inter-Continental
Hotels Corporation, a United States Corporation.
HOTEL SHERATON LIBERTADOR, CITY OF BUENOS AIRES. Hotel Sheraton Libertador
is located in downtown City of Buenos Aires at the corner of the streets Cordoba
and Maipu, one block from Galerias Pacifico. The hotel contains 193 rooms and 7
suites, eight meeting rooms, a restaurant, a business center, a spa and fitness
facilities with a swimming pool. In March 1999, we sold 20% of our interest in
the Sheraton Libertador Hotel for US$ 4.7 million to Hoteles Sheraton de
Argentina. The hotel is managed by Sheraton Overseas Management Corporation.
HOTEL PISCIS, VALLE DE LAS LENAS, PROVINCE OF MENDOZA. The Piscis Hotel is
located in Valle de Las Lenas an important ski resort in Argentina. The property
was acquired in September, 2002, for US$ 1.4 million. This five-star hotel
offers its guests 90 rooms and 8 suites, 2 restaurants and 2 bars, a casino, a
spa, fitness facilities that include two swimming pools and a place for skis.
The hotel is managed by Badino S.A., a travel agency and the concession expires
in March 2005.
54
INTERNATIONAL
As of June 30, 2001, we participated in an international strategic alliance
in Brazil. In December 2000, we sold to Consultoria Inmobiliaria Velutini y
Asociados all of our interest in Venezuela Invest Ltd. and Fondo de Valores
Inmobiliarios, companies through which we held our interests in Venezuela. On
February 28, 2002, we sold all of our interest in Brazil Realty for US$ 44.2
million.
INTERNATIONAL PROPERTIES
IRSA'S RESULTS FOR THE YEAR ENDED JUNE 30, BOOK VALUE AS
COUNTRY SHARE (%) ($000) (1) OF JUNE 30, PARTNER
2002 2001 2000 2002
-------- ---------- ---------- ----------- ----------- ---------------- -----------
BRAZIL REALTY Brazil 0,00% (3,378) 17,040 17,477 -- Elie Horn
FONDO VALORES Velutini
INMOBILIARIOS Venezuela 0,00% -- 542 (10,747) -- Group
TOTAL (3,378) 17,582 6,730 --
(1) Our Company's proportional equity value in the period's results. Gives
effect to our ownership interest.
BRAZIL REALTY
Until February, 2002, when we sold our subsidiary Brazil Realty, we
participate in the Brazilian real estate market through Brazil Realty which is
engaged in:
o the acquisition and operation of office and shopping center properties
for rental, and
o the acquisition and development of properties, and vacant land, to be
used as office and retail properties for rental and/or sale, and as
residential properties for sale.
Brazil Realty primarily focuses its activities in the Sao Paulo real estate
market, Brazil's largest consumer and industrial market.
At the time we sold Brazil Realty we approximately owned 50% of the capital
stock of Brazil Realty, through our wholly owned subsidiary Ritelco S.ABrazil
Realty's shares are listed and traded on the Sao Paulo Stock Exchange and trade
in the over-the-counter market in the United States in the form of American
Depositary Shares (NASDAQ symbol: BRZD).
FONDO DE VALORES INMOBILIARIOS
In December 2000, we sold to Consultoria Inmobiliaria Velutini y Asociados
all of our interest in Venezuela Invest Ltd. and Fondo de Valores Inmobiliarios,
companies through which we held our interests in Venezuela, for total
consideration of US$ 67.0 million.
TECHNOLOGY INVESTMENTS IN LATIN AMERICA
LATIN AMERICAN ECONETWORKS N.V.
In July 2000, together with divine InterVentures, Inc., Dolphin Fund Plc
(formerly Quantum Dolphin Plc) and Catanzaro Holding B.V., we formed Latin
American Econetworks N.V., a holding company organized in the Netherlands
Antilles ("LAE"). LAE was conceived as a developer of software, technology and
internet-related information network for the technology service suppliers. In
connection with the formation, a 11.2% interest in the holding company was
issued to us in exchange for US$ 5.3 million in cash.
On November 7, 2001, we sold our ownership in Latin American Econetworks
for US$. 5.2 million.
55
IRSA TELECOMUNICACIONES N.V. In the fourth quarter of fiscal year 2000, we
had invested US$ 3.0 million, -in the form of irrevocable capital
contributions-, into two unrelated companies, namely, Red Alternativa, a
provider of satellite capacity to internet service providers, and Alternativa
Gratis, an internet service provider (the "Companies"). At that date, the
Companies were development stage companies with no significant operations.
Between July 2000 and August 2000, we, together with Dolphin Fund Plc (formerly
Quantum Dolphin Plc), increased our respective investments in the abovementioned
Companies, in exchange for shares of common stock. In a series of transactions,
which occurred between August 2000 and December 2000, (i) we formed IRSA
Telecomunicaciones N.V. ("ITNV"), a holding company organized under the laws of
the Netherlands Antilles, for the purposes of completing a reorganization of the
Companies and (ii) Dolphin Fund Plc (formerly Quantum Dolphin Plc), the previous
majority shareholder of the Companies and us contributed our respective
ownership interest in the Companies into ITNV in exchange for shares of common
stock of ITNV. As a result of the reorganization, the Companies are now wholly
owned subsidiaries of ITNV. Following the reorganization, we held a 49.36%
interest in ITNV and Dolphin Fund Plc. held a 20.13% interest in ITNV.
On December 27, 2000, the shareholders of ITNV entered into a shareholders
agreement with new investors in ITNV, namely Quantum Industrial Partners LDC and
SFM Domestic Investment LLC, under which such new investors contributed US$ 4.0
million in cash in exchange for 1,751,453 shares of Series A mandatorily
redeemable convertible preferred stock and an option to purchase 2,627,179
additional shares of mandatorily redeemable convertible preferred stock.
Pursuant to the terms of the Shareholders Agreement, options were granted for a
period up to five years and at an exercise price equal to the quotient of US$
6.0 million by 2,627,179 preferred shares. On or after December 27, 2005, ITNV
might be required, at the written request of holders of the then outstanding
Series A preferred stock to redeem such holders' outstanding shares of series A
preferred stock for cash at the greater of (i) 200% of the original issue price
multiplied by the number of preferred stock to be redeemed, and (ii) the fair
market value of the common shares each holder of Series A preferred stock would
have been entitled to receive if such holder had converted the number of Series
A preferred stock to be redeemed into common stock at the redemption date; in
both cases plus any accrued or declared but unpaid dividends.
ALTOCITY.COM. Altocity.Com, is a company engaged in delivering e-commerce
services providing customers with the information necessary to make personalized
online buying decisions and giving retailers the ability to reach a large
customer base. Altocity.Com, is a wholly owned subsidiary of E-commerce Latina
S.A., ("E-commerce Latina"), an internet venture between APSA and Telefonica de
Argentina S.A. ("Telefonica"), where each of them have a 50% interest.
Previously, APSA's partner in the venture was Telinver S.A., a wholly owned
subsidiary of Telefonica; but on April 27, 2001 Telinver notified APSA that it
had transferred its holdings in E-commerce Latina to Telefonica.
Altocity.Com's goal is to make the shopping experience informed, quick,
interactive and personalized. Altocity.Com primarily derives its revenues from
sales of products on its website and to a lesser extent from sales of
advertising and sponsorships and a fixed amount charged to retailers.
Altocity.Com began operating its web site on June 1, 2000 and by June 30,
2002 had 30,000 registered users. The site offers a product supply of more than
320,000 items from over 100 retailers that are classified into 16 categories
such as apparel, books, music and home appliances. The site's "url address"
www.altocity.com, is visited monthly by approximately 84,077 visitors on
average.
For the year ended June 30, 2002, Altocity.Com net revenues totaled Ps. 1.3
million and had a net loss of Ps. 15.1 million. Of its revenues for such period,
approximately 31.5% were derived from fixed amount charged to retailers, 64.4%
represented product sales and commissions earned. APSA accounts for its 50%
indirect equity investment in Altocity.Com under the equity method of
accounting.
In connection with the formation of E-commerce Latina, on December 15, 1999
APSA entered into a shareholders' agreement with Telinver. On April 27, 2001,
Telinver notified APSA that it had assigned that agreement to Telefonica.
Pursuant to the shareholders agreement, Telinver contributed to E-commerce
Latina US$ 5.0 million upon execution, and an additional US$ 5.0 million on June
15, 2000 in return for its 50% ownership position. APSA contributed intellectual
property rights in exchange for its 50% ownership interest. APSA and Telinver
made additional capital contributions of US$ 5.0 million each, during April
2001, and agreed to make optional capital contributions to be approved by
E-commerce Latina's Board of
56
Directors of up to US$ 12.0 million to develop new lines of business, of which
75% is to be contributed by Telinver and 25% is to be contributed by APSA.
The shareholders' agreement also sets forth the rights and obligations of
each party over the operation of E-commerce Latina. The significant provisions
of the shareholders agreement include:
o our obligation to remain as APSA's controlling shareholder and of
Grupo Telefonica to control Telinver or any successor;
o the determination of the election of the members of the board of
directors;
o terms for notices of the shareholders meetings; and
o certain restrictions on transfers of shares for the first two years,
and thereafter reciprocal first refusal and "tag along" rights.
COMPETITION
We have a large and difficult to determine number of small competitors in
each of the different markets in which we operate.
With respect to the segment of office and other non-shopping center rental
properties, most of our Argentine properties are located in developed areas.
There are numerous other offices, retail and residential properties within the
market area of each of our properties. The number of competitive properties in a
particular area could have a material adverse effect on our ability to lease or
sell units in the properties and on the amount of rent or the sale price that we
are able to charge. Historically, there have been relatively few companies
competing with us for rental or development property acquisitions. Actually, it
is a very atomized market, with no big players, so there is no important
competitor. We own Santa Maria del Plata and Puerto Retiro, two unique
waterfront land reserves by the city of Buenos Aires which are yet not
developed, but don't have competition. However, additional companies, including
foreign companies, may become active in the real estate acquisition and
development markets in Argentina, as well as in the markets outside of Argentina
in which we participate, in the future.
We own three five-star hotels in Argentina which are managed through
strategic alliances by international operators such as Sheraton Overseas
Management Corporation, Inter-Continental Hotels Corporation and the local
operator Compania de Servicios Hoteleros S.A., which manages the Hotel Alvear.
The Hotel Llao Llao is unique for his landscape and beauty and is well known
around the world. Our other two hotels, that is, Hotel Inter-Continental and
Hotel Sheraton Libertador, are located in the city of Buenos Aires and
concentrate the 24% of the total available rooms for this five-star hotel
category. The following table shows the breakdown of five-star hotels in the
city of Buenos Aires as of June 30, 2002:
REVENUE
NUMBER OF OCCUPANCY GENERATION AVERAGE DAILY RATE
HOTEL ROOMS RATE INDEX (1) IN US$ YIELD RANKING
Caesar 170 49% 0.77 97.4 1
Marriot Plaza 325 44% 0.98 110.9 2
Sheraton Libertador 203 43% 0.91 106.4 5
Sheraton 742 43% 1.09 124.8 4
Intercontinental 312 39% 0.82 95.4 6
Hilton 421 44% 1.55 157.3 3
Total/average 2173 43% 1 115.4
-----------------
(1) The revenue generation index is the relative participation of the
Revpar (revenue per available room) of each hotel with respect to the
average of the market.
57
In the shopping center sector we compete through APSA. Because most of our
shopping centers are located in developed and highly populated areas, there are
competing shopping centers within, or in close proximity to, our targeted areas.
The number of shopping centers in a particular area could have a material effect
on our ability to lease space in our shopping centers and on the amount of rent
that we are able to charge. We believe that due to the limited availability of
large plots of land and zoning restrictions in the city of Buenos Aires, it will
be difficult for other companies to compete with us in areas through the
development of new shopping center properties. Our principal competitor is
Cencosud S.A. which owns and operates Unicenter shopping center and the Jumbo
hypermarket chain, among others.
The following table shows the breakdown of the main owners and operators of
shopping centers in Argentina:
% OF NATIONAL
GROSS LEASABLE GROSS LEASABLE
COMPANIES LOCATION (1) AREA STORES AREA (2) STORES (2)
--------- ------------ ---- ------ -------- ----------
(%) (%)
APSA
Alto Avellaneda.................. GBA 47,627 155 4.3 4.1
Abasto Shopping Center........... CBA 40,746 182 3.7 4.8
Mendoza Plaza (3) ............... Mendoza 40,367 137 3.7 3.6
Paseo Alcorta ................... CBA 32,161 (5) 124 2.9 3.3
Alto Palermo .................... CBA 18,129 155 1.7 4.1
Buenos Aires Design Center (4) .. CBA 13,404 66 1.2 1.7
Patio Bullrich................... CBA 10,872 89 1.0 2.4
Alto Noa ........................ Salta 18,876 91 1.7 2.4
------ ----- ----- ----
Subtotal......................... 222,182 999 20.3 26.4
Cencosud S.A.
Unicenter Shopping............... GBA 97,300 (5) 314 8.9 8.3
Plaza Oeste Shopping............. GBA 32,085 (5) 150 2.9 4.0
Quilmes Factory.................. GBA 30,449 (5) 45 2.8 1.2
Lomas Center Shopping............ GBA 36,624 (5) 50 3.3 1.3
San Martin Factory............... GBA 24,516 (5) 33 2.2 0.9
Parque Brown Factory Outlet...... GBA 23,392 (5) 44 2.6 1.2
Las Palmas Pilar................. GBA 34,819 (5) 30 3.2 0.8
Jumbo Palermo Centro Comercial... CBA 33,220 (5) 40 3.0 1.1
El Portal de la Patagonia........ GBA 39,957 (5) 40 3.6 1.1
El Portal de Escobar............. GBA 38,088 (5) 30 3.5 0.8
------ ------- -------- -------
Subtotal......................... 395,450 (5) 776 36.1 20.5
Maccarone S.A.
Showcenter Norte................. GBA 39,688 19 3.6 0.5
Showcenter Haedo................. GBA 24,644 40 2.3 1.1
64,332 59 5.9 1.6
Manfisa/Ingotar
Boulevard Shopping............... GBA 15,800 120 1.4 3.2
Patio Olmos...................... Cordoba 10,608 104 1.0 2.8
Subtotal......................... 26,408 224 2.4 5.9
Other Operators.................. 86,797 1,721 35.3 45.6
-------- ---------- -------- ------
Totals........................... 1,095,169 3,779 100.0 100.0
-------------
(1) "GBA" means Greater Buenos Aires and "CBA" means the city of Buenos
Aires.
(2) Percentage of the total shopping centers in Argentina. Sums may not
total due to rounding.
(3) APSA owns directly a 18.9% interest in this property.
(4) APSA owns directly a 51% interest in the company which operates the
concession of this property.
(5) Includes gross leasable area occupied by supermarkets and
hypermarkets.
Sources: Argentine Chamber of Shopping Centers and APSA.
58
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of our investment objectives and policies,
financing policies and policies with respect to certain other activities. These
policies may be amended or revised from time to time at the discretion of our
Board of Directors without the approval of our stockholders.
Our principal activities consist of:
o the acquisition and development of residential properties primarily
for sale,
o the acquisition, development and operation of office and other
non-shopping center retail properties primarily for rental purposes,
o the acquisition, development and operation of shopping center
properties,
o the acquisition and operation of luxury hotels, and
o the acquisition of undeveloped land reserves for future development or
sale.
Our strategy is to increase our cash flow, revenues and asset value through
the continuous expansion of our diversified portfolio of properties and assets
by means of the purchase, development and operation of real property, either
individually or in association with third parties, in all our business segments.
Offices. We intend to purchase, develop and operate class A office
buildings, in the principal office areas of Buenos Aires and in other strategic
areas, with attractive returns and capital appreciation potential. We believe
that large Argentine and multinational companies will continue to show a growing
demand for class A offices, to the extent that their business continues to
expand in Argentina and Latin America, which, in turn, will further encourage
the shift from the traditional midtown office area to other more modern areas
with better access and more convenient spaces. We have managed to create a
top-quality tenant base.
Shopping Centers. Through our subsidiary APSA, we seek to become a leader
in the shopping center industry in Argentina through the consolidation of our
operations, new developments in strategic points of Buenos Aires and other large
cities of Argentina, and the purchase of the principal shopping centers. The
main growth engines of the shopping center industry are: (i) the increase in the
consumption of goods capable of being sold in shopping centers; (ii) the change
in buying habits, abandoning shopping at street-level retail stores; and (iii)
the relatively low level of market penetration of shopping centers in Argentina
as compared to many developed countries, which implies a significant growth
potential in the long term. APSA has been able to improve the operating margins
of its shopping centers by consolidating its administration, which has enabled
it to capitalize on operating synergies, scales of economy and marketing and
promotion opportunities.
Residential Properties. We have benefited from the increased financing
available for the purchase of houses and the better transportation
infrastructure from the center of the cities towards suburban areas. In urban
areas, we seek to purchase undeveloped properties strategically located in
densely populated areas for the development of apartment complexes that offer
recreational "green areas", sports facilities and security services. In suburban
areas, we seek to purchase undeveloped properties close to Buenos Aires in order
to build residential neighborhoods, and, subsequently, sell the land for
construction of houses after the installation of the basic infrastructure by us.
Hotels. We intend to purchase first-line hotels, whenever opportunities
arise, and to delegate their operation to first-level hotel operators in order
to capitalize on their operating experience, international networks and
marketing agreements so as to take advantage of the benefits derived from the
growing flow of tourism and trade.
59
Land Reserves. We continue to acquire undeveloped lands and properties
strategically located inside and outside the city. In all cases, the objective
is to acquire lands with potential for development and appreciation for their
subsequent sale. We consider that having a reserve of lands will enable us to
have wide supply of properties for the development of new projects and will
create a barrier against potential competitors.
We may change our current policy regarding any of these activities without
the need for a vote from the securities holders.
Throughout the past three years the rental of office and retail properties
have been our main activities, whereas the acquisition and development of
residential properties for sale and the operation of luxury hotels have become
secondary activities as a result of the economic recession. We have made no
acquisitions of undeveloped land reserves during this period.
Going forward, we expect to continue to focus on rental activities of both
office and retail space as main activities, while we believe we will not
continue with the development of residential properties for sale until we see
clear signs of a recovery in the Argentine economy. The operation of luxury
hotels will probably remain a secondary activity.
Historically, the acquisition of undeveloped land reserves has been the
only activity in which the main objective was to obtain capital gains, while the
rest of our business segments are mostly income producing activities.
Nevertheless, in the past, we have sold, and we expect to continue selling in
the future, properties which belong to other business segments, with the
intention of producing a capital gain.
We originate mortgage loans to stimulate the sale of units within our
development projects. Most of this mortgage portfolio was sold in December 2001,
but we have granted a small number of new loans subsequent to that date.
We may purchase rental properties for long-term investment or sell such
properties, in whole or in part, when it is advisable according to the
circumstances. In addition, we may purchase properties for development and sale
in whole or in part when it is advisable according to the circumstances. We do
not have a policy with respect to particular holding periods for our properties
and may dispose of them in whole or in part at any time we deem appropriate. We
have and may continue to invest in real estate through subsidiary corporations
or participate with other Argentine or foreign entities in property ownership
through strategic alliances or other types of co-ownership entities that we may
or may not control. We currently contemplate acquiring additional properties
located in Argentina and other countries in Latin America through strategic
alliances.
In the past, we have not invested in mortgage pools nor have sold or
transferred to third parties our loans secured by mortgages pursuant to our
seller financing programs for purchasers of units in our development properties.
However, in light of the recent development of the legal framework for the
secondary market for mortgages in Argentina, there can be no assurance that we
will not engage in this type of transaction in the future.
We have in the past and may in the future make secured loans to third
parties in connection with our real estate operations.
We have not in the past and do not plan in the future underwrite securities
of other issuers. We do not have an established policy regarding the investment
in the securities of other issuers for the purpose of exercising control or
relating to offers of securities in exchange for property. We may periodically
decide to repurchase or otherwise reacquire our shares or other securities.
REGULATION AND GOVERNMENT SUPERVISION
LEASES
Argentine Law imposes certain restrictions on landlords, including:
60
o the prohibition of lease agreements that adjust prices for inflation;
and
o the imposition of minimum three-year lease terms for retail property,
except in the case of stands and/or space for special exhibitions.
Although our lease agreements are U.S. dollar-denominated, Decree No. 214
and Decree No. 762 that amend the Public Emergency Law provide that monetary
obligations in force as of January 7, 2002 resulting from agreements governed by
private law and which provide for payments in U.S. dollars are subject to the
following rules:
o the obligations are to be paid in Pesos at the exchange rate of Ps.
1.00 = US$ 1.00 plus the CER for commercial leases or beginning on
October 1, 2002, the Coeficiente de Variacion de Salarios, ("CVS",)
for residential leases; and
o if for the application of this provision the value of the installment
were higher or lower to the value at the moment of the payment, any of
the parties could require an equitable adjustment of the price. If in
the event the parties do not reach an agreement, the judicial courts
will decide about the difference in each particular case.
In addition, there are currently conflicting policies and judicial
decisions as to whether rent may be increased during the term of a lease. For
example, certain sections of the Convertibility Law prohibit lease agreements
that adjust rents for inflation based on an official index such as the Argentine
Consumer Price Index or Whole Price Index. Most of our leases contain rent
escalation clauses. However, they are not based on an official index. Generally,
the rent escalation clause in our lease agreements increases the Base Rent
between 4% and 7% annually.
To this date, no tenant has filed a judicial action or used in court an
argument against us based on the existence of the escalation clause, but no
assurance can be given that such actions will not be taken in the future, which
if they prevail could materially and adversely affect us.
Under the Lease Law, lease terms may not exceed ten years, except for the
leases regulated by Law No. 24,441, which provides that leases containing a
purchase option (leasing inmobiliario), are not subject to term limitations.
Generally, our lease agreements vary from 3 to 10 years.
Since May 28, 1997, Law No. 24,808 provides that tenants may rescind
commercial lease agreements after the initial six months, upon not less than 60
days' written notice, subject to penalties which vary from one to one and a half
months rent, if the tenant rescinds during the first year of its lease, and one
month of rent if the tenant rescinds after the first year of its lease.
Argentine Law permits, with certain exceptions, the parties to a lease
agreement to define freely their rights and obligations thereunder. However, in
the past, in response to housing shortages, high rates of inflation and
difficult access to credit, the Argentine Government imposed strict and
burdensome regulations regarding leases. Such regulations limited or prohibited
rental increases and prohibited the eviction of tenants even for failure to pay
rent. These regulations discouraged both property rental and the construction of
new housing.
While current Argentine government policy discourages Argentine government
regulation of lease agreements, there can be no assurance that additional
regulations will not be imposed in the future by the Congress, including
regulations similar to those previously in place. Furthermore, most of our
leases provide that the tenants pay all costs and taxes related to the property
in proportion to their respective leasable areas. In the event of a significant
increase in the amount of such costs and taxes, the Argentine Government may
respond to political pressure to intervene by regulating this practice, thereby
negatively affecting our rental income.
While Argentine civil procedure permits a summary proceeding to collect
unpaid rent and a special procedure to evict tenants, historically, the heavy
workload of the courts that hear these matters and the existence of numerous
procedural steps required have tended to delay efforts of lessors to evict
tenants.
61
Moreover, the lessor must provide written notice to the tenant at least ten days
prior to commencing the eviction proceedings.
Despite the amendment of the Argentine civil procedures code by which the
lessor may, through a security interest, obtain the immediate eviction of the
tenant, eviction proceedings generally took from six months to two years from
the date of filing of the suit to the time of actual eviction. However,
historically we have generally attempted to negotiate with defaulting tenants
the termination of lease agreements in order to avoid legal proceedings.
The Public Emergency Law, as amended by law 25,640, suspended for the term
of 270 days from the enactment of that law the auction of the debtor's property
or the property used by the debtor for production, service rendering or trade
activities and the enforcement of precautionary measures resulting in the
divestiture of property used by the debtor. Although the period of 270 days has
expired on November 15, 2002, we cannot assure you that the Argentine government
would not concede debtors a new extension of the suspension of the foreclosures
causing longer delays for the collection of the defaulting rent of our tenants.
DEVELOPMENT AND LAND USE
Buenos Aires Urban Planning Code. Our real estate activities are subject to
various municipal zoning, building and environmental regulations. In the city of
Buenos Aires, where the vast majority of our real estate properties are located,
the Buenos Aires Urban Planning generally restricts the density and use of
property and controls physical features of improvements on property, such as
height, design, set-back and overhang, consistent with the city's urban
landscape policy. The regulatory body of the Urban Planning Code is the
Secretary of Urban Planning of the Government of the city of Buenos Aires.
Buenos Aires Building Code. The Buenos Aires Building Code complements the
Buenos Aires Urban Planning Code and regulates the structural use and
development of property in the city of Buenos Aires. The Buenos Aires Building
Code requires builders and developers to file applications for building permits,
including the submission to the Secretary of Work and Public Services of
architectural plans for review, to assure compliance therewith.
We believe that all of our real estate properties are in material
compliance with all relevant laws, ordinances and regulations.
SALES AND OWNERSHIP
Real Estate Installment Sales Act. The Real Estate Installment Sales Act
Law No. 14,005, as amended, imposes a series of requirements on contracts for
the sale of subdivided lots of land when the sales price is paid in installments
and the deed is not conveyed until final payment. The provisions of this law
require, among other things,
o the registration of the sale in the Real Estate Registry corresponding
to the jurisdiction of the property, provided that such property is
free and clear of all liens and encumbrances, and
o the registration of any contract with the Real Estate Registry within
30 days of execution.
Once the property is registered, the installment sale may not occur in a
manner inconsistent with the Real Estate Installment Sales Act. In the event of
a dispute over title between the purchaser and third-party creditors of the
seller, the installment purchaser who has duly registered the installment sales
contract prevails.
Further, the purchaser can demand conveyance of title after at least 25% of
the purchase price has been paid, although the seller may demand a mortgage to
secure payment of the balance of the purchase price.
62
After payment of 25% of the purchase price or the construction of
improvements on the property equal to at least 50% of the property value, the
Real Estate Installment Sales Act prohibits the rescission of the sales contract
for failure by the purchaser to pay the balance of the purchase price. However,
in such event the seller may take action under any mortgage on the property.
Consumer Protection Act. Consumer Protection Law No. 24,240, as amended,
regulates several issues concerning the protection of consumers in the formation
and execution of contracts.
The Consumer Protection Act aims at preventing certain potential abuses
deriving from the strong bargaining position of sellers of goods and services in
a mass market economy where standard form contracts are widespread.
For that reason, the Consumer Protection Act deems void and unenforceable
certain contractual provisions in consumer contracts, including: (i) warranty
and liability disclaimers, (ii) waiver of rights, and (iii) changes of the
burden of proof. In addition, the Consumer Protection Act imposes fines to
induce compliance from sellers.
The Consumer Protection Law defines consumers or users, as the individuals
or legal entities that contract for a price for final use or their own benefit
or their family or social group:
(a) the acquisition or hiring of personal property things;
(b) the supply of services;
(c) the acquisition of new real estate bounded to housing, including lots
of land acquired with the same intent, when the offer is public and directed to
undetermined persons.
It also establishes that they will not be considered consumers or users,
those who acquire, store, utilize or consume goods or services to integrate them
into a production, transformation, commercialization or supplying to third
parties process.
In addition, the Consumer Protection Law defines the suppliers of goods and
services as the individuals or legal entities, either public or private that in
a professional way, even occasionally, produce, import, distribute or
commercialize goods or supply services to consumers or users.
It is excluded from the application of the Consumer Protection Law:
(a) the services supplied by liberal professionals that require a
registration with professional bars officially recognized or by another
authority (nevertheless, they are included the advertising done for its
offering); and
(b) the contracts over used assets, executed between consumers.
The Consumer Protection Law determines that the information contained in
the offer addressed to undetermined prospective consumers, binds the offeror
during the period in which the offer takes place and until its public
revocation. Further, it determines that specifications included in
advertisements, announcements, prospects, circulars or other media bind the
offeror and are considered part of the contract entered into by the consumer.
With regard to services, the Consumer Protection Law establishes that those
who supply services of any nature are obliged to respect the terms, conditions,
and other circumstances according to which they have been offered, published or
accepted.
Buildings. Buildings Law No. 19,724, as amended, establish a regime for the
construction of buildings for later subdivision into strata title. Under this
law, developers must inform potential purchasers of the future existence of a
strata regime or co-proprietorship proposal, as well as of all sale conditions,
and the size of each unit in relation to the whole.
63
Unit sales subject to the pre-strata title regime must be registered with
the Real Estate Registry.
The owner of the property subject to pre-strata title regulations may not
take out a mortgage on the property without the consent of the purchasers of
individual units unless expressly stipulated in the purchase contract. In
addition, the owner must inform such purchasers of the conditions of the
mortgage, which may not retroactively affect contracts previously signed.
This law also states that, in the event that construction is not completed,
all amounts already deposited must be repaid to the purchasers.
Mortgage Regulation. The Argentine Civil Code of 1871, as amended,
regulates mortgages both as a contract and as a right over property. There are
no special provisions in the Civil Code aimed at protecting mortgagors.
Nevertheless, any agreement entered into by a mortgagor and a mortgagee at the
time of execution of a mortgage contract or prior to the default of the
mortgagor allowing the mortgagee to recover the property without a public
auction of the property will not be enforced by the courts as contrary to
Argentine public policy.
In an attempt to facilitate the development of a strong secondary market
for mortgages, Law No. 24,441, enacted in 1995, establishes a new alternative
proceeding to collect unpaid amounts secured by a mortgage. The new rules
introduced by Law No. 24,441 are aimed at overcoming the difficulties and delays
of the traditional summary proceeding still in effect.
Until the enactment of Law No. 24,441, the only procedure available to
collect unpaid amounts secured by a mortgage was a summary proceeding regulated
by the Code of Civil and Commercial Procedure. The heavy caseload on the courts
that hear such matters usually delays the summary proceeding, which currently
takes an average of 12 months to complete.
Chapter V of Law No. 24,441 institutes a new procedure which may expedite
collection of unpaid amounts secured by a mortgage. To be applicable, the new
rules, which allow an out-of-court auction, need to be expressly agreed to by
the parties in the mortgage contract.
Currently, we include in our mortgages a clause enabling the enforcement of
Law No. 24,441. However, there can be no assurance that such collection
provisions will accelerate the recovery of unpaid amounts under mortgage
guarantees.
On the other hand, the Public Emergency Law, as amended established the
suspension for the term of 270 days from the enactment of that law, of all the
judicial or non-judicial enforcement including the enforcement of mortgages and
pledges, regardless of its origin. Although the period of 270 days has expired
on November 15, 2002, we cannot assure you that the Argentine government would
not concede debtors a new extension of the suspension of the foreclosures
causing longer delays for the collection of the defaulting rent of our tenants.
Most mortgages executed by us provide that we are empowered to declare the
anticipated expiration of the loan upon non-payment of an installment. This
enables us to recover the unpaid amounts through the sale of the relevant
property pursuant to the Code of Civil and Commercial Procedure of Argentina or
Law No. 24,441.
Pursuant to the Argentine law, fees and expenses related to collection
procedures must be borne by the debtor, and the proceeds from any auction of the
property may be used for the settlement of such obligation.
Although our mortgages are U.S. dollar-denominated, Decree No. 214 and
Decree No. 762 that amend the Public Emergency Law provides that monetary
obligations in force as of January 7, 2002 arising from agreements governed by
private law and which provide for payments in U.S. dollars are subject to the
following rules:
64
o the obligations are to be paid in Pesos at the exchange rate of Ps.
1.00 = US$ 1.00 plus the CER for loans granted for the acquisition of
commercial properties guaranteed by mortgages or, beginning on October
1, 2002, the CVS (, coefficient reflecting variations in the salaries
elaborated and published by the INDEC for loans granted for the
acquisition of residential properties; and
o if for the application of this provision, any of the parties could
require an equitable adjustment of the price. If the parties do not
reach an agreement, the judicial courts will decide about the
difference in each particular case.
Protection for the Disabled Law. Protection for the Disabled Law No.
22,431, enacted on March 20, 1981, as amended, provides that in connection with
the construction and renovation of buildings, obstructions to access must be
eliminated in order to enable access by mobility impaired individuals. In the
construction of public buildings, entrances, transit pathways and adequate
facilities for mobility impaired individuals must be provided.
Buildings constructed before the enforcement of the Protection for the
Disabled Law must be adapted to provide accesses, transit pathways and adequate
facilities for mobility impaired individuals.
Those pre-existing buildings, which due to their architectural design may
not be adapted to the use by mobility impaired individuals, are excepted from
the fulfillment of these requirements.
The Protection for the Disabled Law provides that residential buildings
must ensure access by mobility impaired individuals to elevators and aisles.
Differential architectural requirements refer to pathways, stairs, ramps and
parking spaces.
Antitrust Law. Antitrust Law No. 25,156 prevents antitrust practices and
requires administrative authorization for transactions that according to the
Antitrust Law constitute an economic concentrations.
According to such law, mergers, transfers of goodwill, acquisitions of
property or rights over shares, capital or other convertible securities, or
similar operations by which the acquirer controls a company, are considered
economic concentration.
Whenever an economic concentration involves a company or companies (i)
which hold 25% or more of the relevant market or (ii) which accumulated sales
volume exceeds approximately Ps. 200 million in Argentina or Ps. 2,500 million
worldwide, then the respective concentration should be submitted for approval to
the National Antitrust Commission.
The request for approval may be filed, either prior to the transaction or
within a week after its completion.
Because the consolidated annual sales volume of APSA and IRSA exceeds Ps.
200 million, we should give notice to the National Antitrust Commission of any
transaction referred in the Antitrust Law.
Currently, we have no transaction required to be notified. Compliance with
the Antitrust Law provisions does not affect our ongoing business.
Hotel Regulatory Issues. The Hotel Regulation Act Law No. 18,828 enacted on
November 6, 1970, as amended creates The National Registry of Hotels in which
certain hotels may be registered. Our hotels are required to meet certain
conditions with respect to facilities, services and employees.
65
PROPERTY AND TRANSFER TAXES
Value Added Tax. Under Argentine law, the sale of improved real estate by a
constructor is taxable at a rate equal to 21% of the sale price (excluding the
value of the land). A lower rate has been set at 10.5% for construction meant
for housing. This value added tax is not applicable to the real estate leased by
the constructor for periods greater than three years.
Tax on Gross Income. A local transfer tax is imposed on the sale price of
real property (including the land) located in the City of Buenos Aires at a rate
equal to 1.5% when the seller is the constructor of the property, and 3% when
the seller is not the constructor. For properties located in the province of
Buenos Aires the rate is equal to 2.5% when the seller is the constructor of the
property, and 3% when the seller is not the constructor. Nevertheless, in 1993,
most of the provinces and the federal government concluded an agreement that
repealed the turnover tax for construction of real estate. Each jurisdiction
establishes conditions for the exemption to apply. For example, the city of
Buenos Aires only considers this activity exempt when construction takes place
within the city's boundaries. This tax is not applied to the sale of certain low
priced real estate properties by its constructor, when the property is located
in the city of Buenos Aires.
Stamp Tax. This is a Federal Tax that the 23 provinces and the city of
Buenos Aires collect based on similar rules regarding subject matter, tax base
and rates. In general, this tax is levied on acts validated by documents, e.g.
acts related to the constitution, transmission, or expiry of rights on real
estate, contracts for renting real estate, contracts for sales of stock and
company shares, public deeds relating to real property, etc.
Decree 114/93 repealed this tax in the city of Buenos Aires (federal
district), with one exception. It refers to public deeds for the transfer of
real estate, or for any other contract whereby the ownership of real property is
transferred. The purchase/sale of real estate done through public deed is not
taxable if the real estate is to be used for housing.
o In the city of Buenos Aires the Tax rate is 2.5 %
o In the province of Buenos Aires, the tax rate is 4% in case of public
deed of transfer of real estate.
The purchaser is exempt when the real estate is acquired for unique,
familiar and permanent housing if the fiscal valuation does not exceed the
amount established by law.
INHERITANCE AND GIFT TAXES
Presently inheritance and gift taxes are not levied in Argentina.
C. ORGANIZATIONAL STRUCTURE
The following table presents information relating to our ownership interest
and the percentage of our consolidated total net revenues represented by our
subsidiaries as of June 30, 2002.
PERCENTAGE OF
COUNTRY OF PERCENTAGE PERCENTAGE OF OUR TOTAL NET
SUBSIDIARY ACTIVITY INCORPORATION OWNERSHIP VOTING POWER REVENUES
---------- -------- ------------- --------- ------------ --------
Palermo Invest Investment Argentina 66.7% 66.7% 0.0%
Inversora Bolivar Real Estate Argentina 66.7% 66.7% 10.1%
Ritelco Investment Uruguay 100% 100% 0.0%
IRSA Telecomunicaciones Investment Netherlands Antilles 49.4% 49.4% 0.0%
APSA Shopping Centers Argentina 49.7% 49.7%(1) 37.6%
(1) Pursuant to a voting agreement subscribed, Goldman Sachs granted us,
subject to certain conditions, rights to vote the shares held by Goldman Sachs
in APSA for a period of ten years.
66
The following is our organizational chart and our principal subsidiaries as
of June 30, 2002:
67
------------------------------------------------------------------------------------------------------------------------------------
IRA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
------------------------------------------------------------------------------------------------------------------------------------
| | | | 67% | 100% |
| | | | | |
| | | --------------- | ---------------
| | | Palermo | Ritelco -----|
| | | Invest | --------------- |
| | | --------------- | |
| | | | | |
LEGAL | | | | 100% | |
ENTITIES | | | --------------- | 49.7% | 49%
| | | Inversora -------------- -----------------
| | | Bolivar APSA IRSA
| | | --------------- -------------- Telecommuniciones --------------|
| | | | | ----------------- |
| | | | | |
....................................................................................................................................|
| | | | | |
ASSETS | | | |-----------| |---------------------------------------------------------- |
| 100% | | | 100% | | | 100% | | 51% | 19% | 80% |
----------------- | | ----------------- | | | ---------------- ---------------- ---------------- ---------------- |
Office Buildings | | Office Buildings | | | Shopping Centers Shopping Centers Shopping Centers Credit Card |
----------------- | | ----------------- | | | ---------------- ---------------- ---------------- ---------------- |
Libertador 498 | | Intercontinental | | | Alto Palermo Buenos Aires Mendoza |
Madero 1020 | | Plaza | | | Paseo Alcorta Design Plaza Tarshop |
Reconquista 823/41 | | | | | Alto Avellaneda |
Maipu 1300 | | Others | | | |
Suipacha 652/664 | | | | | Abasto |
Others | | | | | Patio Bullrich
| | | | | Alto Noa |
----------------- | | ---------------- | | | ---------------- ---------------- ---------------- ---------------- |
| | | | | |
| | | | |--------------------------| |--------|
| |----------| | | | 76% | 50% | |
| | 50% | 50% 50% | | | ----------------- -------------- -------------- --------------
| ---------- ---------- ----------- | | Internet Internet Internet Internet
| Hotel Hotel Hotel | | Companies Companies Companies Companies
| ---------- ---------- ----------- | | ----------------- -------------- 98% -------------- --------------
| Llao Libertador Inter- | | Alto Invest S.A. E-Commerce ------ Altocity.com Alternativa
| Llao Continental | | Latina S.A. Gratis
| ---------- ---------- ----------- | | Red
| | | Alternativa
| | | ----------------- -------------- -------------- --------------
| | |
| | --------------------------------------------------------|
| | |
| |--------------------------------------------------| |
| | | | | |
|--------------------------------------|--|----------------|--| | | 100% |--------------|
| 100% | 100% | 100% 50%| | 50% 50% | | 50% | | 100% | | 100%
------------ ------------- ----------- --------------- -------------- -------------- ------------ ------------ --------------
Apartments Land Reserves Residential Residential Land Reserves Land Reserves Apartments Apartments Land Reserves
Apartments Apartments
------------ ------------- ----------- --------------- -------------- -------------- ------------ ------------ --------------
Torres Puerto Madero Villa Abril Pereiraola Puerto Retiro Alto Palermo Torres de Caballito
Jardin Caballito Celina (50%) Park Abasto Others
Concepcion Santa Maria Others (100%) Others
Arenal del Plata
Others
------------ ------------- ----------- --------------- -------------- -------------- ------------ ------------ --------------
[] Legal Entities [] Office & Rental Properties [] Shopping Centres [] Hotels [] Developments [] Internet Companies [] Credit Card
Footnote: All participants reflect percentage of total capital. Percentages have been rounded.
In February, 2002 we sold all of our participation in Brazil Realty.
68
D. PROPERTY.
As of June 30, 2002, most of our property, consisting of rental properties
in the office and retail real estate sectors and development properties
primarily in the residential real estate sector, were located in Argentina. We
lease our headquarters, located at Bolivar 108, C1066AAD Buenos Aires,
Argentina, pursuant to two lease agreements that expire on June 30, 2007. We
believe that all our facilities are adequate for our present needs and suitable
for our intended purposes.
The following table sets forth certain information about our properties
that are held in fee:
OUTSTANDING BALANCE DUE AT
HELD IN FEE ENCUMBRANCE LOCATION PRINCIPAL AMOUNT MATURITY DATE MATURITY RATE
----------- ----------- -------- ---------------- ------------- -------- ----
(Ps. million) (Ps.)
Santa Maria del City of
Plata.......... Mortgage Buenos Aires 1.5 November 2003 0.7 Libor 1 Y
Sheraton City of Libor 3M +
Libertador (1). Mortgage Buenos Aires 42.8 January 2006 23.9 401/476 bps
--------------
(1) In January 2001 our subsidiary Hoteles Argentinos, owner of 100% of
the Sheraton Libertador, obtained a loan from Bank Boston N.A. for US$
12.0 million. This loan is due in January 2006 with interest being
payable quarterly at LIBOR plus a spread ranging between 401 and 476
basis points, depending on the value of certain financial ratios.
We do not currently lease any material properties other than our
headquarters.
INSURANCE
We carry liability and fire insurance with respect to all of our
properties. Such insurance policies have specifications, limits and deductibles
customary for the community where the property is located. We believe that the
insurance coverage for our properties is adequate.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. CONSOLIDATED OPERATING RESULTS
The following Operating and financial review and prospects should be read
together with Item 3: "Key Information--Selected Financial Data" and our
Financial Statements appearing elsewhere in this annual report. This Operating
and Financial Review and Prospects discussion contains forward-looking
statements that involve risks, uncertainties and assumptions. These
forward-looking statements include, among others, those statements including the
words "expects", "anticipates", "intends", "believes" and similar language. The
actual results may differ materially from those anticipated in these
forward-looking statements as a result of many risk factors, including those set
forth elsewhere in this annual report.
For purposes of the following discussion, unless otherwise specified,
references to fiscal years 2002, 2001 and 2000 relate to the fiscal years ended
June 30, 2002, 2001 and 2000, respectively.
We maintain our financial books and records in Pesos and prepare our
Financial Statements in conformity with Argentine GAAP and the regulations of
the Comision Nacional de Valores. See Note 19to the Financial Statements for a
description of the principal differences between Argentine GAAP and U.S. GAAP,
as they relate to us, and a reconciliation to U.S. GAAP of net (loss) income and
total shareholders' equity. The differences involve methods of measuring the
amounts shown in the financial statements as well as additional disclosures
required by U.S. GAAP and Regulation S-X of the SEC.
The report of our independent accountants, PricewaterhouseCoopers, Buenos
Aires, Argentina, on our consolidated financial statements for the year ended
June 30, 2002, issued in connection with this annual report, includes an
explanatory paragraph stating that, we were negatively impacted by the
69
continued deterioration of the Argentine economy, the Argentine Government
adoption of various economic measures and by the devaluation of the Peso. These
factors raise substantial doubt about our ability to continue as a going
concern. Management's plans in regard to these matters are described in the
notes to our consolidated financial statements - Note 2 "Argentine economic
situation and its impact on the Company's economic and financial position". Our
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. Investors in IRSA should review
carefully the report of PricewaterhouseCoopers, Buenos Aires, Argentina. There
can be no assurance that we will be able to continue as a going concern. See
"Risk Factors--Factors related to our business."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In connection with the preparation of the financial statements included in
this annual report, we have relied on variables and assumptions derived from
historical experience and various other factors that we deemed reasonable and
relevant. Although we review these estimates and assumptions in the ordinary
course of business, the portrayal of our financial condition and results of
operation often requires our management to make judgments regarding the effects
of matters that are inherently uncertain on the carrying value of our assets and
liabilities. Actual results may differ from those estimated under different
variables, assumptions or conditions. In order to provide an understanding about
how management forms its judgments about future events, including the variables
and assumptions underlying the estimates, and the sensitivity of those judgments
to different variables and conditions, we have included comments related to each
critical accounting policy described as follows:
o proportionate consolidation;
o revenue recognition;
o rental property depreciation;
o provision for allowances and contingencies; and
o impairment of long-lived assets.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles used in Argentina which differ in
certain significant respects from generally accepted accounting principles in
the United States of America. Such differences involve methods of measuring the
amounts shown in the financial statements, as well as additional disclosures
required by U.S. GAAP and Regulation S-X of the SEC.
PROPORTIONATE CONSOLIDATION
The consolidated statements of income were prepared on a proportionate
consolidation basis. As from July 1, 1996, we have used the
"proportionate-consolidation method" of accounting for our investments in which
we exercise control and other jointly-controlled investments. This method has
not been used for balance sheet and cash flows purposes. All notes to our
consolidated financial statements relating to income-statement items have been
also prepared on a proportionate consolidation basis. We calculate the
proportionate-consolidation method by applying our percentage ownership interest
to the historical financial statements of our equity method investments. We
consider this method more appropriately reflect our results of operations and
the integration of our core businesses. The use of the
proportionate-consolidation method has been approved by the Argentine Comision
Nacional de Valores.
Although the use of the proportionate consolidation method as compared to
the equity method of accounting from a financial presentation perspective
impacts almost all areas of our consolidated statements of income, it does not
impact our consolidated shareholders' equity or net earnings. Note 14 to our
audited financial statements presents our statements of income for the three
years in the period ended June 30, 2002 reporting (i) the jointly-controlled
investments accounted for by the equity method, with the
70
earnings or losses included as earnings or losses from equity investments, and
(ii) minority interest in earnings or losses of controlled subsidiaries.
REVENUE RECOGNITION
We primarily derive our revenues from domestic and international office and
shopping center leases and services operations, the development and sale of
properties, hotel operations and to a lesser extent, from e-commerce activities.
The proportionate consolidation method has not been used for balance sheet and
cash flows purposes. This section reflects our revenue recognition policies and
those of our controlled and jointly-controlled subsidiaries. All revenues are
stated net of taxes levied on sales.
Development and sale of properties. We generally enter into purchase and
sale agreements with purchasers of units in our residential development
properties prior to the commencement of construction. Pursuant to this practice,
we initiate our marketing and sales efforts on the basis of already-commissioned
architectural designs and model units. As a general rule, purchasers pay a
booking charge for the units and subsequently enter into fixed price purchase
and sale agreements by advancing us approximately 5% of the purchase price and
agreeing to advance an additional 20% of the purchase price in equal
installments over an agreed upon construction period. The balance of the
purchase price is due upon delivery of the constructed and completed unit.
Construction of such residential development properties is done pursuant to
"turn-key" contracts with major Argentine and South American construction
companies that provide for construction to be completed within a prescribed
period and budget, subject to customary exceptions.
We record revenue from the sale of properties when all of the following
criteria are met:
o the sale has been consummated;
o there is sufficient evidence of the buyer's initial capacity and
commitment to pay for the property;
o our receivable is not subject to future subordination; and
o we have transferred to the buyer the risk of ownership, and do not
have a continuing involvement in the property.
We use the percentage-of-completion method of accounting with respect to
sales of development properties under construction effected under fixed-priced
contracts. Under this method, revenue is recognized based on the ratio of costs
incurred to total estimated costs applied to the total contract price. We do not
commence revenue and cost recognition until such time as the decision to proceed
with the project is made and construction activities have begun.
The percentage-of-completion method of accounting requires management to
prepare budgeted costs (i.e., the estimated costs of completion) in connection
with sales of properties / units. All changes to estimated costs of completion
are incorporated into revised estimates during the contract period.
Under this method of accounting, revenues for work completed may be
recognized in the statement of income prior to the period in which actual cash
proceeds from the sale are received. In this situation, a deferred asset is
recorded. Alternatively, and as is more common for us, where property unit
purchasers pay us an advance down-payment and monthly cash installments prior to
the commencement of construction, a liability is recorded. This is recorded as a
customer advance in the financial statements.
Leases and services from office and other buildings. Leases with tenants
are accounted for as operating leases. Tenants are charged a base rent on a
monthly basis. Rental income is recognized on a
71
straight-line basis over the term of the lease and unpaid rents are included in
accounts receivable in the consolidated balance sheets.
Leases and services from shopping center operations. Leases with tenants
are accounted for as operating leases. Tenants are generally charged a rent
which consists of the higher of (i) a monthly base rent and (ii) a specified
percentage of the tenant's monthly gross retail sales which generally ranges
between 4% and 8% of tenant's gross sales. Furthermore, pursuant to the rent
escalation clause in most leases, a tenant's base rent generally increases
between 4% and 7% each year during the term of the lease. Minimum rental income
is recognized on a straight-line basis over the term of the lease and unpaid
rents are included in accounts receivable in the consolidated balance sheets.
Certain lease agreements contain provisions which provide for rents based
on a percentage of sales or based on a percentage of sales volume above a
specified threshold. We determine the compliance with specific targets and
calculate the additional rent on a monthly basis as provided for in the
contracts. Thus, these contingent rents are not recognized until the required
thresholds are exceeded.
Generally, our lease agreements vary from 36 to 120 months. Law No. 24,808
provides that tenants may rescind commercial lease agreements after the initial
six months, upon not less than 60 days' written notice, subject to penalties
which vary from one to one and a half months rent if the tenant rescinds during
the first year of its lease, and one month of rent if the tenant rescinds after
the first year of its lease.
We also charge our tenants a monthly administration fee, prorated among the
tenants according to their leases, which varies from shopping center to shopping
center, relating to the administration and maintenance of the common area and
the administration of contributions made by tenants to finance promotional
efforts for the overall shopping centers operations. Administration fees are
recognized monthly when earned. In addition to rent, tenants are generally
charged "admission rights", a non-refundable admission fee that tenants may be
required to pay upon entering into a lease and upon lease renewal. Admission
right is normally paid in one lump sum or in a small number of monthly
installments. Admission rights are recognized using the straight-line method
over the life of the respective lease agreements. Furthermore, the lease
agreements generally provide for the reimbursement of real estate taxes,
insurance, advertising and certain common area maintenance costs. These
additional rents and tenant reimbursements are accounted for on the accrual
basis.
Credit card operations. Revenues derived from credit card transactions
consist of commissions and financing income. Commissions are recognized at the
time the merchants' transactions are processed, while financing income is
recognized when earned.
Hotel operations. We recognize revenues from our rooms, catering, and
restaurant facilities as earned on the close of business each day.
International operations. On February 28, 2002, we sold all of our interest
in Brazil Realty, a company operating in Brazil, whose business primarily
comprises the same type of operations conducted by us in Argentina.
All revenues are state net of taxes levied on sales.
RENTAL PROPERTY DEPRECIATION
We compute depreciation using the straight-line method over an estimated
useful life of 50 years for buildings, ten years for facilities and five years
for furniture and other equipment, all of which are judgmental determinations.
These determinations may prove to be different than the actual life of the
properties.
PROVISION FOR ALLOWANCES AND CONTINGENCIES
We provide for losses relating to mortgage, lease and other accounts
receivable. The allowance for losses is recognized when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the terms of the agreements. The allowance
is determined on
72
a one-by-one basis considering the present value of expected future cash flow or
the fair value of collateral if the loan is collateral dependent, when
applicable. While management uses the information available to make evaluations,
future adjustments to the allowance may be necessary if future economic
conditions differ substantially from the assumptions used in making the
evaluations. Management has considered all events and/or transactions that are
subject to reasonable and normal methods of estimations, and the consolidated
financial statements reflect that consideration.
We have certain contingent liabilities with respect to existing or
potential claims, lawsuits and other proceedings, including those involving
labor and other matters. We accrue liabilities when it is probable that future
costs will be incurred and such costs can be reasonably estimated. Such accruals
are based on developments to date, our estimate of the outcomes of these matters
and our lawyers' experience in contesting, litigating and settling other
matters. As the scope of the liabilities becomes better defined, there may be
changes in the estimates of future costs, which could have a material effect our
future results of operations and financial condition or liquidity.
IMPAIRMENT OF LONG-LIVED ASSETS
We periodically evaluate the carrying value of our long-lived assets for
impairment. We consider the carrying value of a long-lived asset to be impaired
when the expected cash flows, undiscounted and without interest, from such asset
is separately identifiable and less than its carrying value. Impairments are
allocated to the results of the period. The reposition value is mainly
determined using independent appraisals or projections of future cash flows. In
that event, a loss would be recognized based on the amount by which the carrying
value exceeds the fair market value of the long-lived asset. We determine the
fair market value primarily using independent appraisals and utilizing
anticipated cash flows discounted at a rate commensurate with the risk involved.
We believe that the accounting estimate related to asset impairment is a
"critical accounting estimate" because:
1. it is highly susceptible to change from period to period because
it requires company management and/or independent appraisers to
make assumptions such as, future sales and cost of sale, future
vacancy rates and future prices; and
2. because the impact that recognizing an impairment would have on
assets reported on our balance sheet as well as on the results of
our operations could be material. Independent appraisals about
future sales prices and future vacancy rates require significant
judgment because actual sales prices and vacancy rates have
fluctuated in the past and are expected to continue to do so.
We reviewed our assets related to Development and sales of properties,
Office and others and Hotel segments for impairments as of June 30, 2002, due to
the continued deterioration of the Argentine economy and the Argentine
Government's adoption of economic measures that could affect our future
revenues. Assets related to those three segments represent approximately 95% of
our total long-lived assets. As mentioned in our consolidated financial
statement as of June 30, 2002 we accounted for an impairment since the
independent appraisals of the assets described in Notes 4.c.(iii), 4.d. and 4.e.
were less than their recorded values.
Valuation of office and retail buildings was performed according to the
Rent Value Method. We calculated discount rates considering each property's
location, competition in its market, its historical vacancy rates and cash flow.
The average discount rate we used was 15%, the average price per square meter
was Ps. 26.7, approximately US$ 7.2 and the average vacancy rate was 13.8%. The
performance of a sensitivity analysis which reduced prices per square meter by
5.0% and increased the average vacancy rates to 16.6%, resulted in an increased
impairment accounted for as of June 30, 2002 equal to Ps. 23.7 million.
We used the open market method for the valuation of the land reserve and
non current inventories. In the January - June period there were no significant
real estate transactions in the market due to the complicated Argentine
macroeconomic scenario and to the restrictions on cash transactions imposed by
the Duhalde Administration; thus, no reference values for this kind of
transactions could be used. For this
73
reason, the valuation performed by an independent international appraiser
engaged by us was based on historical market values which were forward projected
to the current date to obtain the present value. This projection considered the
recent devaluation of the Argentine Peso and was inflation adjusted. It is worth
noting that despite the fact that the real estate market is usually among the
hardest hit in times of economic turmoil, big extensions of urban land suffer a
relatively lower deterioration due to their scarcity and its safe haven feature.
The sensitivity analysis considering a 10% price reduction, results in an
increased impairment accounted for as of June 30, 2002 equal to Ps. 22.0
million.
The above-mentioned impairment amounts to a loss of Ps. 45.7 million which
affects the Balance Sheet lines "Non Current Investments--Parcels of Undeveloped
Land--", "Non Current Inventories" and "Fixed Assets--Properties--", reducing
the value of our total assets by approximately 8.2%. This impairment would have
resulted in a net loss of 9.1% for the year ended June 30, 2002.
VARIABILITY OF QUARTERLY RESULTS
A principal source of our revenue is rental income derived from leases of
office and retail properties and sales of developed properties. Nevertheless,
our historical revenues have varied from period to period depending upon the
timeliness of sales of properties. No assurance can be given that our period to
period results of operations will not continue to vary as a result of periodic
property sales.
OVERVIEW
As described below, economic and political factors affecting Argentina as
well as changes in interest rates and foreign currency have a substantial impact
on our financial performance.
EFFECT OF RECENT DEVALUATION AND ECONOMIC CRISIS ON US
All of our assets are located and our operations are performed in
Argentina. Accordingly, our financial condition and results of operations depend
substantially upon economic conditions prevailing in Argentina. Due to a
four-year-old recession, the Argentine economy has deteriorated sharply.
The rate of gross domestic product growth of Argentina dropped to a
negative 5% during the first two quarters of 2001 and fell a further 16% during
the first quarter of 2002. In May 2002, unemployment rate rose to 22%. Other
relevant economic indicators have not been showing signs of recovery. In
conclusion, the economic crisis, the lower level of activity in the Argentine
economy and the increase in the unemployment rate during the period have
detrimentally affected our profitability.
On December 23, 2001, President Adolfo Rodriguez Saa declared the
suspension of the payment of foreign debt and later Eduardo Duhalde ratified
this decision. On January 7, 2002, the National Congress enacted the Public
Emergency Law which repeals several provisions of the Convertibility Law which
prevailed in Argentina for 10 years, and the Executive Branch announced the
devaluation of the Peso with the establishment of a dual exchange rate system in
which certain limited transactions will occur at a fixed rate of Ps. 1.4 to US$
1.0 and all other transactions will be settled at a floating market rate
depending on supply and demand. This new legislation is expected to have a
material adverse impact on our financial position and the results of our
operations. Our Board of Directors is currently analyzing the impact of the new
legislation and has begun conversations with our creditors for renegotiations of
existing agreements. Additionally, we will initiate negotiations with tenants
regarding the terms of our lease agreements as called for in the new
legislation.
As described above, economic and political factors affecting Argentina as
well as changes in interest rates and foreign currency have a substantial impact
on our financial performance. We have been negatively impacted by the continued
deterioration of the Argentine economy, the Argentine government's adoption of
the economic measures summarized above and the devaluation of the Argentine
Peso. During fiscal year 2002, we suffered a net loss of Ps. 499.6 million and
as of June 30, 2002, we have a working capital deficiency of Ps. 469.8 million.
Due to the continuing effects of economic recession, the unavailability of
financial credit and the succession of recent economic measures adversely
affecting the normal operations of the banking and payments system, we were
unable to make the schedule payments
74
upon maturity of our floating rate notes and our syndicated credit facility. Our
management has already been able to regulate this situation and restructure our
debt on a long term basis and at lower interest rates.
EFFECTS OF INFLATION
From 1997 until the end of year 2001, policies adopted by Argentine
government have substantially reduced the level of inflation. Therefore, during
that period, inflation did not affect our financial condition and results of
operations. Nevertheless, inflation increased substantially during the ten
months ended October 31, 2002. The following are annual inflation rates' figures
published by the Ministry of Economy of Argentina:
Year ended June 30 Consumer Price Index Wholesale Price Index
------------------ -------------------- ---------------------
1997 0.9% 0.1%
1998 1.1% -1.9%
1999 -1.4% -5.3%
2000 -1.2% 4.4%
2001 -0.3% -1.6%
2002 40.0% 123.5%
The Public Emergency Law authorizes the executive branch to establish the
system which will determine the new exchange ratio between the Peso and foreign
currencies, and to approve the corresponding monetary regulations. The
devaluation of the Peso by the executive branch creates a significant risk that
inflation will increase materially, and we have no means to hedge and protect us
from the risks of inflation.
EFFECTS OF INTEREST RATE FLUCTUATIONS
Almost all of our U.S. dollar-denominated indebtedness bears variable
interest rates. An increase in interest rates would significantly increase our
financial costs and materially affect our financial condition and our results of
operations.
EFFECTS OF FOREIGN CURRENCY FLUCTUATIONS
From April 1, 1991 until the beginning of 2002, the Convertibility Law was
applicable in Argentina. This law established a fixed exchange rate, under which
the Argentine Central Bank was obliged to sell U.S. dollars to any person at a
fixed rate of one Peso per U.S. dollar. Accordingly, the foreign currency
fluctuations were reduced to a minimum level during the fiscal year 2001 and the
subsequent interim period.
The primarily economic change announced by the current Argentine government
in January 2002 was the devaluation of the Peso. Most of our lease contracts and
a significant portion of our liabilities are denominated in U.S. dollars.
Foreign currency exchange rate fluctuations significantly increase the risk of
default on our mortgage receivables, leases and services and other receivables,
because many of our customers have Peso-denominated revenue streams and will
therefore experience a relative increase in their U.S. dollar-denominated
liabilities compared to their Peso-denominated revenues. Foreign currency
exchange restrictions hereafter imposed by the Argentine Government could
prevent or restrict our access to U.S. dollars, affecting our ability to service
our U.S. dollar-denominated liabilities. Also, fluctuations in the exchange rate
between the Peso and the U.S. dollar may adversely affect the U.S. dollar
equivalent of the Peso price of our common shares on the Bolsa de Comercio de
Buenos Aires, and as a result, are likely to affect the market price of our GDSs
in the United States.
75
OPERATING COSTS AND EXPENSES
ALLOCATION OF SELLING EXPENSES TO BUSINESS SEGMENTS
Selling expenses related to the shopping centers, hotels and international
segments are directly allocated to such segments because such segments are
individually managed and clearly identifiable. The remaining selling expenses
are allocated among the development and sale of properties and offices and other
non-shopping center rental properties segments, excluding those located in
shopping centers, based on the cost center which incurred the selling expense.
ALLOCATION OF ADMINISTRATIVE EXPENSES TO BUSINESS SEGMENTS
Administrative expenses (other than those expenses we incurred for the
benefit of all the business segments) related to our Shopping Centers, Hotels
and International business segments are directly attributable to such segments
because such segments are individually managed and are clearly identifiable.
Administrative expenses include management fees paid, if any, to the managers of
such segments. The remaining administrative expenses are allocated to the
different segments, based on the cost center in which they are incurred, as
follows: (i) administrative expenses related to all business segments, as those
corresponding to the board of directors, are allocated among each segment pro
rata on the basis of their respective assets; (ii) administrative expenses
incurred by certain departments associated with specific segments are allocated
to such segments; and (iii) 70% of the remaining administrative expenses are
allocated to the Development and sale of properties segment, and 30% to the
Offices and other non-shopping center rental properties segment.
ALLOCATION OF OTHER EXPENSES AND NET INCOME TO BUSINESS SEGMENTS
Financial Results, Net. Includes interest income, gain (loss) on financial
operations, financing expenses, gain (loss) on exposure to inflation, exchange
differences and miscellaneous income (expense) allocable to each segment, as
described below:
Interest income and gain (loss) on financial operations. Only those related
to the International, Shopping Center and Hotel segments were separately
allocated to such segments, as each of them manage their own financial
surpluses. The remaining amounts in this respect have been allocated to
"financial operations and others" because they are not directly related to any
segment in particular.
Financing expenses. Concerning the International, Shopping Center and Hotel
segments, only the proportional financing expenses incurred in Brazil Realty,
Fondo de Valores Inmobiliarios, APSA and Hotels have been considered. The
remaining proportional consolidated financing expenses have been apportioned to
the Sales and Development, Office and others, Hotel segments and the column
headed "financial operations and others " pro rata in the basis of the total
assets allocated to each such segment.
Gain (loss) on exposure to inflation, exchange differences and
miscellaneous. These have been allocated to the segments from which they stem.
Net Income in Affiliated Companies. These have been allocated to the
related segments. Regarding the income/loss related to the investments in IRSA
Telecomunicaciones and Latin American Econetworks, they have been allocated to
"financial operations and others" because they are not related to any segment in
particular.
Other income (Expenses). Only those related to the International, Shopping
Center and Hotel segments were separately allocated to such segments. The
remaining amounts in this respect have been allocated to "financial operations
and others" because they are not directly related to any segment in particular.
Income tax. The income tax applicable to each segment was separately
applied to each such segment.
76
Extraordinary loss. The extraordinary loss applicable to each segment was
separately applied to each such segment.
SIGNIFICANT RECENT ACQUISITIONS
In the last few years, we have grown significantly through a series of
acquisitions made directly and/or indirectly, through our subsidiaries. We seek
to identify desirable properties for acquisitions which we may acquire in the
normal course of business and regularly review our portfolio and from time to
time consider and effect the sale of certain properties.
BUSINESS SEGMENT REPORTING
We have determined that our reportable segments are those that are based on
our method of internal reporting. Accordingly, we have six reportable segments.
These segments are Development and sales of properties, Office and other
non-shopping center rental properties, Shopping centers, Hotel operations,
International, Financial operations and others. The consolidated statements of
income were prepared on a proportionate consolidation basis. As from July 1,
1996, we used the "proportionate-consolidation method" of accounting for our
investments in which we exercise control and other jointly-controlled
investments. This method has not been used for balance sheet and cash flows
purposes. Accordingly, this section reflects the results of operations of our
controlled and jointly-controlled subsidiaries on a proportionate basis.
A general description of each segment follows:
Development and sale of properties. This segment includes the operating
results of our construction and ultimate sale of residential buildings business.
Offices and other non-shopping center rental properties. This segment
includes the operating results of our lease and service revenues of office space
and other non-retail building properties from tenants.
Shopping centers. This segment includes the operating results of our
shopping centers principally comprised of lease and service revenues from
tenants. This segment also includes revenues derived from credit card
transactions which consist of commissions and financing income.
Hotel operations. This segment includes the operating results of our hotels
principally comprised of room, catering and restaurant revenues.
International. This segment includes the results of operations of our
equity investments in:
o Brazil (which we sold in February 2002) for all periods presented; and
o Venezuela (which we sold in December 2000) for the period ended June
30, 2001.
Others. This segment primarily includes revenues and associated costs
generated from the sale of equity securities, other securities-related
transactions and other non-core activities. For the fiscal year ended June 30,
2002 and 2001, this segment also includes the loss in our equity investees
relating to internet, telecommunications and other technology-related
activities.
We measure our reportable segments based on net income. Inter-segment
transactions, if any, are accounted for at current market prices. We evaluate
performance and allocate our resources to each segment based on net segment
income. We are not dependent on any single customer.
The following tables show certain operating data by business activity:
77
FOR THE FISCAL YEAR 2002 (IN MILLIONS OF PESOS) (1)
------------------------------------------------------------------------------------------------
DEVELOPMENT OFFICES AND SHOPPING HOTEL
AND SALE OF OTHER INTERNATIONAL CENTERS OPERATIONS OTHERS TOTAL
PROPERTIES NON-SHOPPING
CENTER
RENTAL
PROPERTIES
------------- ------------- ------------- ----------- ------------ -------- ------------
Sales.................. 45.2 34.3 24.8 77.6 29.5 - 211.3
Costs.................. (37.4) (10.7) (14.1) (38.4) (20.8) - (121.4)
Gross profit........... 7.8 23.6 10.8 39.2 8.7 - 90.0
Selling expenses....... (3.7) (0.5) (4.6) (22.3) (3.3) - (34.3)
Administrative
expenses............... (9.0) (5.0) (3.8) (11.2) (8.7) - (37.6)
Loss on purchasers
rescissions of sale
contracts.............. 0.0 - - - - - 0.0
(Loss) income from
operations and holdings
of real estate assets,
net........ (30.8) (41.7) 31.5 (23.9) - - (65.0)
------------- ------------- ------------- -------- -------- --------- ------------
Operating (loss)
income (35.6) (23.6) 33.9 (18.3) (3.4) - (46.9)
============= ============= ============= ======== ======== ========= ============
Financial results,
net.............. (18.5) (14.8) (3.6) 8.9 (15.5) (388.6) (432.2)
Net income (loss) in
Affiliated
Companies.... - - 0.4 (3.9) - 1.5 (2.0)
Other income
(expenses), net.... - - 0.0 (4.7) 0.2 (4.0) (8.5)
(Loss) income before
taxes and
extraordinary loss.... (54.1) (38.4) 30.8 (18.1) (18.7) (391.1) (489.6)
Income tax.... (0.6) (3.3) (4.5) (1.3) (0.1) (0.1) (10.0)
Net (loss) income for
the year............. (54.7) (41.8) 26.2 (19.4) (18.7) (391.2) (499.6)
============= ============= ============= ======== ======== ======== ============
Total assets.... 354.0 273.4 26.1 299.6 114.4 77.2 1,144.7
============= ============= ============= ======== ======== ======== ============
(1) Adjusted for price-level changes and expressed in millions of constant
Pesos of June 30, 2002.
78
FOR THE FISCAL YEAR 2001 (IN MILLIONS OF PESOS)
-------------------------------------------------------------------------------------------------
DEVELOPMENT OFFICES AND INTERNATIONAL SHOPPING HOTEL OTHERS TOTAL
AND SALE OF OTHER CENTERS OPERATIONS
PROPERTIES NON-SHOPPING
CENTER
RENTAL
PROPERTIES
----------- ------------- ------------- ----------- ------------ -------- ------------
Sales......................... 89.8 45.6 69. 94.5 40.9 - 339.8
Costs......................... (68.2) (8.9) (31.0) (36.8) (27.1) - (172.0)
Gross profit.................. 21.6 36.7 38.1 57.7 13.8 - 167.8
Selling expenses.............. (8.5) (0.5) (8.7) (11.4) (4.7) - (33.8)
Administrative expenses....... (13.4) (6.3) (7.2) (14.1) (9.8) - (50.7)
Loss on purchasers
rescissions of sale
contracts .................... (0.0) - - - - - (0.0)
(Loss) from operations and
holdings of real estate
assets, net .................. (3.8) (1.9) (0.6) - - - (6.3)
----------- ------------- ------------- ----------- ------------ -------- ------------
Operating income.............. (4.1) 28.1 21.6 32.2 (0.8) - 77.0
=========== ============= ============= =========== ============ ======== ============
Financial results, net........ (25.0) (20.0) (14.4) (28.1) (8.5) (14.5) (110.3)
Net loss in Affiliated
Companies..................... (0.0) - (1.3) (1.4) - (7.6) (10.3)
Other income (expenses),
net........................... - - (0.0) (0.2) 0.2 (5.7) (5.6)
(Loss) income before taxes
and extraordinary loss........ (29.1) 8.1 5.9 2.5 (9.0) (27.7) (49.2)
Income tax.................... 0.0 (2.4) (1.9) (0.8) 0.0 - (5.1)
Income tax.................... (29.1) 5.7 4.0 1.7 (8.9) (27.7) (54.3)
Extraordinary loss ........... - - - - (5.7) - (5.7)
Net (loss) income for the
year.......................... (29.1) 5.7 4.0 1.7 (14.6) (27.7) (60.0)
=========== ============= ============= =========== ============ ======== ============
Total assets.................. 419.4 335.0 142.0 326.0 117.1 155.1 1,494.6
=========== ============= ============= =========== ============ ======== ============
(1) Adjusted for price-level changes and expressed in millions of constant
Pesos of June 30, 2002.
79
FOR THE FISCAL YEAR 2000 (IN MILLIONS OF PESOS)
-------------------------------------------------------------------------------------------
DEVELOPMENT OFFICES AND SHOPPING HOTELS
AND SALE OF OTHER INTERNATIONAL CENTERS OPERATIONS OTHERS TOTAL
PROPERTIES NON-SHOPPING
CENTER
RENTAL
PROPERTIES
-------------------------------------------------------------------------------------------
Sales..................... 80.45 46.7 86.4 89.3 59.1 0.0 361.9
Costs..................... (52.5) (8.1) (34.7) (34.0) (38.5) 0.0 (167.7)
Gross
profit................... 28.0 38.6 51.7 55.3 20.6 0.0 194.2
Selling expenses (4.7) (0.6) (6.1) (19.9) (6.5) 0.0 (36.9)
Administrative expenses... (15.2) (6.7) (10.1) (12.4) (11.3) 0.0 (55.7)
Loss on purchasers
rescissions of sale
contracts (1.5) 0.0 0.0 0.0 0.0 0.0 (1.5)
Loss from operations and
holdings of real estate
assets,
net....................... (0.7) 0.0 (1.9) 0.0 0.0 0.0 (2.7)
-------- ------- --------- -------- ------- ------- --------
Operating income 5.8 31.4 33.6 23.8 2.9 0.0 97.5
======== ======== ========= ======== ======== ======== ========
Financial results,
net....................... (17.9) (15.6) 4.8 (21.8) (7.6) (0.8) (58.8)
Net loss in Affiliated
Companies................. 0.0 0.0 (1.5) 0.0 0.0 0.0 (1.5)
Other (expenses) income,
net...................... 0.0 0.0 (4.5) (1.0) 0.4 (6.7) (11.9)
(Loss) income before
taxes and extraordinary
loss..................... (12.1) 15.8 32.45 0.9 (4.3) (7.45) 25.3
Income tax............... (2.4) (2.0) (6.6) (2.1) (0.45) 0.0 (13.8)
Net (loss) income for the
year..................... (14.5) 13.7 25.9 (1.2) (4.8) (7.45) 11.6
Total assets 459.4 356.8 266.4 309.0 134.8 138.9 1,665.2
======== ======== ========= ======== ======== ======== ========
(1) Adjusted for price-level changes and expressed in millions of constant
Pesos of June 30, 2002.
80
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 2002 AND 2001.
SALES
Sales decreased 37.8%, from Ps. 339.8 million in the fiscal year ended June
30, 2001 to Ps. 211.3 million in the fiscal year ended June 30, 2002, on account
of a decrease in sales in all segments of our activity. This decrease was
primarily attributable to the severe and ongoing recession that the Argentine
economy is undergoing and that is paralyzing our operations all of which are
conducted in Argentina.
Development and sale of properties. Sales from development and sale of
properties decreased 49.6%, from Ps. 89.8 million for the fiscal year ended June
30, 2001 to Ps. 45.2 million for the fiscal year ended June 30, 2002. The
decrease in sales in the development and sale of properties segment was
attributable to: (i) the Ps. 21.6 million decrease in sales from the residential
communities of Abril and Villa Celina; (ii) the Ps. 12.0 million decrease in
sales of undeveloped parcels of land, on account of the non-recurrence of sales
of Dique IV and Monserrat made in 2001; (iii) the Ps. 4.7 million decrease in
the sales of other real property primarily resulting from the lack of recurrence
of sales in Serrano 250, Sarmiento 580, Av. De Mayo 701, Madero 1020 and
Montevideo 1975, partially offset by new sales during fiscal year 2002 of the
real properties on Santa Fe 1588, Rivadavia 2243 and Libertador 498 and finally
(iv) the Ps. 5.2 million reduction in interest income from financed sales
primarily due to the sale on October 2001 of a significant portion of our real
estate loans to Banco Sudameris Argentina S.A.. See "Business--Development
Property".
Offices and other. Sales from Offices and other decreased 24.9% from Ps.
45.6 million during the fiscal year ended June 30, 2001 to Ps. 34.2 million
during the fiscal year ended June 30, 2002. This decrease is primarily due to:
(i) a 22.1% decrease in revenues from office rents from Ps. 39.5 million in the
fiscal year ended June 30, 2001 to Ps. 30.8 million in the fiscal year ended
June 30, 2002 mainly due to decreases in occupancy rates in almost all rental
properties and (ii) a 45.5% decrease in sales from commercial property rents
from Ps. 6.2 million in the fiscal year ended June 30, 2001 to Ps. 3.4 million
in the fiscal year ended June 30, 2002 mainly due to the sales of the
properties: Florida 291, Santa Fe 1588 and Montevideo 1975. See
"Business--Offices and Other Rental Properties".
Shopping centers. Sales from Shopping Centers went down by 17.9%, from Ps.
94.5 million during the fiscal year ended June 30, 2001 to Ps. 77.6 million for
the fiscal year ended June 30, 2002. The decrease in revenues from leases and
services is mainly due to the recession that the Argentine economy has been
suffering for over 4 years, which has resulted in a decrease in sales of tenants
giving rise to a fall in both occupancy rates revenues from minimal rent and
goodwill in all our shopping centers. The general occupancy rate of our shopping
centers decreased from 94% as of June 30, 2001 to 92% as of June 30, 2002.
Hotels. Sales from hotels went down 27.9%, from Ps. 40.9 million for the
fiscal year ended June 30, 2001 to Ps. 29.5 million for the fiscal year ended
June 30, 2002, due to a decrease in the average occupancy level of hotels from
58% in 2001 to 44% in 2002, as well as a decrease in rates, giving rise to a
decrease in the sales from Hotel Sheraton Libertador of Ps. 5.2 million, from
Hotel Intercontinental of Ps. 5.9 million and from Hotel Llao Llao of Ps. 0.3
million during this year. See "Business--Hotels".
International. Sales from international operations decreased 64.1%, from
Ps. 69.1 million for the fiscal year ended June 30, 2001 to Ps. 24.8 million for
the fiscal year ended June 30, 2002, mainly due to a decrease in the sales of
Brazil Realty and the effect of the sale of Fondo de Valores Inmobiliarios
S.A.C.A. ("FVI"), on the sales of the international segment during this fiscal
year. Sales from Brazil Realty went down by 61.9%, from Ps. 65.2 million for the
fiscal year ended June 30, 2001 to Ps. 24.8 million for the fiscal year ended
June 30, 2002 due to the significant decrease in sales in Brazilian Reais
between both fiscal years and in particular due to the non recurrence during
2002 of the sales of the JK Financial Center and Brasilinvest offices and the
sale of our equity interest in such company in February 2002. See
"Business-International".
81
COSTS
Costs decreased 29.5%, from Ps. 172.0 million for the fiscal year ended
June 30, 2001 to Ps. 121.4 million for the fiscal year ended June 30, 2002,
mainly due to lesser costs from Development and Sale of properties, Hotels and
International, which decrease was partially offset by an increase in the costs
related to the operation of Offices and other and Shopping Centers. Total costs
as a percentage of sales increased from 50.6% for the fiscal year ended June 30,
2001 to 57.4% for the fiscal year ended June 30, 2002.
Development and Sale of properties. The costs of Development and Sales of
properties decreased 45.1%, from Ps. 68.2 million for the fiscal year ended June
30, 2001 to Ps. 37.4 million for the fiscal year ended June 30, 2002, due to
fewer sales of real properties. The costs of Development and Sale of properties
as a percentage of sales from Development and Sale of properties increased from
75.9% for the fiscal year ended June 30, 2001 to 82.7% for the fiscal year ended
June 30, 2002.
Offices and other. Costs of Offices and other rose by 19.9%, from Ps. 8.9
million for the fiscal year ended June 30, 2001 to Ps. 10.7 million for the
fiscal year ended June 30, 2002. The costs of Offices and other as a percentage
of sales resulting from Offices and other increased from 19.6% for the fiscal
year ended June 30, 2001 to 31.2% for the fiscal year ended June 30, 2002. The
increase in the costs of Offices and other in absolute terms and as a percentage
of sales is due to the decrease in the average occupancy rate from 89% during
all fiscal year 2001 to 72% during all fiscal year 2002, which resulted in an
increase in the maintenance costs of the unoccupied units, especially as regards
common expenses. The main component of the cost of offices is represented by the
depreciation of leased properties.
Shopping Centers. The costs of Shopping Centers increased 4.3%, from Ps.
36.8 million for the fiscal year ended June 30, 2001 to Ps. 38.4 million for the
fiscal year ended June 30, 2002, mainly due to the increase in the cost of rents
derived from the recognition of a one-time loss for charges for expenses billed
to the tenants in the fiscal year which were not recovered, which increase was
partially offset by the reduction in the cost of sale of Torres de Abasto and
the cost of Tarjeta Shopping operations. The costs of Shopping Centers as a
percentage of sales resulting from Shopping Centers increased from 39.0% for the
fiscal year ended June 30, 2001 to 49.5% for the fiscal year ended June 30,
2002. The main component of the cost of shopping centers in this fiscal year is
represented by depreciation and amortization charges of leased properties,
including the goodwill paid upon acquisition thereof.
Hotels. Costs from hotel operations decreased 23.3%, from Ps. 27.1 million
for the fiscal year ended June 30, 2001 to Ps. 20.8 million for the fiscal year
ended June 30, 2002, primarily due to: (i)lower levels of activity in this
segment; (ii) decrease in the constant value of the cost components of Hotels
such as salaries, fees and services mainly on account of the effect of this last
semester inflation and (iii) the restructuring carried out to offset the fall in
the level of occupancy so as to attain greater efficiency. Hotel operating costs
as a percentage of sales from hotels increased from 66.2% for the fiscal year
ended June 30, 2001 to 70.5% for the fiscal year ended June 30, 2002 primarily
due to the combination of lower sales reflecting the fall in occupancy rates and
to lower rtes compared to the previous fiscal year together with the same
incidence in both fiscal years of fixed costs such as depreciation. Costs of
hotels are primarily composed of rooms, depreciation, food and beverages,
salaries and social security contributions.
International. Costs of international operations fell by 54.7% from Ps.
31.0 million for the fiscal year ended June 30, 2001 to Ps. 14.1 million for the
fiscal year ended June 30, 2002, due to (i) lower costs in Brazilian Reais
attributable both to a lower level of sales and to the sale of such company in
the preceding quarter, which resulted in Ps. 17.1 million decrease and (ii) a
decrease in costs attributable to FVI as a consequence of the sale of our equity
interest during the previous fiscal year. International operating costs as a
percentage of sales from international operations went up from 44.9% for the
fiscal year ended June 30, 2001 to 56.7% for the fiscal year ended June 30,
2002.
GROSS PROFIT
As a result of the foregoing, the gross profit decreased by 46.4% from Ps.
167.8 million for the fiscal year ended June 30, 2001 to Ps. 90.0 million for
the fiscal year ended June 30, 2002.
82
SELLING EXPENSES
Selling expenses increased by 1.7% from Ps. 33.7 million for the fiscal
year ended June 30, 2001 to Ps. 34.3 million for the fiscal year ended June 30,
2002, primarily due to the increase in Shopping Centers selling expenses and
partially offset by the reduction in selling expenses of the Hotels,
International and Sales and Development segments. Selling expenses as a
percentage of sales increased from 9.9% for the fiscal year ended June 30, 2001
to 16.2% for the fiscal year ended June 30, 2002.
Development and Sale of properties. Selling expenses for Development sand
Sales decreased by 56.8% from Ps. 8.5 million for the fiscal year ended June 30,
2001 to Ps. 3.7 million during the fiscal year ended June 30, 2002, as a
consequence of the decrease in sale operations during this fiscal year
generating less direct selling expenses. Selling expenses of Development and
Sale of properties as a percentage of sales from Development and Sale of
properties decreased from 9.5% for the fiscal year ended June 30, 2001 to 8.1%
for the fiscal year ended June 30, 2002. The main components of selling expenses
of Development and Sale of properties are commissions and expenses from sales
and advertising.
Offices and other. Selling expenses of Offices and other increased by 1.9%
from Ps. 0.47 million during the fiscal year ended June 30, 2001 to Ps. 0.48
million during the fiscal year ended June 30, 2002. Selling expenses of Offices
and other properties as a percentage of sales from Offices and other increased
from 1.0% for the fiscal year ended June 30, 2001 to 1.4% for the fiscal year
ended June 30, 2002.
Shopping Centers. Selling expenses of Shopping Centers rose by 96.1% from
Ps. 11.4 million for the fiscal year ended June 30, 2001 to Ps. 22.3 million for
the fiscal year ended June 30, 2002, resulting mainly from the increase in bad
debts charges, that was partially offset with a decrease in advertising
expenses, salaries and bonuses. Selling expenses of Shopping Centers as a
percentage of sales from Shopping Centers increased from 12.0% for the fiscal
year ended June 30, 2001 to 28.7% for the fiscal year ended June 30, 2002. The
main components of selling expenses of Shopping Centers are bad debts charges
and advertising expenses.
Hotels. Selling expenses dropped 30.0% from Ps. 4.7 million during the
fiscal year ended June 30, 2001 to Ps. 3.3 million for the fiscal year ended
June 30, 2002, primarily due to a decrease in advertising expenses and to a
lesser extent a decrease in salaries and social security contributions in all
Hotels. Selling expenses of Hotels as a percentage of sales from Hotels
decreased from 11.6% for the fiscal year ended June 30, 2001 to 11.3% for the
fiscal year ended June 30, 2002. The main components of selling expenses are
advertising expenses and salaries.
International. Selling expenses of international operations decreased by
47.3% from Ps. 8.7 million for the fiscal year ended June 30, 2001 to Ps. 4.6
million for the fiscal year ended June 30, 2002, basically due to (i) drop in
selling expenses of FVI of Ps. 0.2 million as a result of the sale of such
company in the previous fiscal year and (ii) a decrease in selling expenses of
Brazil of Ps. 3.9 million as a result of the fall in the sale operations during
this fiscal year, which originated less direct selling expenses, and of the sale
of our equity interest in Brazil in February 2002. Selling expenses as a
percentage of sales from international operations increased from 12.6% for the
fiscal year ended June 30, 2001 to 18.4% for the fiscal year ended June 30,
2002. The main components of selling expenses are advertising expenses and
commissions.
ADMINISTRATIVE EXPENSES
Administrative expenses decreased by 25.8%, from Ps. 50.7 million for the
fiscal year ended June 30, 2001 to Ps. 37.6 million for the fiscal year ended
June 30, 2002, due to lower expenses in all the segments. As a percentage of
sales, administrative expenses rose from 14.9% for the fiscal year ended June
30, 2001 to 17.8% for the fiscal year ended June 30, 2002. The main components
for the fiscal year are salaries and social security contributions, fees and
compensations for services and depreciation and amortization.
Development and Sale of properties. Administrative expenses of Development
and Sale of properties decreased by 33.2% from Ps. 13.4 million for the fiscal
year ended June 30, 2001 to Ps. 9.0 million for the fiscal year ended June 30,
2002, primarily due to (i) the restructuring carried out with the purpose of
achieving a structure sustainable in the medium term and (ii) the decreases as
measured in constant values of expenses such as salaries, fees and services,
principally due to the effect of inflation
83
during the last semester. Administrative expenses of Development and Sale of
properties as a percentage of sales from Development and Sales increased from
15.0% for the fiscal year ended June 30, 2001 to 19.8% for the fiscal year ended
June 30, 2002.
Offices and other. The administrative expenses of Offices and other fell by
21.0% from Ps. 6.3 million for the fiscal year ended June 30, 2001 to Ps. 5.0
million for the fiscal year ended June 30, 2002, primarily due to (i) the
restructuring carried out with the purpose of achieving a structure sustainable
in the medium term and (ii) the decreases as measured in constant values of
expenses such as salaries, fees and services, mainly due to the effect of
inflation during the last semester. Administrative expenses of Offices and other
as a percentage of the sales from this segment increased from 13.8% for the
fiscal year ended June 30, 2001 to 14.5% for the fiscal year ended June 30,
2002.
Shopping Centers. Administrative expenses of Shopping Centers decreased by
20.1%, from Ps. 14.0 million for the fiscal year ended June 30, 2001 to Ps. 11.2
million for the fiscal year ended June 30, 2002 due to a general fall in
administrative expenses, especially salaries and social security contributions,
fees and compensations for services. Administrative expenses of Shopping Centers
as a percentage of sales from Shopping Centers decreased from 14.9% for the
fiscal year ended June 30, 2001 to 14.5% for the fiscal year ended June 30,
2002. The main components of administrative expenses of Shopping Centers are
salaries, fees for services and fees paid to Directors.
Hotels. Administrative expenses of Hotels dropped by 11.1% from Ps. 9.8
million for the fiscal year ended June 30, 2001 to Ps. 8.7 million during the
fiscal year ended June 30, 2002, basically due to the decrease during this
fiscal year of all the administrative expenses of Llao Llao, Intercontinental
and Sheraton Libertador Hotels, and especially due to reductions in fees for
services, salaries and social security contributions. Administrative expenses of
hotels as a percentage of sales from the hotel operation rose from 24% during
the fiscal year ended June 30, 2001 to 29.6% during the fiscal year ended June
30, 2002. The main components of administrative expenses of hotel operation are
salaries, fees for services depreciation and amortization.
International. Administrative expenses of international operations
decreased by 47.4%, from Ps. 7.2 million during the fiscal year ended June 30,
2001 to Ps. 3.8 million during the fiscal year ended June 30, 2002, mainly due
to (i) a decrease in administrative expenses of FVI of Ps. 0.9 million as a
result of the sale of such company in 2001 and (ii) a decrease in the
administrative expenses of Brazil of Ps. 2.4 million. Administrative expenses as
a percentage of sales from international operations increased from 10.4% during
the fiscal year ended June 30, 2001 to 15.2% during the fiscal year ended June
30, 2002.
(LOSS) GAIN ON PURCHASERS RESCISSIONS OF SALES CONTRACTS
The losses resulting from the rescission of Torres de Abasto sales
contracts varied from a loss of Ps. 0.01 million in the fiscal year ended June
30, 2001 to a profit of Ps. 0.03 in the fiscal year ended June 30, 2002.
(LOSS) FROM OPERATIONS AND HOLDINGS OF REAL ESTATE ASSETS, NET
Loss from operations and holdings of real estate assets, net, showed a Ps.
58.7 million loss change between both fiscal years, from a Ps. 6.3 million loss
for the fiscal year ended June 30, 2001 to a Ps. 65.0 million loss for the
fiscal year ended June 30, 2002. This decrease results mainly from the net
result between (i) the gain obtained from the sale of our equity interest in
Brazil Realty which amounted to Ps. 31.5 million in this fiscal year; (ii) the
non-recurrence in 2002 of the Ps. 1.0 million loss attributable to the sale of
our equity interest in FVI recognized in 2001 and (iii) the Ps. 91.2 million
loss from the impairment of long-lived assets, which rose from Ps. 5.7 million
during 2001 to Ps. 96.9 million during 2002. This Ps. 91.2 million loss from the
impairment of long-lived assets between both fiscal years, was distributed among
our segments as follows: (a) Development and Sales: Ps. 27.0 million, (b)
Offices and Others: Ps. 39.8 million and (c) Shopping Centers: Ps. 24.4 million.
84
OPERATING INCOME
As a result of the foregoing, the total operating income decreased from a
Ps. 77.0 million gain during the fiscal year ended June 30, 2001 to a Ps. 46.9
million loss during the fiscal year ended June 30, 2002.
Development and Sale of properties. Operating results from Development and
Sales of properties showed an improvement, from a Ps. 4.1 million loss for the
fiscal year ended June 30, 2001 to a Ps. 35.6 million loss for the fiscal year
ended June 30, 2002.
Offices and other. The operating results from Offices and other decreased
from a Ps. 28.1 million profit for the fiscal year ended June 30, 2001 to a Ps.
23.6 million loss for the fiscal year ended June 30, 2002.
Shopping Centers. The operating results from Shopping Centers decreased
from a Ps. 28.1 million profit for the fiscal year ended June 30, 2001 to a Ps.
18.3 million loss for the fiscal year ended June 30, 2002.
Hotels. The operating results from hotels increased from a Ps. 0.8 million
loss for the fiscal year ended June 30, 2001 to a Ps. 3.4 million loss for the
fiscal year ended June 30, 2002.
International. The operating results from international operations
increased 57.0% from Ps. 21.6 million for the fiscal year ended June 30, 2001 to
Ps. 33.9 million for the fiscal year ended June 30, 2001 to 136.7% for the
fiscal year ended June 30, 2002.
FINANCIAL RESULTS, NET
The financial, net results reflected an increase from a loss of Ps. 110.3
million during the fiscal year ended June 30, 2001 to a loss of Ps. 432.2
million during the fiscal year ended June 30, 2002. The total increase in
financial results was primarily due to: (i) the increase in the net loss of Ps.
294.9 million as compared to the previous fiscal year due to the joint effect of
the peso devaluation and inflation, the impact of foreign currency denominated
net debts, partially offset by a Ps. 84.6 million reduction in financing
expenses, which dropped from Ps. 100.7 million during 2001 to Ps. 16.1 million
during 2002 as a result of the impact of the negative actual financing interest
rate on our loans and (ii) an increase in the loss for financial transactions
for Ps. 113.4 million as compared to 2001, mainly due to the fall in the value
of the stock of Banco Hipotecario, to losses connected with investments such as
Telecom stock, Pro1 bonds and FRB and the drop in the quotation of Quantum Fund
during this fiscal year.
NET (LOSS) IN EQUITY INVESTMENTS
The net loss derived from affiliated companies showed an 80.9% reduction
from a loss of Ps. 10.3 million during the fiscal year ended June 30, 2001 to a
loss of Ps. 2.0 million during the fiscal year ended June 30, 2002, mainly due
to a reduction in the loss derived from IRSA Telecommunicaciones investment for
an aggregate amount of Ps. 8.0 million.
OTHER (EXPENSES) INCOME, NET
The other expenses, net line increased 51.3% from a loss of Ps. 5.6 million
during the fiscal year ended June 30, 2001 to a loss of Ps. 8.5 million during
the fiscal year ended June 30, 2002, basically due to: (i) the loss originated
during the current fiscal year by the new tax on bank credits and debits for Ps.
1.8 million; (ii) the Ps. 1.3 million decrease in the results from the
repurchase of Negotiable Obligations of Alto Palermo in the open market, from an
income of Ps. 1.2 million during 2001 to a loss of Ps. 0.2 million during 2002;
(iii) the loss resulting from a contingency due to lawsuits of Alto Palermo for
Ps. 3.5 million, mainly resulting from a provision for a lawsuit brought by
Carrefour supermarket in connection with the construction of Paseo Alcorta
shopping center, which decreases were partially offset by (iv) lower charges
from gifts and non-computable VAT as compared to the previous fiscal year for
Ps. 3.7 million.
85
LOSS BEFORE TAXES
As a consequence of the factors described above, the loss before taxes and
extraordinary results showed an increase from a Ps. 49.2 million loss during the
fiscal year ended June 30, 2001 to a loss of Ps. 489.6 million during the fiscal
year ended June 30, 2002.
INCOME TAX
Income tax increased 97.1% from Ps. 5.1 million during the fiscal year
ended June 30, 2001 to Ps. 10.0 million during the fiscal year ended June 30,
2002 mainly due to the net variation between (i) the increase during the current
fiscal year of IRSA's Minimum Presumed Income Tax charges by Ps. 3.6 million, as
an income tax recovery for such amount was computed during 2001 as a result of
the amendments of Law 25,360, and of Brazil's Income Taxe by Ps. 1.6 million;
and (ii) the reduction during this fiscal year of the Income Tax charges of APSA
group by Ps. 0.2 million and FVI by Ps. 0.2 million, due to the sale of this
company during the previous fiscal year.
ORDINARY (LOSS) INCOME FOR THE PERIOD
As a consequence of the factors described above, the ordinary loss before
extraordinary results showed an increase from a Ps. 54.3 million loss during the
fiscal year ended June 30, 2001 to a loss of Ps. 499.6 million during the fiscal
year ended June 30, 2002.
EXTRAORDINARY LOSS
During the fiscal year ended June 30, 2002 no extraordinary results were
registered as compared to the fiscal year ended June 30, 2001, when they
amounted to a loss of Ps. 5.7 million due to our share in the results recognized
by Llao Llao Resorts S.A. as a consequence of adjustments in the provisions
recorded in connection with a lawsuit brought by the National Parks
Administrative (Administracion de Parques Nacionales).
NET (LOSS) INCOME FOR THE PERIOD
As a consequence of the factors mentioned above, the net loss for the
fiscal year changed from a loss of Ps. 60.0 million during the fiscal year ended
June 30, 2001 to a loss of Ps. 499.6 million during the fiscal year ended June
30, 2002.
RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2001 AND 2000
SALES
Sales decreased by 6.1% from Ps. 361.9 million in fiscal year 2000 to Ps.
339.8 million in fiscal year 2001, mainly due to a decrease in sales from
hotels, international and offices and other non-shopping center rental
properties segments, partially offset by increases in sales from shopping
centers and development and sale of properties.
Development and sale of properties. Sale from development and sale of
properties increased by 11.5% from Ps. 80.6 million in fiscal year 2000 to Ps.
89.8 million for fiscal year 2001, primarily attributable to
o an increase of Ps. 7.3 million relating to the sale of development
properties, mainly April and
o an increase of Ps. 9.8 million relating to the sale of undeveloped
parcels of land, mainly Dique 4. These increases were partially offset
by a decrease of Ps. 4.4 million relating to lower sales from Torres
Jardin and Alto Palermo Park properties and a decrease of Ps. 3.0
million relating to lower sales from other properties.
Offices and other non-shopping center rental properties. Sales from offices
and other non-shopping center rental properties decreased by 2.4% from Ps. 46.8
million in fiscal year 2000 to Ps. 45.6 million during fiscal year 2001. This
decrease is primarily attributable to (i) a decrease in sales of Ps. 2.4
86
million from the properties Libertador 498 and Suipacha 652, respectively, and
(ii) lower sales from Galerias Pacifico, which was sold during this year, as
compared to Ps. 2.4 million for fiscal year 2000. These decreases were partially
offset by higher sales stemming from Laminar Plaza of Ps. 5.0 million as
compared to Ps. 3.1 million for fiscal year 2000, and from Edificios Costeros of
Ps. 1.9 million as compared to Ps. 0.1 million for fiscal year 2000.
Shopping centers. Sales from shopping centers rose by 5.8% from Ps. 89.2
million in fiscal year 2000 to Ps. 94.5 million in fiscal year 2001, primarily
due to higher sales from credit card operations attributable to the opening of
new points of sale for the marketing and selling of our branded credit card
Tarjeta Shopping outside our shopping centers, and to the brand's positioning
derived from an active commercial approach in shopping centers such as Abasto
Shopping, Alto Avellaneda, Alto Palermo Shopping and Paseo Alcorta. The increase
was partially offset by lower sales from leases and services due to a drop in
the shopping centers' occupancy rate by 2.4%, thus decreasing from 96.76% as of
June 30, 2000 to 94.36% as of June 30, 2001.
Hotels. Sales from hotels decreased by 30.8% from Ps. 59.1 million in
fiscal year 2000 to Ps. 40.9 million in fiscal year 2001, attributable to
o a decrease in sales from Hotel Sheraton Libertador from Ps. 19.7
million in fiscal year 2000 to Ps. 16.0 million in fiscal year 2001
and from Hotel Intercontinental from Ps. 22.4 million in fiscal year
2000 to Ps. 16.4 million in fiscal year 2001 as a result of lower
occupancy levels and average rates per room for fiscal year 2001 and
o a decrease in sales from Hotel Llao Llao from Ps. 17.2 million in
fiscal year 2000 to Ps. 8.4 million in fiscal year 2001 due to the
sale of a 50% equity stake in Llao Llao Resorts in June 2000.
International. Sales from international operations decreased 20.0%, from
Ps. 86.2 million in fiscal year 2000 to Ps. 69.0 million in fiscal year 2001.
Our sales from Brazil Realty decreased by 9.0% from Ps. 71.6 million in fiscal
year 2000 to Ps. 65.2 million in fiscal year 2001 due primarily to the effect of
the Brazilian Reais devaluation in the third and fourth quarters of fiscal year
2001, which was not offset by the fact of higher sales or equity increases in
this company. Since we sold our equity interest in Fondo de Valores
Inmobiliarios in December 2000, we recognized lower sales from this investment
in fiscal year 2001, from Ps. 14.8 million in fiscal year 2000 to Ps. 3.9
million in fiscal year 2001.
COSTS
Costs increased 2.6% from Ps. 167.7 million in fiscal year 2000 to Ps.
172.0 million in fiscal year 2001, mainly due to higher costs of development and
sale of properties, offices and other non-shopping center rental properties and
shopping centers, partially offset by a decrease in costs associated with hotels
and international operations. Costs as a percentage of sales increased from
46.3% for fiscal year 2000 to 50.6% for fiscal year 2001.
Development and sale of properties. Costs of development and sale of
properties increased by 29.9% from Ps. 52.4 million in fiscal year 2000 to Ps.
68.1 million in fiscal year 2001, due to lower gross margin levels for fiscal
year 2001 as compared to fiscal year 2000 despite the fact of higher property
sales volume.
Offices and other non-shopping center rental properties. Costs of offices
and other non-shopping center rental properties increased 10.0% from Ps. 8.0
million in fiscal year 2000 to Ps. 9.0 million in fiscal year 2001. Costs of
offices and other non-shopping center rental properties as a percentage of sales
rose from 17.4% in fiscal year 2000 to 19.6% in fiscal year 2001. Although the
most significant component of costs from office and other non-shopping center
rental properties is depreciation (Ps. 7.4 million and Ps. 6.7 million in fiscal
years 2001 and 2000, respectively), slightly lower occupancy rates for fiscal
year 2001 as compared to fiscal year 2000 (from 93.1% to 92.0%) resulted in
higher maintenance and other common expenses paid by us for unoccupied units.
87
Shopping Centers. Costs of shopping centers increased 8.3%, from Ps. 34.1
million in fiscal year 2000 to Ps. 36.7 million in fiscal year 2001, primarily
due to (i) higher costs of credit card operations attributable to higher
activity levels and (ii) higher costs from leases and services primarily due to
increased depreciation and amortization and parking lots expenses. Costs of
shopping centers as a percentage of sales increased from 38.1% in fiscal year
2000 to 39.0% in fiscal year 2001.
Hotels. Costs of hotel operations dropped 29.6%, from Ps. 38.5 million in
fiscal year 2000 to Ps. 27.0 million in fiscal year 2001, primarily due to lower
salaries, bonuses and other fees as a result of the effect of cost reduction
programs and improved efficiency levels and lower costs from Hotel
Intercontinental and Hotel Llao Llao due to the sale of a 50% equity stake
interest in Llao Llao Resorts. Costs of hotel operations as a percentage of
sales increased from 65.1% in fiscal year 2000 to 66.2% in fiscal year 2001.
International. Costs of international operations decreased 10.4% from Ps.
34.7 million in fiscal year 2000 to Ps. 31.1 million in fiscal year 2001,
primarily due to the net effect of (i) lower costs from Brazil Realty operations
due to the effect of the Brazilian Reais devaluation and improved efficiency,
and (ii) the sale of our equity interest in Fondo de Valores Inmobiliarios in
December 2000, thus resulting in the recognition of only six months of costs in
fiscal year 2001 as compared to a full year of operations for fiscal year 2000.
Costs of international operations as a percentage of sales increased from 40.1%
in fiscal year 2000, to 44.9% in fiscal year 2001.
TOTAL GROSS PROFIT
As a result of the foregoing, total gross profit decreased 13.6% from Ps.
194.2 million in fiscal year 2000 to Ps. 167.8 million in fiscal year 2001.
SELLING EXPENSES
Selling expenses decreased 8.5%, from Ps. 37.0 million in fiscal year 2000
to Ps. 33.8 million in fiscal year 2001, primarily due to lower selling expenses
related to the offices and other non-shopping center rental properties, shopping
centers and hotels business segments partially offset by higher selling expenses
associated with the development and sale of properties and international
business segments. Selling expenses as a percentage of total sales decreased
from 10.2% in fiscal year 2000 to 9.9% in fiscal year 2001.
Development and sale of properties. Selling expenses of development and
sale of properties increased 80.4%, from Ps. 4.7 million in fiscal year 2000 to
Ps. 8.4 million for fiscal year 2001, primarily attributable to higher sale
levels for fiscal year 2001, which resulted in higher direct selling expenses
and other expenses related mainly to the Alto Palermo Park project, derived from
an agreement signed with Perez Companc. Selling expenses of development and sale
of properties as a percentage of sales increased from 5.9% in fiscal year 2000
to 9.5% in fiscal year 2001.
Offices and other non-shopping center rental properties. Selling expenses
of offices and other non-shopping center rental properties decreased 19.3%, from
Ps. 0.6 million in fiscal year 2000 to Ps. 0.4 million in fiscal year 2001 due
to lower doubtful accounts recorded during fiscal year 2001 as compared to the
previous year. Selling expenses of offices and other non-shopping center rental
properties as a percentage of sales decreased from 1.2% in fiscal year 2000 to
1.0% in fiscal year 2001.
Shopping centers. Selling expenses of shopping centers decreased 40.5% from
Ps. 19.1 million in fiscal year 2000 to Ps. 11.4 million in fiscal year 2001,
basically due to: (i) a decrease of 8.5% in bad debts charged; (ii) a decrease
in advertising expenses of 71.8%, basically due to the discontinuation of the
Altochecks promotional campaign during fiscal year 2001; and (iii) lower fees
for services. Selling expenses of shopping centers as a percentage of sales
decreased from 21.4% in fiscal year 2000 to 12.0% in fiscal year 2001.
Hotels. Selling expenses dropped 26.7%, from Ps. 6.5 million in fiscal year
2000 to Ps. 4.7 million in fiscal year 2001, mainly attributable to :(i) a
decrease of Ps. 0.4 million in advertising expenses associated with our Hotel
Sheraton Libertador operations; and (ii) the sale of a 50% equity stake in Llao
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Llao Resorts in June 2000, thus resulting in the recognition of 50% equity
interest of related selling expenses in fiscal year 2001 as compared to a 100%
equity interest for fiscal year 2000. Selling expenses of hotel operations as a
percentage of sales increased from 10.9% in fiscal year 2000 to 11.6% in fiscal
year 2001.
International. Selling expenses of international operations increased
43.7%, from Ps. 6.1 million in fiscal year 2000 to Ps. 8.6 million in fiscal
year 2001, primarily due to: (i) the recognition of expenses related to
construction projects and the increase in selling and advertising expenses; and
(ii) the increase in the average equity interest in Brazil Realty. Selling
expenses of international operations as a percentage of sales increased from
7.0% in fiscal year 2000 to 12.6% in fiscal year 2001.
ADMINISTRATIVE EXPENSES
Administrative expenses decreased 8.8%, from Ps. 55.6 million in fiscal
year 2000 to Ps. 50.7 million fiscal year 2001, primarily attributable to lower
administrative expenses related to our development and sale of properties,
offices and other non-shopping center rental properties, hotels and
International business segments, partially offset by higher administrative
expenses stemming from our shopping centers segment. As a percentage of total
sales, administrative expenses decreased from 15.4% in the fiscal year 2000 to
14.9% in the fiscal year 2001.
Development and sale of properties. Administrative expenses of development
and sale of properties decreased 11.6% from Ps. 15.3 million in fiscal year 2000
to Ps. 13.5 million in fiscal year 2001, primarily due to lower salaries, fees
and other compensation for services. Administrative expenses of development and
sale of properties as a percentage of respective sales decreased from 18.9% in
fiscal year 2000 to 15.0% in fiscal year 2001.
Offices and other non-shopping center rental properties. Administrative
expenses of offices and other non-shopping center rental properties decreased
5.5%, from Ps. 6.7 million in fiscal year 2000 to Ps. 6.2 million in fiscal year
2001, primarily due to lower salaries, fees and other compensation for services.
Administrative expenses of offices and other non-shopping center rental
properties as a percentage of respective sales decreased from 14.2% in fiscal
year 2000 to 13.8% in fiscal year 2001.
Shopping centers. Administrative expenses of shopping centers increased
13.4%, from Ps. 12.3 million in fiscal year 2000 to Ps. 14.1 million in fiscal
year 2001, primarily attributable to an increase in salaries, bonuses and fees
for services associated with our credit card operations, partially offset by
lower salaries and bonuses related to our shopping center operations.
Administrative expenses of shopping centers as a percentage of respective sales
increased from 13.9% in fiscal year 2000 to 14.9% in fiscal year 2001.
Hotels. Administrative expenses of hotel operations decreased 12.9%, from
Ps. 11.4 million in fiscal year 2000 to Ps. 9.8 million in fiscal year 2001,
primarily due to (i) a decrease in salaries and other compensation expenses
associated with our Hotel Sheraton Libertador and Hotel Intercontinental
operations and (ii) the sale of a 50% equity stake in Llao Llao Resorts in June
2000, thus resulting in the recognition of 50% equity interest of related
administrative expenses in fiscal year 2001 as compared to a 100% equity
interest for fiscal year 2000. Administrative expenses of hotel operations as a
percentage of respective sales increased from 19.1% in fiscal year 2000 to 24.0%
in fiscal year 2001.
International. Administrative expenses of international operations
decreased 29.2%, from Ps. 10.2 million in fiscal year 2000 to Ps. 7.3 million in
fiscal year 2001, primarily due to the sale of our equity interest in Fondo de
Valores Inmobiliarios in December 2000, thus resulting in the recognition of
only six months of related administrative expenses in fiscal year 2001 as
compared to a full year of operations for fiscal year 2000. Administrative
expenses of international operations as a percentage of respective sales
decreased from 11.7% in fiscal year 2000 to 10.4% in fiscal year 2001.
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LOSS ON PURCHASERS RESCISSIONS OF SALES CONTRACTS
During the fiscal year 2000, we suffered a loss of Ps. 1.6 million as a
consequence of the rescission of certain Torres de Abasto sales contracts due to
the failure of purchasers to fulfill their obligations. We experienced minor
rescissions during the fiscal year 2001, amounting to Ps. 0.01 million.
LOSS FROM OPERATIONS AND HOLDINGS OF REAL ESTATE ASSETS, NET
Losses from operations and holdings of real estate assets increased from
Ps. 2.7 million in fiscal year 2000 to Ps. 6.2 million in fiscal year 2001,
primarily due to: (i) the write-down of certain property (mainly related to
Torres Jardin and Constitucion 1111) totaling Ps. 5.6 million for fiscal year
2001 as compared to Ps. 0.7 million for fiscal year 2000; (ii) a loss of Ps. 1.0
million related to the sale of our equity interest in Fondo de Valores
Inmobiliarios in December 2000; and (iii) a non-recurrent loss of Ps. 2.7
million related to the sale of the shares of Parque Arauco S.A. during last
fiscal year.
OPERATING INCOME
As a result of the foregoing, total operating income decreased 21.0%, from
Ps. 97.5 million in fiscal year 2000 to Ps. 77.0 million in fiscal year 2001.
Operating margin dropped 15.9%, from 26.9% in fiscal year 2000 to 22.7% in
fiscal year 2001.
Development and sale of properties. Operating income from development and
sale of properties decreased from a gain of Ps. 5.9 million in fiscal year 2000
to a loss of Ps. 4.1 million in fiscal year 2001.
Offices and other non-shopping center rental properties. Operating income
from offices and other non-shopping center rental properties decreased 10.5%,
from Ps. 31.3 million in fiscal year 2000 to Ps. 28.0 million in fiscal year
2001. Operating margin for offices and other non-shopping center rental
properties decreased from 67.2% in fiscal year 2000 to 61.5% in fiscal year
2001.
Shopping centers. Operating income from shopping centers increased 35.4%,
from Ps. 23.9 million in fiscal year 2000 to Ps. 32.3 million in fiscal year
2001. Operating margin for shopping centers increased from 26.7% in fiscal year
2000 to 34.1% in fiscal year 2001.
Hotels. Operating income from hotel operations decreased from Ps. 3.0
million in fiscal year 2000 to a loss of Ps. 0.7 million in fiscal year 2001.
International. Operating income from international operations fell 35.7%,
from Ps. 33.6 million in fiscal year 2000 to Ps. 21.5 million in fiscal year
2001. Operating margin for international operations decreased from 38.9% in
fiscal year 2000 to 31.3% in fiscal year 2001.
FINANCIAL RESULTS, NET
Total financial results, net, decreased 87.4% from a loss of Ps. 58.8
million in fiscal year 2000 to a loss of Ps. 110.4 million in fiscal year 2001.
The decrease in total financial results is mainly attributable to
o a loss of Ps. 13.3 million in fiscal year 2001 arising from the
devaluation of the Brazilian currency net of the effects of the
inflation over the book value of Brazil Realty compared to a gain of
Ps. 7.4 million in fiscal year 2000;
o higher interest expenses of Ps. 21.3 million in fiscal year 2001,
attributable to the higher average indebtedness at higher rates in
fiscal year 2001;
o the write-off of certain deferred expenses related to aborted capital
market transactions, and
o the decline of the fair market value of the shares of Banco
Hipotecario, resulting in a loss of Ps. 15.3 million in fiscal year
2001 as compared to a loss of Ps. 7.6 million in fiscal year 2000.
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NET (LOSS) INCOME IN EQUITY INVESTMENTS
Net loss in affiliated companies represents our share of the earnings or
losses of related companies. Net loss in affiliated companies increased Ps. 9.0
million, from a Ps. 1.3 million loss in fiscal year 2000 to a Ps. 10.4 million
loss in fiscal year 2001, primarily attributable to losses generated by our new
investments in Latin American Econetworks and IRSA Telecomunicaciones N.V.
totaling Ps. 7.4 million in fiscal year 2001, and to a lesser extent to losses
generated by APSA's investments in Perez Cuesta and E-Commerce Latina, totaling
Ps. 1.3 million in fiscal year 2001 as compared to Ps. 0.01 for the previous
fiscal year.
OTHER EXPENSES, NET
Other expenses, net decreased 52.8%, from Ps. 12.0 million in fiscal year
2000 to Ps. 5.6 million in fiscal year 2001, basically attributable to an
increase in gains from the repurchase of PARCKS in the open market, from a loss
of Ps. 3.6 million during fiscal year ended June 30, 2000 to a gain of Ps. 1.2
during fiscal year ended June 30, 2001; a decrease in other expenses of Fondo de
Valores Inmobiliarios due to the recognition of the indemnity for the rescission
of the management contract with Asesoria Financiera Velutini y Asociados C.A.
recorded during fiscal year ended June 30, 2000, and a decrease in other income
from hotel activity as compared with that at June 30, 2000.
(LOSS) GAIN BEFORE TAXES
As a result of the foregoing, (loss) income before taxes and extraordinary
loss decreased from a gain of Ps. 25.2 million in fiscal year 2000 to a loss of
Ps. 49.3 million in fiscal year 2001.
EXTRAORDINARY LOSS
In fiscal year 2001, we recognized a Ps. 5.6 million extraordinary loss
representing our proportionate share of the extraordinary loss recorded by one
of our subsidiaries, Llao Llao Resorts. This loss relates to the judgment
against this company entered by Parques Nacionales, a governmental agency,
following a dispute on the amount of the selling price of the Hotel Llao Llao,
sole asset of the subsidiary; Llao Llao Resorts had filed an appeal contending
the verdict was erroneous as a matter of law, both as to liability and damages,
and the plaintiff filed a cross appeal, which outcome resulted adverse to our
subsidiary. We recorded no extraordinary items in fiscal year 2000.
INCOME TAX
This line item includes our income tax and asset tax charges. Income tax
decreased 63.1%, from Ps. 13.6 million in fiscal year 2000 to Ps. 5.0 million in
fiscal year 2001, primarily due to (i) the net charge to income currently of Ps.
9.0 million in respect of our asset tax, and Ps. 2.5 million in respect of
income tax of APSA, and (ii) the increase in the income tax of Ps. 1.3 million
reported by Brazil Realty and Ps. 1.0 million reported by Inversora Bolivar.
The statutory rate for those periods was 35.0%. We do recognize deferred
taxes. The difference between the statutory rate and the effective rate is due
to the allocation of temporary differences.
NET (LOSS) GAIN INCOME FOR THE PERIOD
As a result of the foregoing, net (loss) income decreased from a gain of
Ps. 11.6 million in fiscal year 2000 to a loss of Ps. 59.8 million in
fiscal year 2001.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources include our cash and cash equivalents,
proceeds from bank borrowings and long-term debt, capital financings and sales
of real estate investments.
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As of June 30, 2002, we had a working capital deficiency of Ps. 469.8
million. At the same date, we had cash and cash equivalents totaling Ps. 25.3
million, a decrease of 13.7% from Ps. 33.3 of cash and cash equivalents held as
of June 30, 2001.
Our operating activities resulted in net cash inflows of Ps. 47.3 million,
Ps. 95.5 million and Ps. 123.8 million for fiscal years 2002, 2001 and 2000,
respectively. Net cash inflows for fiscal year 2002 significantly decreased from
net cash inflows for fiscal year 2001 primarily due to lower operating results
caused by the economic recession. The operating cash inflows for fiscal year
2002 primarily resulted from the increase in financial results of Ps. 301.1
million, a decrease in investments for Ps. 16.1 million and in a decrease of
receivables for Ps. 38.0 million. The operating cash inflows for fiscal year
2001 primarily resulted from operating gains of Ps. 7.9 million, a decrease in
inventories totaling Ps. 52.2 million and an increase in accrued interest of Ps.
55.0 million, partially offset by an increase in investment of Ps. 34.8 million.
The operating cash inflows for fiscal year 2000 primarily resulted from
operating gains of Ps. 23.3 million, decrease in investments and inventories
totaling Ps. 51.1 million and an increase in accrued interest of Ps. 44.6
million.
Our investing activities resulted in net cash outflows of Ps. 17.5 million
for fiscal year 2002 and net cash inflows of Ps. 72.8 million for fiscal year
2001 and net cash outflows of Ps. 33.5 million for fiscal year 2000. In December
2000, we sold our equity interest in Fondo de Valores Inmobiliarios for US$ 67.0
million and in February 2002 we sold our investment in Brazil Realty for US$
44.2 million. In fiscal years 2002, 2001 and 2000, we purchased and/or invested
in existing properties for Ps. 24.0 million, Ps. 9.0 million and Ps. 20.9
million, respectively. In fiscal year 2002, we also granted loans to related
parties for Ps. 94.4 million.
Our net cash used in financing activities of Ps. 37.9 million for fiscal
year 2002 was primarily due to the payment of short term debt partially offset
by the income for new loans for Ps. 151.3 million. Net cash used in financing
activities of Ps. 164.6 million for fiscal year 2001 was primarily due to the
repayment of short-term and long-term indebtedness and seller financing for Ps.
403.9 million and Ps. 80.4 million of cash paid to repurchase shares of our
common stock outstanding, partially offset by Ps. 129.2 million proceeds from
the sale of our convertible notes in December 2000 and Ps. 195.4 million
proceeds from other short-term and long-term indebtedness. Net cash used in
financing activities of Ps. 104.4 million for fiscal year 2000 was primarily due
to the repayment of our convertible notes and other short-term and long-term
indebtedness and cash dividends paid of Ps. 373.8 million and Ps. 29.9 million
of cash paid to repurchase shares of our common stock outstanding, partially
offset by Ps. 287.4 million proceeds from other short-term and long-term
indebtedness.
We believe that the restructuring of our existing debt, the issuance of the
convertible notes and the sale of non-core assets, together with our cash
generating activities, will provide us with the working capital necessary to
cover our needs and invest as opportunities may rise.
OUR INDEBTEDNESS
Our total outstanding debt as of June 30, 2002 was Ps. 566.4 million of
which 93.11% is dollar denominated. Of our total debt, at such date, 100% was
short-term debt.
Pursuant to Decree No. 214, part of our indebtedness was "pesified,"
although a large portion, governed by foreign laws continued to be
dollar-denominated. "Pesified" indebtedness is to be adjusted by the CER index.
Between January and June of 2002, we repaid "pesified" short-term debt in
an aggregate amount of Ps. 46.7 million with the proceeds of the sale of Brazil
Realty and cash from operations, using rescheduled time deposits as payment.
Repayment was made at discounts on the original U.S. dollar value of the debt
and on the converted Peso value of the debt. Nevertheless, we currently intend
to continue selling assets in order to raise funds to repay our debt.
Syndicated Credit Facility and Floating. On May 24, 2000, we entered into a
US$ 80.0 million syndicated loan arranged by BankBoston N.A. Loans under this
syndicated credit facility bear interest at three-month LIBOR plus a margin of
500 basis points.
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Amounts owing under the syndicated credit facility were payable in U.S.
dollars. Although final maturity on the loan agreement was on August 30, 2002,
due to the continuing effects of economic recession, the unavailability of
financing sources and the succession of recent governmental measures adversely
affecting the normal operations of the banking and payments system, we could not
make the scheduled payment on that date. As explained below we renegotiated this
facility under new conditions.
On December 18, 2000, we issued US$ 43.5 million unsecured Class 2 floating
rate notes due December 24, 2001. Proceeds from this issuance were used to repay
certain outstanding short-term indebtedness. Our floating rate notes matured in
December 2001, and we were unable to pay the principal then due. As a result of
such non-payment, in December 2001, we entered into negotiations with the
holders of our floating rate notes and to date have been able to obtain
short-term deferrals of our obligation to pay such matured notes. On February 8,
2002, we agreed with our holders to replace the floating interest rate for an
annual fixed interest rate of 12%. Pursuant to the most recent deferral, granted
on October 31, 2002, the principal of and interest on our floating rate notes
were due in full on November 14, 2002 and were further renegotiated as explained
below. We also agreed with our holders on a capitalization of the interest due
on October 31, 2002. On May 15, 2002, we repurchased to Banco Sudameris its
participation in the mentioned convertible notes for US$ 6.8 million.
The floating rate notes and the syndicated credit facility included various
restrictive covenants, which among other things, require us to meet certain
financial tests and to comply with certain other covenants, including
restrictions on incurrence of debt and liens, restrictions on mergers,
acquisitions, asset dispositions, capital contributions and repurchases of stock
and investments. As of June 30, 2002, we were not in compliance with certain of
the financial covenants under the floating rate notes and syndicated credit
facility, and a waiver had been granted by the respective holders and banks in
relation to such covenants.
After months of negotiations, we have finished the restructuring of our
debt under the US$ 80 million loan agreement and the outstanding US$ 41.2
million of our floating rate notes. On November 15 we have signed a "Refinancing
Framework Agreement" with our six bank creditors (Banca Nazionale del Lavoro
S.A., BankBoston N.A., Banco de la Ciudad de Buenos Aires, HSBC Bank Argentina
S.A., Banco Itau S.A., New York Branch and Banco de la Nacion Argentina, New
York Branch) to refinance our debt under the following scheme:
o US$ 13.6 million cash down payment reducing the principal;
o US$ 15.0 million of the 8% convertible notes due 2007 which were
recently offered by us were subscribed by BankBoston, allowing us to
cancel a portion of our debt;
o US$ 37.4 million secured floating rate notes due 2009 with an interest
rate of 90-day LIBOR plus 200 basic points. These notes will be
secured with a first priority mortgage on some of our real estate
properties for a total value of US$ 18.7 million; and
o US$ 51.0 million unsecured credit facility due 2009. 69% of the
Facility will bear an interest rate of 90-day LIBOR plus 200 basic
points while the remaining will bear a fixed step up rate ranging from
5.5% to 6.5%.
Loan from Goldman Sachs. On January 31, 2002, and on April 30, 2002 our
Company did not pay to Goldman Sachs two equal installments of US$ 6.6 million
plus reasonable costs and interest. On October 7, 2002, Goldman Sachs sent a us
letter claiming that since January 31, 2002, we have been in default under our
obligations under the amended shareholders agreement dated November 9, 2001. On
November 21, 2002, together with Goldman Sachs, we signed a Letter Agreement in
which we agree to cancel the US$ 16.3 million debt before November 29, 2002. The
payment was done with US$ 9.0 million cash and US$ 3.1 million face amount of
APSA's convertible notes previously owned by Inversora Bolivar.
Subordinated Intercompany Loan to APSA. On February 8, 2002 we and Parque
Arauco, principal shareholders of APSA, subordinated the collection of loan
receivables granted by us to APSA to the repayment of principal and interest on
APSA's US$ 120 million Senior Notes and on its short-term debt. If APSA defaults
on its indebtedness, due to cross-default provisions in the agreements that
govern our syndicated credit facility and floating rate notes, any event of
default under any of their Senior Notes, Notes
93
or their swap agreement would also constitute an event of default under our
financial agreements. If we and APSA are unable to reach a satisfactory
agreement with creditors and they accelerate APSA's and/or our financial debt or
otherwise exercise remedies, we and APSA will not be able to honor payment
obligations and will likely be forced to restructure our liabilities and seek
the protection of the bankruptcy courts. As of June 30, 2002, APSA's debt to us
was Ps. 40.6 million. The loan was used to suscribe the convertible notes that
APSA issued on July 19, 2002.
Loan to Hoteles Argentinos. In January 2001, our subsidiary Hoteles
Argentinos Hoteles Argentinos S.A., owner of 100% of Hotel Sheraton Libertador,
obtained a US$ 12.0 million loan from BankBoston N.A. The maturity date is
January 2006 and the loan bears interest on a quarterly basis at LIBO rate plus
a spread ranging between 401 and 476 basis points, depending on the value of
certain financial ratios. This loan was not pesified and remains in U.S. dollars
due to the fact it is governed by New York law. As a result of the current
economic situation, the lack of credit and the crisis of the Argentine financial
system Hoteles Argentinos did not pay for the principal installments of US$
300.000 each, that were due on January 26, April 29, July 29 and October 26,
2002, and the interest installments due on July 29 and October 26, 2002, for a
total amount of US$ 315.000, under the US$ 12.0 million loan. Although Hoteles
Argentinos' Management is renegotiating its debt with its creditors, we cannot
assure you that an agreement will be reached.
Unsecured Short-term Debt. As of June 30, 2002, we had outstanding
short-term uncollateralized loans totaling Ps. 3.5 million, including accrued
interest. Generally, our short-term uncollateralized borrowings are in the form
of overdraft facilities and/or bank loans with an original maturity of less than
one year. The weighted average interest rates on uncollateralized short-term
debt were 8.0% plus CER and 10.2% as of June 30, 2002 and 2001, respectively.
All these loans were paid by June 30, 2002. We generally use the proceeds from
these borrowings for working capital needs and other general corporate purposes.
Collateralized Loans. As of June 30, 2002, we also had outstanding
collateralized loans totaling Ps. 100.2 million, including accrued interest at
period-end. Our collateralized loans are comprised of several loans which accrue
interest at fixed/variable rates ranging from 6.56% to 25.00% due at various
dates through October 2006. Loans amounting Ps. 42.8 million are collateralized
with a mortgage over the Sheraton Libertador Hotel which has a book value of Ps.
31.7 million. The remaining loans, amount to Ps. 57.4 million and are
collateralized with Palermo Invest shares, representing the Company's ownership
of Alto Palermo Plaza and Alto Palermo Park with a net book value of Ps. 120.7
million. Also, certain of these collateralized loans require us to meet certain
financial tests and to comply with certain other customary covenants, including
restrictions on incurrence of debt and liens, restrictions on mergers,
acquisitions, asset dispositions, capital contributions and others.
Other Loans Recently Repaid. On October 11, 2001, Banco Galicia granted us
a Ps. 7.0 million loan with a one-year maturity. The loan accrued interest at
Encuesta corregida rate (rate reported daily by Argentine Central Bank which
represents the average paid by banks on 30-35 day dollar denominated deposits of
over Ps. 1,000,000) plus 500 basis points. According to Decree No. 214, this
loan was pesified. In May 2002 we repaid this loan in full at a discount to its
Peso value by tendering rescheduled time deposits in payment.
Cyrela Loan. On August 29, 2001 we obtained a loan from Cyrela Capital
Management Ltd. for US$ 10.0 million. This loan was payable on June 5, 2002 and
accrued interest at 12% annually. This loan was secured by pledging 8,089,800
shares and 591,020 ADSs of Brazil Realty. We repaid this loan in full upon the
sale of our interest in Brazil Realty in February 2002.
Notes convertible into common shares of our Company. On October 15, 2002,
we initiated a preemptive rights offering to subscribe for 100,000,000 units
consisting of US$ 100.0 million of 8% convertible notes due 2007 and
non-detachable warrants to purchase additional shares of our common stock. The
convertible notes may be converted into shares of our common stock after
December 13, 2002. Each warrant will be exercisable on or after conversion of
the convertible note to which it is attached at the same conversion price plus a
20% premium (US$ 0.6686). The rights offering to holders of our common shares
and GDSs expired on November 13, 2002. Existing shareholders have subscribed
through the exercise of their preemptive rights for US$ 66.7 million and they
have exercised their accretion rights for
94
US$ 10.7 million, adding together US$ 77.4 million. During the allocation of the
remainder new investors have subscribed the remaining 22.6 million units
completing the US$ 100 million offering. The offering was fully subscribed and
the funds have already been received by the Company. We intend to use the
proceeds of the offering to facilitate the renegotiation or partial payment of
our outstanding debt, to finance our working capital and other general corporate
purposes, and to acquire APSA's second tranche of convertible notes, if offered.
CAPITAL EXPENDITURES
During the fiscal year ended June 30, 2002 we had capital expenditures of
Ps. 43.3 million. We made investments in fixed assets for Ps. 24.0 million
primarily to the acquisition of Costeros Dique IV in the office segment for Ps.
18.3 million and in undeveloped parcels of land for Ps. 3.0 million primarily in
Dique III for Ps. 2.2 million and in our subsidiaries and equity investees for
Ps. 19.3 million.
During fiscal year ended June 30, 2001, we had capital expenditures of Ps.
61.3 million. We made investments in related companies of Ps. 52.3 million
primarily in Brazil Realty for Ps. 13.8 million, APSA for Ps. 11.9 million and
Latin American Econetworks for Ps. 10.2 million. We also made investments in
fixed assets for Ps. 6.8 million primarily to the acquisition of a property in
the office segment for Ps. 2.4 million and in the hotels segment for Ps. 2.5
million. We also investment Ps. 2.2 million in undeveloped parcels of land.
During fiscal year ended June 30, 2000, we had capital expenditures of Ps.
37.3 million. We made investments of Ps. 16.3 million, primarily to acquire 8.0%
of Banco de Credito y Securitizacion S.A. for Ps. 9.8 million and to acquire Red
Alternativa and Alternativa Gratis for Ps. 5.9 million. We also made investments
of Ps. 8.0 million in fixed assets, consisting primarily of Ps. 4.4 million in
the hotel segment and investments of Ps. 12.9 million in undeveloped parcels of
land, consisting primarily of Ps. 10.5 million in Puerto Madero Dock 3 and Ps.
2.2 million in Puerto Retiro.
We believe that the restructuring of our existing debt, the issuance of the
convertible notes and the sale of non-core assets, together with our cash
generating activities, will provide us with the working capital necessary to
cover our needs and invest as opportunities may rise.
In September 2002 we purchased the Piscis Hotel in Valle de Las Lenas for
US$ 1.4 million and during the first quarter of fiscal year 2003, our Company
acquired 30.955% of the share ownership of and US$ 3.7 million convertible notes
due October 31, 2005 of Valle de Las Lenas S.A. for US$ 2.4 million.
SALES
Sale of Brazil Realty
On February 28, 2002 we sold 100% of our interest in Brazil Realty, our
subsidiary in Brazil, acquired in 1994 together with the Brazilian businessman,
Mr. Elie Horn. Creed Holdings LTD acquired all the shares. The price agreed upon
was US$ 44.2 million. This transaction provided a positive net result of Ps.
31.5 million for the fiscal year ended June 30, 2002.
Sale of FVI Shareholdings
During December, 2000 we sold all of our shareholding in FVI (Fondo de
Valores Inmobiliarios S.A.C.A.) and Venezuela Invest Ltd. To Asesoria Financiera
Velutini v. Asociados C.A. in a series of related transactions. The price agreed
upon between the parties was US$ 67.0 million. This transaction provided a Ps.
0.7 million loss for the fiscal year 2001.
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U.S. GAAP RECONCILIATION
The accounting principles applied in Argentina vary in certain significant
respects from accounting principles applied in the United States. Application of
accounting principles generally accepted in the United States (U.S. GAAP) would
have affected the determination of amounts shown as net (loss) income for each
of the three years in the period ended June 30, 2002, and the amount of total
shareholders' equity as of June 30, 2002 and 2001 to the extent summarized in
Note 19 to the Financial Statements.
The principal differences, other than inflation accounting, between
Argentine GAAP and U.S. GAAP are the following:
(i) the impact of certain U.S. GAAP adjustments on equity investees;
(ii) the accounting for derivatives and hedging activities;
(iii) the accounting for options to acquire marketable securities;
(iv) the accounting for the management ownership plan;
(v) the application of different useful lives for depreciation purposes;
(vi) the deferral of certain preoperating and organization expenses under
Argentine GAAP which are expensed as incurred under U.S. GAAP;
(vii) the application of certain U.S. GAAP adjustments to the estimation of
the fair value of net assets acquired;
(viii) the accounting for securitization programs;
(ix) the accounting for available for sale securities;
(x) the recognition of deferred income taxes; and
(xi) the effect on minority interest of the foregoing reconciling items.
In addition, certain other disclosures required under U.S. GAAP have been
included in the U.S. GAAP reconciliation. See Note 19 to our annual financial
statements as of June 30, 2002, 2001 and 2000, included elsewhere in this annual
report for details.
Net income (loss) under Argentine GAAP for the years ended June 30, 2002,
2001 and 2000 was approximately Ps. (499.6) million, Ps. (60.0) million and Ps.
11.6 million, respectively, as compared to approximately Ps. (650.9) million,
Ps. 20.0 million and Ps. (16.9) million, respectively, under U.S. GAAP.
Shareholders' equity under Argentine GAAP as of June 30, 2002, 2001 and 2000,
was Ps. 460.4, Ps. 960.0 million and Ps. 1,100.4 million, respectively, as
compared to Ps. 329.5 million, Ps. 877.9 million and Ps. 1,026.4 million,
respectively, under U.S. GAAP.
B. APSA'S RESULTS OF OPERATIONS
We do not consolidate the consolidated financial statements of our
subsidiary APSA. However, according to Rule 3-09 of Regulation S-X we are
required to file separate financial statements of significant subsidiaries. APSA
meets the significant subsidiary test for fiscal year 2002. We herein include
the following Operating and Financial Review and Prospects of the results of
operations of APSA. This Operating and Financial Review and Prospects should be
read together with APSA's consolidated financial statements appearing elsewhere
in this annual report. This Operating and Financial Review and Prospects
discussion contains forward-looking statements that involve risks, uncertainties
and assumptions. These forward-looking statements include, among others, those
statements including the words "expects", "anticipates", "intends", "believes"
and similar language. The actual results may differ materially from
96
those anticipated in these forward-looking statements as a result of many
factors, including those set forth elsewhere in this annual report. For purposes
of the following discussion, unless otherwise specified, references to fiscal
years 2002, 2001 and 2000 relate to the fiscal years ended June 30, 2002, 2001
and 2000, respectively. APSA maintains its financial books and records in Pesos
and prepare its financial statements in conformity with Argentine GAAP and the
regulations of the Comision Nacional de Valores. See Note 15 to the consolidated
financial statements of APSA for a description of the principal differences
between Argentine GAAP and U.S. GAAP as they relate to APSA, and a
reconciliation to U.S. GAAP of net (loss) income and total shareholders' equity.
The differences involve methods of measuring the amounts shown in the financial
statements as well as additional disclosures required by U.S. GAAP and
Regulation S-X of the SEC.
REVENUE RECOGNITION
APSA primarily derives its revenues from leases and services operations,
the sale and development of properties, credit card operations and to a lesser
extent, from e-commerce activities.
Leases and services
Leases with tenants are accounted for as operating leases. Tenants are
generally charged a rent which consists of the higher of (i) a monthly base rent
(the "Base Rent") and (ii) a specified percentage of the tenant's monthly gross
retail sales (the "Percentage Rent") (which generally ranges between 4% and 8%
of tenant's gross sales). Furthermore, pursuant to the rent escalation clause in
most leases, a tenant's Base Rent generally increases between 4% and 7% each
year during the term of the lease. Minimum rental income is recognized on a
straight-line basis over the term of the lease and unpaid rents are included in
accounts receivable in the consolidated balance sheets. Certain lease agreements
contain provisions which provide for rents based on a percentage of sales or
based on a percentage of sales volume above a specified threshold. APSA
determines the compliance with specific targets and calculate the additional
rent on a monthly basis as provided for in the contracts. Thus, these contingent
rents are not recognized until the required thresholds are exceeded.
Generally, APSA's lease agreements vary from 36 to 120 months. Law No.
24,808 provides that tenants may rescind commercial lease agreements after the
initial six months, upon not less than 60 days written notice, subject to
penalties which vary from one to one and a half months rent if the tenant
rescinds during the first year of its lease, and one month of rent if the tenant
rescinds after the first year of its lease.
APSA also charges its tenants a monthly administration fee, prorated among
the tenants according to their leases, which varies from shopping center to
shopping center, relating to the administration and maintenance of the common
area and the administration of contributions made by tenants to finance
promotional efforts for the overall shopping centers' operations. Administration
fees are recognized monthly when earned.
In addition to rent, tenants are generally charged "admission rights", a
non-refundable admission fee that tenants may be required to pay upon entering
into a lease and upon lease renewal. Admission right is normally paid in one
lump sum or in a small number of monthly installments. Admission rights are
recognized using the straight-line method over the life of the respective lease
agreements. Furthermore, the lease agreements generally provide for the
reimbursement of real estate taxes, insurance, advertising and certain common
area maintenance costs. These additional rents and tenant reimbursements are
accounted for on the accrual basis.
In September 2000, APSA completed the acquisition of the 99.99% equity
interest of Fibesa, a related company. Fibesa acts as its leasing agent for the
retail space available in all of its shopping centers. Fibesa's revenues are
derived primarily from success fees calculated as a percentage of the final
rental income value for the lessee. Revenues related to success fees are
recognized at the time that the transaction is successfully concluded. A
transaction is considered successfully concluded when the related lease contract
has been signed by both parties.
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Sales and development properties
APSA generally enters into purchase and sale agreements with purchasers of
units in its residential development properties prior to the commencement of
construction. Pursuant to this strategy, APSA initiates its marketing and sales
efforts on the basis of already-commissioned architectural designs and model
units. Purchasers reserve units and subsequently enter into fixed price
contracts paying approximately 5% of the purchase price and agreeing, generally,
to pay monthly equal installments over an agreed-upon construction period for an
additional 15% of the purchase price. The balance of the purchase price is due
upon delivery of the constructed and completed unit.
Construction of such residential development properties is done pursuant to
"turnkey" contracts with major Argentine and other Latin American construction
companies that provide for construction to be completed within a prescribed
period and budget.
APSA records revenue from the sale of properties when all of the following
criteria are met:
o the sale has been consummated;
o APSA has determined that the buyer's initial and continuing
investments are adequate to demonstrate a commitment to pay for the
property;
o APSA' s receivable is not subject to future subordination; and
o APSA has transferred to the buyer the risk of ownership, and has not a
continuing involvement in the property.
APSA uses the percentage-of-completion method of accounting with respect to
sales of development properties under construction effected under fixed-priced
contracts. Under this method, revenue is recognized based on the ratio of costs
incurred to total estimated costs applied to the total contract price. APSA does
not commence revenue and cost recognition until such time as the decision to
proceed with the project is made and construction activities have begun.
The percentage-of-completion method of accounting requires that APSA
prepares budgeted costs (i.e., the estimated costs of completion) in connection
with sales of properties/units. Changes to estimated costs of completion are
generally incorporated into revised estimates during the contract period.
Credit card operations
Revenues derived from credit card transaction consist of commissions and
financing revenues. Commissions are recognized at the time the merchants'
transactions are processed, and financing revenues are recognized when earned.
E-commerce activities
APSA primarily conducts e-commerce activities through E-Commerce Latina, a
holding company organized in Argentina in December 1999 as an internet joint
venture between us and Telefonica de Argentina S.A. E-Commerce Latina owns
Altocity.Com S.A., a development stage company. Altocity.Com S.A. primarily
derives its revenues from monthly maintenance fees charges to suppliers, from
sales of products on its website and, to a lesser extent, from sales of
advertising and sponsorship. APSA accounts for its indirect investment in
Altocity.Com S.A. under the equity method of accounting.
For the years ended June 30, 2002 and 2001, net revenues from Altocity.Com
S.A. totaled Ps. 1.3 million and Ps. 2.0 million, and had a net loss of Ps. 15.1
million and Ps. 11.4 million, respectively.
In addition, APSA holds an interest in Alto Invest, a web-based provider of
comprehensive investing tools including planning and financial information and a
means to buy and sell financial assets. Alto Invest generated its revenues
primarily from advertising fees and commissions charged to customers for online
trading. Effective May 2001, Alto Invest ceased all operations.
98
All revenues are stated net of taxes levied on sales.
APSA MANAGEMENT'S ASSESSMENT OF IMPAIRMENT OF LONG-LIVED ASSETS
We periodically evaluate the carrying value of our long-lived assets for
impairment. We consider the carrying value of a long-lived asset to be impaired
when the expected cash flows, undiscounted and without interest, from such asset
are separately identifiable and less than its carrying value. In that event, a
loss would be recognized based on the amount by which the carrying value exceeds
the fair market value of the long-lived asset. Impairments are allocated to the
results of the year. We determine the fair market value primarily using
independent appraisals and utilizing anticipated cash flows discounted at a rate
commensurate with the risk involved.
We believe that the accounting estimate related to asset impairment is a
"critical accounting estimate" because:
it is highly susceptible to change from period to period because it
requires company management and/or independent appraisers to make
assumptions such as, future sales and cost of sale, future vacancy rates
and future prices; and
o because the impact that recognizing an impairment would have on assets
reported on our balance sheet as well as on the results of our
operations could be material. Independent appraisals about future
sales prices and future vacancy rates require significant judgment
because actual sales prices and vacancy rates have fluctuated in the
past and are expected to continue to do so.
We reviewed our assets related to leases and services and sales and
development properties segments for impairments as of June 30, 2002, due to the
continued deterioration of the Argentine economy and the Argentine government's
adoption of economic measures that could affect our future revenues. Assets
related to those two segments represent approximately 94% of our total
long-lived assets. As mentioned in our consolidated financial statement as of
June 30, 2002 we accounted for an impairment since the independent appraisals of
the assets described in Notes 4.d. and 4.e. were less than their recorded
values.
Valuation of shopping centers was performed according to the "rent value
method". We calculated discount rates considering each property's location,
competition in its market, its historical vacancy rates and cash flow. The
average discount rate we used was 16.6%, the average price per square meter was
Ps. 5.685, approximately US$ 1.516, and the average vacancy rate was 4.7%. The
performance of a sensitivity analysis which reduced prices per square meter by
5%, resulted in an increased impairment accounted for as of June 30, 2002 equal
to Ps. 29.5 million.
We used the "open market method" for the valuation of the land reserve and
non current inventories. In the January - June period there were no significant
real estate transactions in the market due to the Argentine macroeconomic crisis
and to the restrictions on cash transactions imposed by the current government.
Therefore, no reference values for this kind of transactions could be used. The
reserve land that the Company owns constitutes a unique portfolio for shopping
centers development in CBD (Central Business Districts). Caballito, Rosario and
Neuquen are the biggest participation in APSA's portfolio.
The above-mentioned impairment amounts to a loss of Ps. 29.5 million which
affects the balance sheet lines "Non Current Inventories, net" and "Fixed
Assets, net", reducing the value of our total assets by approximately 2.9%. This
impairment would have resulted in a net loss of 69.6% for the year ended June
30, 2002.
OPERATING COSTS AND EXPENSES
Leases and services
APSA's most significant costs and expenses are (i) depreciation and
amortization, (ii) taxes, both federal and local, contributions and services and
(iii) parking lots maintenance costs.
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Sales and development properties
APSA's most significant costs and expenses are (i) all direct contracts
costs such as land, materials and construction fees associated with development
properties and (ii) capitalized interest costs. Costs and expenses principally
consist of the Torres de Abasto construction project, a residential apartment
complex located near the Abasto Shopping Center.
Credit Card operations
APSA's most significant costs and expenses are (i) salaries and related
bonuses, (ii) taxes, both federal and local, contributions and services and
(iii) commissions and interest.
RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2002 AND 2001
SALES
Sales decreased by 25.7%, from Ps. 228.6 million during fiscal year 2001 to
Ps. 169.8 million during fiscal year 2002 due to a 28.4% reduction in leases and
services revenues (from Ps. 175.1 million to Ps. 125.5 million), a 69.1%
reduction in sales of properties (from Ps. 11.5 million to Ps. 3.6 million) and
a 2.7% reduction in sales from credit card operation (from Ps. 41.9 million to
Ps. 40.8 million).
The reduction in leases and services revenues is mainly due to the economic
recession undergone by Argentina for more than 4 years, which has affected
consumption, the main variable of our business. As a result, our tenants have
suffered a decrease in their sales representing a reduction both in occupancy
rates and in minimum lease and key money revenues. The overall occupancy rate in
our shopping centers fell from 94.4% as of June 30, 2001 to 92.4% as of June 30,
2002.
The reduction in sales of properties, related mainly to Torres de Abasto,
is attributable to the lower inventory available during the fiscal year 2002,
which included only 39 units for sale as opposed to the 135 units existing at
the beginning of fiscal year 2001.
The fall in sales from credit card operation is mainly a result of the
consumption reduction, despite the higher number of cards issued during the
fiscal year, the average credit portfolio and the volume of sales performed with
the card and thus the revenues of this segment suffered a slight fall.
FISCAL YEARS
ENDED JUNE 30,
-----------------------------
2002 2001
-----------------------------
(IN THOUSANDS OF PS.)
Leases and services.................. 125,471.2 175,139.3
Sales and development properties..... 3,562.5 11,530.7
Credit card operations............... 40,794.2 41,945.1
----------- -----------
Total net sales.................. 169,827.9 228,615.0
COSTS
Total costs registered a 12.1% decrease, from Ps. 97.1 million during
fiscal year 2001 to Ps. 85.3 million during fiscal year 2002.
Leases and services costs registered a 2.1% decrease, from Ps. 70.6 million
during fiscal year 2001 to Ps. 69.1 million during the fiscal year 2002. In
spite of such situation, during this fiscal year we experienced a once-off loss
of Ps. 10.5 million in connection with expenses charges billed to our tenants
which were not recovered. Excluding such charges, leases and services costs
decrease 16.9%, main cutbacks include taxes, rates, contributions and services
reductions as a result of changes to the tax
100
legislation which now imposes a VAT charge to commercial leases, allowing us to
use the VAT tax credit previously identified as loss.
Cost from sales of properties decreased by 61.8%, from Ps. 12.6 million in
fiscal year 2001 to Ps. 4.8 million in fiscal year 2002, as a result of the
reduction in sales mentioned above.
The cost from credit card operation decreased by 18.2% from Ps. 14.0
million in fiscal year 2001 to Ps. 11.4 million in fiscal year 2002, as a result
of the reduction in the level of activity.
FISCAL YEARS
ENDED JUNE 30,
-----------------------------
2002 2001
-----------------------------
(IN THOUSANDS OF PS.))
Leases and services................ (69,108.5) (70,597.8)
Sales and development properties... (4,803.7) (12,566.5)
Credit card operations............. (11,429.5) (13,977.9)
---------- ----------
Total costs.................... (85,341.7) (97,142.2)
GROSS PROFIT
As a result of the factors mentioned above, gross profit decreased by
35.7%, recording an income of Ps. 131.5 million for the fiscal year ended June
30, 2001 against Ps. 84.5 for fiscal year 2002.
Gross profit, calculated in terms of total sales percentage, fell from
57.5% during fiscal year 2001 to 49.7% during fiscal year 2002. Gross profit
from leases and services, calculated in terms of leases and services sales
percentage, fell from 59.7% during fiscal year 2001 to 44.9% during fiscal year
2002. Sales of properties gross loss, calculated as a percentage of sales of
properties, increased from 9.0% during fiscal year 2001 to 34.8% during fiscal
year 2002. Credit cards operations gross profit, calculated as a percentage of
sales of credit cards operations, rose from 66.7% during fiscal year 2001 to
72.0% during fiscal year 2002.
FISCAL YEARS
ENDED JUNE 30,
-----------------------------
2002 2001
-----------------------------
(IN THOUSANDS OF PS.)
Leases and services.................. 56,362.7 104,541.4
Sales and development properties..... (1,241.2) (1,035.8)
Credit card operations............... 29,364.6 27,967.2
----------- -----------
Total gross profit............... 84,486.2 131,472.8
SELLING EXPENSES
Selling expenses registered an 87.4%, growth from Ps. 27.6 million in
fiscal year 2001 to Ps. 51.7 million in fiscal year 2002. The increase results
mainly from the 161.7% increase in the allowance for doubtful accounts, from Ps.
18.0 million during fiscal year 2001 to Ps. 47.0 million during fiscal year
2002. Excluding the allowance for doubtful accounts, selling expenses decreased
by 51.0% mainly due to a 43.7% reduction in advertising charges and 64.7% in
salaries and bonuses.
Selling expenses, calculated in terms of total sales percentage increased
from 12.1% during the fiscal year ended June 30, 2001 to 30.4% during the fiscal
year ended June 30, 2002.
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ADMINISTRATIVE EXPENSES
Administrative expenses registered a 26.7% fall from Ps. 30.8 million
during fiscal year 2001 to Ps. 22.6 million during fiscal year 2002, basically
as a result of the reduction in salary, bonuses, social security contributions,
taxes, rates, contributions and services.
Administrative expenses, calculated as a percentage of total sales, fell
from 13.5% during fiscal year 2001 to 13.3% during fiscal year 2002.
TORRES DE ABASTO UNIT CONTRACTS' RESCISSIONS
The results of purchasers recessions of sales contracts registered a Ps.
0.08 million increase, surging from a Ps. 0.03 million loss during fiscal year
2001 to a profit of Ps. 0.05 million during fiscal year 2002.
NET (LOSS) INCOME IN CREDIT CARD TRUST
Net (loss) Income in credit card trust registered a Ps. 5.7 million
decrease, going from a Ps. 2.1 million profit in the fiscal year ended June 30,
2001 to a Ps. 3.6 million loss during the fiscal year ended June 30, 2002, as a
result of an increase in bad debtors concerning financial trust issuance under
Tarshop S.A. securitization programs.
OPERATING INCOME
As a result of the factors mentioned above, the operating income decreased
by 91.1%, recording a profit of Ps. 75.1 million during fiscal year 2001 against
a profit of Ps. 6.6 million during fiscal year 2002. The operating income
measured in terms of total sales decreased from 32.8% during fiscal year 2001 to
3.9% during fiscal year 2002.
NET LOSS IN EQUITY INVESTMENTS
The result stemming from the interests in Perez Cuesta S.A.C.I. and
E-Commerce Latina S.A. registered a 54.9% decrease, from a Ps. 3.0 million loss
during fiscal year 2001 to a Ps. 4.7 million loss during fiscal year 2002,
mainly due to the loss registered in E-Commerce Latina S.A., where we currently
hold a 50% interest.
FINANCIAL RESULTS, NET
Net financial results recorded a 38.4% decrease, from a Ps. 63.1 million
loss during fiscal year 2001 to a Ps. 38.9 million loss during fiscal year 2002,
as a result of the income generated as a result of inflation exposure partially
compensated due to (a) a higher average indebtedness cost during fiscal year
2002, (b) a higher average of financial indebtedness level in fiscal year 2002
than in fiscal year 2001, (c) the application on debts converted to pesos of the
CER which by June 30, 2002 amounted to approximately 25% and (d) the impairment
of long-lived assets for Ps. 55.8 million.
OTHER EXPENSES NET
Other expenses, net registered a decrease of Ps. 9.4 million, from a Ps.
0.3 million loss during fiscal year 2002 to a Ps. 9.6 million loss during fiscal
year 2002 mainly due to the Ps. 6.0 million contingencies provision, in
connection with a legal action filed by Carrefour supermarket regarding the
construction of Paseo Alcorta.
(LOSS) INCOME BEFORE TAXES AND MINORITY INTEREST
As a result of the factors described above, the (loss) income before taxes
and minority interest suffered a Ps. 55.3 million decrease, recording a Ps. 46.6
million loss during fiscal year 2002 against a Ps. 8.7 million income during
fiscal year 2001.
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INCOME TAX
Income tax charges decreased by 45.2% from Ps. 2.4 million during fiscal
year 2001 to Ps. 1.3 million during fiscal year 2002.
MINORITY INTEREST
Minority interest registered a Ps. 6.3 million increase, from a Ps. 0.8
million loss during fiscal year 2001 to a Ps. 5.5 million profit during fiscal
year 2002.
NET (LOSS) INCOME
As a result of the factors explained above, the net (loss) income for the
period registered a Ps. 47.9 million decrease, from a Ps. 5.5 million profit for
fiscal year 2001 to a loss of Ps. 42.4 million for fiscal year 2002.
RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2001 AND 2000
SALES
Sales increased by 5.0% from Ps. 217.8 million during the fiscal year 2000
to Ps. 228.6 million during fiscal year 2001, mainly due to an increase by 58.9%
in sales from credit cards (from Ps. 26.4 million to Ps. 41.9 million) and an
increase in sales of properties by 16.6% (from Ps. 9.9 million to Ps. 11.5
million), partly offset by a 3.5% decrease in sales from leases and services
(from Ps. 181.5 million to Ps. 175.1 million).
The increased sales from credit card operations are attributable to the
opening of new points of sale for the marketing and selling of our branded
credit card "Tarjeta Shopping" outside our shopping centers, and to the brand's
positioning derived from an active commercial approach in shopping centers such
as Abasto Shopping, Alto Avellaneda, Alto Palermo Shopping and Paseo Alcorta.
Consequently, the amount of credit cards issued increased by 72.7%. Nearly
79,900 credit cards were issued as of June 30, 2000 compared with approximately
137,990 as of June 30, 2001.
Despite the adverse economic environment in Argentina, APSA pursued an
aggressive sales policy which contributed to the increase in sales of
development properties, primarily associated with Torres de Abasto, resulting in
the sale of 96 additional units.
The decrease in sales from leases and services is essentially due to a drop
in our shopping centers' occupancy rate by 2.4%, thus decreasing from 96.76% as
of June 30, 2000, to 94.36% as of June 30, 2001.
FISCAL YEARS
ENDED JUNE 30,
-----------------------------
2002 2001
-----------------------------
(IN THOUSANDS OF PS.)
Leases and services............... 175,139.3 181,545.2
Sales and development properties.. 11,530.7 9,893.0
Credit card operations............ 41,945.1 26,392.4
----------- -------------
Total sales................... 228,615.0 217,830.5
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COSTS
Total costs increased by 9.2%, from Ps. 89.0 million in fiscal year 2000 to
Ps. 97.1 million in fiscal year 2001.
Costs associated with leases and services increased by 1.1%, from Ps. 69.8
million in fiscal year 2000 to Ps. 70.6 million in fiscal year 2001, primarily
due to increased depreciation and amortization and parking lots' expenses. Such
increase was partly offset by contracted taxes, both local and federal,
contributions and services.
Costs associated with the sale and development of properties increased by
20.9%, from Ps. 10.4 million in fiscal year 2000 to Ps. 12.6 million in fiscal
year 2001, attributable to the increase in sales referred to above.
Costs associated with credit card operations increased by 60.0%, from Ps.
8.7 million during fiscal year 2000 to Ps. 14.0 million during fiscal year 2001,
due to an increased activity.
FISCAL YEARS
ENDED JUNE 30,
-----------------------------
2002 2001
-----------------------------
(IN THOUSANDS OF PS.)
Leases and services................ 70,597.8 69,824.3
Sales and development properties... 12,566.5 10,397.0
Credit card operations............. 13,977.9 8,734.3
----------- ----------
Total costs.................... 97,142.2 88,955.6
GROSS PROFIT
As a result of the factors discussed above, total gross profit increased by
2.0%, from Ps. 128.9 million in fiscal year 2000 to Ps. 131.5 million in fiscal
year 2001.
Gross profit, as a percentage of total revenues, decreased from 59.2% in
fiscal year 2000 to 57.5% in fiscal year 2001. Gross profit from leases and
services, as a percentage of respective revenues, decreased from 61.5% in fiscal
year 2000 to 59.7% in fiscal year 2001. The gross loss in the sales and
development properties segment, as a percentage of respective revenues, rose
from 5.1% in fiscal year 2000 to 9.0% in fiscal year 2001. Gross profit from
credit card operations, as a percentage of respective revenues, decreased from
66.9% in year 2000 to 66.7% in year 2001.
FISCAL YEARS
ENDED JUNE 30,
-----------------------------
2002 2001
-----------------------------
(IN THOUSANDS OF PS.)
Leases and services.................. 104,541.4 111,720.8
Sales and development properties..... (1,035.8) (504.0)
Credit card operations............... 27,967.2 (17,658.1)
--------------- ----------
Total gross profit............... 131,472.8 128,874.9
SELLING EXPENSES
Selling expenses decreased by 38.4%, from Ps. 44.8 million in fiscal year
2000 to Ps. 27.6 million in fiscal year 2001. The decreased was mainly due to:
(i) a decrease in the allowance for doubtful accounts by 8.5%, from Ps. 19.6
million during fiscal year 2000 to Ps. 18.0 million during fiscal year 2001, out
of which Ps. 15.3 million and Ps. 12.0 million are related to defaulting
receivables from our shopping center
104
operations during fiscal years 2000 and 2001 respectively; (ii) a decrease in
advertising expenses by 71.8%, from Ps. 20.0 million in fiscal year 2000 to Ps.
5.6 million in fiscal year 2001, primarily related to the discontinuance of the
Altochecks promotion launched during fiscal year 2000. Advertising expenses from
credit card operations represent 75.9% of the total advertising expenses during
fiscal year 2001 and 11.36% during fiscal year 2000; and (iii) a permanent
decrease in the amount paid for fees and services by 99.6%, from Ps. 1.8 million
in fiscal year 2000 to Ps. 0.006 million during fiscal year 2001.
Selling expenses, as a percentage of total revenues, decreased from 20.6%
in fiscal year 2000 to 12.1% in fiscal year 2001.
ADMINISTRATIVE EXPENSES
Administrative expenses increased by 11.7%, from Ps. 27.6 million in fiscal
year 2000 to Ps. 30.8 million in fiscal year 2001, principally due to higher
credit card issuances.
Administrative expenses related to APSA's credit card operations increased
by 75.12%, from Ps. 6.7 million in fiscal year 2000 to Ps. 11.7 million in
fiscal year 2001, attributable to higher salaries, bonuses and fees. Excluding
the effect of credit card operations, administrative expenses decreased by 8.6%
due to salaries and bonuses cuts.
Administrative expenses, as a percentage of total revenues, increased from
12.7% in fiscal year 2000 to 13.5% in fiscal year 2001.
TORRES DE ABASTO UNIT CONTRACTS' RESCISSIONS.
During fiscal year 2000, APSA suffered a loss of Ps. 3.4 million as a
consequence of the rescission of certain Torres de Abasto sales contracts due to
the failure of purchasers to fulfill their obligations. APSA experienced
non-significant rescissions during fiscal year 2001, amounting to Ps. 0.03
million.
OPERATING INCOME
As a result of the foregoing, operating income increased by 40.0%, from Ps.
53.6 million in fiscal year 2000 to Ps. 75.1 million in fiscal year 2001.
Operating margin as a percentage of total revenues increased from 24.6% in
fiscal year 2000 to 32.8% in fiscal year 2001.
NET LOSS IN EQUITY INVESTMENTS
Net loss in equity investments represents our share of the earnings or
losses of investee companies. As of June 30, 2001, APSA owns a 18.9% interest in
Perez Cuesta S.A.C.I. and a 49% in Altocity.Com S.A. through a 50% interest in
E-Commerce Latina. As of June 30, 2000, APSA owned a 25% interest in Perez
Cuesta S.A.C.I. and a 49% in Altocity.Com S.A. through a 50% interest in
E-Commerce Latina. Net loss in equity investments increased from Ps. 0.04
million in fiscal 2000 to Ps. 3.0 million in fiscal year 2001 due to the
negative results as well as the dilute of the equity interest in Perez Cuesta
S.A.C.I. from 25% as of June 30, 2000 to 18.9% as of June 30, 2001.
NET INCOME IN CREDIT CARD TRUST
Net income in credit card trust increased by 293.8% from Ps. 0.5 million in
fiscal year 2000 to Ps. 2.1 million in fiscal year 2001 mainly due to the
implementation of new securitization series of the Tarshop S.A. securitization
program.
FINANCIAL RESULTS, NET
Financial Results, net increased the loss by 27.3%, from Ps. 49.6 million
loss in fiscal year 2000 to Ps. 63.1 million loss in fiscal year 2001. Financial
income generated by assets increased by 81.0%, from Ps. 1.8 million in fiscal
year 2000 to Ps. 3.2 million in fiscal year 2001, due to increased interest in
arrears collected. In addition, financial expense generated by liabilities
increased by 29.1%, from Ps. 51.4 million in fiscal year 2000 to Ps. 66.3
million in fiscal year 2001, primarily attributable to higher interest expense
105
from Ps. 50.1 million in fiscal year 2000 to Ps. 65.9 million in fiscal 2001
reflecting a higher average financial cost in fiscal year 2001.
OTHER EXPENSE, NET
Other expense, net decreased from Ps. 0.9 million in fiscal year 2000 to
Ps. 0.2 million in fiscal year 2001, reflecting the net effect of a gain from
early redemption of debt and an allowance for doubtful mortgage receivables.
During the third quarter of fiscal year 2001, APSA redeemed a portion of the
senior notes and the notes (US$ 2.5 million and Ps. 35.3 million, respectively)
at 100% and different prices below par plus accrued interest, respectively. In
connection with the redemption, APSA recorded a gain of Ps. 3.5 million (Ps. 2.2
million, after tax). Such gain is net of a charge of Ps. 1.0 million relating to
the amortization of deferred financing costs associated with the redeemed
obligations. This gain was partially offset by Ps. 1.8 million relating to the
allowance for doubtful mortgage receivables.
INCOME BEFORE TAXES AND MINORITY INTEREST
As a result of the foregoing, income before taxes and minority interest
increased by 176.0%, from Ps. 3.1 million in fiscal year 2000 to Ps. 8.7 million
in fiscal year 2001.
INCOME TAX
Income tax decreased 71.8% from Ps. 8.3 million in fiscal year 2000 to Ps.
2.4 million in fiscal year 2001. Our effective tax rate in fiscal year 2001 was
27.2% and 265.9% in fiscal year 2000 while the statutory rate for those periods
was of 35.0%. APSA does not recognize deferred taxes. The difference between the
statutory rate and the effective rate is due to the allocation of temporary
differences.
MINORITY INTEREST
Minority interest represents the shareholdings of third-parties in APSA's
controlled subsidiaries. Minority interest increased from Ps. 0.4 million in
fiscal year 2000 to Ps. 0.8 million in fiscal year 2001.
NET INCOME (LOSS)
Net income (loss) increased 198.0% from a loss of Ps. 5.6 million in fiscal
year 2000 to a gain of Ps. 5.5 million in fiscal year 2001.
LIQUIDITY AND CAPITAL RESOURCES
APSA's principal liquidity and capital resources requirements include:
o the acquisition of shopping centers;
o the development of new shopping centers;
o the improvement of existing shopping centers;
o the development of residential properties for sale;
o working capital needs; and
o the maintenance of cash and other liquid assets to enable APSA to take
advantage of the acquisition and development opportunities as they arise.
APSA has basically relied upon equity and debt financing to finance its
cash and working capital requirements and expects to satisfy its liquidity and
capital resources needs with funds from transactions to the extent that income
from rents increases.
106
As of June 30, 2002, APSA had cash and cash equivalents totaling Ps. 14.6
million, an decrease of 22.4% from Ps. 18.9 million of cash and cash equivalents
held as of June 30, 2001. This decrease primarily resulted from its financing
activities partiality offset by an increase in our operating activities.
Likewise, as of June 30, 2002 APSA had credit arrangements, additional to
the credit lines already used, with banking institutions for Ps. 14.9 million,
although it cannot give any assurance that it will be able to effectively use
such credit lines given the current conditions of the Argentine economy.
APSA's operating activities resulted in net cash inflows of Ps. 47.9
million, Ps. 28.3 million and Ps. 85.7 million for fiscal years 2002, 2001 and
2000, respectively. Net cash inflows for fiscal year 2002 increased as compared
to fiscal year ended June 30, 2001, primarily due to the increase in trade
accounts payable, taxes payable and accrued interest.
As to the increase in fiscal year 2001 as compared to fiscal year 2000,
the significant differences result from a decreased need to finance its working
capital and an increase in the sales of apartments in the Torres del Abasto
project.
APSA's investing activities reached Ps. 3.3 million, Ps. 48.6 million and
Ps. 48.1 million for fiscal years 2002, 2001 and 2000, respectively. APSA
expects to generate regularly fixed assets. The net cash used in investing
activities was Ps. 48.1 million and Ps. 316.3 million for fiscal years 2000 and
1999, respectively. In those years acquisitions or investment in existing
properties has been made for Ps. 41.0 million and 296.0 million, respectively.
Acquisitions and investment charges paid were Ps. 6.9 and Ps. 20.3 for those
years as well.
APSA's net cash (used) provided by financing activities were Ps. (48.8)
million for fiscal year 2002, which were produced due a collateral integration
of Ps. 97.8 million, a debt payment of Ps. 61.2 million, the repurchase of notes
for Ps. 30.0 million, which were partially offset by Ps. 109.6 million
intercompany debt obtaining and Ps. 28.8 million as a result of new loans.
APSA's net cash provided by financing activities of Ps. 25.7 million for
fiscal year 2001 was primarily due to an increase in indebtedness by Ps. 300.0
million as a result of the issue of notes in January 2001 and other short-term
indebtedness, partially offset by repayment of short-term and long-term
financial debt, including the repurchase of convertible notes under the issues
of April 2000 and January 2001 for an aggregate amount of Ps. 270.2 million.
APSA'S INDEBTEDNESS
On January 18, 2001, APSA issued, together with its wholly-owned
subsidiary, Shopping Alto Palermo SA, US$ 120.0 million of secured senior notes
due on January 13, 2005 in three classes: (i) US$ 40.0 million of Class A-2
notes, issued individually by Alto Palermo S.A. (APSA), due January 13, 2005, at
a corrected Badlar interest rate plus 395 basis points; (ii) US$ 5.0 million of
Class B-1 notes, issued by Alto Palermo S.A. (APSA) and Shopping Alto Palermo
S.A., due January 13, 2005, at a 90-day LIBOR plus 475 basis points, and (iii)
US$ 75.0 million of Class B-2 notes, issued by Alto Palermo S.A. (APSA) and
Shopping Alto Palermo S.A., maturing at various dates through January 13, 2005,
at a corrected Badlar rate plus 395 basis points. The proceeds from the issuance
were used to repay financial indebtedness, including outstanding
mortgage-collateralized borrowings and other short-term debts. Additionally,
during the third quarter of the fiscal year 2001, APSA redeemed US$ 2.5 million
of the Class A-2 notes at 100% of par value. The payment of the total amount of
the senior secured notes is guaranteed by a Trust Agreement pursuant to which
all of the shares of SAPSA were transferred to a trust. The Trust Agreement was
entered into on January 16, 2001 among APSA and Ritelco, as shareholders of
SAPSA and as Trustors, RioTrust S.A., as Trustee, and the holders of the senior
secured notes' Beneficiaries.
Interest on both classes are paid on a quarterly basis as from April 18,
2001.
On April 7, 2000, APSA issued Ps. 85.0 million of unsecured notes due April
7, 2005 at a 14.875% annual rate payable semiannually. Proceeds from this
issuance were used to repay certain outstanding syndicated loan and other
short-term financial debt. During March and December 2001, APSA redeemed Ps.
18.1 million and Ps. 15.5 million respectively at different prices below par,
and during July
107
and August, 2002, APSA redeemed Ps. 1,1 million of notes below par; therefore,
subtracting its holding, the aggregate amount owned by it for such notes as of
September 30, 2002 is of Ps. 50.3 million.
On March 30, 2000, in connection with the issue of unsecured notes for a
par value of Ps. 85 million due in 2005, APSA entered into a swap agreement with
Morgan Guaranty Trust to cover and reduce the interest rate of such notes,
converting part of the Peso-denominated fixed rate debt into U.S.
dollar-denominated floating rate debt. However, due to the economic situation,
the political instability and the depreciation of the Argentine public debt,
there was a negative deviation of the performance of the swap agreement that
required the modification of the original terms. Under the terms of the revised
agreement, APSA converted its Peso-denominated fixed rate debt to U.S.
dollar-denominated floating rate debt for an amount of US$ 69.1 million due in
March 2005, and we were required to make as collateral a deposit of US$ 50
million with the counterparty. As of June 30, 2002, interest rate payable was at
a floating rate of 2.3% in U.S. dollars and interest rate receivable was at a
fixed rate of 10% in Pesos. APSA is not required to make additional deposits
until maturity. An additional payment at maturity could be required depending on
the prevailing exchange rate between the Peso and the U.S. dollar. Thus, a
continuous devaluation on the Peso and/or an increase in interest rates would
significantly increase its losses.
In order to finance the US$50 million collateral deposit and the subsequent
transactions related to the swap, APSA entered into loan agreements with us and
Parque Arauco S.A. As of June 30, 2002 APSA's debt with us and Parque Arauco
S.A. in concept of those loan agreements was Ps. 40.6 million and Ps. 20.4
million respectively. The existing loans contributed by us and Parque Arauco,
were used by us to subscribe to part of the convertible notes issued by APSA.
From the US$ 50.0 million issuance, our Company and Parque Arauco subscribed US$
27.2 million and US$ 15.2 million respectively.
As of. September 30, 2001, APSA began not to be in compliance with certain
financial covenants with respect to the US$ 120 million senior secured notes due
in 2005 and the Ps. 85 million unsecured notes due in 2005. Therefore and
considering that this event does not entail the impossibility of regularly
performing its obligations which is rather a direct consequence of the general
economic situation its board of directors called a special bondholders meeting
for the US$ 120 million secured senior notes where it obtained the limited
waiver with respect to such covenant violations until the submission of the
financial statements dated December 31, 2002. No such waiver was obtained with
respect to the unsecured notes for Ps. 85 million, and as a result, APSA is not
able to incur any additional indebtedness for so long as such financial covenant
violation is in existence.
Due to the continuing effects of the economic recession the lack of
availability of financing resources and the succession of recent governmental
measures adversely affecting the normal operations of the banking and payments
system, our operations and financial condition have been severely impaired.
Apart from not being in compliance with certain financial covenant above
mentioned, on January 14, 2002, there were payments scheduled for about Ps. 19.3
million of Classes A and B secured senior notes. However, on January 16, 2002
and March 15, 2002, the holders of Class A and B secured senior notes
unanimously approved certain waivers and deferrals of accrued interests and
scheduled principal payments until July 17, 2002.
This extension was approved subject to the signing of the subordination
agreement between us Parque Arauco S.A. and Citibank the administrative agent of
the senior secured notes, in which Parque Arauco S.A.'s shareholders agreed to
subordinate the payment of the loans granted to APSA to the prior payment of the
senior secured notes and APSA's short term debt.
On June 24, 2002, APSA agreed with the holders of its senior secured notes,
that it would pay all interest owed and the amortization coupon which originally
matured in January 2002, prior to July 17, 2002. Such payment would receive an
approximately 20% discount or be carried out through the purchase of rescheduled
time deposits, which allow for a similar discount. Moreover, full payment of
APSA's short term debt was agreed upon with the banks under these same terms. As
of July 17, 2002, all interest owed and the amortization coupon that matured in
January 2002, had been fully paid.
108
On July 19, 2002, APSA issued the series I of convertible notes which have
the option to be converted into common stock for up to US$ 50 million. The offer
was subscribed for the full US$ 50 million.
The convertible notes issued are convertible into common stock of up to the
holder's option. The issue conditions include a conversion price of US$ 0.0324,
which means that every convertible note is potentially convertible for 30.864
shares of Ps. 0.10 face value each, the accrual of a 10% annual interest rate
payable semi-annually and a subscription price of 100% of the principal amount
of the convertible note. Maturities were fixed for July 19, 2006. Raymond James
Argentina Sociedad de Bolsa S.A. acted as subscription and placement agent.
In case of all the bondholders convert the convertible notes APSA's capital
would extend from 700,000,000 shares to 2,243,209,877 shares.
The issue of the convertible notes has allowed APSA to pay an important
portion of its existing debt. The funds obtained have been allocated to the full
repayment of (i) loans from APSA's major shareholders (we and Parque Arauco
S.A.) which, as of June 30, 2002, came up to approximately Ps. 61.0 million,
(ii) short-term bank debt for the total amount of Ps. 39.0 million, and (iii)
the amount of Ps. 64.9 million (plus the accrued CER adjustment) of the senior
secured notes. Regarding the loans APSA had with its shareholders, these were
used for the subscription of the convertible notes. In the case of the secured
senior notes repurchase and short-term bank debt repayments, APSA obtained
discounts for up to 25%.
The Public Emergency Law, enacted on January 6, 2002 and Decree No. 214 of
the National Executive Branch established the conversion to Pesos of all loans
and agreements in effect that had been agreed in U.S. dollars or any other
foreign currency at the exchange rate of Ps. 1.00 = 1.00 U.S. dollar (US$ 1.00).
In APSA, the pesification of debts basically affected the secured senior notes
(US$ 117.5 million short-term bank debt (US$ 44.6 million) and the loans with
our majority shareholders. Such agreements and loans, have been adjusted as from
February 3, 2002 by the Reference Stabilization Index (CER) which is calculated
and published daily by the Argentine Central Bank and its purpose is to adjust
the obligations according to the evolution of the retail price index. Thus if
there were a severe inflationary process, our debt would be significantly
increased.
In connection with the interest rates, Central Bank Communication "A" 3507
I dated March 13, 2002 established a fixed interest rate between 6% and 8% to
debts issued by companies under argentine law. This resolution affected APSA's
secured senior notes (Ps. 117.5 million) and short-term bank debt (Ps. 44.6
million).
APSA'S CAPITAL EXPENDITURES
FISCAL YEAR 2002
During fiscal year 2002 APSA invested approximately Ps. 3.3 million in
capital expenditures. APSA made investments for Ps. 3.1 million mainly related
to Rosario Project and improvements of its shopping center properties.
FISCAL YEAR 2001
In the first quarter of fiscal year 2001, APSA completed the acquisition of
the 99.99% equity interest in Fibesa, a related company, engaged in real estate
brokerage activities for our shopping centers for total consideration of US$
10.0 million.
As of April 30, 2001, APSA contributed Ps. 9.8 million in E-Commerce Latina
S.A. in order to finance Altocity.Com S.A.'s growth.
109
FISCAL YEAR 2000
In the third quarter of fiscal year 2000, APSA acquired a 61% equity
interest in Alto Invest for the minimis consideration. Alto Invest is a
web-based provider of comprehensive investing tools, planning and financial
information and primarily generated its revenues from website advertising fees
and commissions charged to customers for on-line trading. Effective May 2001,
Alto Invest ceased operations and is actively pursuing to evaluate alternative
investment projects.
In January 2000, APSA acquired the remaining 20% equity interest in Tres Ce
S.A. for Ps. 4.9 million in cash.
In July 1999, APSA acquired a 99.9% interest in Inversora del Puerto, a
wholly-owned subsidiary of IRSA, for de minims consideration. Inversora del
Puerto had no significant activity prior to our acquisition. Thereafter, we
contributed Ps. 6.1 million to this company. On the same date, Inversora del
Puerto acquired a property located near Paseo Alcorta shopping center for US$
3.7 million, of which US$ 2.1 million was paid in cash and the remaining balance
was paid in July 2000.
In July 1999, APSA acquired a 94.6% interest in Shopping Neuquen for US$
4.2 million in cash. Shopping Neuquen's sole asset comprised of a piece of land
with preliminary governmental approval for construction of a shopping center on
the site. APSA paid US$ 0.9 million on August 20, 1999, and the remaining US$
3.3 million to be paid on the earlier of (i) the opening of the shopping center
or (ii) July 5, 2001. During the last quarter of fiscal year 2001, APSA entered
into negotiations with the Municipality of Neuquen to reschedule the original
timing of construction. Also, APSA requested permission to sell a portion of the
land to third parties. Construction is rescheduled to commence on December 15,
2002 under our new proposed scheme. The proposal is currently being analyzed by
governmental authorities. In the event that the proposal is not accepted by the
local governmental authorities, the sale may be cancelled and Shopping Neuquen
may not recover its original investment. Although APSA anticipates a favorable
resolution to our proposal, there can be no assurance as to the final outcome of
the negotiations.
U.S. GAAP RECONCILIATION
The principal differences, other than inflation accounting, between
Argentine GAAP and U.S. GAAP are the following: (i) the recognition of revenue
for sales of development properties under fixed-priced construction contracts
following the percentage-of-completion method under Argentine GAAP while revenue
is recognized under the installment method under U.S. GAAP; (ii) the appraisal
revaluation of certain fixed assets under Argentine GAAP while fixed assets are
valued at cost under U.S. GAAP; (iii) the deferral of certain preoperating and
advertising expenses under Argentine GAAP which are expensed as incurred under
U.S. GAAP; (iv) the treatment of expenses incurred for the development of web
sites under the provisions of EITF 00-2; (v) the treatment of expenses incurred
for the development and acquisition of software under the provisions of SOP
98-1; (vi) the application of certain U.S. GAAP adjustments to the estimation of
the fair value of net assets acquired; (vii) the impact of certain U.S. GAAP
adjustments on the Company's equity investees; (viii) the accounting for changes
in interest in unconsolidated affiliated companies; (ix) the accounting for
changes in interest in consolidated affiliated companies; (x) the accounting for
stock option agreements; (xi) the accounting for securitized credit card
receivables in accordance with SFAS No. 140; (xii) the accounting for
available-for-sale securities; (xiii) the deferral of certain costs under
Argentine GAAP which are expensed as incurred under U.S. GAAP; (xiv) the
amortization of fees related to the Senior Notes; (xv) the accounting for
derivatives and hedging activities; (xvi) the application of SFAS No 109
"Deferred Income Taxes" and (xvii) the effect on minority interest of the
foregoing reconciling items. In addition, certain other disclosures required
under U.S. GAAP have been included in the U.S. GAAP reconciliation. See Note 15
to the Financial Statements included elsewhere in this annual report for
details.
Net income (loss) under Argentine GAAP for the years ended June 30, 2002,
2001 and 2000 was approximately Ps. (42.4) million, Ps. 5.5 million and Ps.
(5.6) million, respectively, as compared to approximately Ps. (144.0), Ps.
(12.7) million and Ps. 10.3 million, respectively, under U.S. GAAP.
110
Shareholders' equity under Argentine GAAP as of June 30, 2002, and 2001 was Ps.
601.2 and Ps. 643.6 million, respectively, as compared to Ps. 471.9 and Ps.
617.8 million, respectively, under U.S. GAAP.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
This item is not applicable.
D. TREND INFORMATION
Development and sale of properties
We have practically sold all of our developed projects. However, we still
have a significant portion of undeveloped land, as we have determined that the
Argentine economic recession of the last few years has not presented us with the
adequate opportunities to implement such developments. We also have an important
amount of undeveloped land ready to use. Further, the current condition of the
Argentine financial system, which, as of this date, has significantly worsened,
has caused interest rates to increase and imposed significant restrictions upon
the accessibility to loans, thus preventing our company from making such
investments.
We still have pending the development of Santa Maria del Plata and Puerto
Retiro which we are currently unable to start due to the unavailability of
financing and nationwide paralysis of real estate transactions.
Looking forward to the future, it is evident that the present crisis, which
has affected the financial system in particular, will cause further rises in
interest rates and restrict access to sources of financing.
Offices and other non-shopping center rental properties
The recent economic and legal measures implemented by the Argentine
government have forced owners to receive their rental payments in Pesos. These
measures not only affect the rental amounts received in terms of U.S. dollars,
but, in addition, have caused lessees to reduce their rental expenses and move
to less burdensome office spaces as a result of the economic environment in
general, and our market, in particular.
Although we have long term agreements and have had an excellent compliance
with monthly payments on part of lessees, the uncertainty prevailing during this
last period has caused a drop in demand and a reduction in the space leased by
lessees. This, in turn, has given rise to an excess supply in the market, which
reduces rental value, thus leading to permanent renegotiations of lease values.
The pesification of rental payments, the impossibility of applying indexation
clauses to the agreements, the uncertainty with respect to exchange rates and
the fear of inflation have caused lessees to be reluctant to enter into U.S.
dollar-denominated lease agreements and to be even more reluctant to enter into
Peso-denominated lease agreements without indexation clauses. Although currently
the interest in eventual leases and the relocation of tenants have considerably
increased, we have begun to implement U.S. dollar-denominated lease agreements
with a flotation band so that in the case of a downturn in the exchange rate,
the parties may renegotiate such leases by mutual agreement.
Despite this particular situation, our occupancy rate is presently at 65%,
which, given the general condition of the depressed market with high vacancy
rates, is significant. It is to be further noted that we have applied the CER
Index, a coefficient which is being negotiated between owners and tenants, upon
the nominal values agreed upon. Notwithstanding the above, there is a shortfall
of premium quality office space in Buenos Aires, and, therefore, a future
increase in economic activity might entail simultaneous growth in this business
segment.
Shopping centers
Tenant's sales have remained stable even during this economic crisis as our
subsidiary, APSA, has been able to include salable area in its portfolio. The
future maturities of APSA's lease agreements are well diversified into the
future and occupancy rates are above 92%. Nevertheless, APSA has been
111
experiencing delays in lease payments. This tendency should increase going
forward if the new economic plan restrains even more consumption.
Hotels
The hotel business in general, and our hotels in particular, will face an
extremely difficult 2002. They must compete against both the companies that have
income largely in U.S. dollars and the uncertainty and social unrest in
Argentina and which negatively affects the inflow of tourists. Moreover,
business travel will also be reduced to the extent there are fewer prospects for
foreign investments.
The hotels which have been most adversely affected by the prevailing
economic conditions are those located in the city of Buenos Aires
(Intercontinental Hotel and Sheraton Libertador Hotel), mainly due to the drop
in businessmen and tourists visiting this part of the country. Further, there
has been an increase in competition in this segment during the last few years as
several international hotel chains have decided to establish hotels in the city
of Buenos Aires. Demand is expected to continue at low levels due to the above
reasons, and the rapidity of its growth shall depend on the political and
economic developments of the next few months.
112
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
COMPOSITION OF THE BOARD OF DIRECTORS
We are managed by a board of directors which is composed of eight directors
and three alternate directors. Our directors and alternate directors are elected
for three year terms by our shareholders by a majority vote at a general
ordinary shareholders' meeting. Our directors and alternate directors may be
reelected indefinitely.
Our current board of directors was elected at a shareholders' meeting held
on November 5, 2002. Our current directors are as follows:
NAME DATE OF OCCUPATION IN IRSA DATE OF TERM CURRENT
BIRTH CURRENT EXPIRATION POSITION
(M/D/Y) APPOINTMENT HELD SINCE
-----------------------------------------------------------------------------------------------------------------
Eduardo S. Elsztain 01/26/1960 chairman, member of the executive 2000 2003 1991
committee and chief executive officer.
-----------------------------------------------------------------------------------------------------------------
M. Marcelo Mindlin 01/19/1964 first vice-chairman, executive 2001 2004 1991
vice-president, member of the
executive committee, and chief
financial officer.
-----------------------------------------------------------------------------------------------------------------
Saul Zang 12/30/1945 second vice-chairman and member of 2000 2003 1994
the executive committee.
-----------------------------------------------------------------------------------------------------------------
Ernesto M. Vines 02/05/1942 director. 2000 2003 1991
-----------------------------------------------------------------------------------------------------------------
Oscar P. Bergotto 06/19/1943 director, chief treasury officer and 2000 2003 1994
alternate member of the excutive
committee.
-----------------------------------------------------------------------------------------------------------------
Fernando A. 01/04/1961 director and chief commercial officer. 2002 2005 1999
Elsztain
-----------------------------------------------------------------------------------------------------------------
A Gabriel Juejati 05/09/1960 director and chief commercial officer. 2002 2005 1999
-----------------------------------------------------------------------------------------------------------------
Alejandro G. 31/03/1966 director 2001 2004 2001
Elsztain
-----------------------------------------------------------------------------------------------------------------
Salvador D. Bergel 04/17/1932 alternate director. 2002 2005 1996
-----------------------------------------------------------------------------------------------------------------
Juan C. Quintana 06/11/1937 alternate director. 2002 2005 1996
Teran
-----------------------------------------------------------------------------------------------------------------
Gabriel A.G. Reznik 11/18/1958 alternate director and chief 2002 2005 1999
technical officer.
The following is a brief biographical description of each member of our board of
directors:
EDUARDO S. ELSZTAIN. Mr. Elsztain studied accounting at the Universidad de
Buenos Aires. He has been engaged in the real estate business for more than
twenty years. He founded Dolphin Fund Management. He is Chairman of the Board of
Directors of APSA, SAPSA, Dolphin Fund Management, Hoteles Argentinos and Cresud
among others; he is also Vice-Chairman of Banco Hipotecario and E-Commerce
Latina S.A. He is Fernando A. Elsztain's cousin and Alejandro G. Elsztain's
brother.
113
M. MARCELO MINDLIN. Mr. Mindlin obtained a degree in economics from the
Universidad de Buenos Aires and a Master Degree in business administration at
the Centro de Estudios Macroeconomicos de Buenos Aires. He is the Vice-Chairman
of the Board of Directors of APSA, Dolphin Fund Management, Hoteles Argentinos
and Cresud; and director of Banco Hipotecario.
SAUL ZANG. Mr. Zang obtained a degree in law from the Universidad de Buenos
Aires. He is founding partner of the law firm Zang, Bergel & Vines. He is also
the Second Vice-Chairman of Cresud and Vice-Chairman of Puerto Retiro and
Fibesa; a director of APSA, Banco Hipotecario, Nuevas Fronteras S.A., Tarshop
and Palermo Invest S.A.; and alternate director of SAPSA.
ERNESTO M. VINES. Mr. Vines obtained a degree in law from the Universidad
de Buenos Aires. He is a founding partner of the law firm Zang, Bergel & Vines
and General Counsel of Banco Hipotecario. He is a director of Cresud and also an
alternate director of APSA, Inversora Bolivar and Emprendimientos Recoleta.
OSCAR P. BERGOTTO. Mr. Bergotto is the Chief Treasury Officer of IRSA since
1991. He has also worked in various other real estate companies. He is an
alternate director of APSA and Dolphin Fund Management.
FERNANDO A. ELSZTAIN. Mr. Elsztain studied architecture at the Universidad
de Buenos Aires. He has been our Chief Commercial Officer since March 1994. He
has been engaged in the real estate business as consultant and as managing
officer of a familiar real estate company. He is Chairman of the Board of
Directors of Llao Llao Resorts S.A., Palermo Invest S.A. and Nuevas Fronteras
S.A. He is also a director of APSA, Hoteles Argentinos and Tarshop; and
alternate director of Banco Hipotecario and Puerto Retiro among others. He is
the cousin of Alejandro Elsztain and Eduardo S. Elsztain.
A. GABRIEL JUEJATI. Mr. Juejati has been engaged in real estate activities
since 1975. He is one of the founding members of Gama Propiedades, an Argentine
real estate brokerage company. He is Chairman of Shopping Neuquen, Fibesa,
Tarshop and Emprendimientos Recoleta; he is Executive Vice-Chairman of APSA and
Vice-Chairman of SAPSA. He is also a director of Brazil Realty, Nuevas Fronteras
S.A. and Altocity.Com among others.
ALEJANDRO G. ELSZTAIN. Mr. Elsztain obtained a degree in agricultural
engineering from the Universidad de Buenos Aires. He is Chairman of Inversiones
Ganaderas and director of APSA and Cresud. He is the brother of our Chairman
Eduardo S. Elsztain and is the cousin of our Director, Fernando A. Elsztain.
SALVADOR D. BERGEL. Mr. Bergel obtained a degree in law and a Ph.D. in law
from the Universidad del Litoral. He is a founding partner of the law firm of
Zang, Bergel & Vines and a consultant to Repsol YPF S.A. He is also an alternate
director of Cresud.
JUAN C. QUINTANA TERAN. Mr. Quintana Teran obtained a degree in law from
the Universidad de Buenos Aires. He is a consultant of the law firm Zang, Bergel
& Vines. He has been Chairman and Judge of the National Court of Appeals of the
city of Buenos Aires dealing in commercial matters. He is an alternate director
of Cresud, APSA, Banco Hipotecario and Nuevas Fronteras S.A.
GABRIEL A. G. REZNIK. Mr. Reznik obtained a degree in civil engineering
from the Universidad de Buenos Aires. He has been working for IRSA since 1992.
He formerly worked for an independent construction company in Argentina. He is a
director of APSA; Emprendimientos Recoleta, Inversora Bolivar, Puerto Retiro and
Nuevas Fronteras S.A. and alternate director of Banco Hipotecario among others.
EMPLOYMENT CONTRACTS WITH OUR DIRECTORS
We do not have any employment contracts with our directors, except for
Messrs Elsztain, Mindlin, Zang and Bergotto, as disclosed further under the
"Compensation" caption.
114
EXECUTIVE COMMITTEE
Pursuant to our bylaws, our day-to-day business is managed by an executive
committee consisting of five directors among which, there should be the
chairman, first vice-chairman and second vice-chairman of the board of
directors. An alternate member, also selected from the board of directors,
serves on the executive committee in the event of a vacancy. As a result of the
resignation of Enrique A. Antonini as member of the board of directors and of
the executive committee, Mr. Oscar P. Bergotto who was an alternate member
assume as member of the executive committee. Therefore, the current members of
the Executive Committee are Messrs. Eduardo S. Elsztain, M. Marcelo Mindlin,
Saul Zang, and Mr. Oscar Bergotto.
The executive committee is responsible for the management of the day to day
business delegated by the board of directors in accordance with applicable law
and our bylaws. Our bbylaws authorize the executive committee to:
o designate the managers and establish the duties and compensation of
such managers;
o grant and revoke powers of attorney on behalf of us;
o hire, discipline and fire personnel and determine wages, salaries and
compensation of personnel;
o enter into contracts related to our business;
o manage our assets;
o enter into loan agreements for our business and set up liens to secure
our obligations; and
o perform any other acts necessary to manage our day-to-day business.
SUPERVISORY COMMITTEE
COMPOSITION OF THE SUPERVISORY COMMITTEE
The supervisory committee (Comision Fiscalizadora) is responsible for
reviewing and supervising our administration and affairs, and verifying
compliance with the bylaws and the resolutions adopted at shareholders'
meetings. The members of the supervisory committee, the syndics, are appointed
at the annual general ordinary shareholders' meeting for a term of one year. The
supervisory committee is composed of 3 syndics and 3 alternate syndics.
INFORMATION ABOUT MEMBERS OF THE SUPERVISORY COMMITTEE
The following table shows information about the Members of our Supervisory
Committee, who were elected in the annual general ordinary shareholders' meeting
held on November 5, 2002:
DATE OF OCCUPATION IN IRSA CURRENT
NAME AND BIRTH (M/D/Y) POSITION HELD
POSITION SINCE
--------------------------------------------------------------------------------------------------------
Martin Barbafina 09/03/1965 syndic. 1997
--------------------------------------------------------------------------------------------------------
Jose D. Abelovich 07/20/1956 syndic. 1992
--------------------------------------------------------------------------------------------------------
Marcelo H. Fuxman 11/30/1955 syndic. 1992
--------------------------------------------------------------------------------------------------------
Corina I. Pando 12/26/1952 alternate syndic. 2002
--------------------------------------------------------------------------------------------------------
Diego Niebuhr 02/10/1953 alternate syndic. 2002
--------------------------------------------------------------------------------------------------------
Carlos A. Rebay 05/06/1949 alternate syndic. 1993
Set forth below is a brief biographical description of each member of our
supervisory committee.
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MARTIN BARBAFINA. Mr. Barbafina obtained a degree in accounting from the
Universidad Catolica Argentina. He is a partner of PricewaterhouseCoopers,
Buenos Aires, Argentina. He is also a member of the supervisory committee of
APSA, Cresud, Metrovias S.A. and Grupo Concesionario del Oeste, among others.
JOSE D. ABELOVICH. Mr. Abelovich obtained a degree in accounting from the
Universidad de Buenos Aires. He is a founding member and partner of Abelovich,
Polano and Associates/SC International, a public accounting firm in Argentina.
Formerly, he had been a manager of Harteneck, Lopez y
Cia/PricewaterhouseCoopers, Buenos Aires, Argentina and has served as a senior
advisor in Argentina for the United Nations and the World Bank. He is a member
of the supervisory commitees of APSA, SAPSA, Hoteles Argentinos and Inversora
Bolivar.
MARCELO H. FUXMAN. Mr. Fuxman obtained a degree in accounting from the
Universidad de Buenos Aires. He is a partner of Abelovich, Polano and
Associates/SC International, a public accounting firm in Argentina. He is also a
member of the supervisory committee of APSA, SAPSA and Inversora Bolivar.
CORINA I. PANDO. Mrs Pando obtained a degree in accounting from the
Universidad de Buenos Aires. She is a partner of of PricewaterhouseCoopers,
Buenos Aires, Argentina. She is also a member of the supervisory committee of
Ford Argentina S.A., Unilever Argentina S.A. and Massalin Particulares S.A.
DIEGO NIEBUHR. Mr Niebuhr obtained a degree in accounting from the
Universidad de Buenos Aires. He is a partner of of PricewaterhouseCoopers,
Buenos Aires, Argentina. He is also a member of the supervisory committee of
Cresud, Commercial Union S.A., Ford Credit Cia Financiera S.A., Nutricia Bago
S.A., Ace Seguros and Epson Argentina S.A.
CARLOS A. REBAY. Mr. Rebay obtained a degree in accounting and a degree in
administration from the Universidad Argentina de la Empresa. He is a partner of
PricewaterhouseCoopers, Buenos Aires, Argentina. He is also a member of the
supervisory committees of Massalin Particulares S.A., Hart S.A., Tapiales S.A.
and AT&T Argentina S.A.
SENIOR MANAGEMENT
APPOINTMENT OF THE SENIOR MANAGEMENT
The board of directors appoints and removes the senior management. The
senior management performs its duties in accordance with the instructions of the
board of directors.
INFORMATION ABOUT SENIOR MANAGEMENT
The following table shows information about our current Senior Management:
NAME DATE OF BIRTH POSITION CURRENT POSITION
(M/D/Y) HELD SINCE
------------------------------- ---------------- ---------------------------- --------------------
Eduardo S. Elsztain 01/26/1960 Chief Executive Officer 1991
M. Marcelo Mindlin 01/19/1964 Executive Vice-President and 1991 and 2001
Chief Financial Officer
Gabriel A. G. Reznik 11/18/1958 Chief Technical Officer 1992
A. Gabriel Juejati 05/09/1960 Chief Commercial Officer 1994
Fernando A. Elsztain 01/04/1961 Chief Commercial Officer 1994
Oscar P. Bergotto 06/19/1943 Chief Treasury Officer 1991
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B. COMPENSATION
COMPENSATION TO DIRECTORS AND SUPERVISORY COMMITTEE
Under Argentine law, if the compensation of the members of the Board of
Directors and the supervisory committee is not established in the bbylaws of a
company, it should be determined by the shareholders meeting. The maximum amount
of total compensation of the members of the board of directors and the
supervisory committee, including compensation for technical or administrative
permanent activities, cannot exceed 25% of the earnings of the Company. That
amount should be limited to 5% when there is no distribution of dividends to
shareholders, and will be increased proportionally to the distribution.
When one or more directors perform special commissions or technical or
administrative activities, and there are no earnings to distribute, or they are
reduced, the shareholders meeting may approve compensation in excess of the
above mentioned limits. The compensation of our directors for each fiscal year
is determined pursuant to the Argentine corporations law, taking into
consideration if the directors perform technical or administrative activities
and our fiscal year's results. Once the amounts are determined, they are
considered by the shareholders meeting.
Provisions have been made for compensations of the members of the board of
directors for the fiscal year ended 2002, for an amount of Ps. 979,885 as
approved by the shareholders meeting held on November 5, 2002. The members of
the supervisory committee renounced to collect their fees for the fiscal year
ended 2002.
COMPENSATION TO SENIOR MANAGEMENT.
We pay our senior management pursuant to a fixed amount established taking
into consideration their background, capacity and experience as well as an
annual bonus which varies according to their individual performance and our
overall results.
The aggregate cash compensation of our senior management for the fiscal
year ended 2002, was Ps. 1,770,187.
EXECUTIVE EMPLOYMENT AGREEMENTS
On October 30, 1997, our shareholders authorized us to enter into Master
Executive Employment Agreements with Eduardo S. Elsztain, M. Marcelo Mindlin,
Saul Zang and Oscar P. Bergotto. The Employment Agreements were executed on
December 27, 1997 and our shareholders approved their subscription at an
extraordinary shareholders meeting held on April 7, 1998.
Pursuant to the Employment Agreements, Messrs. Elsztain, Mindlin, Zang and
Bergotto will serve in their current capacity as director or senior manager; and
are restricted from participating in real estate activities in Argentina that
are in the same line of our business.
Under this employment agreements, Messrs. Elsztain, Mindlin, Zang and
Bergotto are entitled to receive from us annual compensation in the aggregate of
approximately Ps. 750,000, subject to an annual 4% increase.
The initial term of this employment agreements is seven years; however, the
agreements may be terminated prior to their expiration by us or the relevant
executive. If we terminate the employment agreements without cause, we will be
liable to the relevant executive for two years of compensation.
MANAGEMENT OWNERSHIP PLAN
On October 30, 1997 our shareholders authorized us to enter into a
management ownership plan with eight executive officers (the "Beneficiaries"),
pursuant to which the Beneficiaries were granted the right to purchase up to 24
million shares of common stock (the "Participation Shares"), at a purchase price
equal to Ps. 1 per share, subject to the implementation of an Equity
Participation Agreement ("EPA"). Under Argentine Law, we established a special
purpose trust in this connection (the "Trust").
117
The Beneficiaries were required to purchase the Participation Shares
available, if any, within 24 months of any capital increase. The Trust has an
original term of six years. According to the terms of the management ownership
plan and the Trust, Beneficiaries are not entitled to receive any distributions
(either in the form of shares, cash or other) from the Trust during its term,
although, Beneficiaries are allowed to cause the Trust to sell their designated
shares of common stock held by the Trust in certain cases. In addition, we were
not allowed to grant any loans or otherwise assist the Beneficiaries in
financing the purchase of the Participation Shares. The Trust will release the
shares to the Beneficiaries on the sixth anniversary of the inception of the
Trust on a pro rata basis.
On April 7, 1998, our shareholders, at an extraordinary shareholders'
meeting, approved a capital increase of 24 million shares to permit the
Beneficiaries to purchase all of the Participation Shares to which they were
entitled under the EPA. As of June 30, 1998, the EPA had not yet been
implemented. On October 1, 1998, we issued 21,090,024 shares to be subscribed by
the Beneficiaries and, on August 31, 1999, we and the Beneficiaries entered into
a Subscription Agreement pursuant to which the Beneficiaries purchased the
abovementioned amount of shares at Ps. 1 per share, in the following
proportions: Eduardo S. Elsztain, 56.66%; M. Marcelo Mindlin, 10.00%; Saul Zang,
5.00%; Ricardo Torres, 6.67%; A. Gabriel Juejati, 6.67%; Gabriel A. G. Reznik,
5.00%; Fernando A. Elsztain, 6.67%; and Oscar P. Bergotto, 3.33%.
On May 31, 2001, we entered into a Confidential Separation Agreement and
General Release (the "Agreement") with Ricardo Torres, our former Chief
Financial Officer, pursuant to which we and Ricardo Torres set forth our mutual
agreement with respect to all matters relating to the Ricardo Torres's
resignation and cessation of employment and the Ricardo Torres's release of
claims upon the terms set forth therein. In consideration of the mutual promises
and agreements, we and Mr. Torres agreed that Mr Torres would resign as chief
financial officer, we would pay Mr. Torres a lump sum cash amount equal to Ps.
125,447 and would also be entitled to continued coverage for him and his
dependants under our medical and dental plans for a period of up to six months
following his termination.
As the result of the sale and reallocation of Mr. Torres' shares in the
trust, the interests of Mr. Eduardo S. Elsztain and Mr. Saul Zang in the shares
in the trust increased to 61.66% and 6.67%, respectively.
According to the terms of the Trust, on October, 2002 were sold 7,718,701
shares of the Beneficiaries. As a result, to date there are only 111,575 shares
remaining in hands of the Beneficiaries.
BENEFIT PLANS
Currently there are no variable compensations; no plans providing for
pension, retirement; nor any other kind of compensation or remuneration that the
ones described for the members of the board of directors, supervisory committee
and senior management.
C. BOARD PRACTICES
BENEFITS UPON TERMINATION OF EMPLOYMENT
Under the Executive Employment Agreements entered into with Messrs. Eduardo
S. Elsztain, M. Marcelo Mindlin, Saul Zang and Oscar P. Bergotto, if we
terminate the Executive Employment Agreements without cause, we will be liable
to the relevant executive for two years of compensation.
AUDIT COMMITTEE AND REMUNERATION COMMITTEE
There is no Audit or Remuneration Committee.
D. EMPLOYEES
As of October 31, 2002, we had 1,628 employees. Our employees are not
represented by any union or other collective bargaining organization except for
our Hotel's workers, whom are members of a union. We have never experienced a
work stoppage. We believe that our relations with our employees are good.
118
The following table sets forth the number of employees in our various
businesses at October 31, 2002:
BRAZILIAN
ARGENTINE VENEZUELAN REAL SHOPPING TELECOMMU- CREDIT TOTAL
REAL ESTATE REAL ESTATE ESTATE CENTERS HOTELS NICATION CARD STAFF
----------- ----------- ---------- --------- -------- ------------ -------- --------
As of June 30, 1999.. 213 121 28 761 774 0 203 2,100
As of June 30, 2000.. 186 118 34 750 714 43 210 2,055
As of June 30, 2001.. 169 0 33 663 660 36 312 1,873
As of June 30, 2002.. 150 0 0 600 618 45 226 1,639
As of October 31, 2002 151 0 0 602 610 45 220 1,628
The decrease in the number of our employees from June 30, 2000, to June 30,
2001, was due to outsourcing programs. The decrease from June 30, 2001, to June
30, 2002, was due to reorganization programs. As of October 31, 2002, we also
had 150 temporary employees working at the shopping centers and 99 working in
the hotels.
E. SHARE OWNERSHIP
SHARE OWNERSHIP OF DIRECTORS, MEMBERS OF THE EXECUTIVE COMMITTEE, MEMBERS
OF THE SUPERVISORY COMMITTEE AND SENIOR MANAGEMENT.
The following table sets forth the amount and percentage of our shares
beneficially owned by our directors, members of the executive committee, senior
management and members of the supervisory committee as of October 31, 2002
.
NAME SHARE OWNERSHIP
---- ---------------
NUMBER OF SHARES PERCENTAGE(*)
---------------- -------------
Eduardo S. Elsztain......................... 64,578,044(1) 31.14
M. Marcelo Mindlin.......................... 814,177(2) 0.39
Saul Zang................................... 498,491(3) 0.24
Oscar P. Bergotto........................... 3,716(4) 0.00
Fernando A. Elsztain........................ 7,442(5) 0.00
A Gabriel Juejati........................... 7,442 (6) 0.00
Gabriel A.G. Reznik......................... 5,579(7) 0.00
Alejandro G. Elsztain....................... 29,084(8) 0.01
(*) The percentages have been calculated assuming that as of October 31,
2002 there were 207,411,988 outstanding shares because 4,587,285 were treasury
shares.
(1) Includes (i) 15,582,057 shares of our common stock owned by Dolphin
Fund, plc, an investment fund in which the principal investment manager is
Dolphin Fund Management, a company where Mr. Eduardo S. Elsztain has a
controlling interest; (ii) 111,575 shares of common stock purchased pursuant to
the management stock ownership plan of which 68,797 shares are held by a trust
for the benefit of Mr. Eduardo S. Elsztain; (iii) 43,491,866 shares of common
stock owned by Cresud; and (iv) 5,392,546 shares directly owned. Mr. Eduardo S.
Elsztain by reason of his position with Cresud, may be deemed to own all of our
common stock shares held for the account of Cresud. The number of shares
beneficially owned is 255,016,421 assuming full conversion of the notes and
warrants issued pursuant to 53,046,610 units.
(2) Includes (i) 803,020 shares directly owned; and (ii) 11,157 shares of
common stock purchased pursuant to the management stock ownership plan which are
held by a trust for the benefit of Mr. M. Marcelo Mindlin. M. Marcelo Mindlin
also owns a non-controlling 20% of Dolphin Fund Management's Common Stock.
The number of shares beneficially owned is 1,891,183 assuming full conversion of
the notes and warrants issued pursuant to 300,000 units.
119
(3) Includes 7,442 shares of common stock purchased pursuant to the
management stock ownership plan which are held by a trust for the benefit of Mr.
Saul Zang and 491,049 shares directly owned. The number of shares beneficially
owned is 947,243 assuming full conversion of the notes and warrants issued
pursuant to 125,000 units.
(4) Common stock purchased pursuant to the management stock ownership plan
which are held by a trust for the benefit of Mr. Oscar P. Bergotto.
(5) Common stock purchased pursuant to the management stock ownership plan
which are held by a trust for the benefit of Mr. Fernando A. Elsztain.
(6) Common stock purchased pursuant to the management stock ownership plan
which are held by a trust for the benefit of Mr. A. Gabriel Juejati.
(7) Common stock purchased pursuant to the management stock ownership plan
which are held by a trust for the benefit of Mr. Gabriel A. G. Reznik.
(8) Directly owned.
ITEM 7. MAJOR SHAREHOLDERS AND TRANSACTIONS
A. MAJOR SHAREHOLDERS
INFORMATION ABOUT MAJOR SHAREHOLDERS
SHARE OWNERSHIP
The following table shows, as of October 31, 2002, the information known by
us, regarding the beneficial ownership of our outstanding common stock by:
o each person known to us to be beneficial owner of more than 5% of our
outstanding common shares.
o each of our named executive officers;
o each director; and
o all current directors and executive officers as a group.
NUMBER OF SHARES
SHAREHOLDER(S) BENEFICIALLY OWNED %(1)
-------------- ------------------ -----------
Eduardo S. Elsztain..................................... 64,578,044(2) 31.14
M. Marcelo Mindlin .................................... 814,177 0.39
Saul Zang............................................... 498,491 0.24
Oscar P. Bergotto....................................... 3,716 0.00
Fernando A. Elsztain.................................... 7,442 0.00
A Gabriel Juejati....................................... 7,442 0.00
Gabriel A.G.Reznik...................................... 5,579 0.00
Alejandro G. Elsztain................................... 29,084 0.01
------ ----
Directors and executive officers in
the aggregate(3)........................................ 65,901,197 31.77
Pension Funds in the aggregate(4)....................... 33,933,357 16.36
Templeton Investment Counsel............................ 34,707,310 16.7
Templeton World Fund.................................... 19,787,570 9.54
The Peabody Group....................................... 10,400,740 5.06
(1) The percentages have been calculated assuming that as of October 31, 2002
there were 207,411,988 outstanding shares because 4,587,285 were treasury
shares.
(2) Includes (i) 15,582,057 shares of our common stock owned by Dolphin Fund,
plc, an investment fund in which the principal investment manager is
Dolphin Fund Management, a company where Mr. Eduardo S. Elsztain has a
controlling interest; (ii) 111,575 shares of common stock purchased
pursuant to the management stock ownership plan of which 68,797 shares are
held by a trust for
120
the benefit of Mr. Eduardo S. Elsztain; (iii) 43,491,866 shares of common
stock owned by Cresud ; and (iv) 5,392,546 shares directly owned. Mr.
Eduardo S. Elsztain by reason of his position with Cresud, may be deemed to
own all of our common stock shares held for the account of Cresud. The
number of shares beneficially owned is 255,016,421 assuming full conversion
of the notes and warrants issued pursuant to 53,046,610 units.
(3) Directors and executive officers in the aggregate is not a sum of all
director's ownership individually, as shares from the Management Stock
Ownership Plan are considered only for Eduardo S. Elsztain who is the
beneficial owner of all of them.
(4) Based on estimations from the Superintencia de AFJP. None of the pension
funds own more than 5.0% of our common stock. The highest percentage owners
of the shares are Origenes AFJP with 3.46%, Consolidar with 3.77%, Siembra
with 2.63%, and Maxima with 1.99%.
CHANGES IN SHARE OWNERSHIP
SHARE OWNERSHIP AS OF JUNE 30,
------------------------------
SHAREHOLDER 2002 2001 2000 1999
----------- ---- ---- ---- ----
Eduardo S. Elsztain.................... 31.93% 28.76% 15.55% 14.36%
Cresud................................. 19.85% 14.91% 0.00% 0.00%
Templeton Investment Counsel........... 16.76% 4.34% 4.08% 4.42%
Templeton World Fund................... 9.54% 6.69% 4.99% 5.12%
The Peabody Group...................... 5.06% 5.09% 0.00% 0.00%
Our major shareholders do not have different voting rights.
There are no arrangements that may at a subsequent date result in a change
in control.
In November 2002, Eduardo S. Elsztain sold 5,392,546 shares to Cresud.
Except for the above, we are not aware of the existence of other
shareholders owning more than 5% of our capital stock. The voting rights of our
principal shareholders are not different from those of the remaining
shareholders.
DIFFERENCES IN VOTING RIGHTS
Our major shareholders do not have different voting rights.
ARRANGEMENTS FOR CHANGE IN CONTROL
There are no arrangements that may at a subsequent date result in a change
in control.
SECURITIES HELD IN THE HOST COUNTRY
As of October 31, 2002, there were approximately 11,880,420 American
Depositary Shares (representing 118,804,200 of our common shares, or 57.2% of
all of our outstanding shares) held in United States. Additionally, as of such
date, there were approximately 8 registered holders represented by American
Depositary Shares in the United States.
On October 15, 2002, we initiated a preemptive rights offering of rights to
subscribe for 100,000,000 units consisting of US$100.0 million of 8% convertible
notes due 2007 and non-detachable warrants to purchase shares of our common
stock. The convertible notes may be converted into shares of our common stock
after December 13, 2002 and the rights offering to holders of our common shares
and GDSs expired on November 13, 2002. Existing shareholders have subscribed
through the exercise of their preemptive rights for US$ 66.7 million and they
have exercised their accretion rights for US$ 10.7 million, amounting to a total
of US$ 77.4 million. During the allocation of the remainder new investors have
subscribed the remaining 22.6 million units completing the US$ 100 million
offering.
At October 31, 2002 our directors and senior officers controlled, directly
or indirectly, approximately 31.7% of our common shares. As a result, these
shareholders have, and will continue to have, significant influence on the
election of our directors and the outcome of any action requiring shareholder
approval. Moreover, certain of our directors and senior managers have exercised
their
121
preemptive rights and accretion rights to subscribe for 53,471,610 units offered
by us. If our directors and senior managers convert all convertible notes and
exercise all warrants so acquired and none of our other shareholders convert
their notes, they will control, directly or indirectly, 64.6% of our common
stock.
B. RELATED PARTY TRANSACTIONS
IRSA MANAGEMENT OWNERSHIP PLAN
On October 30, 1997 our shareholders authorized us to enter into a
management ownership plan with certain executive officers, the content and
details of which have been previously disclosed in this document under the
"Compensation" caption.
APSA LOAN
On July 20, 2001, our board of directors approved to grant APSA several
loans to finance transactions related to its swap agreement. On February 8, 2002
we and Parque Arauco signed subordination agreements subordinating the repayment
of our respective loans to the payment of APSA's senior notes. The interest rate
on such loans till February 1, 2002 was the lesser of (i) variable cost of money
for us in operations of up to 30 days and (ii) the average of the last five
BADLAR rates for U.S. dollar transactions, plus 200 annual nominal basis points
for operations in foreign and local currency according to market conditions. The
interest rate on such loans from February 1, 2002 till August 20, 2002 was
10.23% plus an inflation adjustment. At August 20, 2002, the outstanding
principal of these loans was Ps. 43.6 million.
The bondholders of the series A2 and series B1-B2 senior secured notes due
2005 for the nominal value of Ps. 40.0 million and Ps. 80.0 million,
respectively, gathered in two meetings held on January 16 and 24, 2002, and
unanimously decided to postpone the payment of the series A2 and B1-B2
convertible notes that should have been made on January 13, 2002. Such
postponement was granted by the bondholders under the condition that we execute
with Citibank N.A., Buenos Aires Branch, as calculation and administrative agent
of the convertible notes, subordination agreement of our right to receive from
APSA and SAPSA the payment of the principal and interest of the loan agreements
(the "Subordination Agreement"). On February 4, 2002 our board of directors
approved the execution of the Subordination Agreement with APSA.
In May and July, 2002 we advanced APSA a US$ 10.1 million loan that was
applied on August 20, 2002 to our subscription for US$ 27.2 million of APSA's
convertible notes. From May, 2002 to August 20, 2002 the interest rate on such
loans was 10%.
WE HAVE SUBSCRIBED FOR CONVERTIBLE NOTES ISSUED BY APSA.
In August 2002, we subscribed for US$ 27.2 million convertible notes issued
by APSA. The payment was made by cancelling a loan APSA has borrowed from us for
US$ 22.3 million and of US$4.9 million in cash.
At October 31, 2002, we owned 49.8% of APSA's common shares. Immediately
following APSA's offering (assuming we exercise our conversion rights of all of
our convertible notes and no exercise of such rights by any of APSA's other
bondholders), we would own 77.2% of APSA's common shares. In the case all
shareholders exercise their conversion rights and we exercise them as well, we
would own 53.0% of APSA's common stock.
ISSUE OF CONVERTIBLE NOTES BY CRESUD.
On October 15, 2002, Cresud initiated a preemptive rights offering to
subscribe for 50,000,000 units consisting of US$ 50.0 million of 8% convertible
notes due 2007 and non-detachable warrants to purchase shares of its common
stock. The offering was fully subscribed and the funds have already been
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received by Cresud. Proceeds of the offering were applied to subscribe US$ 50.0
million of our convertible notes.
LEASE OF OUR HEADQUARTERS
We sublease a portion of our headquarters from Dolphin Fund Management
pursuant to two lease agreements dated June 30, 1997. We pay monthly rents of
Ps. 5,500 and Ps. 6,415. Both contracts expire on June 30, 2007. Dolphin Fund
Management leases such offices both from Elsztain e Hijos S.C.A., a company
controlled by relatives of Eduardo S. Elsztain, our chairman, and also from
Hamonet S.A., a company controlled by Fernando A. Elsztain, our chief commercial
officer, and certain of his relatives. Rental expenses incurred under these
leases for of the fiscal years ended June 30, 2002 and 2001 amounted to Ps.
244.000 and Ps. 280.000, respectively, adjusted by inflation.
CORPORATE SERVICES RENDERED TO APSA AND CRESUD
In order to reduce administrative expenses, and to achieve a more efficient
allocation of corporate resources, as of June 30, 2002 we and APSA provide
corporate services in the areas of institutional relations, finance and human
resources to ourselves and our affiliate Cresud.
In the future and in order to continue with our policy of achieving a more
efficient allocation of corporate resources, we may extend the areas in which we
share corporate services with APSA and Cresud.
Our chairman and vice-chairman are also chairman and vice-chairman of
Cresud.
AGREEMENT FOR THE COMMERCIALIZATION OF TORRES DE ABASTO, WITH APSA
On May 1, 2000, we entered into an agreement with APSA for the
commercialization of the units of Torres de Abasto. The services rendered by us
include:
o commercial operation services such as implementation of sale and lease
strategy pursuant to the prices, terms and conditions set by APSA;
o selection of suppliers and hire of advertising agencies, real estate
brokers, notary public and appraisers; and
o coordination of the subscription of sale agreements, deeds of sale and
lease agreements according to the terms set by APSA.
The monthly fee for the commercialization services is Ps. 2,500 plus value
added tax, and an additional fee of:
o sales. 1% plus value added tax, of the sale price of each unit; or
o leases: 2% plus value added tax, of the total lease price of each
unit.
Since the commercialization of the units is completed, the agreement
between both companies has expired.
We believe that the terms and conditions of this agreement were consistent
in all material respects with those prevailing in the market at the relevant
time for similar agreements between unaffiliated parties.
LEASE OF OFFICE PROPERTY
We leased office space to Cresud S.A.C.I.F. y A. until December 2001.
Eduardo S. Elsztain, Marcelo Mindlin and Saul Zang, chairman, first
vice-chairman and second vice-chairman, respectively, of the board of directors
as well as our shareholders, are directors of Cresud. Mr. Eduardo S. Elsztain is
also shareholder of Cresud. Rent income is recognized ratably over the lease
term. Rent income for each of the
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fiscal years ended June 30, 2002 and 2001 amounted to Ps. 147,000 and Ps.
329,000 respectively adjusted by inflation.We have entered into lease agreements
for offices located in the Costero, a building located in Puerto Madero with
Altocity.Com, Alternativa Gratis S.A. and Dolphin Interventures S.A. The first
agreement expires in May 2003 and the second in May 2004. Both of them may be
extended by the lessees for up to seven additional consecutive twelve-month
periods. The leases are for monthly rents of Ps. 9,523 and of Ps. 9,950,
respectively.
We lease to Tarshop the seventh floor of our property located in Suipacha
664. The total monthly rent is Ps. 3,650 and the lease expires on August 10,
2004.
LEGAL SERVICES
During the fiscal years ended June 30 2002, 2001 and 2000, we paid the law
firm Zang, Bergel & Vines an aggregate amount of approximately Ps. 470,818, Ps.
928,484 and Ps. 970,997 as payment for legal services. Saul Zang and Ernesto M.
Vines, directors of the Company, and Salvador D. Bergel and Juan C. Quintana
Teran, alternate directors of the Company, are partners of the law firm.
MANAGEMENT CONTRACT
Prior to the execution of the Executive Employment Agreements and the non
contributory stock ownership plan described above, Dolphin Fund Management
(formerly Consultores Asset Management) provided real estate investment-advisory
services to us on an exclusive basis under a Consulting Agreement (the
"Consulting Agreement"). The Consulting Agreement was terminated effective July
1, 1998 without liability to us, subject to the execution of the definitive
employment agreements and non contributory stock ownership plan. Pursuant to the
terms of the Consulting Agreement, Dolphin Fund Management had agreed to
(i) advise us with respect to capital investments in Argentine real estate
operations, including the selection of properties,
(ii) act as intermediary in our real estate transactions,
(iii) administer our properties and other assets and,
(iv) advise us with respect to securities investments.
Dolphin Fund Management also had agreed not to engage in real estate
projects during the term of the Consulting Agreement unless we first decided not
to pursue such projects. For its services under the Consulting Agreement, we
paid the Dolphin Fund Management an annual fee equal to 10% of our annual
after-tax net income (calculated before the payment of such fee). We also
reimbursed administrative expenses incurred by Dolphin Fund Management in
performing its duties under the Consulting Agreement. We recorded consulting
expense under Argentine GAAP of Ps. 8.0 million and Ps. 6.8 million for the
years ended June 30, 1998 and 1997, respectively. No consulting expense was
recorded during the years ended June 30, 2001, 2000 and 1999.
INVESTMENT FUND
Since 1996, we have investments in Dolphin Fund Plc, an open-ended
investment fund which is related to our directors. These investments are carried
at market value as of year-end. Unrealized gains and losses relating to
investment funds are included in financing results, net, in the consolidated
statements of income. The amounts relating to our net gain on holding Dolphin
Fund investments for the years ended June 30, 2002, 2001 and 2000 are Ps. 25.1
million, Ps.2.9 million and Ps. 1.6 million, respectively.
DONATIONS TO FUNDACION IRSA AND MUSEO DE LOS NINOS
During the years ended June 30, 2002, 2001, and 2000, we made donations to
two not-for-profit organizations, namely Fundacion IRSA and Fundacion Museo de
los Ninos, for a total amount of Ps. 0.08
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million, Ps. 1.9 million and Ps. 1.2 million, respectively. Eduardo S. Elsztain
is the President of these organizations.
PURCHASE OF OUR SHARES BY CRESUD
During the year ended June 30, 2002, Cresud has invested in our shares for
a total amount of Ps. 111.8 million, resulting in a 19.85% ownership. Eduardo S.
Elsztain, M. Marcelo Mindlin and Saul Zang, are chairman, first vice-chairman
and second vice-chairman, respectively, of our board of directors as well as our
shareholders. They are also chairman, first vice-chairman and second
vice-chairman, respectively, of the board of directors of Cresud. Mr. Eduardo S.
Elsztain and Saul Zang are also shareholders of Cresud.
INVESTMENT IN BANCO HIPOTECARIO
As of June 30, 2002, our Company owns 5.73 % of Banco Hipotecario S.A.
Additionally, as of the same date we own 2,697,500 options to purchase Banco
Hipotecario's ADS. Each option represents the right to purchase 100 ADS's at an
exercise price of Ps. 10.4 per ADS. These options are exercisable through
February 2, 2004. Some of our Company's directors are also directors of Banco
Hipotecario.
C. INTERESTS OF EXPERTS AND COUNSEL
This item is not applicable
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 19 for our Financial Statements.
LEGAL OR ARBITRATION PROCEEDINGS
The following, is a description of the material legal proceedings to which
we are a party. We are not engaged in any other material litigation or
arbitration and no other material litigation or claim is known to us to be
pending or threatened against us or our subsidiaries. Nevertheless, we may be
involved in other litigation from time to time in the ordinary course of
business.
IRSA
PUERTO RETIRO
On November 18, 1997, through the acquisition of the capital stock of the
Old Alto Palermo (currently Inversora Bolivar S.A.), Perez Companc's real estate
subsidiary, we indirectly acquired 35.2% capital stock of Puerto Retiro. The Old
Alto Palermo had purchased such shares of Puerto Retiro from Redona Investments
Ltd. N.V. in 1996. In addition, pursuant to the execution of several stock
purchase agreements in May and June 1999, we -through Inversora Bolivar S.A.-
increased our interest in Puerto Retiro up to 50% of its capital stock.
On April 18, 2000 Puerto Retiro received notice of a complaint filed by the
Federal Government, through the Ministry of Defense, with the purpose of
requiring the extension of the bankruptcy of Inversora Darsena Norte S.A.
("Indarsa"). Concurrently with the complaint, at the request of plaintiff, the
bankruptcy court granted an order restraining the ability of Puerto Retiro to
sell or dispose in any manner the real estate property purchased from Tandanor
S.A. ("Tandanor").
Indarsa had purchased 90% of the capital stock of Tandanor, a formerly
state owned company privatized in 1991 engaged in the shipyard industry which
owned a large piece of land near Puerto Madero of approximately 8 hectares,
divided into two spaces: Planta 1 and 2. Such property did not have (and still
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does not have) approved zoning established in the Urban Planning Code and
therefore no project can be currently developed.
After the purchase of Tandanor by Indarsa, Tandanor sold to Puerto Retiro,
"Planta 1" for a sum of US$ 18 million, pursuant to a valuation performed by
J.L. Ramos, a well known real estate brokerage firm in Argentina. The deed was
executed in June, 1993.
Indarsa did not comply with the payment of the outstanding price for the
purchase of the capital stock of Tandanor, and therefore the Ministry of Defense
requested the bankruptcy of Indarsa. Since the only asset of Indarsa were the
shareholdings in Tandanor, the Ministry of Defense is pursuing to extend the
bankruptcy to other companies or individuals which, according to its view, acted
as an economic group, and therefore, requested the extension of the bankruptcy
to Puerto Retiro which acquired Planta 1 from Tandanor.
On April 18, 2001, the judicial procedure entered into trial stage.
We believe, pursuant to the advice of our legal advisors, that the
plaintiff's claim shall be rejected by the courts. However, no assurance can be
given that such decision will be obtained. If the plaintiff's claim is favored
by the court or by the court of appeals, such decision may cause a material
adverse effect in our financial situation, since all of the assets of Puerto
Retiro will be used to pay the debts incurred by Indarsa.
CLAIM BY GOLDMAN SACHS
On October 7, 2002, Goldman Sachs sent us a letter claiming that since
January 31, 2002, we have been in default under our obligations under the
amended shareholders agreement dated November 9, 2001 by virtue of, including
among other things, (i) having failed to timely repay to Goldman sachs (a) an
amount of US$ 13,134,676.63 as of November 9, 2001, plus interest; and (b) the
sum of $ 565,000 of reasonable costs plus interest; obligations which resulted
from lending funds from Palermo Invest S.A. and Inversora Bolivar S.A. to us. On
October 16, 2002 IRSA answered to Goldman sachs rejecting all the terms of the
claim.
On November 21, 2002, together with Goldman Sachs, we signed a Letter
Agreement in which we agree to cancel the US$ 16.3 million debt before November
29, 2002. The payment was done with US$ 9.0 million cash and US$ 3.1 million
face amount of APSA's convertible notes previously owned by Inversora Bolivar.
DIVIDEND POLICY
Pursuant to the Argentine law, the distribution and payment of dividends to
shareholders is valid only if they result from realized and net earnings of the
Company pursuant to an annual financial statements approved by the shareholders.
The approval, amount and payment of dividends are subject to the approval of our
Annual Ordinary Shareholders Meeting. That approval requires the affirmative
vote of the majority of the present votes with right to vote at the meeting.
Pursuant to the Law of Corporations and Section 29 of our bylaws,
liquidated and realized profits of each fiscal year shall be distributed as
follows:
o 5% to the legal reserve fund until reaching 20% of our capital stock;
o a certain amount determined at a shareholders' meeting is allocated
for the compensation of our directors and members of the supervisory
committee; and
o dividends, additional dividends to preferred shares if any, or to
optional reserve funds or contingency reserves or to a new account, or
for whatever purpose the shareholders' meeting determines are
distributed.
In the past, we paid dividends in cash and stock that averaged Ps. 0.11 per
share.
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With regard to the fiscal year ended June 30, 2001, there was a loss of Ps.
59.9 million. In order to keep adequate liquidity level, to reduce the
outstanding debt and the financial burden, we did not pay any cash dividends.
In the shareholders meeting held on November 5, 2002, the shareholders
approved the distribution of 4,587,285 treasury shares distributed pro rata
among the shareholders. Due to the Ps. 499.6 million loss, no cash dividends
were distributed.
The following table sets forth the amounts of total dividends paid on each
fully paid share common stock in respect of the year indicated. Amounts in Pesos
are presented in historical Pesos of the respective payment dates.
PAYMENTS (1)
YEAR DECLARED CASH DIVIDENDS STOCK DIVIDENDS TOTAL PER SHARE
------------- -------------- --------------- ---------------
(Pesos) (Pesos) (Pesos)
1995 0.094 0.06 0.154
1996 0.092 -- 0.092
1997 0.110 -- 0.110
1998 0.060 0.05 0.110
1999 0.076 0.04 0.116
2000 -- 0.20 0.204
2001 -- -- --
2002 -- 0.05 0.048
(1) Corresponds to per share payments. To calculate the dividends paid per GDS,
the payment per share should be multiplied by ten.
Under certain of our debt obligations, we have specific limitations
regarding the distribution of dividends. In accordance with our syndicated
credit facility for US$ 80 million, neither we nor our subsidiaries are able to
pay dividends or make any other distribution or debt or equity repurchase,
except for certain restricted subsidiary payments to us. Restricted payments can
be made only if no event of default has occurred, or would occur as a result of
such payment, and no financial covenants have been violated during the prior
calculation period. Moreover, as agreed upon the issuance of the floating rate
notes, if we do not fulfill any of our obligations, neither we nor our
subsidiaries will be able to pay dividends in cash directly or indirectly
through payments of bonds, compensation, loans, forgiveness of debt, or any
other distribution, in money or kind, to shareholders, or fees to directors,
except that our subsidiaries may distribute dividends to us, to be used to pay
off the floating rate notes.
Although our intentions are to distribute cash dividends in the future,
there can be no assurance that we will be able to do it.
B. SIGNIFICANT CHANGES
DEFAULTS, PARTIAL WAIVERS AND DEBT RESTRUCTURING
On May 24, 2000, we entered into a US$ 80 million syndicated credit
facility arranged by BankBoston N.A. Loans under this syndicated credit facility
bear interest at three-month LIBOR plus a margin of 500 basis points. Amounts
owing under the syndicated credit facility were payable in U.S. dollars.
Although final maturity on the loan agreement was on August 30, 2002, due to the
continuing effects of economic recession, the unavailability of financing
sources and the succession of recent governmental measures adversely affecting
the normal operations of the banking and payments system, we could not make the
scheduled payment on that date.
On December 18, 2000, we issued US$ 43.5 million Class 2 floating rate
notes due December 24, 2001. Proceeds from this issuance were used to repay
certain outstanding short-term indebtedness. Our floating rate notes matured in
December 2001, and we were unable to pay the principal then due. As a result of
such non-payment, in December 2001, we entered into negotiations with the
holders of our floating rate notes and to date have been able to obtain
short-term deferrals of our obligation to pay such
127
matured notes. On February 8, 2002, we agreed with our holders to replace the
floating interest rate for an annual fixed interest rate of 12%. Pursuant to the
most recent deferral, granted on October 31, 2002, the principal of and interest
on our floating rate notes were due in full on November 14, 2002 and were
further renegotiated as explained below. We also agreed with our holders on a
capitalization of the interest due on October 31, 2002. On May 15, 2002, we
repurchased from Banco Sudameris its participation in the mentioned convertible
notes for US$ 6.8 million.
The floating rate notes and the syndicated credit facility included various
restrictive covenants, which among other things, require us to meet certain
financial tests and to comply with certain other covenants, including
restrictions on incurrence of debt and liens, restrictions on mergers,
acquisitions, asset dispositions, capital contributions and repurchases of stock
and investments. As of June 30, 2002, we were not in compliance with certain of
the financial covenants under the floating rate notes and syndicated credit
facility, and a waiver had been granted by the respective holders and banks in
relation to such covenants.
After months of negotiations, we have finished the restructuring of our
debt under the US$ 80 million loan agreement and the outstanding US$ 41.2
million of our floating rate notes. On November 15 we have signed a "Refinancing
Framework Agreement" with our six bank creditors (Banca Nazionale del Lavoro
S.A., BankBoston N.A., Banco de la Ciudad de Buenos Aires, HSBC Bank Argentina
S.A., Banco Itau S.A., New York Branch and Banco de la Nacion Argentina, New
York Branch) to refinance our debt under the following scheme:
o US$ 13.6 million cash down payment reducing the principal;
o US$ 15.0 million of the 8% convertible notes due 2007 which were
recently offered by us were subscribed by BankBoston, allowing us
to cancel a portion of our old debt;
o US$ 37.4 million secured floating rate notes due 2009 with an
interest rate of 90-day LIBOR plus 200 basic points. These notes
will be secured with a first priority mortgage on some of our
real estate properties for a total value of US$ 18.7 million; and
o US$ 51.0 million unsecured credit facility due 2009. 69% of the
Facility will bear an interest rate of 90-day LIBOR plus 200
basic points while the remaining will bear a fixed step up rate
ranging from 5.5% to 6.5%.
On January 31, 2002, and on April 30, 2002 our Company did not pay to
Goldman Sachs two equal installments of US$ 6.6 million plus reasonable costs
and interest. On October 7, 2002, Goldman Sachs sent a us letter claiming that
since January 31, 2002, we have been in default under our obligations under the
amended shareholders agreement dated November 9, 2001. On November 21, 2002,
together with Goldman Sachs, we signed a Letter Agreement in which we agree to
cancel the US$ 16.3 million debt before November 29, 2002. The payment was done
with US$ 9.0 million cash and US$ 3.1 million face amount of APSA's convertible
notes previously owned by Inversora Bolivar.
Moreover, our subsidiary Hoteles Argentinos, owner of the Sheraton
Libertador Hotel, did not pay the principal installments of US$ 300.000 each,
that were due on January 26, April 29, July 29 and October 26, 2002, and the
interest installments due on July 29 and October 26, 2002, for a total amount of
US$ 315.000, under the US$ 12.0 million loan. Although Hoteles Argentinos'
Management is renegotiating its debt with its creditors, we cannot assure you
that an agreement will be reached.
ISSUE OF BONDS CONVERTIBLE INTO ORDINARY SHARES OF APSA.
On August 20, 2002, APSA ended its subscription period for the first branch
for up to US$ 50 million of bonds convertible into ordinary shares of APSA of a
Ps.0.1 nominal value each. In this sense, we have subscribed a total amount of
US$ 27.2 million of the convertible notes of APSA.
ISSUE OF NOTES CONVERTIBLE INTO COMMON SHARES OF OUR COMPANY
On October 15, 2002, we commenced the susbcription period for 100,000,000
units consisting of
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US$ 100.0 million of 8% convertible notes due 2007 and non-detachable warrants
to purchase additional shares of our common stock. The convertible notes may be
converted into shares of our common stock after December 13, 2002, and until
maturity on November 14, 2007, at the initial conversion price of US$ 0.5571 per
common share. Each warrant will be exercisable on or after conversion of the
convertible note to which it is attached at the same conversion price plus a 20%
premium (US$ 0.6686). The rights offering to holders of our common shares and
GDSs expired on November 13, 2002. Existing shareholders have subscribed through
the exercise of their preemptive rights for US$ 66.7 million and they have
exercised their accretion rights for US$ 10.7 million, adding together US$ 77.4
million. During the allocation of the remainder new investors have subscribed
the remaining 22.6 million units completing the US$ 100 million offering. The
offering was fully subscribed and the funds have already been received by the
Company. Cresud has subscribed US$ 50.0 million of our convertible notes.
We intend to use, and we partially used the proceeds of the offering to
facilitate the renegotiation or partial payment of our outstanding indebtednss,
to finance our working capital and other general corporate purposes, and to
acquire APSA's second tranche of convertible notes, if offered.
ACQUISITION OF PISCIS HOTEL
In September, 2002, we acquired the Piscis Hotel which is located in Valle
de Las Lenas , an important ski resort in Argentina. This five-star hotel was
acquired for US$ 1.4 million from Banco Rio and ICI Argentina. The building
consists of 90 rooms and 8 suites, 2 restaurants and 2 bars, a casino, a spa,
fitness facilities that include two swimming pools and a place for skis. The
hotel is managed by Badino S.A., a travel agency andhe concession expires in
March 2005.
ACQUISITION OF VALLE DE LAS LENAS
During the first quarter of fiscal year 2003, our Company acquired 30.955%
of the share ownership of and US$ 3.7 million convertible notes due October 31,
2005 of Valle de Las Lenas S.A. for US$ 2.4 million.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING
INFORMATION ON THE LISTING OF IRSA'S STOCK
STOCK EXCHANGES IN WHICH OUR SECURITIES ARE LISTED
Our common shares are listed on the Bolsa de Comercio de Buenos Aires and
our GDSs on the NYSE.
PRICE HISTORY OF OUR STOCK ON THE BOLSA DE COMERCIO DE BUENOS AIRES
Our common shares are listed and traded on the Bolsa de Comercio de Buenos
Aires under the trading symbol "IRSA". The shares began trading on the Bolsa de
Comercio de Buenos Aires on the year 1948. The following table shows, for the
periods indicated, the high and low closing sales price of our common shares on
the Bolsa de Comercio de Buenos Aires. On November 19, 2002, the closing price
for our common shares on the Bolsa de Comercio de Buenos Aires was,
approximately, Ps 1.92 per share.
FISCAL YEAR PESOS PER SHARE
HIGH LOW
--------------- --------------
2002........................................ 1.88 0.58
2001........................................ 2.23 1.30
2000........................................ 3.15 1.99
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1999....................................... 3.37 1.63
1998........................................ 4.08 2.52
1997........................................ 3.84 2.43
FISCAL QUARTER PESOS PER SHARE
HIGH LOW
--------------- -------------
2002
4th quarter................................. 1.88 1.26
3rd quarter................................. 1.45 0.76
2nd quarter................................. 0.97 0.58
1st quarter................................. 1.59 1.00
2001
4th quarter................................. 1.71 1.30
3rd quarter................................. 2.06 1.47
2nd quarter................................. 2.08 1.46
1st quarter................................. 2.23 2.06
2000
4th quarter................................. 2.84 1.99
3rd quarter................................. 3.15 2.66
2nd quarter................................. 2.95 2.45
1st quarter................................. 2.82 2.44
MONTH PESOS PER SHARE
HIGH LOW
--------------- -------------
October (FY 2003)......................... 2.30 1.96
September (FY 2003)....................... 2.25 1.47
August (FY 2003).......................... 1.70 1.47
July (FY 2003)............................ 1.72 1.57
June (FY 2002)............................ 1.87 1.49
May (FY 2002)............................. 1.88 1.65
April (FY 2002)........................... 1.7 1.45
March (FY 2002)........................... 1.45 1.26
February (FY 2002)........................ 1.27 1.00
January (FY 2002)......................... 1.03 0.76
--------------------------
Source: Bloomberg.
PRICE HISTORY OF OUR STOCK ON THE NYSE
Our Global Depositary Shares, each representing 10 common shares, are
listed and traded on the NYSE under the trading symbol "IRS". The Global
Depositary Shares began trading on the NYSE on December 20, 1994 and were issued
by the Bank of New York, Inc., acting as Global Depositary Shares Depositary. It
should not be assumed, however, that the Global Depositary Shares will actually
trade at a multiple of 10 times the price per common share. The following table
shows, for the periods indicated, the high and low closing sales price of the
Global Depositary Shares on the NYSE. On November 19, 2002, the closing price of
our Global Depositary Shares on the NYSE was US$ 5.06.
FISCAL YEAR US DOLLAR PER GDS
HIGH LOW
--------------- -------------
2002.......................................... 16 2/25 3 33/50
2001.......................................... 22 2/9 13
2000.......................................... 31 1/4 19 6/7
1999.......................................... 33 1/2 16
1998.......................................... 40 1/3 25 1/5
1997.......................................... 38 1/3 24 1/5
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FISCAL QUARTER US DOLLAR PER GDS
HIGH LOW
--------------- -------------
2002
4th quarter................................ 6 1/10 3 2/3
3rd quarter................................ 6 2/7 4 1/2
2nd quarter................................ 9 3/4 4 9/10
1st quarter................................ 16 9 4/5
2001
4th quarter................................ 17 1/9 13
3rd quarter................................ 20 1/2 14 1/2
2nd quarter................................ 20 59/64 14 1/2
1st quarter................................ 22 2/9 20 1/2
2000
4th quarter................................ 28 1/3 19 6/7
3rd quarter................................ 31 1/4 26 5/8
2nd quarter................................ 29 3/7 24 2/3
1st quarter................................ 28 24 1/3
MONTH US DOLLAR PER GDS
HIGH LOW
--------------- -------------
October (FY 2003)............................ 6 3/20 5 3/20
September (FY 2003).......................... 6 1/4 4 3/10
August (FY 2003)............................. 4 1/2 3 19/20
July (FY 2003)............................... 5 4 1/10
June (FY 2002)............................... 5 3 2/3
May (FY 2002)................................ 5 2/7 5
April (FY 2002).............................. 5 3/5 4 4/5
March (FY 2002).............................. 6 1/10 4 3/5
February (FY 2002)........................... 5 1/3 4 1/4
January (FY 2002)............................ 6 2/7 4 1/3
--------------------------
Source: Bloomberg.
B. PLAN OF DISTRIBUTION
This item is not applicable.
C. MARKETS
ARGENTINE SECURITIES MARKETS
The Comision Nacional de Valores is a separate governmental entity with
jurisdiction covering the territory of the Argentine Republic. Its main purpose
is to ensure transparency of Argentina's securities markets, to watch over the
market price formation process and to protect investors. The Comision Nacional
de Valores supervises corporations authorized to issue securities to the public,
the secondary markets where these securities are traded, and all persons and
corporations involved in any capacity in the public offering and trading of
these securities. Pension funds and insurance companies are regulated by
separate government agencies. The Argentine markets are governed generally by
Law No. 17,811, as amended, which created the Comision Nacional de Valores and
regulates stock exchanges, stockbrokers, market operations and the public
offerings of securities.
There is a relatively low level of regulation of the market for Argentine
securities and investors' activities in such market, and enforcement of existing
regulatory provisions has been extremely limited. Furthermore, there may be less
publicly available information about Argentine companies than is regularly
published by or about companies in the United States and certain other
countries. However, the Argentine
131
government and the Comision Nacional de Valores, taking into consideration the
deeper global awareness of the importance of having adequate corporate
governance practices and a legal framework to enforce principles such as "full
information," and "transparency," have recently issued decree No. 677/2001. This
decree has the objective of determining the rights of the "financial consumer",
increasing market transparency and an adequate legal framework to increase the
investor's protection within the capital market. Most of its reforms are in line
with world trends pertaining to corporate governance practices that have already
been adopted by many emerging markets.
In order to offer securities to the public in Argentina, an issuer must
meet certain requirements of the Comision Nacional de Valores regarding assets,
operating history, management and other matters, and only securities for which
an application for a public offering has been approved by the Comision Nacional
de Valores may be listed on the Bolsa de Comercio de Buenos Aires. This approval
does not imply any kind of certification or assurance related to the merits or
the quality of the securities, or the solvency of the issuer. Issuers of listed
securities are required to file unaudited quarterly financial statements and
audited annual financial statements, as well as various other periodic reports,
with the Comision Nacional de Valores and the Bolsa de Comercio de Buenos Aires.
There are 11 securities exchanges in Argentina, the principal exchange for
the Argentine securities market is the Bolsa de Comercio de Buenos Aires, which
handles approximately 99% of all equity trading in the country.
The Bolsa de Comercio de Buenos Aires is a complex, non-profit and
self-regulated organization. Various markets require different
self-organizations of brokers within the Bolsa de Comercio de Buenos Aires,
which is one of its particular characteristics. The most important and
traditional of such markets is Mercado de Valores.
The securities that may be listed on the Bolsa de Comercio de Buenos Aires
are: Stocks, Corporate Bonds, Convertible Corporate Bonds, Close-ended
Investment Funds, Financial Trust, Indexes, Derivatives and Public Bonds. The
Bolsa de Comercio de Buenos Aires is legally qualified for admission,
suspension, and delisting of securities according to its own rules approved by
the Comision Nacional de Valores. Furthermore, the Bolsa de Comercio de Buenos
Aires works very closely with the Comision Nacional de Valores in surveillance
activities. Also under a special agreement, registration and listing
applications are directly filed with the Bolsa de Comercio de Buenos Aires for
simultaneous processing.
The Merval is a self-regulated incorporated business organization. The
capital stock of such entity is divided into 183 stocks, the holders of which
(natural or artificial persons) are thereby entitled to act as individual
brokers or brokerage firms; i.e. to execute securities purchase and sale
transactions in their own name and on behalf of third parties. Brokers receive a
commission for their services.
The primary functions of the Merval are concerned with the settlement,
surveillance and guarantee of market trades. This entity is also qualified to
take disciplinary actions against individual brokers or brokerage firms who
might violate the statutory rules in vigor, and/or the rules and regulations
governing the Argentine Stock Market System.
Furthermore, the Merval regulates, coordinates and implements each and
every aspect connected with stock exchange trading, types of securities, market
mechanisms, terms and conditions of payment, and the like. Jointly with the
Bolsa de Comercio de Buenos Aires is has implemented stock-watch mechanisms.
Merval counts with a trading mechanism applicable to corporate securities
and government bonds called Concurrent Market, where trades are executed
screen-based or in the traditional open out-cry mode on the floor of the Bolsa
de Comercio de Buenos Aires in an automated order-matching system. Merval
guarantees the settlement of all trades executed in the Concurrent Market.
Also trades on government and corporate bonds may be executed on the
Continuous Trading Session (with or without Merval's settlement guarantee).
132
The cash mechanism (standard maturity) in the Concurrent Market admits the
following operating forms:
o Automated trade execution based on orders entered from Sistema
Integral de Negociacion Asistida por Computadora work-stations or
through open out-cry Floor-trade order slips.
o Open out-cry Floor-trade executions are subsequently inputted through
order slips.
Open out-cry trades are executed pursuant to the rules applicable to
traditional floor trading. Automated-execution trades based on the offers are
carried out according to the rules of the electronic system. Both executions
entail the registration of trades in a unique price-volume structure, and both
modes of entering the system feed a unique order structure per issue.
Among the main features of the open out-cry mechanism carried out on the
Floor, the following are highlighted:
o trades are executed open out-cry
o they are perfected through the preparation of order slips
o the best-offer rule applies and as in the electronic system, it open
out-cry the Mercado de Valores settlement guarantee.
Block trading is allowed in a minimum amount of Ps. 200,000 for leader companies
which are listed on the leader panel of the Bolsa de Comercio de Buenos Aires,
and Ps. 100,000 for the companies listed on the general panel of the Bolsa de
Comercio de Buenos Aires. Block trading takes place on the floor of the Bolsa de
Comercio de Buenos Aires and is conducted in Spanish by continuous open outcry.
Transaction of more than Ps. 1.0 million are announced on the floor and are put
on stand by for approximately 30 minutes. For transactions of more than Ps. 5.0
million, a certificate of the units from Caja de Valores is additionally
required.
As to the electronic system, its outstanding characteristics are:
o trades are executed based on bids and offers entered in work-stations,
i.e. computers linked to the Stock Exchange information network,
o trades are executed automatically,
o offers are recorded as per price-time priority, privileging the best
of them.
These trades have the Mercado de Valores guarantee.
Brokers and brokerage firms may trade in this segment, either by buying or
selling government and corporate bonds for their own account, executing trades
with another broker or brokerage firm or any other intermediary, by means of
direct negotiations. In this system the best-offer rule does not apply and
traders' compensations as well as stock market and stock exchange fees are
implicit in the price agreed upon.
Trades must be reported in real-time for their dissemination, registration
and publication. Counterparty trades are settled by Mercado de Valores, and may
be channeled through the guaranteed or the non-guaranteed segment.
Over the Counter Market, MAE
The MAE is an exchange organized under the laws of the Argentine Republic,
which operates as a self-regulatory organization under the supervision of the
Comision Nacional de Valores.
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The MAE works as an electronic environment to process Over The Counter
transactions. It is an electronic exchange where both government securities and
corporate bonds are traded through spot and forward contracts.
MAE has 76 brokers/dealers members, which include national banks,
provincial banks, municipal banks, private national banks, foreign banks,
cooperative banks, financial institutions, foreign exchange entities and pure
brokers/dealers (exclusively engaged in brokerage activities). Both Argentine or
foreign capital banks and financial institutions may be MAE's brokers/dealers.
Securities to be traded must be registered with the pertinent supervising
authorities and may be traded in MAE, in other exchanges or in both of them
concurrently.
Securities Central Depositary, Caja
The Caja is a corporation, totally private, which acts as central
depositary of public bonds and private securities. It was established in 1974 by
Act 20,643, and it is supervised by the Comision Nacional de Valores.
Those authorized to make deposits of securities with the Caja are
stockbrokers, banking and financial institutions, and mutual funds.
The majority shareholders of the Caja are the Bolsa de Comercio de Buenos
Aires and the Mercado de Valores (49.60% each).
CERTAIN INFORMATION REGARDING THE BOLSA DE COMERCIO DE BUENOS AIRES
The following table shows certain information regarding the Bolsa de
Comercio de Buenos Aires:
As of June 30, As of December 31,
2002 2001(1) 2000(1) 1999(1)
---- ------- ------- -------
Market capitalization (Ps. Billon) 399.4 192.5 165.8 83.9
Average daily trading volume (Ps. Million) 19.7 30.9 38.8 47.2
Number of listed companies 114 119 125 125
(1) Amounts are not inflation adjusted.
Source: Bolsa de Comercio de Buenos Aires
Although companies may list all of their capital stock on the Bolsa de
Comercio de Buenos Aires, in many cases a controlling block is retained by the
principal shareholders resulting in only a relatively small percentage of many
companies' stock being available for active trading by the public on the Bolsa
de Comercio de Buenos Aires. Individuals constitute the largest group of
investors in Argentina's equity markets.
Argentina's investment funds controlled, as of June 30, 2001, less than 10%
of the market. As of June 30, 2001, approximately 119 companies had equity
securities listed on the Bolsa de Comercio de Buenos Aires. As of June 30, 2001,
approximately 93.6% of the total market capitalization of the Bolsa de Comercio
de Buenos Aires was represented by the securities of ten companies. The top 30
companies in terms of trading value during 2000 represented approximately 94.3%
of the total trading in that market for such period.
The Argentine securities markets are substantially more volatile than the
securities markets in the United States and certain other developed countries.
The Merval experienced a 13% increase in 1995, a 25% increase in 1996, a 6%
increase in 1997, a 37% decrease in 1998 a 28% increase in 1999 and a 24%
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decrease in 2000 and a 29% decrease in 2001 and a 34% increase through September
30, 2002, measured in Pesos. To control volatility, the Bolsa de Comercio de
Buenos Aires operates a system in which trades of an issuer's stock are
suspended for one-half hour when such issuer's share price changes by more than
10% from its opening price.
D. SELLING SHAREHOLDERS
This item is not applicable.
E. DILUTION
This item is not applicable.
F. EXPENSES OF THE ISSUE
This item is not applicable.
ITEM 10 ADDITIONAL INFORMATION
A. SHARE CAPITAL
OUR COMMON STOCK
Our authorized capital stock consists of 211,999,273 shares of common
stock, Ps. 1.00 par value per share. As of October 31, 2002, our outstanding
capital stock consisted of 207,411,988 shares of common stock and 4,587,285
shares of treasury stock. In addition, we issued 100,000,000 registered units
consisting of US$ 100.0 million of 8% convertible notes due 2007 and warrants to
purchase shares of common stock, on November 21, 2002.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
OUR CORPORATE PURPOSE
Our legal name is IRSA Inversiones y Representaciones Sociedad Anonima. We
were incorporated under the laws of Argentina on April 30, 1943 as a stock
corporation (sociedad anonima) and were registered with the Inspeccion General
de Justicia of the city of Buenos Aires () on June 23, 1943 under number 284, on
page 291, book 46 of volume A.
Article 4 of our bylaws defines our purpose as follows:
o Invest, develop and operate real estate developments;
o Invest, develop and operate personal property, including securities;
o Construct and operate works, services and public property;
o Manage real or personal property, whether owned by us or by third
parties;
o Build, recycle, or repair real property whether owned by us or by
third parties;
o Advise third parties with respect to the aforementioned activities;
o Finance projects, undertakings, works and/or real estate transactions
of third parties.
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BOARD OF DIRECTORS
VOTING ON PROPOSALS IN WHICH DIRECTORS HAVE MATERIAL INTEREST
Decree-Law 677/01 of Capital Markets Transparency and Best Practices,
establishes in Section 8 that the directors, administrators and members of the
supervisory committee of companies whose securities are publicly offered, shall
act in a loyal and diligent manner when exercising their functions. In that
sense, they have to:
o place the corporate interests of the company and the common interest
of the shareholders above any other interest, including the
controlling shareholder's interests;
o refrain from obtaining a personal benefit from the issuer other than
the compensation paid for their functions;
o organize and implement preventive systems and mechanisms to protect
the corporate interests, reducing the risk of conflicts of interests,
either permanent or temporary, in the personal relationship with the
company or with persons related to the company. This duty specifically
refers to activities competing with the company, the use or imposition
of a lien on corporate assets, the determination of compensations or
proposals related thereto, the use of non public information, the use
of business opportunities for their own benefit or for the benefit of
third parties and, in general, any situation that may generate a
conflict of interests affecting the issuer;
o make the necessary arrangements to perform the company's activities
and implement the necessary internal control to ensure a careful
management and avoid breaches of the duties established by the
applicable regulations;
o act with due diligence when preparing and disclosing the information
to the market, and maintain the independence of external auditors.
The Argentine Law of Corporations No. 19,550 establishes in Section 271
that directors may contract with the company when the contract is related to the
regular activities of the company and its terms and conditions are established
on market terms. All other contracts with directors should be approved by the
shareholders.
Further, Section 73 of Decree-Law 677/01 of Capital Markets Transparency
and Best Practices establishes a specific procedure for transactions of a
company whose securities are publicly offered, entered into with its directors,
members of the supervisory committee, or senior managers and which involve a
relevant amount. The transaction is considered to have a relevant amount when it
exceeds: (i) one percent (1%) of the corporate capital, measured pursuant to the
last approved financial statements, and (ii) the equivalent of one hundred
thousand pesos (Ps. 100,000).
The related person with an interest in the transaction, should submit all
the relevant documentation to the approval of the board of directors. The
directors must request a report (i) of the audit committee stating if the
conditions of the operation may be reasonably considered adequate according to
normal market conditions; or (ii) of two independent evaluating firms that shall
have informed about the same matter and about the other operation conditions.
Immediately after being approved by the board of directors the transaction has
to be informed to the Comision Nacional de Valores.
Notwithstanding that, Section 272 of the Law of Corporations No.19,550
provides that when a director has an opposite interest to the one of the
company, he or she should notify that situation to the board of directors and
the supervisory committee and abstain to vote in that respect. The violation of
this provision results in the director being jointly and severally unlimitedly
liable.
In the event that the results of the reports are not favourable to the
transaction, its approval should be considered by the shareholders' meeting.
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APPROVAL OF COMPENSATION OF THE MEMBERS OF THE BOARD OF DIRECTORS AND
SUPERVISORY COMMITTEE
Our bylaws do not establish the compensation to be paid to members of the
board of directors and the supervisory committee, and therefore pursuant to
Section 261 of the Law of Corporations No.19,550, it should be approved by the
shareholders. The maximum amount that may be paid as compensation to members of
the board of directors and the supervisory committee, should not exceed 25% of
the realized and net earnings of the Company and 5% when there is no
distribution of dividends. If the Company does not distribute the total
earnings, the amount of the compensation should be proportional to that
distribution and within the mentioned limits. These limits may only be surpassed
by express approval of the shareholders.
BORROWING POWERS OF DIRECTORS
Our bylaws establish, in Section 18, that the board of directors have full
and broad powers to organize, manage and direct us and aimed at fulfilling the
corporate purpose.
RETIREMENT OF DIRECTORS
Our bylaws do not establish any requirements or provisions regarding age
limits for director's retirement, nor do they require a number of shares a
director must own to qualify for the position.
RIGHTS, PREFERENCES AND RESTRICTIONS ATTACHING TO THE COMMON SHARES
DIVIDEND RIGHTS
The Law of Corporations No.19,550 establishes that the distribution and
payment of dividends to shareholders is valid only if they result from realized
and net earnings of the company pursuant to an annual balance sheet approved by
the shareholders. The Board of Directors submits our financial statements for
the previous financial year, together with the reports of the Supervisory
Committee, to the Annual Ordinary Shareholders' Meeting. This meeting must be
held by October 30 of each year to approve the financial statements and decide
on the allocation of our net income for the year under review. The distribution,
amount and payment of dividends if any, must be approved by the affirmative vote
of the majority of the present votes with right to vote at the meeting.
Under the applicable regulations of the Comision Nacional de Valores, cash
dividends must be paid to the shareholders pro rata according to the interest
held by shareholders within 30 days of the decision approving their
distribution. If stock dividends are declared, the corresponding shares must be
delivered to the shareholders within three months of the shareholders' meeting
approving them. The right of shareholders to collect the dividends expires upon
the expiration of a term of three years since they were placed at the disposal
of shareholders.
The shareholders' meeting may authorize payment of dividends on a quarterly
basis provided no applicable regulations are violated. In that case, all and
each of the members of the board of directors and the supervisory committee will
be jointly and severally unlimitedly liable for the refund of those dividends
if, as of the end of the respective fiscal year, the realized and net earnings
of the Company are not sufficient to allow the payment of dividends.
When we declare and pay dividends on the common shares, the holders of our
GDSs, each representing the right to receive ten ordinary shares, outstanding on
the corresponding registration date, shall be entitled to receive the dividends
due on the common shares underlying the GDSs, subject to the terms of the
Modified and Ordered Deposit Contract dated December 12, 1994 executed by and
between us, the Bank of New York (the "Depository") and the eventual holders of
GDSs (the "Deposit Contract"). The cash dividends are to be paid in pesos and,
except under certain circumstances, are to be converted by the Depositary into
U.S. dollars at the exchange rate prevailing at the conversion date and are to
be paid to the holders of the GDSs net of any applicable fee on the dividend
distribution, costs and conversion expenses, taxes and public charges. Since
January 2002 and due to the devaluation of the Peso, the exchange rate for the
dividends will occur at a floating market rate which, as the date of this annual
report, ranges from Ps. 1.85 to Ps. 1.95 for each U.S. dollar. However, since
December 1 2001, no amount in excess of US$ 10,000 per month can be transferred
abroad, except for international trade or to the payment of expenses outside
Argentina with credit cards, debit cards or travelers checks, unless receiving
an
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authorization of the Central Bank. Therefore, we cannot assure you that we can
transfer abroad the payment of dividends to the holders of our GDSs. See
"Taxation-Argentine Taxes-Taxation of Dividends".
VOTING RIGHTS AND STAGGERED ELECTIONS
Our stock capital is composed by book-entry common shares with face value
of Ps. 1 per share and entitled to one vote each.
All directors and alternate directors are elected for a three-year term.
Our by laws do not consider staggered elections.
RIGHTS TO SHARE IN IRSA'S PROFITS
The holders of our common shares have the right to participate in our net
and realized profits on a pro rata basis of their respective interests.
Pursuant to the Law of Corporations and Section 29 of our bylaws,
liquidated and realized profits of each fiscal year shall be distributed as
follows:
o Allocate 5% of such net profits to legal reserve, until the amount of
such reserve equals 20% of our the capital stock;
o the sum established by the shareholders' meeting as remuneration of
the board of Directors and the supervisory committee;
o dividends, additional dividends to preferred shares if any, or to
optional reserve funds or contingency reserves or to a new account, or
for whatever purpose the shareholders' meeting determines.
RIGHTS TO SHARE IN ANY SURPLUS IN THE EVENT OF LIQUIDATION
Section 30 of our bylaws establishes that in the event of liquidation,
dissolution or winding-up, our assets (i) will be first applied to satisfy
liabilities and (ii) the remaining will be proportionally distributed among
holders of preferred stock if there are any and in accordance with the terms of
the preferred stock. If any surplus remains, the holders of common shares are
entitled to receive and share on a pro rata basis in all net assets remaining
for distribution.
PROVISIONS RELATED TO A SHAREHOLDER'S OWNERSHIP OF CERTAIN AMOUNT OF SHARES
Section 9 of our bylaws establishes that the acquisition by any person or
group, directly or indirectly of our shares, convertible securities, rights to
receive any of those securities that may grant that person the control of our
company or 35% or more of our capital stock; may only be done by following a
tender offer procedure for all of our shares.
There are cases excluded from the tender offer requirements:
o acquisitions by persons holding or controlling shares or convertibles
securities which represent more than 50% of our capital stock,
notwithstanding the provisions of the Comision Nacional de Valores;
and
o holdings of more than 35%, which derive from the distribution of
shares or dividends paid in shares approved by the shareholders, or
the issuance of shares as a result of a merger approved by the
shareholders; in both cases, the excess holding shall be disposed of
within 180 days of its registration in the relevant shareholder's
account, or prior to the holding of our shareholders meeting, whatever
occurs first.
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The Comision Nacional de Valores regulations require that transactions
which cause a person's holdings of capital stock of a registered Argentine
company, to hold 5% or more of the voting power, should be immediately notified
to the Comision Nacional de Valores. Thereafter, every change in the holdings
that represents a multiple of 5% of the voting power should also be notified.
PROCEDURE TO CHANGE THE RIGHTS OF STOCKHOLDERS
The rights of holders of stock are established in the Law of Corporations
and in the bylaws. The rights of shareholders provided for by the Law of
Corporations may not be diminished by the bylaws. Section 235 of the Law of
Corporations establishes that the amendment of the bylaws should be approved by
the absolute majority of our shareholders at an Extraordinary Shareholders
Meeting.
ORDINARY AND EXTRAORDINARY SHAREHOLDERS' MEETING
Our bylaws establish that any meeting must be called by the board of
directors or by the supervisory committee in the assumptions provided for by law
or at the request of the holders of shares representing no less than 5% of the
share capital. Any meetings requested by shareholders must be held within 30
days after the request is made. Ordinary meetings may be called simultaneously
for the first and second call. Upon failure to give simultaneous call, the
meeting on second call, due to failure to constitute quorum on first call, must
be held within 30 days after such meeting, complying with all notices required
by applicable regulations.
Any shareholder may appoint any person as its duly authorized
representative at whatever meeting, by granting a proxy with duly certified
signature. Co-owners of shares must have single representation.
In order to attend a shareholders' meeting, shareholders should deposit
with us the share certificate issued by the registrar agent, with at least 3
business days prior to the date of the respective shareholders meeting. We will
deliver the respective receipt which will be required for admission to the
shareholders meeting. On the day of the meeting, the shareholders or their
representatives will have to fill in their addresses, identity document and
number of votes and will sign the Shareholders' Meetings' Attendance Book.
The meetings shall be presided by the Chairman of the board of directors.
The first call of the ordinary shareholders' meeting requires the
attendance of shareholders representing a majority of the shares with voting
rights. The second call, does not require a minimum of shares with right to
vote. In both cases, resolutions shall be adopted by the absolute majority of
the votes that may be cast in the relevant decision.
The first call of the extraordinary shareholders' meeting requires the
attendance of shareholders representing 60% of the shares with voting rights.
The second call, does not require a minimum of shares with right to vote. In
both cases, resolutions shall be adopted by the absolute majority of the votes
that may be cast in the relevant decision.
LIMITATIONS TO OWN SECURITIES BY NON-RESIDENT OR FOREIGN SHAREHOLDERS
There are no legal limitations to own securities or exercise voting rights,
by non-resident or foreign shareholders.
OWNERSHIP THRESHOLD ABOVE WHICH OWNERSHIP SHOULD BE DISCLOSED
The Comision Nacional de Valores regulations require that transactions
which cause a person's holdings of capital stock of a registered Argentine
company, to hold 5% or more of the voting power, should be immediately notified
to the Comision Nacional de Valores. Thereafter, every change in the holdings
that represents a multiple of 5% of the voting power should also be notified.
Directors, senior managers, executive officers, members of the supervisory
committee, and controlling shareholders of an Argentine company whose securities
are publicly offered, should notify
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the Comision Nacional de Valores on a monthly basis, their beneficial ownership
of shares, debt securities, and call and put options related to securities of
such companies and their controlling, controlled or affiliated companies.
Further, the Comision Nacional de Valores must be immediately notified of
transactions which cause a person's holdings of capital stock of an Argentine
company whose securities are publicly offered to hold 5% or more of the voting
power and every change in the holdings that represents a multiple of 5% of the
voting power. Holders of more than 50% of the common shares or who otherwise
control decision making in shareholders' meetings, as well as directors,
officers and members of the supervisory committee, must provide the Comision
Nacional de Valores with annual reports of their holdings in the capital stock
of such companies and monthly reports of any change in their holdings.
C. MATERIAL CONTRACTS
We do not have any material contract entered into outside the ordinary
course of business other than some of the operations previously described under
the Related Party Transactions and Our Indebtedness sections.
D. EXCHANGE CONTROLS
CURRENCY EXCHANGE REGULATION
Pursuant to Executive Order No. 260/2002 enacted by the Executive Power on
February 8th, 2002, the dual exchange rate system in force since January 2002
has been eliminated. This dual system established an "official" exchange rate of
Ps.1.40 equal to 1 US dollar and a free exchange rate, and was replaced by a
unique and free exchange market. All foreign currency exchange transactions must
be carried out in the free exchange market, in which the Argentine Central Bank
participates by purchasing and selling foreign currency.
IMPORT AND EXPORT OF CAPITAL
IMPORT OF CAPITAL
At present, there are no laws, executive orders or regulations nor any
exchange controls in force in Argentina limiting the import of capital.
Pursuant to the Argentine Foreign Investment Law No. 21.832, and amendments
thereto and Decree No. 1853, enacted in 1993, the purchase by foreign investors
(any natural or legal person domiciled out of Argentina or an Argentine company
of "foreign capital") of capital participation in a company existing in
Argentina (according to the Foreign Investment Act) shall constitute a foreign
investment.
At present there are no restrictions on foreign investment in industries
other than public broadcasting media, and no prior authorization is required to
make foreign investments.
Therefore, no prior authorization is required for the purpose of purchasing
securities of our Company.
See Item 3: "Key Information - B. Exchange Rates"
EXPORT OF CAPITAL INCLUDING THE AVAILABILITY OF CASH OR CASH EQUIVALENTS.
In compliance with the economic measures set forth by the Government by means of
Decree No. 1570/2001 dated December 1, 2001 and subsequent amendments thereto,
aimed at protecting the integrity of the Argentine financial system, money
cannot be transferred abroad, unless expressly authorized by the Argentine
Central Bank.
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REMISSION OF DIVIDENDS, INTERESTS OR OTHER PAYMENTS TO HOLDERS OF
SECURITIES IN OUR COMPANY, TO NON RESIDENTS.
In compliance with the economic measures set forth by the Argentine
Government by means of Decree No. 1570/2001 dated December 1st, 2001, as amended
by Decree No. 1606/2001, aimed at protecting the integrity of the Argentine
financial system, some limitations have been imposed on export of capital. See:
"Export of Capital, including the availability of cash or cash equivalents."
E. TAXATION
UNITED STATES TAXATION
The following summary describes the material United States federal income
tax consequences of the ownership of shares and GDSs as of the date hereof. The
discussion set forth below is applicable to U.S. Holders (as defined below).
Except where noted, this discussion deals only with U.S. Holders (as defined
below) that purchase the shares or GDSs as capital assets and that do not have a
permanent establishment in Argentina, are not residents of Argentina, are not
domiciled in Argentina, are not organized in Argentina, do not have a local
branch in Argentina, do not carry on certain commercial activities, do not fall
within the legal presumption for non-Argentine legal entities with respect to
the Argentine Personal Assets Tax, do not own an Argentine bank account and are
not physically present in Argentina for 183 days or more within a calendar year.
This summary does not represent a detailed description of the United States
federal income tax consequences applicable to you if you are subject to special
treatment under the United States federal income tax laws, including if you are:
o a bank;
o a dealer in securities or currencies;
o a financial institution;
o a regulated investment company;
o a real estate investment trust;
o an insurance company;
o a tax exempt organization;
o a person holding the shares or GDSs as part of a hedging, integrated
or conversion transaction, constructive sale or straddle;
o a trader in securities that has elected the mark-to-market method of
accounting for your securities;
o a person liable for alternative minimum tax;
o a person who owns more than 10% of the voting stock of our company;
o an investor in a pass-through entity; or
o a United States person whose "functional currency" is not the United
States dollar.
Furthermore, the discussion below is based upon the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), and regulations, rulings
and judicial decisions thereunder as of the date hereof, and such authorities
may be replaced, revoked or modified so as to result in federal income tax
consequences different from those discussed below. In addition, this summary is
based, in part, upon representations made by the depositary (the "Depositary")
to us and assumes that the deposit agreement governing the GDSs, and all other
related agreements, will be performed in accordance with their terms. IF YOU ARE
CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF SHARES OR GDSs YOU SHOULD
CONSULT
141
YOUR OWN TAX ADVISOR CONCERNING THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES TO YOU AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY
OTHER TAXING JURISDICTION.
"U.S. Holder" means a beneficial owner of a share, or GDS that is for
United States federal income tax purposes:
o a citizen or resident of the United States;
o a corporation created or organized in or under the laws of the United
States or any political subdivision of the United States;
o an estate the income of which is subject to United States federal
income taxation regardless of its source;
o a trust if it (1) is subject to the primary supervision of a court
within the United States and one or more United States persons has
authority to control all substantial decisions of the trust or (2) has
a valid election in effect under applicable United States Treasury
regulations to be treated as a United States person.
If a partnership holds shares or GDSs, the tax treatment of a partner will
generally depend on the status of the partner and the activities of the
partnership. If you are a partner of a partnership holding shares or GDSs, you
should consult your tax advisors.
GDSs
In general, for United States federal income tax purposes, U.S. Holders of
GDSs will be treated as the owners of the underlying shares that are represented
by the GDSs. However, the United States Treasury has expressed concerns that
parties to whom depositary shares are pre-released may be taking actions that
are inconsistent with the claiming of foreign tax credits by the holders of
GDSs. Accordingly, the analysis of the creditability of Argentine taxes
described herein could be affected by future actions that may be taken by the
United States Treasury. Deposits or withdrawals of shares by U.S. Holders for
GDSs will not be subject to United States federal income tax.
DISTRIBUTIONS ON SHARES OR GDSs
Subject to the discussion under "Passive Foreign Investment Company Rules"
below, distributions on the shares or GDSs, (including net amounts withheld to
reflect Argentine withholding taxes, if any) will be taxable as dividends to the
extent of our current and accumulated earnings and profits (as determined under
United States federal income tax principles). Such income will be includable in
your gross income as ordinary income on the day actually or constructively
received by you, in the case of shares, or by the GDS depositary, in the case of
GDSs. Such dividends will not be eligible for the dividends-received deduction.
The amount of any dividend paid in Pesos will equal the United States
dollar value of the Pesos received calculated by reference to the exchange rate
in effect on the date the dividend is actually or constructively received by you
in the case of shares, or by the GDS depositary, in the case of GDSs, regardless
of whether the Pesos are converted into United States dollars. If the Pesos
received are not converted into United States dollars on the day of receipt, you
will have a basis in the Pesos equal to their United States dollar value on the
date of receipt. Any gain or loss you realize on a subsequent conversion or
other disposition of the Pesos will be treated as United States source ordinary
income or loss.
Subject to certain significant conditions and limitations, Argentine tax
withheld from dividends, if any, may be treated as foreign income tax eligible
for credit or deduction against your United States federal income tax liability.
For purposes of the foreign tax credit, dividends paid on the shares will be
treated as income from sources outside the United States and will generally
constitute "passive income" or, in the case of certain United States Holders,
"financial services income." The rules governing the foreign tax
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credit are complex. Investors are urged to consult their tax advisors regarding
the availability of the foreign tax credit under their particular circumstances.
TAXATION OF CAPITAL GAINS
Subject to the discussion under "Passive Foreign Investment Company Rules"
below, upon the sale, exchange or other disposition of shares or GDSs, you
generally will recognize capital gain or loss equal to the difference between
the United States dollar value of the amount realized upon the sale, exchange or
other disposition and the adjusted tax basis of the shares or GDSs, determined
in United States dollars. The capital gain or loss will be long-term capital
gain or loss if at the time of sale, exchange or other disposition you have held
the shares or GDSs for more than one year. Capital gains of individuals derived
with respect to capital assets held for more than one year are eligible for
reduced rates of taxation depending upon the holding period of such capital
assets. The deductibility of capital losses is subject to limitations. Any gain
or loss you recognize will generally be treated as United States source gain or
loss.
PASSIVE FOREIGN INVESTMENT COMPANY RULES
Based on the composition of our income and valuation of our assets, we do
not believe we were a PFIC for our taxable year ended June 30, 2002 and, based
on the projected composition of our income and valuation of our assets do not
expect to become one in the future, although there can be no assurance in this
regard.
In general, we will be a PFIC for any taxable year in which, either (i) at
least 75% of the gross income of our company for the taxable year is passive
income or (ii) at least 50% of the value (determined on the basis of a quarterly
average) of our assets is attributable to assets that produce or are held for
the production of passive income. For this purpose, passive income generally
includes dividends, interest, royalties, rents (other than rents and royalties
derived in the active conduct of a trade or business and not derived from a
related person), annuities and gains from assets that produce passive income. If
we own at least 25% by value of the stock of another corporation, we will be
treated for purposes of thePFIC tests as owning a proportionate share of the
assets of the other corporation, and as receiving directly a proportionate share
of the other corporation's income.
The determination of whether we are a PFIC is made annually. To determine
whether we are a PFIC for our current taxable year which ends on June 30, 2003,
we would need to rely on the projected composition of our income and valuation
of our assets. A number of factors could affect these calculations. The
volatility and instability of Argentina's economic and financial system may
substantially affect the composition of our income and assets and the accuracy
of our projections. Other unanticipated changes may also cause our projections
to be inaccurate. Accordingly, it is possible that we may be a PFIC in the
current or any future taxable year due to changes in our asset or income
composition or if our projections are not accurate.
If we are a PFIC for any taxable year during which you hold an equity
interest in our company, unless you make the mark-to-market election discussed
below, you will be subject to special tax rules discussed below.
If we are a PFIC for any taxable year during which you hold our shares or
GDSs, you will be subject to special tax rules with respect to any "excess
distribution" received and any gain realized from a sale or other disposition,
including a pledge, of such shares or GDSs. Distributions received in a taxable
year that are greater than 125% of the average annual distributions received
during the shorter of the three preceding taxable years or your holding period
for the equity interests will be treated as excess distributions. Under these
special tax rules (i) the excess distribution or gain will be allocated ratably
over your holding period for the equity interests, (ii) the amount allocated to
the current taxable year, and any taxable year prior to the first taxable year
in which we were a PFIC, will be treated as ordinary income, and (iii) the
amount allocated to each other year will be subject to tax at the highest tax
rate in effect for that year and the interest charge generally applicable to
underpayments of tax will be imposed on the resulting tax attributable to each
such year.
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In certain circumstances, in lieu of being subject to the excess
distribution rules discussed above, you may make an election to include gain on
the stock of a PFIC as ordinary income under a mark-to-market method provided
that such stock is regularly traded on a qualified exchange. Under current law,
the mark-to-market election is only available for stock traded on certain
designated United States exchanges and foreign exchanges which meet certain
trading, listing, financial disclosure and other requirements to be treated as a
qualified exchange under applicable United States Treasury regulations.
Consequently, the mark-to-market election may be available to you with respect
to the GDSs because the GDSs will be listed on the New York Stock Exchange,
which constitutes a qualified exchange under the regulations, although there can
be no assurance that the GDSs will be regularly traded. You should note that
only the GDSs and not the shares are listed on the New York Stock Exchange. The
shares are listed on the Buenos Aires Stock Exchange. Consequently, the Buenos
Aires Stock Exchange would need to meet the trading, listing, financial
disclosure and other requirements of the United States Treasury regulations. The
GDSs or shares would need to be regularly traded on such exchanges in order for
the GDSs or shares to be potentially eligible for the mark-to-market election.
If we are a PFIC in any taxable year in which you hold our shares or GDSs,
but you do not make a mark-to-market election until a subsequent taxable year,
you will be subject to special rules in the taxable year of the election. You
should consult your own tax advisors regarding the application of the
mark-to-market election in your particular situation.
United States Holders who make the mark-to-market election with respect to
shares or GDSs after exchanging their convertible notes or exercising their
warrants for shares or GDSs will be subject to special rules in the taxable year
of the election if we qualified as a PFIC during the period of their ownership
of a convertible note or warrant, which in general will subject the
mark-to-market inclusion resulting from such election to the rules on excess
distributions as described above. You should consult your tax advisors regarding
the application of these rules to your particular situation.
If you make an effective mark-to-market election, you will include in
income each year as ordinary income, rather than capital gain, the excess, if
any, of the fair market value of your PFIC shares or GDSs at the end of the
taxable year over your adjusted tax basis in the shares or GDSs and will be
permitted an ordinary loss in respect of the excess, if any, of the adjusted
basis of such shares or GDSs over their fair market value at the end of the
taxable year, but only to the extent of the net amount previously included in
income as a result of the mark-to-market election. Your basis in the shares or
GDSs will be adjusted to reflect any such income or loss amounts. Any gain or
loss on the sale of the shares or GDSs will be ordinary income or loss, except
that such loss will be ordinary loss only to the extent of the previously
included net mark-to-market gain.
If you make a mark-to-market election it will be effective for the taxable
year for which the election is made and all subsequent taxable years unless the
shares or GDSs are no longer regularly traded on a qualified securities exchange
or the IRS consents to the revocation of the election. Under proposed Treasury
regulations, mark-to-market inclusions and deductions will be suspended during
taxable years in which are not a PFIC, but would resume if they subsequently
become a PFIC. You are urged to consult your own tax advisor about the
availability of making such a mark-to-market election.
Alternatively, a United States Holder of shares or GDSs in a PFIC can
sometimes avoid the rules described above by electing to treat the company as a
"qualified electing fund" under section 1295 of the Code. This option is not
available to you because we do not intend to comply with the requirements
necessary to permit you to make this election.
A United States Holder who owns shares or GDSs during any year that we are
a PFIC must file IRS Form 8621.
You should consult your own tax advisors concerning the United States
federal income tax consequences of holding shares or GDSs if we are considered a
PFIC in any taxable year.
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ARGENTINE PERSONAL ASSETS TAXES
Amounts paid on account of the Argentine Personal Assets Taxes, if any,
will not be eligible as a credit against your United States federal income tax
liability, but may be deductible subject to applicable limitations in the Code.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to distributions
on shares or GDSs and to the proceeds of sale of a share or GDS paid to United
States Holders other than certain exempt recipients (such as corporations).
Backup withholding may apply to such payments if you fail to provide a correct
taxpayer identification number or certification of foreign or other exempt
status or fail to report in full dividend and interest income.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against your United States federal income tax liability
provided you furnish the required information to the IRS.
ARGENTINE TAXATION
The following discussion is a summary of certain Argentine tax
considerations associated with an investment in, ownership or disposition of,
the shares or the GDSs by an individual holder that is not domiciled or resident
in Argentina and a legal entity that is not organized under the laws of
Argentina and does not have a permanent establishment in Argentina or is not
otherwise doing business in Argentina on a regular basis (a "Foreign Holder").
The discussion is for general information only and is based on current Argentine
tax laws. Moreover, while this summary is considered to be a correct
interpretation of existing laws in force as of the date of this 20-F Form, no
assurance can be given that the courts or administrative authorities responsible
for the administration of such laws will agree with this interpretation or that
changes in such laws or interpretations will not occur. PROSPECTIVE INVESTORS
ARE URGED TO CONSULT THEIR OWN TAX ADVISOR REGARDING THE PARTICULAR TAX
CONSEQUENCES ARISING UNDER ANY TAXING JURISDICTION.
TAXATION OF DIVIDENDS
Dividends, either in cash, shares or kind approved by our shareholders are
currently exempt from Argentine withholding or other taxes.
Notwithstanding the foregoing, according to Argentine law, income tax will
be applied to the amount of dividends distributed in excess of a company's net
taxable income for the fiscal year preceeding the date of the distribution of
such dividends. The legislation requires that companies withhold 35% of the
amount of distributed dividends in excess of the net taxable income of such
distribution, as determined in accordance with the income tax law. The
withholding would not be applied to the payment of future dividends derived out
of retained earnings obtained in the fiscal years ended prior to December 30,
1998. Dividends distributed by an Argentine company are not subject to this tax
to the extent that those dividends arise from dividend income or other
distributions received by such company from other Argentine companies.
TAXATION OF CAPITAL GAINS
Gains on sales or other dispositions of shares or GDSs by non-resident
individuals and foreign entities without a permanent establishment in Argentina
are currently exempt from taxation. Notwithstanding, if the foreign entity
qualifies as an Offshore Taxable Entity and shares or GDS's are not listed,
sales or other dispositions of such shares or GDSs are taxable at the rate of
17,5%.
An Offshore Taxable Entity is a foreign entity without permanent
establishment in Argentina which (i) pursuant to its bylaws or to the applicable
regulatory framework has its principal investing activity outside the
jurisdiction of its incorporation and/or (ii) cannot perform in the jurisdiction
of its incorporation
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certain transactions and/or investments expressly indicated in its bylaws or in
the applicable regulatory framework.
Gains on sales or other dispositions of listed shares or GDSs by resident
individuals are currently exempt from taxation. In the case of non listed shares
or GDS's its sale or other dispositions are taxable at the rate of 9% up to 15%,
but the losses generated by such transactions may only be offset against income
from the same type of transactions.
Gains on the sale or other dispositions of shares or GDSs by Argentine
entities are subject to Argentine income tax at the fixed rate of 35% but the
losses generated by such transaction may only be offset against income from the
same type of transactions.
VALUE ADDED TAX
The sale, exchange, disposition, or transfer of shares or GDSs is not
subject to Value Added Tax.
PERSONAL ASSETS TAX
Law No. 25,585 issued on April 24, 2002 and published in the Official
Gazette on May 15, 2002 (and applicable to personal assets held as of December
31, 2002) introduces amendments to Law No. 23,966 and imposes the personal
assets tax on shares and GDSs held by individuals and undivided estates
domiciled or located in Argentina or abroad and legal entities not domiciled in
Argentina, separately from other assets.
This amendment imposes the obligation to pay the personal assets tax on the
Argentine private issuer of the shares and GDSs, and authorizes it to seek
recovery of the amount so paid, without limitation, by way of withholding or by
foreclosing on the assets that gave rise to such payment. The tax is levied on
the shares proportional equity value of the shares as reflected in the most
recent balance sheet closed as of December 31 of the taxable year, at the rate
of 0.5% without any non-taxable minimum being applicable.
Currently there are no regulations issued by the Executive Branch related to
this amendment, and it has not been interpreted by any court or government
agency and no assurance can be given as to how such amendments may be defined or
interpreted in the future by any such court or government agency.
TAX ON MINIMUM NOTIONAL INCOME (IMPUESTO A LA GANANCIA MINIMA PRESUNTA,
IGMP)
Companies domiciled in Argentina, partnerships, foundations, sole
proprietorships, trusts, certain mutual funds organized in Argentina, and
permanent business establishments owned by foreign persons, among other
taxpayers, shall apply a 1% rate to the total value of assets held by such
persons, above an aggregate nominal amount of Ps. 200,000. Nevertheless, shares
and GDSs issued by entities subject to such tax, are exempt from paying the
IGMP.
The income tax payment determined for a particular fiscal year is
considered as a payment on account of the IGMP to be paid in the same fiscal
year. The IGMP will only be applicable when the income tax for the corresponding
fiscal period results lower than the amount specified for the IGMP. In such
case, the difference between the determined IGMP and the corresponding income
tax has to be paid. If in any specific fiscal year, the amount to be paid as
IGMP exceeds the income tax corresponding to that same fiscal year, the
resulting difference could be computed as an advance to be credited against the
income tax to be paid in excess of the IGMP during the following ten fiscal
years.
TAX ON DEBITS AND CREDITS ON BANKING ACCOUNTS
The Argentine Competition law, as amended, established a tax on debits and
credits, of any nature, made in all bank accounts, except for those specifically
excluded by the law and its regulations. Debits and credits on bank accounts are
subject to general tax rate of 0.6%.
The regulations of the Argentine Competition law taxes many other
transactions in which a bank account is not used but a financial entity
intervenes. The movements and deliveries of funds, by its own
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or on behalf of third parties, carried out by any person, made through organized
systems of payments replacing the use of the bank accounts are also taxed at a
rate of 1.2%.
Therefore, holders of shares that have one or more Argentine bank accounts
may be subject to this tax on the debits and credits to such bank accounts at
the rate of 0.6%, or at the rate of 1.2% on other transactions that are used as
a substitute for the use of such Argentine bank accounts.
GROSS INCOME TAX
The gross income tax is local in nature; therefore, the rules of the
relevant provincial jurisdiction should be considered, which may levy this tax
on the purchase and sale of shares and/or the collection of dividends. In the
particular case of the city of Buenos Aires, any transaction involving shares
and/or the collection of dividends and revaluations is exempt from this tax.
There is no gross income tax withholding system applicable to the payments
made to foreign beneficiaries. Those investors who customarily perform, or who
are deemed to perform, transactions in any jurisdiction in which they obtain
their income from the sale of shares and/or the collection of dividends are
subject to this tax at a rate of up to 15%, unless an exemption is applicable to
them.
STAMP TAX
The stamp tax is a local tax that is generally levied on the
instrumentation of onerous acts executed within a certain territorial
jurisdiction or outside a certain territorial jurisdiction but with effects in
such jurisdiction.
In the city of Buenos Aires, the stamp tax has been repealed for all those
acts that do not imply an onerous conveyance of real property. However, most
provincial tax authorities maintain this tax in effect for all acts in general;
therefore, the instruments which implement onerous transactions (including
issuance, subscription, placement and transfer) involving the shares or GDSs,
executed in other jurisdictions, or with effects in those jurisdictions, could
be deemed to be subject to this tax.
COURT AND OTHER TAXES
In the event that it becomes necessary to institute legal actions in
relation to the convertible notes in Argentina, a court tax (currently at a rate
of 3.0%) will be imposed on the amount of any claim brought before the Argentine
courts sitting in the city of Buenos Aires.
Argentina imposes neither an estate nor gift tax on a decedent, donor,
legatee or donee. No Argentine tax is imposed on the deposit or withdrawal of
shares in exchange for GDSs. Other than the taxes discussed above, no other
Argentine taxes are applicable to an investment in shares or GDSs. At present,
there is no national tax specifically applicable to the transfer of securities.
TAX TREATIES
Argentina has entered into tax treaties with several countries. There is
currently no tax treaty or convention in effect between Argentina and the United
States. Argentine Taxation.
F. DIVIDENDS AND PAYING AGENTS
This item is not applicable.
G. STATEMENT BY EXPERTS
This item is not applicable.
H. DOCUMENTS ON DISPLAY
We file annual, quarterly and other information with the SEC. You may read
and copy any document that we file at the public reference rooms of the SEC at
450 Fifth Street, N.W., Washington, D.C.
147
20549; and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may
obtain information on the operation of the Public Reference Rooms by calling the
SEC at 1-800-SEC-0330. Our Internet address is http://www.irsa.com. It should be
noted that nothing on our website should be considered part of this annual
report on Form 20-F. You may request a copy of these filings at no cost, by
writing or calling the offices of IRSA, Bolivar 108, (C1066AAB) Buenos Aires,
Argentina. Our telephone number is +54-11-4323-7555.
I. SUBSIDIARY INFORMATION
This item is not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our consolidated
financial position, results of operations or cash flows due to adverse changes
in financial and commodity market prices and interest rates. We are exposed to
market risk in the areas of interest rates and foreign currency exchange rates.
This discussion contains forward-looking statements that are subject to risks
and uncertainties. Actual results could vary materially as a result of a number
of factors. Uncertainties that are either nonfinancial or nonquantifiable, such
as political, economic, tax, other regulatory or credit risks, are not included
in the following assessment of our market risks.
INTEREST RATE RISK
Our exposure to market risk associated with changes in interest rates is
limited to our current investments and variable-rate debt.
We place our cash and current investments in high quality financial
institutions in the United States and Argentina. Our policy is to limit exposure
with any individual institution. Our investment portfolio primarily consists of
income securities and local market stocks. As of June 30, 2021 we had cash and
cash equivalents of Ps. 25.3 million and marketable securities totaling Ps. 36.4
million. In view of the nature of our total portfolio, a 10% movement in market
interest rates would not have a significant impact on the total value of our
portfolio as of June 30, 2002.
We are exposed to changes in interest rates primarily as a result of our
borrowing activities which include short-term borrowings, and other
variable-rate long-term debt used to maintain liquidity and fund our business
operations. The instruments' actual cash flows are denominated in U.S. dollars.
Our interest expense is sensitive to changes in the general level of interest
rates because most of our long-term debt arrangements bear interest at variable
rates. Therefore, our results of operations would be affected by interest rate
changes. Based on the nature and current levels of our long-term debt, however,
we have concluded that an immediate 10% change in interest rates would not have
a material effect on our results of operations over the next fiscal year.
For debt obligations, the following table presents principal cash flows and
related weighted average interest rates by expected maturity dates. The
information is presented in US dollars.
JUNE 30, 2002
EXPECTED MATURITY DATE
(US$ AND Ps EQUIVALENT IN MILLIONS)
-----------------------------------
LIABILITIES FY2002 FY2003 FY2004 FY2005 FY2006 TOTAL FAIR VALUE
----------- ------ ------ ------ ------ ------ ----- ----------
FIXED RATE (US$) 39.4 -- -- -- -- 39.4 39.4
Average interest rate.. 12% -- -- -- -- 12% 12%
VARIABLE RATE (US$) 83.2 1.2 1.2 1.2 6.5 93.3 93.3
Average interest rate.. 7.6% 7.0% 7.0% 7.0% 7.0% 7.1% 7.1%
Includes CER.
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As a matter of policy, we use derivative instruments only to minimize our
financing costs. However, there can be no assurance that such risks would be
managed in the future through a variety of strategies, including the use of
hedging transactions. We do not use derivative instruments for trading or
speculative purposes.
FOREIGN EXCHANGE EXPOSURE
We carry out all of our business in Pesos. Accordingly, our earnings are
subject to exposure from adverse movements in currency exchange rates primarily
related to our U.S. dollar-denominated debt.
Historically, volatility has been caused by currency devaluation, among
other factors. Most of these factors have occurred at various times in the last
two decades in Argentina.
On February 28, 2002, we sold all of our interest, we participated in
Brazil Realty through which we participated in the Brazilian real estate market.
From April 1, 1991, until the beginning of year 2002, the Convertibility
Law No. 23,928 was applicable in Argentina. This law established a fixed
exchange rate, under which the Argentine Central Bank was forced to sell U.S.
dollars to any person at a fixed rate of Ps. 1.00 per US$ 1.00. Accordingly, the
foreign currency fluctuations were reduced to a minimum level during this
period.
The primarily economic change implemented by the current Argentine
government in January 2002 was the announcement of the devaluation of the Peso.
Most of our lease contracts and most of our liabilities are denominated in U.S.
dollars. Decree No. 214 and Decree No. 762 mandatorily converted into pesos, all
monetary obligations in U.S. dollars entered into between parties under
Argentine Law. Consequently, all of our leases were pesified at a one-to-one
exchange rate and, additionally, inflation adjusted by the CER index. On the
other hand, most of our debt obligations, which are governed by the laws of the
State of New York, remained dollar-denominated.
Due to the end of Convertibility Plan, our foreign exchange exposure has
increased considerably. Currently all of our revenues are derived from our
operations in Argentina and foreign exchange volatility will probably affect our
Peso-denominated revenues, making it more burdensome for us to pay our
dollar-denominated debt.
Foreign currency exchange fluctuations may additionally affect the risk of
default on our mortgage receivables, leases and services and other receivables,
as any of our customers that have Peso-denominated revenue streams may
experience a relative increase in their U.S. dollar-denominated liabilities
compared to their Peso-denominated revenues. Foreign currency exchange
restrictions hereafter imposed by the Argentine government could prevent or
restrict our access to U.S. dollars, affecting our ability to service our U.S.
dollar-denominated liabilities.
Our hedging strategies may prove ineffective to address the effects of
interest rate or foreign currency exchange movements on our financial condition.
We have experienced net hedging losses in the past, and we could experience such
losses in the future to the extent that interest rates or foreign exchange rates
shift in excess of the risk covered by hedging arrangements. In entering into
interest rate and foreign currency contracts, we bear the credit risk of
counterparties being unable to meet the terms of their contracts; and we may be
unable to recover damages from any such defaulting counterparty through legal
enforcement actions due to laws affording bankruptcy or protection to insolvent
obligors, foreign laws limiting cross-border enforcement actions or otherwise.
We have entered into foreign currency forward exchange contracts with
maturities of one year or less. Consistent with our risk management policy, we
have used foreign currency forward exchange contracts as a supplement to reduce
our overall borrowing costs. The fair value of the forward foreign exchange
contracts is not recognized in our consolidated financial statements. At June
30, 2002, we had no outstanding foreign currency forward contracts. After June
30, 2002, we entered into two foreign currency
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future contracts for a total amount of US$ 4.55 million. As of the date hereof,
all of them have matured, resulting in a gain of US$ 302,066.
We do not use derivative financial instruments for speculative trading
purposes. Based on our historical foreign currency rate movements, we do not
believe that reasonably possible near-term changes in foreign currency will
result in a material effect on our future earnings, fair values or cash flows.
Foreign exchange net losses during fiscal years 2002, 2001 were Ps. 255.1
million, Ps. 25.6 million and Ps. 32.41 million, respectively.
ITEM 12. DESCRIPTION OF OTHER THAN EQUITY SECURITIES
This item is not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
DEFAULTS, PARTIAL WAIVERS AND DEBT AGREEMENTS WITH OUR CREDITORS
On May 24, 2000, we entered into a US$ 80 million syndicated credit
facility arranged by BankBoston N.A. Loans under this syndicated credit facility
bear interest at three-month LIBOR plus a margin of 500 basis points. Amounts
owing under the syndicated credit facility were payable in U.S. dollars.
Although final maturity on the loan agreement was on August 30, 2002, due to the
continuing effects of economic recession, the unavailability of financing
sources and the succession of recent governmental measures adversely affecting
the normal operations of the banking and payments system, we could not make the
scheduled payment on that date.
On December 18, 2000, we issued US$ 43.5 million class 2 floating rate
notes due December 24, 2001. Proceeds from this issuance were used to repay
certain outstanding short-term indebtedness. Our floating rate notes matured in
December 2001, and we were unable to pay the principal then due. As a result of
such non-payment, in December 2001, we entered into negotiations with the
holders of our floating rate notes and to date have been able to obtain
short-term deferrals of our obligation to pay such matured notes. On February 8,
2002, we agreed with our holders to replace the floating interest rate for an
annual fixed interest rate of 12%. Pursuant to the most recent deferral, granted
on October 31, 2002, the principal of and interest on our floating rate notes
were due in full on November 14, 2002, and were further renegotiated as
explained below. We also agreed with our holders on a capitalization of the
interest due on October 31, 2002. On May 15, 2002, we repurchased from Banco
Sudameris its participation in the mentioned convertible notes for US$ 6.8
million.
The floating rate notes and the syndicated credit facility included various
restrictive covenants, which among other things, require us to meet certain
financial tests and to comply with certain other covenants, including
restrictions on incurrence of debt and liens, restrictions on mergers,
acquisitions, asset dispositions, capital contributions and repurchases of stock
and investments. As of June 30, 2002, we were not in compliance with certain of
the financial covenants under the floating rate notes and syndicated credit
facility, and a waiver had been granted by the respective holders and banks in
relation to such covenants.
This situation has already been regularized and after months of
negotiations, we have finished the restructuring of our debt under the US$ 80
million loan agreement and the outstanding US$ 41.2 million of our floating rate
notes. On November 15 we have signed a "Refinancing Framework Agreement" with
our six bank creditors (Banca Nazionale del Lavoro S.A., BankBoston N.A., Banco
de la Ciudad de Buenos Aires, HSBC Bank Argentina S.A., Banco Itau S.A., New
York Branch and Banco de la Nacion Argentina, New York Branch) to refinance our
debt at a long term and lower interest rates.
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Moreover, our subsidiary Hoteles Argentinos, owner of the Hotel Sheraton
Libertador, did not pay the principal installments of US$ 300.000 each, that
were due on January 26, April 29, July 29 and October 26, 2002, and the interest
installments due on July 29 and October 26, 2002, for a total amount of US$
315.000, under the US$ 12.0 million loan. Although Hoteles Argentinos'
Management is renegotiating its debt with its creditors, we cannot assure you
that an agreement will be reached.
On January 31, 2002, and on April 30, 2002 our Company did not pay to
Goldman Sachs two equal installments of US$ 6.6 million plus reasonable costs
and interest. On October 7, 2002, Goldman Sachs sent a us letter claiming that
since January 31, 2002, we have been in default under our obligations under the
amended shareholders agreement dated November 9, 2001. On November 21, 2002,
together with Goldman Sachs, we signed a Letter Agreement in which we agree to
cancel the US$ 16.3 million debt before November 29, 2002. The payment was done
with US$ 9.0 million cash and US$ 3.1 million face amount of APSA's convertible
notes previously owned by Inversora Bolivar.
ITEM 14. MATERIAL MODIFICATIONS
FAIR PRICE PROVISION
At our annual meeting held on October 30, 2000, the shareholders approved
an amendment to our bylaws which included the adoption of a fair price provision
(the "Fair Price Provision").
The following description is a summary of the principal provisions of the
Fair Price Provision, which constitutes Article Nine of our bylaws and does not
contain a description of all of the terms of the Fair Price Provision. The text
of the English language translation and the governing Spanish text of Article
Nine is included as an Exhibit hereto, and should be read in their entirety.
The Fair Price Provision prohibits a party seeking to acquire, directly or
indirectly, either control or (together with such party's other holdings) twenty
percent (20%) or more of our capital stock without complying with the procedural
and price requirements described below. Acquisitions made in violation of the
Fair Price Provision are deemed ineffective against us and will not be
registered in our share registry. Shares acquired in violation of the Fair Price
Provision shall have no voting or equity rights until the Fair Price Provision
has been complied with. The Fair Price Provision applies to transactions
involving shares of our common stock and any securities convertible in shares of
our common stock, including, without limitation, convertible debentures and
bonds and our global depositary receipts ("GDRs"). The Fair Price Provision
excludes certain acquisitions of shares in certain limited circumstances.
The Fair Price Provision provides that a party seeking to acquire, directly
or indirectly, control of our Company or twenty percent (20%) or more of our
capital stock shall be required to make a public tender offer for all of the
outstanding common stock of us and any shares of common stock into which
outstanding securities of our Company are presently convertible or exchangeable
in accordance with the procedural and price terms of the Fair Price Provision
and in accordance with applicable law. For purposes of the twenty percent
threshold contained in the Fair Price Provision parties acting in concert or
which are under common control or administration are deemed a single party.
The Fair Price Provision requires the offering party to notify use of the
tender offer simultaneously with its filing of the public tender offer with the
Comision Nacional de Valores, the Argentine National Securities Commission. The
notice to us is required to set forth all of the terms and conditions of any
agreement that the offering party has made with any other of our shareholders
with respect to the proposed transaction and to provide, among other things, the
following information:
o the identity and nationality of the offering party and, in the event
the offer is made by a group, the identity of each member of the
group;
o the terms and conditions of the offering, including the price, the
tender offer period and the requirements for accepting the tender
offer;
o accounting documentation required by Argentine law relating to the
offering party;
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o details of all prior acquisitions by the offering party of shares or
securities convertible into shares of our capital stock.
We will distribute the information provided by the offering party to our
shareholders.
The Fair Price Provision requires that the consideration paid in the tender
offer be paid in cash and that the price paid for each share in the tender offer
be the same and not less than the highest price per share derived from the five
following alternative valuation methods:
o the highest price per share of our common stock paid by the offering
party, or on behalf of the offering party, for any acquisition of
shares or convertible securities within the 2 years prior to the
commencement of the tender offer;
o the highest closing selling price of a share of our common stock on
the BCBA during the thirty day period immediately preceding the
commencement of the tender offer;
o the highest price resulting from the calculations made according to
the provisions of (i) and (ii) above multiplied by a fraction the
numerator of which is such highest price and the denominator of which
is the lowest closing price of a share of our common stock on the BCBA
during the two-year period prior to the period referred to in
sub-sections (i) or (ii), as applicable;
o our aggregate net earnings per share during our preceding four
completed fiscal quarters prior to the commencement of the tender
offer, multiplied by our highest price to earnings ratio during the
two-year period immediately preceding the commencement of the tender
offer. Such multiples shall be determined considering the average
closing selling price of our common stock on the BCBA, and our
aggregate net income from our preceding four completed fiscal
quarters; and,
o the book value per share of our common stock at the time the tender
offer is commenced, multiplied by the highest ratio determined by a
fraction the numerator of which is the closing selling price of a
share of our common stock on the BCBA on each day during the two year
period prior to the commencement of the tender offer and the
denominator of which is the latest known book value per share of our
common stock on each such date.
ITEM 15. [RESERVED]
ITEM 16. [RESERVED]
PART III
ITEM 17. FINANCIAL STATEMENTS
The Registrant has responded to Item 18 in lieu of responding to this Item.
ITEM 18. FINANCIAL STATEMENTS
Reference is made to pages F-1 through F-100.
ITEM 19. EXHIBITS
Index to Financial Statements (see page F-1).
152
INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
3.1* Estatutos of the registrant, which serve as the registrant's articles
of incorporation and bylaws, and an English translation thereof.
4.1** Unit Agreement between the registrant and the Bank of New York.
4.2** Indenture between the registrant and the Bank of New York.
4.2** Warrant Agreement between the registrant and the Bank of New York,
as warrant agent.
12.1** Statement re computation of ratio of earnings to fixed charges
21.1** Subsidiaries of the registrant
---------------
* Incorporated herein by reference to the exhibit to the registrant's
registration statement on Form F-1 (File No. 33-86792)
** Incorporated herein by reference to the same-numbered exhibit to the
registrant's registration statement on Form F-1 (File No. 333-89660)
153
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
------
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA AND SUBSIDIARIES
Report of Independent Accountants................................................................ F - 2
Consolidated Balance Sheets as of June 30, 2002 and 2001......................................... F - 3
Consolidated Statements of Operations for the years ended June 30, 2002, 2001 and 2000........... F - 4
Consolidated Statements of Changes in Shareholders' Equity for the years ended
June 30, 2002, 2001 and 2000..................................................................... F - 5
Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001 and 2000........... F - 6
Notes to the Consolidated Financial Statements................................................... F - 8
ALTO PALERMO S.A. (APSA) AND SUBSIDIARIES
Report of Independent Accountants................................................................ F - 82
Consolidated Balance Sheets as of June 30, 2002 and 2001......................................... F - 83
Consolidated Statements of Operations for the years ended June 30, 2002, 2001 and 2000........... F - 84
Consolidated Statements of Changes in Shareholders' Equity for the years ended
June 30, 2002, 2001 and 2000..................................................................... F - 85
Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001 and 2000........... F - 86
Notes to the Consolidated Financial Statements................................................... F - 88
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
Report of Independent Accountants................................................................ F - 150
Consolidated Balance Sheets as of June 30, 2001 and 2000......................................... F - 154
Consolidated Statements of Income for the years ended June 30, 2001 and 2000..................... F - 156
Consolidated Statements of Changes in Shareholders' Equity for the years ended
June 30, 2001 and 2000........................................................................... F - 157
Consolidated Statements of Cash Flows for the years ended June 30, 2001 and 2000................. F - 158
Notes to the Consolidated Financial Statements................................................... F - 159
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the shareholders of
IRSA Inversiones y Representaciones Sociedad Anonima:
In our opinion, based in our audits and the reports of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, of changes in shareholders' equity and of cash flows present
fairly, in all material respects, the financial position of IRSA Inversiones y
Representaciones Sociedad Anonima and its subsidiaries at June 30, 2002 and
2001, and the results of their operations and their cash flows for the each of
the three years in the period ended June 30, 2002 in conformity with accounting
principles generally accepted in Argentina. 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 Brazil Realty Empreendimentos e Participacoes, Venezuela
Invest Ltd. and Fondo de Valores Inmobiliarios S.A.C.A., unconsolidated equity
investees of IRSA Inversiones y Representaciones Sociedad Anonima, as of and for
the year ended June 30, 2000, which represent 15.4% of total consolidated assets
and 23.9% of total consolidated revenues as of and for the year then ended.
Those financial statements were audited by other auditors whose respective
reports thereon have been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Brazil Realty Empreendimentos
e Participacoes, Venezuela Invest Ltd. and Fondo de Valores Inmobiliarios
S.A.C.A, is based solely on the reports of the other auditors. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 , the
Company was negatively impacted by the continued deterioration of the Argentine
economy, the Argentine Government's adoption of various economic measures and
the devaluation of the Argentine Peso, which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Accounting principles generally accepted in Argentina vary in certain
significant respects from the accounting principles generally accepted in the
United States and as allowed by Item 18 to Form 20-F. The application of the
latter would have affected the determination of consolidated net (loss) income
expressed in Argentine pesos for each of the three years in the period ended
June 30, 2002 and the determination of consolidated shareholders' equity and
consolidated financial position also expressed in Argentine pesos at June 30,
2002 and 2001 to the extent summarized in Note 19 to the consolidated financial
statements.
PricewaterhouseCoopers
Buenos Aires, Argentina
September 9, 2002
F-2
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002 AND 2001
(Adjusted for price-level changes and expressed in thousands of constant
Argentine Pesos as of June 30, 2002)
2002 2001
----------------- -----------------
ASSETS
CURRENT ASSETS
Cash and banks (Notes 5.a. and 20.e.).............................. Ps. 24,831 Ps. 10,530
Investments (Notes 5.b. and 20.e.)................................. 36,796 89,707
Mortgages and leases receivable, net (Notes 5.c. and 20.e.)........ 12,004 59,928
Other receivables and prepaid expenses (Notes 5.d. and 20.e.)...... 38,547 36,927
Inventories (Note 5.e.)............................................ 24,130 24,783
----------------- -----------------
TOTAL CURRENT ASSETS........................................... 136,308 221,875
----------------- -----------------
NON-CURRENT ASSETS
Mortgages and leases receivable, net (Notes 5.c. and 20.e.)....... 3,135 44,326
Other receivables and prepaid expenses (Notes 5.d. and 20.e.)...... 89,621 34,764
Investments (Notes 5.b. and 20.e.)................................. 526,348 699,893
Inventories (Note 5.e.)............................................ 46,558 67,399
Fixed assets, net (Notes 20.a. y 20.e.)............................ 338,794 419,375
Intangible assets, net (Note 20.b.)................................ 3,951 6,917
----------------- -----------------
TOTAL NON-CURRENT ASSETS....................................... 1,008,407 1,272,674
----------------- -----------------
TOTAL ASSETS.......................................................... Ps. 1,144,715 Ps. 1,494,549
================= =================
LIABILITIES
CURRENT LIABILITIES
Trade accounts payable (Notes 5.f. and 20.e.)...................... Ps. 12,224 Ps. 10,831
Customer advances (Note 20.e.)..................................... 1,931 4,300
Salaries and social security payables (Note 5.g.).................. 1,024 1,923
Short-term debt (Notes 5.h. and 20.e.)............................. 564,739 350,465
Taxes payable (Note 5.i. and 20.e.)................................ 12,598 8,036
Other liabilities (Notes 5.j. and 20.e.)........................... 13,544 10,106
----------------- -----------------
TOTAL CURRENT LIABILITIES...................................... 606,060 385,661
----------------- -----------------
NON-CURRENT LIABILITIES
Trade accounts payable (Notes 5.f. and 20.e.)...................... - 374
Long-term debt (Notes 5.h. and 20.e.).............................. 142 26,012
Customer advances (Note 20.e.)..................................... - 360
Other liabilities (Notes 5.j. and 20.e.)........................... 2,879 7,751
----------------- -----------------
TOTAL NON-CURRENT LIABILITIES.................................. 3,021 34,497
----------------- -----------------
TOTAL LIABILITIES..................................................... 609,081 420,158
----------------- -----------------
Minority interest.................................................. 75,218 114,356
----------------- -----------------
SHAREHOLDERS' EQUITY.................................................. 460,416 960,035
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................ Ps. 1,144,715 Ps. 1,494,549
================= =================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(Adjusted for price-level changes and expressed in thousands of constant
Argentine Pesos as of June 30, 2002)
2002 2001 2000
----------------- ------------------ -------------------
SALES (Net of gross sales tax of Ps. 6.0 million,
Ps. 10.4 million and Ps. 7.4 million, respectively)....... Ps. 211,319 Ps. 339,843 Ps. 361,930
COSTS..................................................... (121,355) (172,024) (167,689)
----------------- ------------------ -------------------
GROSS PROFIT.............................................. 89,964 167,819 194,241
----------------- ------------------ -------------------
Selling expenses.......................................... (34,332) (33,748) (36,886)
Administrative expenses .................................. (37,643) (50,740) (55,629)
----------------- ------------------ -------------------
(71,975) (84,488) (92,515)
----------------- ------------------ -------------------
Gain (loss) on purchasers rescissions of sales contracts.. 27 (14) (1,541)
Loss from operations and holdings of real estate assets,
net (Note 8) ............................................. (64,956) (6,305) (2,696)
----------------- ------------------ -------------------
OPERATING (LOSS) INCOME................................... (46,940) 77,012 97,489
----------------- ------------------ -------------------
Net losses in equity investments.......................... (1,967) (10,323) (1,428)
Financial results, net (Note 9)........................... (432,220) (110,302) (58,876)
Other expenses, net (Note 10)............................. (8,511) (5,624) (11,907)
----------------- ------------------ -------------------
(LOSS) INCOME BEFORE TAXES AND EXTRAORDINARY LOSS......... (489,638) (49,237) 25,278
----------------- ------------------ -------------------
Extraordinary loss (Note 16).............................. -- (5,653) --
Income tax ............................................... (9,981) (5,064) (13,727)
----------------- ------------------ -------------------
NET (LOSS) INCOME......................................... Ps. (499,619) Ps. (59,954) Ps. 11,551
================= ================== ===================
For details of income statement line items, see Note 7 to the
consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(Adjusted for price-level changes and expressed in thousands of constant
Argentine Pesos as of June 30, 2002)
Shareholders' contributions
---------------------------------------------------------------------------------------
Inflation Inflation
adjustment adjustment Additional
of common of treasury paid-in-
Common stock Treasury stock stock capital Total
(Note 6.a.) stock (Note 6.c.) (Note 6.c.) (Note 6.a.)
-------------- ------------ ------------ ------------- ------------ -------------
BALANCES AS OF JUNE 30, 1999................ Ps. 188,476 Ps. 2,434 Ps. 198,099 Ps. 2,558 Ps. 506,767 Ps. 898,334
-------------- ------------ ------------ ------------- ------------ -------------
Capital contributions ...................... 21,090 -- 20,166 -- -- 41,256
Approved by shareholders' meeting held on
October 28, 1999:
- Cash dividends (Ps. 0.11 per share)... -- -- -- -- -- --
- Legal reserve......................... -- -- -- -- -- --
- Distribution of treasury stock........ 2,433 (2,433) 2,557 (2,557) -- --
Purchase of treasury stock.................. (6,237) 6,237 (6,496) 6,496 -- --
Net income for the year..................... -- -- -- -- -- --
-------------- ------------ ------------ ------------- ------------ -------------
BALANCES AS OF JUNE 30, 2000................ Ps. 205,762 Ps. 6,238 Ps. 214,326 Ps. 6,497 Ps. 506,767 Ps. 939,590
-------------- ------------ ------------ ------------- ------------ -------------
Approved by shareholders' meeting held on
October 31, 2000:
- Legal reserve......................... -- -- -- -- -- --
- Distribution of treasury stock........ 20,730 (20,730) 21,592 (21,592) -- --
Purchase of treasury stock.................. (19,080) 19,080 (19,876) 19,876 -- --
Net loss for the year....................... -- -- -- -- -- --
-------------- ------------ ------------ ------------- ------------ -------------
BALANCES AS OF JUNE 30, 2001................ Ps. 207,412 Ps. 4,588 Ps. 216,042 Ps. 4,781 Ps. 506,767 Ps. 939,590
-------------- ------------ ------------ ------------- ------------ -------------
Net loss for the year....................... -- -- -- -- -- --
-------------- ------------ ------------ ------------- ------------ -------------
BALANCES AS OF JUNE 30, 2002................ Ps. 207,412 Ps. 4,588 Ps. 216,042 Ps. 4,781 Ps. 506,767 Ps. 939,590
============== ============ ============ ============= ============ =============
Legal Accumulated
reserve retained
(Note earnings Shareholders'
6.d.) (deficit) Equity
----------- ------------- ------------
BALANCES AS OF JUNE 30, 1999................ Ps. 12,379 Ps. 198,352 Ps.1,109,065
----------- ------------- ------------
Capital contributions ...................... -- -- 41,256
Approved by shareholders' meeting held on
October 28, 1999:
- Cash dividends (Ps. 0.11 per share)... -- (31,518) (31,518)
- Legal reserve......................... 4,349 (4,349) --
- Distribution of treasury stock........ -- -- --
Purchase of treasury stock.................. -- (29,934) (29,934)
Net income for the year..................... -- 11,551 11,551
----------- ------------- ------------
BALANCES AS OF JUNE 30, 2000................ Ps. 16,728 Ps. 144,102 Ps.1,100,420
----------- ------------- ------------
Approved by shareholders' meeting held on
October 31, 2000:
- Legal reserve......................... 577 (577) --
- Distribution of treasury stock........ -- -- --
Purchase of treasury stock.................. -- (80,431) (80,431)
Net loss for the year....................... -- (59,954) (59,954)
----------- ------------- ------------
BALANCES AS OF JUNE 30, 2001................ Ps. 17,305 Ps. 3,140 Ps. 960,035
----------- ------------- ------------
Net loss for the year....................... -- (499,619) (499,619)
----------- ------------- ------------
BALANCES AS OF JUNE 30, 2002................ Ps. 17,305 Ps. (496,479) Ps. 460,416
=========== ============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(Adjusted for price-level changes and expressed in thousands of constant
Argentine Pesos as of June 30, 2002)
2002 2001 2000
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income for the year....................................... Ps. (499,619) Ps. (59,954) Ps. 11,551
Adjustments to reconcile net income to net cash flow from
operating activities:
Depreciation and amortization..................................... 21,033 23,103 26,023
Minority interest................................................. (5,118) 1,459 4,818
Allowances and provisions......................................... 1,314 994 1,389
Gain from the sale of fixed assets................................ -- (29) (68)
Equity in earnings of affiliated companies........................ 17,797 (6,471) (10,810)
Loss from operations and holdings of real estate assets........... 41,631 5,708 743
Loss on early redemption of debt.................................. -- -- 1,199
Financial results................................................. 294,387 39,913 (21,094)
Income tax........................................................ 6,882 3,140 9,460
Changes in certain assets and liabilities, net of non-cash
transactions and the effects of acquisitions:
(Increase) decrease in current investments........................ (16,103) (34,740) 33,476
Decrease in non-current investments............................... 982 -- --
Decrease in mortgages and leases receivables...................... 37,966 15,663 9,464
Increase in other receivables..................................... (13,377) (5,849) (12,848)
Decrease in inventories........................................... 52,758 52,188 17,590
Decrease (increase) in intangible assets.......................... -- 593 (135)
Increase (decrease) in trade accounts payable..................... 8,289 2,578 (3,277)
Increase (decrease) in customer advances, salaries and social
security and taxes payable...................................... 984 (12,762) 6,776
Cash dividends received........................................... 2,496 19,243 5,143
Increase (decrease) in other liabilities.......................... 22,800 (3,840) 5,006
Increase in accrued interest and exchange (loss) gain............. 72,223 54,957 44,628
-------------- -------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................ 47,325 95,894 129,034
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from the sale of interests in joint controlled 119,933 134,074 (1,637)
companies.........................................................
Payment for acquisition of subsidiary companies and
equity investees ................................................. (19,322) (52,291) (16,354)
Loans granted to related parties.................................. (94,077) -- --
Net proceeds from the sale of fixed assets........................ -- 63 481
Payment for acquisition of undeveloped parcels of land............ (2,952) (2,214) (12,928)
Purchase and improvements of fixed assets......................... (21,058) (6,876) (8,058)
-------------- -------------- --------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES.................. (17,476) 72,756 (38,496)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock........................................ -- (80,431) (29,934)
Issuance of common stock.......................................... -- -- 41,256
Payment of notes.................................................. -- -- (154,491)
Payment of cash dividends......................................... -- -- (31,518)
Increase in intangible assets..................................... (3,033) (4,802) (7,692)
Contributions from (dividends paid to) minority shareholders...... 3,059 -- (5,186)
Proceeds from the issuance of notes............................... -- 129,178 --
Proceeds from short-term and long-term debt....................... 151,326 195,330 287,340
Payment of short-term and long-term debt.......................... (187,453) (385,590) (187,913)
Payment of seller financing ...................................... (1,766) (18,332) (16,333)
-------------- -------------- --------------
NET CASH USED IN FINANCING ACTIVITIES ............................... (37,867) (164,647) (104,471)
-------------- -------------- --------------
Net (decrease) increase in cash and cash equivalents................. (8,018) 4,003 (13,933)
Cash and cash equivalents as of beginning of year.................... 33,271 29,268 43,201
-------------- -------------- --------------
Cash and cash equivalents as of end of year.......................... Ps. 25,253 Ps. 33,271 Ps. 29,268
============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(Adjusted for price-level changes and expressed in thousands of constant
Argentine Pesos as of June 30, 2002)
2002 2001 2000
---------------- ---------------- ----------------
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest....................................................... Ps. 26,156 Ps. 55,402 Ps. 63,371
Income tax..................................................... 351 -- --
NON-CASH ACTIVITIES:
Increase in deferred gain through a decrease in current
investments.................................................... Ps. -- Ps. 2,328 Ps --
Increase in non-current investments through a decrease in
mortgages and leases receivable................................ 20,200 -- 7,015
Increase in minority interest through a decrease in long-term
debt........................................................... -- 293 --
Decrease in long-term debt through a decrease in investments .. 5,620 -- --
Increase in fixed assets through a decrease in inventory....... -- 2,408 29,181
Increase in intangible assets through a decrease in inventory . -- 595 2,655
Decrease in non-current investments through a decrease in 33,919
other liabilities.............................................. -- --
Increase in inventory through a decrease in fixed assets....... 36,860 23,809 23,214
Incurrence of debt for related company acquisition............. -- -- 7,874
Increase in non-current investments through a decrease in
non-current other receivables.................................. -- -- 38,392
Increase in current investments through a decrease in
non-current investments........................................ -- -- 44,613
Decrease in customer advances through a decrease in mortgages
and leases receivable.......................................... -- -- 5,282
Decrease in other liabilities through a decrease in current
mortgages and leases receivable................................ -- -- 1,565
Increase in current taxes payable through a decrease in
non-current taxes payable...................................... -- -- 2,181
Increase in mortgages and leases receivable through a decrease
in non-current investments..................................... -- -- 4,495
Increase in inventory through a decrease in undeveloped plots
land........................................................... -- -- 2,973
Increase in non-current investments through an increase in
other liabilities.............................................. -- -- 2,529
Increase in non-current investments through a decrease in
fixed assets................................................... -- -- 20,448
2002 2001 2000
---------------- ---------------- ----------------
ACQUISITION OF EQUITY INVESTEES:
Investments.................................................... Ps. 19,322 Ps. 52,291 Ps. 16,354
---------------- ---------------- ----------------
Ps. 19,322 Ps. 52,291 Ps. 16,354
================ ================ ================
DISPOSITION OF SUBSIDIARY COMPANIES:
Mortgages and leases receivable, net........................... Ps. -- Ps. -- Ps. (3,058)
Other receivables.............................................. -- -- (5,374)
Inventory...................................................... -- -- (366)
Fixed assets, net.............................................. -- -- (31,810)
---------------- ---------------- ----------------
TOTAL NON-CASH ASSETS DISPOSED OF ............................. -- -- (40,608)
---------------- ---------------- ----------------
Trade accounts payable......................................... -- -- 2,956
Loans.......................................................... -- -- 23,787
Customer advances.............................................. -- -- 1,166
Salaries payable............................................... -- -- 918
Taxes payable.................................................. -- -- 209
Other liabilities.............................................. -- -- 10,387
---------------- ---------------- ----------------
TOTAL LIABILITIES DISPOSED OF ................................. -- -- 39,423
---------------- ---------------- ----------------
NET NON-CASH ASSETS DISPOSED OF ............................... -- -- (1,185)
Cash disposed of............................................... -- -- (1,637)
---------------- ---------------- ----------------
VALUE OF NET ASSETS DISPOSED OF ............................... Ps. -- Ps. -- Ps. (2,822)
================ ================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
IRSA Inversiones y Representaciones Sociedad Anonima ("IRSA"), is an
Argentine real estate company incorporated under the laws of Argentina which,
through its investments in subsidiaries, joint ventures and international
alliances (IRSA and subsidiaries is collectively referred hereinafter as "IRSA"
or the "Company"), is primarily involved in (i) the acquisition and development
of residential properties primarily for sale, (ii) the acquisition, development
and operation of office and other non-retail buildings primarily for rental
purposes, (iii) the development and operation of shopping center properties,
(iv) the acquisition and operation of luxury hotels, (v) the acquisition of
undeveloped land reserves either for future development or sale, (vi) e-commerce
activities and, (vii) other non-core activities. The Company seeks to identify
desirable properties for acquisitions which it acquires in the normal course of
business, and, regularly reviews its portfolio and from time to time considers
and effects the sale of certain properties. The Company is the only Argentine
real estate company whose shares are listed and traded on both the Buenos Aires
Stock Exchange ("BASE") and the New York Stock Exchange ("NYSE").
2. ARGENTINE ECONOMIC SITUATION AND ITS IMPACT ON THE COMPANY'S ECONOMIC AND
FINANCIAL POSITION
Economic Crisis
Argentina is immersed in a critical economic climate. The main features
of the current economic context are a major public debt burden, a financial
system in crisis, country risk indicators far above normal average and an
economic recession that has already lasted more than four years. This situation
has led to a significant decrease in the demand for goods and services and a
large rise in the level of unemployment. These circumstances have affected the
Government's ability to comply with existing commitments and access to bank
financing.
As from December 3, 2001 measures were issued to restrict the free
availability and circulation of cash and the transfer of foreign currency
abroad. Subsequently, the Government declared default on the external debt.
On January 6, 2002 after a political crisis that resulted in the
resignation of two presidents, the Government enacted Law 25561 (Law of public
emergency and exchange system reform) that involved an in-depth change of the
prevailing economic model and the amendment of the Convertibility Law in force
since March 1991. In early February the Government announced new economic
measures though Decree 214 (Restructuring of the financial system) dated
February 3, 2002 and Decree 260 (Exchange Regime) dated February 8, 2002,
substantially modifying some of the measures implemented by the Public Emergency
Law. These decrees are being complemented by other regulations being issued by
the various control agencies, some of which are been pending at the date of the
issuance of these financial statements. In addition, on April 24, 2002 the
Government signed an agreement with provincial governors, which, together with
other changes to the National Administration, will lay down the basis for
further measures that have yet to be issued or fully implemented.
Listed below are some of the measures adopted by the Government that are
in force at the date of issuance of these financial statements and the effect
they have had on the Company's economic and financial situation to date.
Exchange system
On February 8, 2002 the Government established a single free exchange
market system as from February 11, 2002, through which all transactions
involving the exchange of currency are to be traded at a rate of exchange to be
freely agreed, observing the requirements to be laid down by the Argentine
Central Bank. At present, most transfers of funds abroad require the prior
approval of the Central Bank. Additionally, certain requirements have to be
fulfilled for export collections.
The new exchange regime replaces the previous convertibility legislation,
under which the previous exchange rate of Ps. 1 to US$ 1 existed for a number of
years. Also, during the year ended June 30, 2002, the Argentine peso devalued
significantly, and at June 30, 2002 the exchange rate was approximately Ps. 3.8
to US$ 1.
The devaluation of the Argentine peso resulted in a loss of approximately
Ps. 255.1 million for the year ended June 30, 2002. This loss from devaluation
was primarily the result of the Company's US denominated debt, partially offset
by a receivable related to the sale of the Company's investment in Brazil Realty
Empreendimentos e Participacoes.
F-8
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. ARGENTINE ECONOMIC SITUATION AND ITS IMPACT ON THE COMPANY'S ECONOMIC AND
FINANCIAL POSITION (CONTINUED)
Deposits in Argentine financial institutions
As from February 3, 2002 deposits in U.S. dollars or other foreign
currencies in Argentine financial institutions were converted to pesos at the
exchange rate of Ps. 1.4 per US$ 1 or its equivalent in such other currency.
Furthermore, there are restrictions on the availability of certain balances in
current accounts and savings accounts in dollars and fixed term deposits in
pesos or dollars. The terms of ultimate repayment of bank deposits to depositors
have not been finalized and is not yet known in what form such payment, or other
compensation, will be made. As from February 3, 2002 a reference stabilization
index (CER) and an interest rate were to be applied to these rescheduled
deposits. The CER is an index that measures the daily rate of change derived
from the monthly change in the Consumer Price Index (CPI) published by the
INDEC. The application of the CER for certain transactions has met with
substantial resistance in Argentina and its application may change substantially
in the future. In addition, the possibility exists of transforming part or all
of the rescheduled deposits into Government Bonds or other financial
institutions. If the depositors do not elect to receive Government Bonds, they
will receive bonds issued by the Bank that will observe the pre-existing
conditions.
Financial debts in foreign currency with Argentine financial institutions
Debts in U.S. dollars or other foreign currencies in the Argentine
financial system were converted to pesos at the rate of exchange of Ps. 1 per
US$ 1 or its equivalent in another currency. As from February 3, 2002 a
reference stabilization index (CER) and an interest rate will be applied to
these debts.
Credits and debts not related to the financial system
The obligation to pay money denominated in dollars or other foreign
currency that are not related to the Argentine financial system, whatever their
origin or nature, were converted to pesos at the exchange rate of Ps. 1 to US$ 1
or its equivalent in such other foreign currency. To these balances must be
applied a reference stabilization index as from February 3, 2002. If through
this provision, the resulting value of the item, good or service is higher or
lower at the time of payment, either of the parties can request a fair
readjustment of the price. If no agreement is reached, the case will be
submitted to the Courts.
Deferment of the deduction of the exchange difference from income tax purposes
The net negative results caused by this devaluation are deductible from
income tax over a five-year period, beginning in the fiscal year ended June 30,
2002.
Presentation of financial statements in constant Argentine pesos
As established by Resolution 3/2002 of the Professional Council in
Economic Sciences of the Autonomous City of Buenos Aires, Resolution 240/02 of
the Argentine Federation of Professional Councils in Economic Sciences and
Resolution No. 415 of the Comision Nacional de Valores ("CNV") - the National
Securities Commission in Argentina-, as from January 1, 2002 financial
statements are required to be restated to reflect the effects of inflation in
accordance with the guidelines of Technical Pronouncement No.6 of the Argentine
Federation of Professional Councils in Economic Sciences. See Note 3.c. for
further detail.
Impact of current economic conditions on the Company
The impact generated by all these measures adopted to date by the
Government on the financial situation of the Company at June 30, 2002 was
calculated according to the evaluations and estimates made by Management at the
date of preparing the financial statements. Future actual results could differ
from the evaluations and estimates made at the date of preparing these financial
statements and these differences could be significant. Therefore, the Company's
financial statements may not report all the adjustments that could result from
these adverse conditions. Furthermore, at this time it is not possible to
foresee the future development of the country's economy or its consequences on
the economic and financial situation of the Company. Thus, any decision that
must be made on the basis of these financial statements must take into account
the effects of these measures and their future development and the Company's
financial statements must be considered in the light of these uncertain
circumstances.
F-9
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. ARGENTINE ECONOMIC SITUATION AND ITS IMPACT ON THE COMPANY'S ECONOMIC AND
FINANCIAL POSITION (CONTINUED)
Impact of current economic conditions on the Company (continued)
The Company has been negatively impacted by the continued deterioration
of the Argentine economy, the Argentine Government's adoption of the economic
measures summarized above and the devaluation of the Argentine Peso. As
described in Note 5.h., the Company was unable to fully pay the principal and
interest of the Notes originally due on December 24, 2001 and the Loan Agreement
originally due on May 31, 2002. As a result of such non-payments, the Company
entered into negotiations with the holders of the remaining Notes and lenders
under the Loan Agreement and obtained for short-term deferrals to pay such
matured debts. Pursuant to the most recent deferrals, the principal and interest
of US$ 39.3 million Notes must be paid in September 9, 2002 and the US$ 80
million Loan Agreement must be paid in September 30, 2002. Due to the continuing
effects of economic recession, the unavailability of financial credit and the
succession of recent economic measures adversely affecting the normal operations
of the banking and payments system, it is probable on September 9, 2002 and
September 30, 2002 the Company will be unable to make the schedule payments upon
maturity of the US$ 39.3 million Notes and the US$ 80.0 million Loan Agreement.
Management is negotiating agreements with the holders of the Notes and the
lenders under the Loan Agreement. Management expects to use the net proceeds
from the rights offering mentioned in Note 11 to facilitate the renegotiations
or partial payment of the indebtedness outstanding above mentioned. It is not
yet certain what the outcome of such negotiations will be.
Additionally, as mentioned in Note 5.h.(v), Hoteles Argentinos S.A. has
not paid principal installments amounting to US$ 300, with original maturates
set for April 29 and July 29, 2002, and an interest installment amounting to US$
127 which fell due on July 29, 2002, under the long-term loan agreement secured
by a mortgage entered into with Bank Boston N.A., Buenos Aires branch.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern.
The accompanying consolidated financial statements have been prepared on
a going concern basis which contemplate continuity of operations, realization of
assets, and liquidation of liabilities in the ordinary course of business and do
not reflect any adjustment that might result should the Company be unable to
continue as a going concern.
3. PREPARATION OF FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles used in Argentina
("Argentine GAAP"), and the regulations of the Comision Nacional de Valores
("CNV"), the National Securities Commission in Argentina, which differ in
certain respects from generally accepted accounting principles in the United
States of America ("US GAAP"). Such differences involve methods of measuring the
amounts shown in the financial statements, as well as additional disclosures
required by US GAAP and Regulation S-X of the Securities and Exchange Commission
("SEC"). A description of the significant differences between Argentine GAAP and
US GAAP as they relate to the Company are set forth in Note 19 to these
consolidated financial statemets.
Amounts included in the notes to the consolidated financial statements
are expressed in thousands of Argentine Pesos, except as otherwise indicated.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries over which the Company has effective control. Investments
in companies in which the Company exercises significant influence, but not
control, are accounted for under the equity method.
All significant intercompany balances and transactions have been
eliminated in consolidation.
F-10
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. PREPARATION OF FINANCIAL STATEMENTS (CONTINUED)
B. PRINCIPLES OF CONSOLIDATION (CONTINUED)
A description of the subsidiaries with their respective percentage of
capital stock owned is presented as follows:
------------------------------------------------
PERCENTAGE OF CAPITAL STOCK
OWNED AS OF JUNE 30, (i)
------------------------------------------------
------------------------------ ---------------
2002 2001 2000
------------------------------ ---------------
CONTROLLED COMPANIES
--------------------
Hoteles Argentinos S.A. ("Hoteles Argentinos") (ii)............ 80.00% 80.00% 80.00%
Palermo Invest S.A. ("Palermo Invest") (ii).................... 66.67% 66.67% 66.67%
Abril S.A. ("Abril") (ii)...................................... 83.34% 83.34% 83.34%
Pereiraola S.A.I.C.I.F. y A. ("Pereiraola") (ii)............... 83.34% 83.34% 83.34%
Baldovinos S.A. ("Baldovinos") (ii)............................ 83.34% 83.34% 83.34%
Ritelco S.A. ("Ritelco") (iii)................................. 100.00% -- --
IRSA International Limited ("IRSA Int'l") (iii)............... -- 100.00% 100.00%
Home Financing S.A. ("HOFISA") (iv) ........................... -- 100.00% 100.00%
Santa Maria del Plata S.A. ("SMP") (iv)........................ -- -- 100.00%
Sociedad del Dique S.A. ("Sociedad del Dique") (iv)............ -- -- 100.00%
(i) Percentage of equity interest owned has been rounded.
(ii) Results of operations have been accounted for under the proportionate
consolidation method.
(iii) As of June 30, 2002 the Company decided the liquidation of IRSA
International Ltd. (iv) As from July 1, 2001, these companies have been
merged into IRSA.
The consolidated statements of operations were prepared on a
proportionate consolidation basis. As from July 1, 1996, the Company uses the
"proportionate-consolidation method" of accounting for the investments in which
the Company exercises control and other jointly-controlled investments. This
method has not been used for balance sheet and cash flows purposes. All notes to
the consolidated financial statements relating to income-statement items have
been also prepared on a proportionate-consolidation basis. The Company
calculates the proportionate-consolidation method by applying its percentage
ownership interest to the financial statements of its equity method investments.
The Company considers this method more appropriately reflects the Company's
results of operations and the integration of its core businesses. The use of the
proportionate-consolidation method has been approved by the CNV. Although the
use of the proportionate-consolidation method as compared to the equity method
of accounting from a financial presentation perspective impacts almost all areas
of the Company's consolidated statements of income, it does not impact the
Company's consolidated shareholders' equity or net earnings.
Note 14 to the consolidated financial statements presents the Company's
statements of income for the three years in the period ended June 30, 2002
reporting (i) the jointly-controlled investments accounted for by the equity
method, with the earnings or losses included as earnings or losses from equity
investments, and (ii) minority interest in earnings or losses of controlled
subsidiaries.
A description of the jointly-controlled investments accounted for under
the proportionate consolidation method is presented as follows:
JOINTLY CONTROLLED COMPANIES 2002 2001 2000
---------------------------- -------------- --------------- --------------
Brazil Realty S.A. Empreendimentos e Participacoes ("Brazil
Realty") (i)................................................... -- 49.27% 44.03%
Alto Palermo S.A. ("APSA")..................................... 49.69% 47.42% 45.66%
Llao Llao Resort S.A. ("LLR").................................. 50.00% 50.00% 50.00%
Argentine Realty S.A. ("ARSA") (ii)............................ 50.00% 50.00% 50.00%
Buenos Aires Realty S.A. ("BARSA") (ii)........................ 50.00% 50.00% 50.00%
Buenos Aires Trade & Finance Center S.A. ("BAT&FCSA") (ii)..... 50.00% 50.00% 50.00%
Puerto Retiro S.A. ("Puerto Retiro") .......................... 33.33% 33.33% 33.33%
Venezuela Invest, Ltd. ("Venezuela Invest").................... -- -- 50.00%
Fondo de Valores Inmobiliarios S.A.C.A. ("F.V.I.")............. -- -- 37.49%
(i) During February 2002, the Company sold its equity interest in Brazil
Realty. See Note 3.f..
(ii) On August 16, 2002, the Company and RAGHSA S.A. agreed the following: i)
the redistribution of the 5M site in Old Puerto Madero of the City of
Buenos Aires, ii) the division and distribution of the cost and
construction commitments for the sites assumed with Corporacion Antiguo
Puerto Madero S.A.(CAPM), iii) the adjustment of the remaining
commitments and obligations also assumed with CAPM and iv) the exchange
of shares issued by the mentioned companies owning the plots making up
the 5M site, ARSA, BARSA y BAT&FCSA , respectively.
As a result of this distribution the Company, as of the date of issuing
of these consolidated financial statements, holds 100% of the capital
stock of BAT&FCSA, while its 50% holding in ARSA and BARSA was
transferred to RAGHSA.
F-11
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. PREPARATION OF FINANCIAL STATEMENTS (CONTINUED)
C. PRESENTATION OF FINANCIAL STATEMENTS IN CONSTANT ARGENTINE PESOS
Under Argentine GAAP, financial statements are required to be restated to
reflect the effects of the inflation for any fiscal year, provided that the
change in Indice de Precios Mayorista Nivel General (General Wholesale Price
Index, or "WPI") for such year has exceeded eight percent. As the change in the
WPI since January 1, 2002 has been more that eight percent, financial statements
in accordance with Argentine GAAP need to be adjusted for inflation after that
date. Accordingly, the consolidated financial statements have been prepared on
the basis of general price-level accounting which reflects the changes in the
purchasing power of the peso in the Company's historical financial statements,
as follows:
- Non-monetary items and consolidated statement of operations amounts are
adjusted to reflect the then-current general purchasing power.
- Monetary items are not adjusted as such items are, by their nature,
stated in terms of current general purchasing power in the financial
statements; and
- Monetary gains or losses are recognized in the consolidated statement of
operations, reflecting the effect of holding monetary items. This gain of
loss on exposure to inflation (monetary gain or loss) is included in the
consolidated statement of operations within total financial results.
The Company used a conversion factor of 1.9562 to restate prior periods
financial statements in constant Argentine pesos of June 30, 2002 for
comparative purposes.
D. RECLASSIFICATIONS
Certain reclassifications of prior year information have been made to
conform with the current year presentation.
E. ACQUISITION AND FORMATION OF BUSINESSES
In the preparation of these consolidated financial statements, unless
otherwise indicated, the operating results of all acquired businesses have been
included in the Company's consolidated financial statements since the date of
the respective acquisition.
Year ended June 30, 2001
During the year ended June 30, 2001, the Company formed two holding
companies for the purposes of conducting the Company's e-business operations, as
follows:
(i) Latin American Econetworks N.V
In July 2000, the Company, together with divine interVentures, Inc.,
Dolphin Fund Plc (formerly Quantum Dolphin Plc.) and Catanzaro Holding B.V.,
formed Latin American Econetworks N.V., a holding company organized in the
Netherlands Antilles ("LAE"). LAE was conceived as a developer of software,
technology and internet-related information network for the technology service
suppliers. In connection with the formation, an 11.2% interest in the holding
company was issued to the Company in exchange for US$ 5.3 million in cash. As
mentioned in Note 3.f., the investment was sold in November 2001.
(ii) IRSA Telecomunicaciones N.V.
In the fourth quarter of the year ended June 30, 2000, the Company had
invested US$ 3.0 million, -in the form of irrevocable capital contributions-,
into two unrelated companies, namely, Red Alternativa S.A., a provider of
satellite capacity to internet service providers, and Alternativa Gratis S.A.,
an internet service provider (referred to herein as the "Companies"). At that
date, the Companies were development stage companies with no significant
operations.
F-12
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. PREPARATION OF FINANCIAL STATEMENTS (CONTINUED)
E. ACQUISITION AND FORMATION OF BUSINESSES (CONTINUED)
Year ended June 30, 2001 (continued)
(ii) IRSA Telecomunicaciones N.V. (continued)
Between July 2000 and August 2000, the Company, together with Dolphin
Fund Plc, increased their respective investments in the abovementioned
Companies, in exchange for shares of common stock. In a series of transactions,
which occurred between August 2000 and December 2000, (i) the Company formed
IRSA Telecomunicaciones N.V. ("ITNV"), a holding company organized under the
laws of the Netherlands Antilles, for the purposes of completing a
reorganization of the Companies (the "Reorganization") and (ii) the Company,
Dolphin Fund Plc and the previous majority shareholder of the Companies
contributed their respective ownership interests in the Companies into ITNV in
exchange for shares of common stock of ITNV. As a result of the Reorganization,
the Companies are now wholly owned subsidiaries of ITNV. Following the
Reorganization, the Company held a 49.36% interest in ITNV. All assets and
liabilities were recorded at their historical carrying amounts.
During September and December 2000, the Company made additional capital
contributions in ITNV for a total amount of US$ 3 million, increasing its
ownership to 62%.
On December 27, 2000, the shareholders of ITNV entered into an agreement
with Quantum Industrial Partners LDC ("QIP") and SFM Domestic Investment LLC
("SFM" and together with QIP referred to herein as the "Investors") (the
"Shareholders Agreement"), under which the Investors contributed US$ 4.0 million
in cash in exchange for 1,751,453 shares of Series A mandatorily redeemable
convertible preferred stock and an option to purchase 2,627,179 additional
shares of mandatorily redeemable convertible preferred stock. Pursuant to the
terms of the Shareholders Agreement, options were granted for a period up to
five years and at an exercise price equal to the quotient of US$ 6.0 million by
2,627,179 preferred shares. On or after December 27, 2005, ITNV might be
required, at the written request of holders of the then outstanding Series A
preferred stock to redeem such holders' outstanding shares of series A preferred
stock for cash at the greater of (i) 200% of the original issue price multiplied
by the number of preferred stock to be redeemed, and (ii) the fair market value
of the common shares each holder of Series A preferred stock would have been
entitled to receive if such holder had converted the number of Series A
preferred stock to be redeemed into common stock at the redemption date; plus in
the case of (i) and (ii), any accrued or declared but unpaid dividends. As a
result of this transaction the Company retains a 49% ownership in ITNV.
Year ended June 30, 2000
(i) Puerto Madero Dique 3
During the year ended June 30, 2000, the Company, together with RAGHSA
Sociedad Anonima ("RAGHSA"), formed a company, namely, Buenos Aires Realty S.A.,
to acquire 20,947 square meters of undeveloped land in Puerto Madero, Buenos
Aires, for a total consideration of Ps. 61 million. Subsequent to this
acquisition, two additional companies were formed by the Company and RAGHSA,
namely, Buenos Aires Trade and Finance Center S.A. and Argentine Realty S.A.,
for the sole purpose of holding an interest in a portion of the undeveloped
land. In this connection, the land was subdivided into three separate lots, and
each lot transferred to a separate company. As of the date of these financial
statements, governmental permits have veen obtained and the Company intends to
construct office buildings on these sites.
(ii) Additional equity interest in Santa Maria del Plata S.A. ("SMP")
On November 10, 1999 the Company acquired an additional 9.92% equity
interest in SMP for US$ 3.9 million in cash (US$ 1.0 million) and seller
financing (US$ 2.9 million).
This additional acquisition was accounted for as a purchase. The purchase
price has been allocated to the assets and liabilities assumed based on
estimated fair values at the date of acquisition.
F-13
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. PREPARATION OF FINANCIAL STATEMENTS (CONTINUED)
E. ACQUISITION AND FORMATION OF BUSINESSES (CONTINUED)
Year ended June 30, 2000 (continued)
(iii) Additional equity interest in Puerto Retiro S.A. ("Puerto Retiro")
During July and August 1999, the Company acquired an additional 5% equity
interest in Puerto Retiro for US$ 2.5 million in cash (US$ 1.4 million) and
seller financing (US$ 1.1 million).
The acquisition of Puerto Retiro was accounted for as a purchase. The
purchase price has been allocated to the assets and liabilities assumed based on
estimated fair values at the date of acquisition. The investment in Puerto
Retiro, representing 50% of the capital of such company, has been accounted for
under the equity method.
F. DISPOSITION OF BUSINESSES
Year ended June 30, 2002
(i) Latin American Econetworks N.V.
On November 7, 2001, the Company sold its interest in Latin American
Econetworks N.V. for a total consideration of US$ 5,250. The price was fully
collected on that date.
(ii) Brazil Realty Empreendimentos e Participacoes ("Brazil Realty")
On February 28, 2002 the Company sold its interests in Brazil Realty for
a total consideration of US$ 44.2 million. The price has been fully collected at
the date of issuance of these consolidated financial statements. Imputed
interest in this transaction was 12%.
Net gain from the sale was Ps. 31.5 million, and was recorded as part of
operating income under the line item "(Loss) gain from operations and holdings
of real estate assets".
Year ended June 30, 2001
(i) Fondo de Valores Inmobiliarios S.A.C.A. ("FVI") and Venezuela
Invest Ltd. ("Venezuela Invest")
Pursuant to an agreement entered into by the Company and Asesoria
Financiera Velutini & Asociados C.A. on August 1, 2000, the Company completed
the sale of its respective equity interests in FVI and Venezuela Invest on
December 18, 2000 for total consideration of US$ 67.0 million.
Loss from the sale was Ps. 1 million, and was recorded as part of
operating income under the line item "Loss from operations and holdings of real
estate assets".
Year ended June 30, 2000
(i) Inversora del Pacifico S.A. ("IPS")
On March 31, 2000, the Company sold to an unrelated party its equity
interest in Inversora del Pacifico S.A., for total consideration of US$ 3.0
million, resulting in a gain of Ps. 5.6 million, which was recorded as part of
operating income under the line item "Sales".
(ii) Llao Llao Resorts s.A. ("LLR")
On June 30, 2000, the Company sold to an unrelated party a 50% interest
in LLR, for total consideration of US$ 7.5 million resulting in a gain of Ps.
3.1 million, which was recorded as part of operating income under the line item
"Sales".
F-14
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. PREPARATION OF FINANCIAL STATEMENTS (CONTINUED)
F. DISPOSITION OF BUSINESSES (CONTINUED)
Year ended June 30, 2000 (continued)
(iii) Inversora del Puerto S.A. ("Inversora del Puerto")
On July 8, 1999, the Company sold a 99.999% equity interest in Inversora
del Puerto to APSA for total consideration of US$ 3.7 million. No result was
recognized for this transaction. Inversora del Puerto owns a property located at
3513 Figueroa Alcorta Avenue, Buenos Aires, near the Paseo Alcorta Shopping
Center.
G. USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Estimates are used when accounting for the
allowance for doubtful accounts, depreciation, impairment of long-lived assets,
income taxes and contingencies. Actual results could differ from those
estimates.
4. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Company in the preparation of these consolidated financial statements.
A. REVENUE RECOGNITION
The Company primarily derives its revenues from domestic and
international office and shopping center leases and services operations, the
development and sale of properties, hotel operations and to a lesser extent,
from e-commerce activities. See Note 7 for details on the Company's business
segments. As discussed in Note 3.b., the consolidated statements of income were
prepared on a proportionate consolidation basis. The Company uses the
"proportionate-consolidation method" of accounting for the investments in which
the Company exercises control and other jointly-controlled investments. This
method has not been used for balance sheet and cash flows purposes. Accordingly,
this note reflects the revenue recognition policies of the Company and its
controlled and jointly-controlled subsidiaries.
o Development and sale of properties
The Company records revenue from the sale of properties when all of the
following criteria are met:
(i) the sale has been consummated;
(ii) the Company has determined that the buyer's initial and continuing
investments are adequate to demonstrate a commitment to pay for
the property;
(iii) the Company's receivable is not subject to future subordination;
and
(iv) the Company has transferred to the buyer the risk of ownership,
and does not have a continuing involvement in the property.
The Company uses the percentage-of-completion method of accounting with
respect to sales of development properties under construction effected under
fixed-priced contracts. Under this method, revenue is recognized based on the
ratio of costs incurred to total estimated costs applied to the total contract
price. The Company does not commence revenue and cost recognition until such
time as the decision to proceed with the project is made and construction
activities have begun.
The percentage-of-completion method of accounting requires management to
prepare budgeted costs (i.e. the estimated costs of completion) in connection
with sales of properties and/or units. All changes to estimated costs of
completion are incorporated into revised estimates during the contract period.
F-15
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. REVENUE RECOGNITION (CONTINUED)
o Leases and services from office and other buildings
Leases with tenants are accounted for as operating leases. Tenants are
charged a base rent on a monthly basis. Rental income is recognized on a
straight-line basis over the term of the lease and unpaid rents are included in
accounts receivable in the accompanying consolidated balance sheets.
o Leases and services from shopping center operations
Leases with tenants are accounted for as operating leases. Tenants are
generally charged a rent which consists of the higher of (i) a monthly base rent
(the "Base Rent") and (ii) a specified percentage of the tenant's monthly gross
retail sales (the "Percentage Rent") (which generally ranges between 4% and 8%
of tenant's gross sales). Furthermore, pursuant to the rent escalation clause in
most leases, a tenant's Base Rent generally increases between 4% and 7% each
year during the term of the lease. Rental is recognized as income over the lease
term as it becomes receivable according to the provision of the lease. Scheduled
rent increases are recognized in the period the rental payment is due.
Certain lease agreements contain provisions which provide for rents based
on a percentage of sales or based on a percentage of sales volume above a
specified threshold. The Company determines the compliance with specific targets
and calculates the additional rent on a monthly basis as provided for in the
contracts. Thus, these contingent rents are not recognized until the required
thresholds are exceeded.
Generally, the Company's lease agreements vary from 36 to 120 months. Law
No. 24,808 provides that tenants may rescind commercial lease agreements after
the initial six months, upon not less than 60 days' written notice, subject to
penalties which vary from one to one and a half months rent if the tenant
rescinds during the first year of its lease, and one month of rent if the tenant
rescinds after the first year of its lease.
The Company also charges its tenants a monthly administration fee,
prorated among the tenants according to their leases, which varies from shopping
center to shopping center, relating to the administration and maintenance of the
common area and the administration of contributions made by tenants to finance
promotional efforts for the overall shopping centers operations. Administration
fees are recognized monthly when earned. In addition to rent, tenants are
generally charged "admission rights", a non-refundable admission fee that
tenants may be required to pay upon entering into a lease and upon lease
renewal. Admission right is normally paid in one lump sum or in a small number
of monthly installments. Admission rights are recognized using the straight-line
method over the life of the respective lease agreements. Furthermore, the lease
agreements generally provide for the reimbursement of real estate taxes,
insurance, advertising and certain common area maintenance costs. These
additional rents and tenant reimbursements are accounted for on the accrual
basis.
o Credit card operations
Revenues derived from credit card transactions consist of commissions and
financing income. Commissions are recognized at the time the merchants'
transactions are processed, while financing income is recognized when earned.
o Hotel operations
The Company recognizes revenues from its rooms, catering, and restaurant
facilities as earned on the close of business each day.
o International operations
As of June 30, 2001 the Company held a 49.27% ownership interest in
Brazil Realty, a company operating in Brazil, which business primarily comprised
the same type of operations related to real estate conducted by the Company in
Argentina. See Note 3.f.
B. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturates of three months or less, consisting primarily of time deposits, to be
cash equivalents.
F-16
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. INVESTMENTS
(i) Current
Current investments include time deposits which are valued at their cost
plus accrued interest and mutual funds which are carried at market value. Time
deposits have original maturities of three months or less. Unrealized gains and
losses on time deposits and mutual funds are included in financial results, net,
in the consolidated statements of operations.
Current investments also include equity securities and government bonds.
Unrealized gains and losses on government bonds and equity securities are also
included in financial results, net, in the consolidated statements of
operations. Generally, these investments represent securities traded on a
National Securities Exchange which are valued at the last reported sales price
on the last business day of the year.
(ii) Non-current
a) Equity investments
Equity investments in unconsolidated affiliated companies, representing
between 20% and 50% of the capital stock in such companies, have been accounted
for under the equity method. However, as indicated in Note 3.b., the
consolidated statements of income were prepared on a proportionate consolidation
basis. The Company used the "proportionate-consolidation method" of accounting
for its investments in which the Company exercises control and other jointly
controlled investments. This method has not been used for balance sheet and cash
flows purposes.
Equity investments in less than 20% of the capital stock in companies in
which the Company does not exercise significant influence are generally carried
at market value, recognizing realized and unrealized gains and losses in
earnings.
b) Retained interest in transferred mortgage receivables
Non-current investments also include a retained interest in transferred
mortgage receivables pursuant to the securitization program described in Note
18.
(iii) Parcels of undeveloped land
The Company acquires undeveloped land in order to provide an adequate and
well-located supply for its residential and office building operations. The
Company's strategy for land acquisition and development is dictated by specific
market conditions where the Company conducts its operations. Land held for
development and sale and improvements are stated at cost adjusted for inflation
at the end of the year, as defined in Note 3.c. or estimated net realizable
value, whichever is lower. Land and land improvements are transferred to
inventories when construction commences.
As mentioned in Note 4.o., at June 30, 2002, the Company has recognized
an impairment of Ps. 8,301 in connection with certain parcels of undeveloped
land (identified as Santa Maria del Plata and Torres Jardin IV), that is
reflected in the line "Loss from operations and holding of real estate assets,
net" in the statement of operations for the year ended June 30, 2002.
D. INVENTORY
Inventories comprise primarily of properties held for development and
sale and to a lesser extent other minor inventories from hotel operations. A
property is classified as available for sale upon determination by the Board of
Directors that the property is to be marketed for sale in the normal course of
business over the next several years.
F-17
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. INVENTORY (CONTINUED)
Residential, office and other non-retail properties completed or under
construction are stated at cost adjusted for inflation at the end of the year,
as defined in Note 3.c., or estimated net realizable value, whichever is lower.
Costs include land and land improvements, direct construction costs,
construction overhead costs, interest on indebtedness and real estate taxes.
Selling and advertising costs are deferred and charged to expense in the period
in which the related revenue is earned, as determined under the
percentage-of-completion method. Total contract costs are charged to expense in
the period in which the related revenue is earned, as determined under the
percentage-of-completion method. No interest costs were capitalized during the
years ended June 30, 2002, 2001 and 2000.
Properties held for sale are classified as current or non-current based
on the estimated date of sale and the time at which the related receivable is
expected to be collected by the Company.
As mentioned in Note 4.o., at June 30, 2002, the Company has recognized
an impairment of Ps. 11,232 in connection with certain properties classified as
inventories (mainly identified as Avda. Madero 1020, Rivadavia 2768,
Constitucion 1111, Terrenos de Caballito, Padilla 902 and parking lots in Dock
13), that is reflected in the line "Loss from operations and holding of real
estate assets, net" in the statement of operations for the year ended June 30,
2002.
E. FIXED ASSETS, NET
Fixed assets, net comprise primarily of rental properties and other
property and equipment held for use by the Company.
o Rental properties
Rental properties are carried at cost adjusted for inflation at the end
of the year, as defined in Note 3.c., less accumulated depreciation. Costs
incurred for the acquisition of the properties are capitalized. Accumulated
depreciation is computed under the straight-line method over the estimated
useful lives of the assets, which generally are estimated to be 50 years for
buildings and improvements. Expenditures for ordinary maintenance and repairs
are charged to operations in the period incurred. Significant renovations and
improvements which improve or extend the useful life of the asset are
capitalized and depreciated over its estimated remaining useful life. At the
time depreciable assets are retired or otherwise disposed of, the cost and the
accumulated depreciation of the assets are eliminated from the accounts and any
profit or loss is recognized. The Company capitalizes interest on long-term
construction projects. No interest costs were capitalized during the years ended
June 30, 2002, 2001 and 2000.
As mentioned in Note 4.o., at June 30, 2002, the Company has recognized
an impairment of Ps. 49,743 in connection with certain properties (identified as
Libertador 498, Maipu 1300, Avda. Madero 1020, Suipacha 652, Laminar Plaza,
Reconquista 823, Constitucion 1111, Dique 2 M10- Edificio C-. Libertador 602,
Dock 2 M10 -Building A-, Avda. Madero 942, Avda. De Mayo 595, Costeros Dique IV
and Sarmiento 517, Intercontinental Plaza, Alto Palermo Park, Alto Palermo
Plaza, Thames and Hotel Intercontinental), that is reflected in the line "Loss
from operations and holding of real estate assets, net" in the statement of
operations for the year ended June 30, 2002.
o Other properties and equipment
Other property and equipment are carried at cost adjusted for inflation
at the end of the year, as defined in Note 3.c., less accumulated depreciation.
Accumulated depreciation is computed under the straight-line method over the
estimated useful lives of the assets, as specified below:
F-18
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. FIXED ASSETS, NET (CONTINUED)
Asset Estimated useful life (years)
--------------------------- -----------------------------------
Leasehold improvements On contract basis
Facilities 10
Machinery and equipment 10
Vehicles 5
Software 3
Computer equipment 3
Furniture and fixtures 5
The cost of maintenance and repairs is charged to expense as incurred.
The cost of significant renewals and improvements are added to the carrying
amount of the respective assets. When assets are retired or otherwise disposed
of, the cost and related accumulated depreciation are removed from the accounts,
and any resulting gain or loss is reflected in the statement of operations.
F. SOFTWARE OBTAINED OR DEVELOPED FOR INTERNAL USE
The Company capitalizes certain costs associated with the development of
computer software for internal use. Costs capitalized during the years ended
June 30, 2002, 2001 and 2000 were not material. These costs are being amortized
on a straight-line basis over a period of 3 years.
G. INTANGIBLE ASSETS, NET
Intangible assets are carried at cost, adjusted for inflation at the end
of the year as defined in Note 3.c., less accumulated depreciation.
o Deferred Financing Costs
Expenses incurred in connection with the issuance of debt have been
deferred and are being amortized using the interest method over the life of the
related issuances.
o Preoperating and organization expenses
Expenses incurred relating to pre-opening activities and/or organization
of subsidiaries are amortized on a straight-line basis over a 5-year period
commencing upon the launching of the project.
o Selling and advertising expenses
Expenses incurred relating to the marketing of developing properties,
including advertising, commissions and other expenses, are charged to expense in
the period in which the related revenue is earned, as determined under the
percentage-of-completion method.
H. FOREIGN CURRENCY ASSETS AND LIABILITIES
Financial statements of foreign unconsolidated equity investees in which
the Company exercises joint control have been translated to Argentine pesos on
the basis of the financial statements of such subsidiaries expressed in the
local currency of the country of origin. The method of translation involves the
translation of monetary assets and liabilities at the exchange rate prevailing
at the end of each period, and non-monetary assets and liabilities and equity
accounts on the basis of the inflation-adjusted amounts at the exchange rate
prevailing at the end of each period. Average exchange rates have been used for
the translation of the accounts which make up the results of the periods. The
net gain/loss on translation is included within financial results, net, foreign
currency translation.
Assets and liabilities denominated in foreign currencies are translated
at the prevailing exchange rates as of year-end. Transactions denominated in
foreign currencies are translated into pesos at the prevailing exchange rates on
the date of transaction settlement. Foreign currency transaction gains and
losses are recorded within financial results, net.
F-19
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
I. INCOME TAX PROVISION
The Company and its subsidiaries calculate their income taxes on a
separate tax basis. The statutory income tax rate was 35% for all the periods
presented. The Company does not recognize deferred taxes.
As permitted under Argentine income tax law in determining its taxable
income for the years ended June 30, 2002, 2001 and 2000, the Company has taken
into consideration tax losses of approximately Ps. 372.2 million, Ps. 10.0
million and Ps. 61.9 million, respectively. The benefit attributable to such
losses was Ps. 130.3 million, Ps. 3.5 million and Ps. 21.5 million,
respectively.
As of June 30, 2002, the Company had accumulated tax loss carryforwards
of approximately Ps. 421.0 million, which expire as follows:
EXPIRATION YEAR AMOUNT
--------------- -------------------------
2002 ........................... Ps. 2,0
2003 ........................... 2.5
2004 ........................... 2.2
2005 ........................... 31.8
2006 ........................... 6.6
2007 ........................... 375.9
-------------------------
TOTAL Ps. 421.0
J. ASSET TAX PROVISION
On December 7, 1998, the Argentine National Congress passed Law No.
25,063 which amended prior tax laws and regulations. According to these
amendments, the Company is subject to a new asset tax effective December 31,
1998 ("Impuesto a la Ganancia Minima Presunta"). Pursuant to this new tax
regime, the Company is required to pay the greater of the income tax or the
asset tax. Any excess of the asset tax over the income tax may be carried
forward and recognized as a tax credit against future income taxes payable
(until 10 years).
The asset tax provision as of June 30, 2002 and 2001 has been calculated
on an individual entity basis at the statutory asset tax rate of 1%, and is
based upon the taxable assets of each company as of the end of the year, as
defined by Argentine law.
The Company has considered the effect of this asset tax in determining
the income tax provision for the year.
K. CUSTOMER ADVANCES
Customer advances represent payments received in advance in connection
with the sale and rent of properties.
L. PROVISIONS FOR ALLOWANCES AND CONTINGENCIES
The Company provides for losses relating to mortgage, lease and other
accounts receivable. The allowance for losses is recognized when, based on
current information and events, it is probable that the Company will be unable
to collect all amounts due according to the terms of the agreements. The
allowance is determined on a one-by-one basis considering the present value of
expected future cash flow or the fair value of collateral if the loan is
collateral dependent, when applicable. While management uses the information
available to make evaluations, future adjustments to the allowance may be
necessary if future economic conditions differ substantially from the
assumptions used in making the evaluations. Management has considered all events
and/or transactions that are subject to reasonable and normal methods of
estimations, and the consolidated financial statements reflect that
consideration.
The Company has certain contingent liabilities with respect to existing
or potential claims, lawsuits and other proceedings, including those involving
labor and other matters. The Company accrues liabilities when it is probable
that future costs will be incurred and such costs can be reasonably estimated.
Such accruals are based on developments to date, the Company's estimates of the
outcomes of these matters and the Company's lawyers' experience in contesting,
litigating and settling other matters. As the scope of the liabilities becomes
better defined, there may be changes in the estimates of future costs, which
could have a material effect on the Company's future results of operations and
financial condition or liquidity.
F-20
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
M. ADVERTISING EXPENSES
The Company generally expenses advertising and promotion costs as
incurred with the exception of advertising and promotion expenses incurred to
market real estate projects. Advertising and promotion expenses were
approximately Ps. 2.2 million, Ps. 3.3 million and Ps. 5.0 million for the years
ended June 30, 2002, 2001 and 2000, respectively.
N. PENSION INFORMATION
The Company does not maintain any pension plans. Argentine laws provide
for pension benefits to be paid to retired employees from government pension
plans and/or privately managed funds plan to which employees may elect to
contribute.
O. IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of its long-lived
assets for impairment. The carrying value of a long-lived asset is considered
impaired by the Company when the expected cash flows, undiscounted and without
interest, from such asset is separately identifiable and less than its carrying
value. In that event, a loss would be recognized based on the amount by which
the carrying value exceeds the fair market value of the long-lived asset. Fair
market value is determined primarily using the anticipated cash flows discounted
at a rate commensurate with the risk involved or based on independent
appraisals. At June 30, 2002, due to the deterioration of the Argentine economy
and the impact on the Company's revenue of the measures adopted by the National
Government mentioned in Note 2 to the consolidated financial statements, the
Company has reevaluated the carrying value of its long-lived assets, recording
an impairment loss over certain parcels of undeveloped lands, inventories and
properties (See Notes 4.c.(iii), 4.d and 4.e).
P. HEDGING INSTRUMENTS
From time to time, the Company utilizes certain financial instruments as
a supplement to reduce its overall financing cost. In the past, the Company also
utilized foreign currency forward-exchange contracts to manage its exposure
associated with its net investment in foreign operations. The Company does not
engage in trading or other speculative use of these financial instruments. For
details on the Company's derivative instruments activity, see Note 17.
- Foreign currency forward-exchange contracts
Foreign currency forward-exchange contracts entered into by the Company
generally mature within one year. Premiums on foreign currency forward-exchange
contracts are amortized over the life of the respective contracts. The fair
value of the foreign currency forward-exchange contracts is not recognized in
the financial statements.
- Interest rate swaps
Interest rate swaps are used to minimize the Company's financing costs.
Interest rate swap agreements are accounted for on an accrual basis, with the
net receivable or payable recognized as an adjustment to interest expense. The
related accrued receivable or payable is included as an adjustment to interest
payable. The fair value of the interest rate swap agreements is not recognized
in the financial statements.
Q. MONETARY ASSETS AND LIABILITIES
Monetary assets and liabilities are disclosed at their par value, adding
or deducting the corresponding financial results.
F-21
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. DETAILS OF BALANCE SHEET ACCOUNTS
A. CASH AND BANKS:
AS OF JUNE 30,
--------------------------------------------------------
2002 2001
--------------------------- -------------------------
Cash ............................................... Ps. 7,960 Ps. 421
Bank accounts ...................................... 11,901 8,447
Checks to be deposited ............................. 4,970 1,662
--------------------------- -------------------------
Ps. 24,831 Ps. 10,530
=========================== =========================
B. INVESTMENTS:
AS OF JUNE 30,
--------------------------------------------------------
2002 2001
---------------------------- -------------------------
CURRENT
Time deposits ...................................... Ps. 422 Ps. 22,741
Banco Hipotecario S.A. ("BHSA") (i) (Note 12)....... 11,522 21,051
Telecom Argentina S.A. ("Telecom") ................. -- 17,351
Mutual funds ....................................... 24,852 13,545
Government bonds.................................... -- 12,817
Commercial bonds ................................... -- 1,414
Other............................................... -- 788
---------------------------- -------------------------
Ps. 36,796 Ps. 89,707
============================ =========================
NON-CURRENT
APSA................................................ Ps. 307,246 Ps. 318,465
Brazil Realty....................................... -- 133,800
Banco Hipotecario S.A. ("BHSA") (i) (Note 12)....... 6,500 32,015
Latin American Econetworks N.V...................... -- 9,658
Llao Llao Resorts................................... 9,745 5,104
IRSA Telecomunicaciones N.V......................... 2,654 3,388
Alto Invest S.A. ................................... 174 --
Banco de Credito y Securitizacion S.A. (Note 12) ... 6,236 9,781
Retained interest in mortgages receivable
securitization program (ii) ........................ 9,796 --
Other .............................................. 38 33
---------------------------- -------------------------
Ps. 342,389 Ps. 512,244
============================ =========================
PARCELS OF UNDEVELOPED LAND (III)
Ciudad Deportiva de la Boca (SMP)................... Ps. 103,213 Ps. 110,244
Puerto Retiro ...................................... 41,170 41,530
Pereiraola ......................................... 19,439 19,349
Argentine Realty S.A. .............................. 4,559 3,977
Buenos Aires Realty S.A. ........................... 4,671 3,840
Buenos Aires Trade and Finance Center S.A........... 6,166 3,256
Torre Jardin IV..................................... 1,985 2,698
Intercontinental Plaza ............................. 1,020 --
Other .............................................. 1,736 2,755
---------------------------- -------------------------
183,959 187,649
---------------------------- -------------------------
Ps. 526,348 Ps. 699,893
============================ =========================
(i) On February 2, 1999, the Company acquired 4,313,811 shares of BHSA
for Ps. 59.1 million. On the same date the Company also acquired
3,697,500 options to purchase BHSA American Depositary Shares
("ADS") for US$. 1.8 million. Each option represents the right to
purchase 100 ADSs at an exercise price of US$. 7.0 per ADS. The
options shall be exercisable by the holders in whole or in part at
any time on or after February 2, 2000 through February 2, 2004. In
June 2001, the Company sold to an unrelated party 1,000,000
options for a total consideration of Ps. 3.1 million, resulting in
a gain of Ps. 2.2 million. The options are recorded at cost,
adjusted for inflation at the end of the year described in Note
3.c. No options have been exercised as of the date of these
financial statements.
(ii) Represents retained interest in mortgage receivables
securitization program described in Note 18.
(iii) The book value of parcels of undeveloped land at June 30, 2002 is
presented net of the impairment loss mentioned in Note 4.c.(iii).
F-22
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. DETAILS OF BALANCE SHEET ACCOUNTS (CONTINUED)
C. MORTGAGES AND LEASES RECEIVABLE, NET:
AS OF JUNE 30,
--------------------------------------------------
2002 2001
----------------------- -----------------------
CURRENT
Mortgage receivable (i).................................. Ps. 3,980 Ps. 13,877
Less:
Unearned interest (i).................................... (404) (5,693)
Receivable from the sale of properties................... 3,698 39,723
Debtors under legal proceedings (ii)..................... 2,201 8,611
Leases and services receivable........................... 1,125 2,484
Hotel receivables........................................ 1,908 1,450
Related parties (Note 12)................................ 717 1,177
Other.................................................... -- 95
Less:
Allowance for doubtful accounts (Note 20.c.)............. (1,221) (1,796)
----------------------- -----------------------
Ps. 12,004 Ps. 59,928
======================= =======================
NON-CURRENT
Mortgage receivable (i).................................. Ps. 1,293 Ps. 57,794
Receivable from the sale of properties................... 579 --
Related parties (Note 12)................................ 1,638 --
Less:
Unearned interest (i).................................... (375) (13,468)
----------------------- -----------------------
Ps. 3,135 Ps. 44,326
======================= =======================
(i) Mortgage receivable consist of fixed-rate mortgages. At June 30,
2002, the remaining principal balance consists of mortgage receivable from
several borrowers. The amount due from the largest individual borrower was Ps.
1,518 at a contractual interest rate of 10%. At June 30, 2002, principal
payments on mortgage receivable become due as follows: 2003 - Ps. 3,980; 2004 -
Ps. 246; 2005 - Ps. 176; 2006 - Ps. 142; 2007 - Ps. 123; thereafter - Ps 606.
(ii) Comprised of Ps. 1.0 million and Ps. 6.8 million related to mortgage
receivable and Ps. 1.2 million and Ps. 1.8 million related to leases receivable,
for the years ended June 30, 2002 and 2001, respectively.
D. OTHER RECEIVABLES AND PREPAID EXPENSES:
AS OF JUNE 30,
--------------------------------------------------
2002 2001
----------------------- -----------------------
CURRENT
Receivable from the sale of equity securities and Ps. Ps.
investees................................................ 26,129 12,520
Value Added Tax ("VAT") receivable....................... 466 6,457
Asset tax credits........................................ 2,319 4,634
Prepaid expenses......................................... 5,511 3,988
C.N. Hacoaj Project...................................... 593 1,363
Premiums on foreign currency forward exchange contracts.. 315 939
Income tax advances...................................... 333 886
Related parties (Note 12)................................ 261 802
Debtors under legal proceedings.......................... -- 2,449
Advances to financial brokers............................ -- --
Patriotic Bond........................................... 2,312 --
Other ................................................... 308 2,889
----------------------- -----------------------
Ps. 38,547 Ps. 36,927
======================= =======================
NON-CURRENT
Asset tax credits........................................ Ps. 14,617 Ps. 29,584
VAT receivable........................................... 1,226 2,555
Related parties (Note 12)................................ 73,309 2,551
Other.................................................... 469 74
----------------------- -----------------------
Ps. 89,621 Ps. 34,764
======================= =======================
F-23
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. DETAILS OF BALANCE SHEET ACCOUNTS (CONTINUED)
E. INVENTORIES:
AS OF JUNE 30,
----------------------------------------------------------------------------------
2002 2002 2001 2001
------------------- ------------------- ---------------------------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT
------------------- ------------------- ---------------------------------------
Abril/Baldovinos......... Ps. 8,344 Ps. 11,298 Ps. 11,872 Ps. 18,838
Alto Palermo Park........ 4,555 -- 5,452 8,666
Constitucion 1111........ 3,767 -- 2,330 --
Torres Jardin............ 356 261 1,759 450
Caballito plots of land.. -- 12,120 -- 17,709
Dock 4 Puerto Madero..... -- 5,483 -- 5,475
Benavidez................ -- 12,645 -- 12,645
Pilar.................... 3,032 -- 3,032
Alto Palermo Plaza....... 2,087 -- 1,289 --
Minetti "D".............. -- 194 491 156
Sarmiento 517............ -- 589 428 84
Villa Celina............. -- 48 61 2
Dock 6 Puerto Madero..... -- -- 184 15
Padilla 902.............. -- 219 -- 321
Alcorta Palace........... -- -- 430 --
Dock 13 Puerto Madero.... 48 -- 51 6
Madero 1020 ............. 4,730 -- -- --
Puerto Madero Dock 5 .... -- 407 -- --
Other.................... 243 262 436 --
------------------- ------------------- ---------------------------------------
Ps. 24,130 Ps. 46,558 Ps. 24,783 Ps. 67,399
=================== =================== =================== ====================
F. TRADE ACCOUNTS PAYABLE:
AS OF JUNE 30,
------------------------------------------------------
CURRENT 2002 2001
----------------------- --------------------------
Accruals ........................................... Ps. 7,742 Ps. 6,752
Suppliers .......................................... 3,270 4,040
Other .............................................. 979 --
Related Parties (Note 12) .......................... 233 119
Less:
Unaccrued interest ................................. -- (80)
----------------------- --------------------------
Ps. 12,224 Ps. 10,831
======================= ==========================
NON-CURRENT
Suppliers .......................................... Ps. -- Ps. 374
----------------------- --------------------------
Ps. -- Ps. 374
======================= ==========================
G. SALARIES AND SOCIAL SECURITY PAYABLES:
AS OF JUNE 30,
-------------------------------------------------------
2002 2001
------------------------- --------------------------
Social security payable ........................... Ps. 454 Ps. 1,043
Provision for vacation and bonuses................. 351 726
Other ............................................. 219 154
------------------------- --------------------------
Ps. 1,024 Ps. 1,923
========================= ==========================
F-24
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. DETAILS OF BALANCE SHEET ACCOUNTS (CONTINUED)
H. SHORT-TERM AND LONG-TERM DEBT:
SHORT-TERM DEBT CONSISTS OF THE FOLLOWING:
AS OF JUNE 30,
------------------------------------------------------
2002 2001
------------------------- -------------------------
Loan Agreement (i).................................. Ps. 311,206 Ps. 157,685
Notes plus accrued interest (ii).................... 149,789 86,466
Commercial paper less unaccrued interest (iii)...... -- 47,995
Uncollateralized loans plus accrued interest (iv)... 3,538 34,916
Collateralized loans plus accrued interest (v)...... 100,206 22,310
Other .............................................. -- 1,093
------------------------ -------------------------
Ps. 564,739 Ps. 350,465
======================== =========================
LONG-TERM DEBT CONSIST OF THE FOLLOWING:
AS OF JUNE 30,
------------------------------------------------------
2002 2001
------------------------ ------------------------
Collateralized loans (v)............................ Ps. -- Ps. 20,540
Other............................................... 142 5,472
------------------------ -------------------------
Ps. 142 Ps. 26,012
======================== =========================
(i) On May 24, 2000, the Company entered into a syndicated loan arranged
by Bank Boston, as principal agent, to provide a US$ 80.0 million credit
facility, originally expiring on May 31, 2002 (the "Loan Agreement"). The Loan
Agreement includes other financial institutions, as lenders. The Company was
unable to pay the Loan Agreement due at the original maturity date. As a result
of such non-payment, the Company started a negotiation process with the lenders
and obtained short-term deferrals to pay such matured debt. Pursuant to the most
recent deferral, which was granted on July 31, 2002, the Loan Agreement must be
paid in full on September 30, 2002. The facility beared interest at three-month
Libor plus a margin of 500 basis points. At June 30, 2002, interest rate
applicable to the loan was 6.99%. The Loan Agreement requires the Company to
meet certain financial tests and to comply with certain other covenants,
including restrictions on incurrence of debt and liens, restrictions on mergers,
acquisitions, asset dispositions, capital contributions, repurchases of stock
and investments. As of June 30, 2002, the Company was not in compliance with
certain of the financial covenants. On July 2002, the Company obtained waivers
to these financial covenants from the lenders.
(ii) On December 21, 2000, the Company issued US$ 43.5 million unsecured
Class 2 notes due December 24, 2001 (the "Notes"). The Notes beared interest at
a variable rate. Interest on the Notes were payable quarterly, commencing March
21, 2001. Proceeds from this issuance were used to repay certain outstanding
short-term indebtedness of the Company. The Notes include various restrictive
covenants, which among other things, require the Company to maintain certain
financial ratios and net worth amounts. The Company was unable to pay the
principal and interest due at the original maturity date. However, in May 2002,
the Company repurchased US$ 6.5 million Notes for a total consideration of Ps.
22.0 million. The Company continued the negotiation process with the remaining
holders of the Notes of US$ 39.3 million and obtained short-term deferrals to
pay such matured debt. Pursuant to the most recent deferral, which was granted
on August 30, 2002, the Notes must be paid in full on September 9, 2002. As of
June 30, 2002, the Company was not in compliance with certain of the financial
covenants.
(iii) In August 2000, the Company entered into a Class 1 Zero Coupon
Commercial Paper maturing September 2001. During fiscal year 2001, the maximum
commercial paper outstanding was US$ 25.0 million at a discount interest rate of
9.86% at the date of issuance. These Commercial Papers were repaid in August
2001.
(iv) Generally, the Company's short-term uncollateralized borrowings are
in the form of overdraft facilities and/or bank loans with an original maturity
of less than one year. The weighted average interest rates on uncollateralized
short-term debt were 8.0% (plus "CER") and 10.17 % as of June 30, 2002 and 2001,
respectively. The Company generally uses the proceeds from these borrowings for
working capital needs and other general corporate purposes.
Pursuant to Decree 214, debts in U.S. dollars or other foreign currencies
in the Argentine financial system were converted to pesos at the rate of
exchange of $ 1 per US$ 1 or its equivalent in another currency. As from
February 3, 2002 the reference stabilization index (CER) and an interest rate
may ultimately be applied to these debts (Note 2).
F-25
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. DETAILS OF BALANCE SHEET ACCOUNTS (CONTINUED)
H. SHORT-TERM AND LONG-TERM DEBT (CONTINUED):
(v) Collateralized loans accrue interest at fixed/variable rates ranging
from 6.56% to 25.00% due at various dates through October 2006. Loans amounting
to Ps. 42.8 million are collateralized by real estate properties with a net book
value of Ps. 31.7 million while the remaining loans, amonting to Ps. 57.4
million, are collateralized with Palermo Invest shares, representing the
Company's ownership of Alto Palermo Plaza and Alto Palermo Park with a net book
value of Ps. 120.7 million (See Note 15.(ii).). Also, certain of these
collateralized loans require the Company to meet certain financial tests and to
comply with certain other customary covenants, including restrictions on
incurrence of debt and liens, restrictions on mergers, acquisitions, asset
dispositions, capital contributions and others. In connection with the loan
amounting to Ps. 42.8 million above mentioned, at the date of issuing of these
financial statements, as a result of the current economic situation, the lack of
credit and the crisis of the Argentine financial system, principal installments
falling due on April 29 and July 29, 2002 and the interest installment amounting
to US$ 127 thousand falling due on July 29, 2002 were not paid. Although Hoteles
Argentinos' Management is renegotiating the debt with its creditors, as failure
to pay the installments when due entitles the bank to require acceleration of
principal and interest maturities, the loan has been classified and is shown
under short term debt in these financial statements.
As of June 30, 2002, APSA was not in compliance with certain financial
covenants with respect to its Ps. 120 million Senior Notes ("ASN") and its Ps.
85.0 million Notes ("AN") due 2005. On August 22, 2002, APSA obtained a limited
waiver from the holders of the ASN with respect to such covenant violation for
the quarter ended June 30, 2002. No such waiver was obtained with respect to the
AN, and as a result, APSA is not able to incur any additional indebtedness for
so long as such covenant violation is in existence. On January 15, 2002 APSA was
unable to make scheduled payments of approximately Ps. 19.6 million on the ASN.
However, as of July 17, 2002, all interest owned and the amortization coupon
that originally matured in January 2002, had been fully paid. On February 8,
2002 IRSA Inversiones y Representaciones and Parque Arauco, principal APSA's
shareholders, subordinated the collection of their loan receivables with APSA to
the repayment of principal and interest on the ASN and on short-term debt. If
APSA defaults on its indebtedness, due to cross-default provisions in the
agreements that govern the Loan Agreement and the Notes, any event of default
under any of the ir ASN, AN or their swap agreement would also constitute an
event of default under the Company's financial agreements.
I. TAXES PAYABLE:
AS OF JUNE 30,
------------------------------------------------
CURRENT 2002 2001
---------------------- ----------------------
Asset tax payable, net................................ Ps. 473 Ps. 4,107
Income tax provision, net............................. 2,103 1,416
Income tax withholdings............................... 6,790 1,213
VAT payable........................................... 1,454 524
Gross sales tax payable............................... 1,072 317
Value added tax withholdings.......................... 62 248
Provision for tax on interest payable (i)............. -- 211
Other................................................. 644 --
--------------------- ---------------------
Ps. 12,598 Ps. 8,036
===================== =====================
(i) Effective January 1, 1999, interest payable is subject to a 15% tax
levied on interest paid on debt and other financial costs incurred by the
Company. Pursuant to a new tax reform enacted December 2000, this tax will be
gradually reduced as from January 1, 2001 and eliminated effective July 1, 2002.
F-26
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. DETAILS OF BALANCE SHEET ACCOUNTS (CONTINUED)
J. OTHER LIABILITIES:
AS OF JUNE 30,
------------------------------------------------
2002 2001
---------------------- ----------------------
CURRENT
Customer advances......................................... Ps. 964 Ps. 2,306
Deferred gain (i)......................................... -- 1,958
Seller financing (ii)..................................... 786 1,626
Related parties (Note 12)................................. 36 --
Dividends payable......................................... 6,567 --
Accruals.................................................. 597 880
Lessee deposits........................................... 968 1,240
Collections on behalf of third parties.................... 50 188
Premiums on foreign currency forward exchange contracts .. -- 571
Fees and other accounts payable........................... 5 188
Provision for contingencies (Note 20.c.) (iii)............ 440 133
Payable to financial brokers.............................. 903 --
Payable from hotel operator............................... 853 --
Other..................................................... 1,375 1,016
---------------------- ----------------------
Ps. 13,544 Ps. 10,106
====================== ======================
AS OF JUNE 30,
------------------------------------------------
2002 2001
---------------------- ----------------------
NON-CURRENT
Lessee deposits........................................... Ps. 837 Ps. 3,468
Seller financing (ii) .................................... 725 2,836
Deferred gain (i)......................................... -- 370
Provision for contingencies (Note 20.c.) (iii)............ 357 207
Related parties (Note 12) ................................ 503 37
Other..................................................... 457 833
---------------------- ----------------------
Ps. 2,879 Ps. 7,751
====================== ======================
(i) As discussed in Note 3.e., the Company formed ITNV in August 2000.
The issuance of preferred stock by ITNV to the Investors in December 2000
decreased the Company's percentage of ownership in ITNV and the value assigned
to the ITNV's preferred stock issued under the transaction was substantially
more than the Company's carrying amount per share of ITNV stock, thus triggering
a change in the Company's interest in ITNV. The change in the Company's interest
resulted in the recognition of a deferred gain of Ps. 3.3 million since ITNV is
in the early stage of development and the realizability of the gain is not
assured. This gain is being amortized to income as the investee incurs operating
losses.
(ii) Comprised of a principal amount of Ps. 1.45 million plus accrued
interest of Ps. 0.11 million relating to the seller financing obtained in the
acquisition of SMP. The shares of SMP are pledged as collateral for this seller
financing. Such seller financing accrues interest at a one-year LIBOR. As of
June 30, 2002, the one-year LIBOR was 6.51%. The non-current portion of Ps. 0.73
million is payable in November, 2003.
(iii) This reserve relates to: (a) labor lawsuits filed against the
Company, (b) tax matters related to differences in basis in the computation of
certain tax contributions, and, (c) other sundry claims. In the opinion of
management and based on consultation with external legal counsel, the Company
has established provisions for amounts which are probable of adverse occurrence
and which, according to estimates developed by the Company's legal counsel,
would meet all related contingencies and corresponding fees relating to these
claims. The classification of contingency reserves as non-current liabilities
was based on a review of the current facts and circumstances and consultation
with external legal counsel. Management reassesses these matters as new facts
are brought into management's attention.
F-27
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6. SHAREHOLDERS' CONTRIBUTION
A. COMMON STOCK
As of June 30, 2002, the Company had 207,411,988 authorized and
outstanding shares of common stock, having a par value of Ps. 1.0 per share.
Holders of the common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders.
Following is a detail of the activity in the Company's shares as from
June 30, 1999:
COMMON STOCK APPROVED BY
------------------------------------------- --------------------------
SHARES ADDITIONAL DATE OF
ISSUED PAR VALUE PAID-IN-CAPITAL BODY DATE REGISTRATION
----------- -------------- -------------- -------------- ---------- ----------
BALANCES AS OF JUNE 30,
1999.................... 188,476,317 Ps. 188,476 Ps. 506,767
=========== ============== ==============
1999 Noncontributory Extraordinary
Management Stock Shareholder's April 7, April 24,
Ownership Plan.......... 21,090,024 21,090 -- Meeting 1998 2000
Distribution of treasury
stock................... 2,432,932 2,433 --
Purchase of treasury
stock................... (6,236,762) (6,237) --
-------------------------- --------------
BALANCES AS OF JUNE 30,
2000.................... 205,762,511 Ps. 205,762 Ps. 506,767
============ ============== ==============
Purchase of treasury
stock................... (19,079,995) (19,080) --
Distribution of treasury
stock................... 20,729,472 20,730 --
-------------------------- --------------
BALANCES AS OF JUNE 30,
2001.................... 207,411,988 Ps. 207,412 Ps. 506,767
============ ============== ==============
Purchase of treasury
stock................... -- -- --
Distribution of treasury
stock................... -- -- --
-------------------------- --------------
BALANCES AS OF JUNE 30,
2002.................... 207,411,988 Ps. 207,412 Ps. 506,767
============ ============== ==============
At June 30, 2002, the negative retained earnings recorded by the Company
use up over 50% of shareholders contributions and reserves. Section 206 of the
Argentine Corporations Law establishes obligatory capital reduction in such
circumstances. However, as a result of the Argentine economic crisis, by Decree
1269, the National Government suspended the application of this section until
December 10, 2003.
B. CAPITAL NATURE TRANSACTIONS
From time to time, the Company repurchases shares of common stock
outstanding when it believes that its stock price is undervalued in the
marketplace.
During fiscal years 2001 and 2000, the Company repurchased 19,079,995 and
6,236,762 outstanding shares of common stock for a total consideration of Ps.
80.4 million and Ps. 29.9 million, respectively. These acquisitions are recorded
as "Treasury stock" and resulted in a reduction of retained earnings.
In October 2000 and 1999, the Company distributed 20,729,472 and
2,432,932 shares of common stock on a pro rata basis to its shareholders.
C. INFLATION ADJUSTMENT OF COMMON STOCK
As mentioned in Note 3.c. the Company's consolidated financial
statements were prepared on the basis of general price-level accounting which
reflected changes in the purchase price of the peso in the historical financial
statements. In this period, the annual inflation adjustments related to common
stock and treasury stock were taken to inflation adjustment reserves that form
part of shareholders' equity. According to Argentine GAAP, the balances in the
inflation adjustment reserves may be applied only towards the issuance of common
stock to shareholders of the Company.
D. RESTRICTION ON THE DISTRIBUTION OF PROFITS
In accordance with the Argentine Corporations Law and the Company's
By-laws, 5% of the net and realized profit for the year calculated in accordance
with Argentine GAAP plus (less) prior year adjustments must be appropriated by
resolution of the shareholders to a legal reserve until such reserve equals 20%
of the Company's outstanding capital. This legal reserve may be used only to
absorb losses.
F-28
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6. SHAREHOLDERS' CONTRIBUTION (CONTINUED)
E. NONCONTRIBUTORY MANAGEMENT STOCK OWNERSHIP PLAN
On October 30, 1997, the shareholders authorized the Company to enter
into a Noncontributory Management Stock Ownership Plan ("NMSOP") with eight
executive officers of the Company (the "Beneficiaries"), pursuant to which the
Beneficiaries were granted the right to purchase up to 24 million shares of
common stock (the "Participation Shares"), at a purchase price equal to Ps. 1.0
per share, subject to the implementation of an Equity Participation Agreement
("EPA"). Under Argentine law, the Company established a special purpose trust in
this connection (the "Trust").
The Beneficiaries were required to purchase the Participation Shares
available, if any, within 24 months of any capital increase. The Trust has an
original term of six years. According to the terms of the NMSOP and the Trust,
Beneficiaries are not entitled to receive any distributions (either in the form
of shares, cash or other) from the Trust during its term, although,
Beneficiaries are allowed to cause the Trust to sell their designated shares of
common stock held by the Trust in certain cases. In addition, the Company was
not allowed to grant any loans or otherwise assist the Beneficiaries in
financing the purchase of the Participation Shares.
On April 7, 1998, the Company's shareholders, at an extraordinary
shareholders' meeting, approved a capital increase of 24 million shares to
permit the Beneficiaries to purchase all of the Participation Shares to which
they were entitled under the EPA. The BASE and the CNV approved the capital
increase on June 4, 1999, and on August 31, 1999 the Beneficiaries acquired
21,090,024 shares at Ps. 1.0 per share.
7. SEGMENT INFORMATION
The Company has determined that its reportable segments are those that
are based on the Company's method of internal reporting. Accordingly, the
Company has six reportable segments. These segments are Development and sales of
properties, Office and other non-shopping center rental properties, Shopping
centers, Hotel operations, International and Others. As discussed in Note 3.b.,
the consolidated statements of income were prepared on a proportionate
consolidation basis. The Company uses the "proportionate-consolidation method"
of accounting for its investments in which the Company exercises control and
other jointly-controlled investments. This method has not been used for balance
sheet and cash flows purposes. Accordingly, this note reflects the results of
operations of the Company's controlled and jointly-controlled subsidiaries on a
proportionate basis.
A general description of each segment follows:
o Development and sale of properties
This segment includes the operating results of the Company's construction
and ultimate sale of residential buildings business.
o Office and other non-shopping center rental properties
This segment includes the operating results of the Company's lease and
service revenues of office space and other non-retail building properties from
tenants.
o Shopping centers
This segment includes the operating results of the Company's shopping
centers principally comprised of lease and service revenues from tenants. This
segment also includes revenues derived from credit card transactions that
consist of commissions and financing income.
o Hotel operations
This segment includes the operating results of the Company's hotels
principally comprised of room, catering and restaurant revenues.
F-29
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
7. SEGMENT INFORMATION (CONTINUED)
o International
This segment includes the results of operations of the Company's equity
investments in: i) Brazil for all periods presented; as discussed in Note 3.f.,
the Company sold its ownership interest in Brazil in February 2002, and ii) the
results of operations of the equity investments in Venezuela for the years ended
June 30, 2001 and 2000; as discussed in Note 3.f., the Company sold its
ownership interest in Venezuela in December 2000.
o Others
This segment primarily includes revenues and associated costs generated
from the sale of equity securities, other securities-related transactions and
other non-core activities of the Company. For the years ended June 30, 2002 and
2001, this segment also includes the results in equity investees of the Company
relating to internet, telecommunications and other technology-related activities
of the Company.
The Company measures its reportable segments based on net income.
Inter-segment transactions, if any, are accounted for at current market prices.
The Company evaluates performance of its segments and allocates resources to
them based on net income. The Company is not dependent on any single customer.
The accounting policies of the segments are the same as those described
in Note 4.
As of and for the year ended June 30, 2002:
Office and
other
Development non-shopping
and sale center
of rental Shopping Hotel
properties properties centers operations Internationa Others Total
----------- ------------------------------------------------------------------------------
Sales ...................... Ps. 45,202 Ps. 34,250 Ps. 77,585 Ps. 29,462 Ps. 24,820 Ps. -- Ps. 211,319
Costs ...................... (37,402) (10,692) (38,426) (20,774) (14,061) -- (121,355)
Gross profit ............... 7,800 23,558 39,159 8,688 10,759 -- 89,964
Selling expenses ........... (3,672) (477) (22,289) (3,318) (4,578) -- (34,332)
Administrative expenses .... (8,971) (4,959) (11,219) (8,721) (3,773) -- (37,643)
Loss on purchasers
rescissions of sales
contracts .................. 27 -- -- -- -- -- 27
Gain (loss) from
operations and holdings
of real estate assets, net.. (30,788) (41,738) (23,946) -- 31,514 -- (64,956)
Operating (loss) income .... (35,602) (23,616) (18,295) (3,351) 33,924 -- (46,940)
Financial results, net ..... (18,532) (14,831) 8,855 (15,504) (3,597) (388,611) (432,220)
Net loss in related
companies .................. -- -- (3,911) -- 404 1,540 (1,967)
Other income
(expenses), net ............ -- -- (4,744) 167 47 (3,981) (8,511)
Loss (income) before
taxes and extraordinary
items ...................... (54,134) (38,447) (18,095) (18,688) 30,778 (391,052) (489,638)
Extraordinary loss .........
Income tax ................. (569) (3,341) (1,333) (58) (4,533) (147) (9,981)
Loss (income) for the
year ....................... (54,703) (41,788) (19,428) (18,746) 26,245 (391,199) (499,619)
Additions of fixed
assets...................... 1,459 18,463 -- 1,136 -- -- 21,058
Depreciation and
amortization (a)............ (5,889) 7,663 30,403 4,815 219 - 37,211
Non-current investments
in jointly controlled
companies................... 37,893 -- 307,246 9,745 -- 2,654 357,538
Operating assets............ 317,384 245,810 269,351 102,848 -- -- 935,393
Non operating assets........ 36,644 27,581 30,223 11,540 26,129 77,205 209,322
----------- -----------------------------------------------------------------------------
Total assets................ Ps.354,028 Ps. 273,391 Ps. 299,574 Ps. 114,388 Ps. 26,129 Ps. 77,205 Ps.1,144,715
----------- -----------------------------------------------------------------------------
(a) Included in operating loss (income)
F-30
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
7. SEGMENT INFORMATION (CONTINUED)
As of and for the year ended June 30, 2001:
Office and
other
Development non-shopping
and sale center
of rental Shopping Hotel
properties properties centers operations International Others Total
--------------------------------------------------------------------------------------------
Sales....................... Ps. 89,772 Ps. 45,591 Ps. 94,475 Ps. 40,873 Ps. 69,132 Ps. -- Ps. 339,843
Costs....................... (68,164) (8,914) (36,829) (27,076) (31,041) -- (172,024)
Gross profit ............... 21,608 36.677 57,646 13,797 38,091 -- 167,819
Selling expenses............ (8,500) (468) (11,364) (4,738) (8,678) -- (33,748)
Administrative expenses .... (13,429) (6,279) (14,049) (9,814) (7,169) -- (50,740)
Loss on purchasers
rescissions of sales
contracts................... (14) -- -- -- -- -- (14)
Gain (loss) from
operations and
holdings of real
estate assets, net ......... (3,793) (1,878) -- -- (634) -- (6,305)
Operating (loss) (4,128) 28,052 32,233 (755) 21,610 -- 77,012
income......................
Financial results, net ..... (24,981) (19,945) (28,113) (8,452) (14,347) (14,464) (110,302)
Net income in related
companies .................. (22) -- (1,420) -- (1,299) (7,582) (10,323)
Other income
(expenses), net ............ -- -- (178) 237 (37) (5,646) (5,624)
Loss (income) before
taxes and
extraordinary items ........ (29,131) 8,107 2,522 (8,970) 5,927 (27,692) (49,237)
Income tax ................. 20 (2,404) (786) 40 (1,933) -- (5,063)
Extraordinary loss.......... -- -- -- (5,653) -- -- (5,653)
Net (loss) income for
the year ................... (29,111) 5,703 1,736 (14,583) 3,994 (27,692) (59,953)
Additions of fixed
assets ..................... 178 4,241 -- 2,525 4 -- 6,948
Depreciation and
amortization (a)............ 659 7,481 33,263 5,663 276 -- 47,341
Non-current
investments in
jointly controlled
companies .................. 11,293 -- 307,172 5,104 133,800 13,046 470,415
Operating assets............ 392,952 316,034 307,481 110,463 133,933 -- 1,260,863
Non operating assets........ 26,467 18,987 18,474 6,637 8,046 155,075 233,686
----------- ----------- ----------- ----------- ----------- ------------ ------------
Total assets................ Ps. 419,419 Ps. 335,021 Ps. 325,955 Ps. 117,100 Ps. 141,979 Ps. 155,075 Ps.1,494,549
----------- ----------------------- ----------- ----------- ------------ ------------
(a) Included in operating loss (income)
As of and for the year ended June 30, 2000:
Office and
other
Development non-shopping
and sale center
of rental Shopping Hotel
properties properties centers operations International Others Total
----------------------------------------------------------------------------------------------
Sales.......................Ps. 80,511 Ps. 46,692 Ps. 89,299 Ps. 59,066 Ps. 86,362 Ps. -- Ps. 361,930
Costs....................... (52,479) (8,105) (34,005) (38,473) (34,627) -- (167,689)
Gross profit ............... 28,032 38,586 55,294 20,593 51,736 -- 194,241
Selling expenses............ (4,712) (579) (19,095) (6,463) (6,037) -- (36,886)
Administrative
expenses.................... (15,200) (6,647) (12,391) (11,262) (10,129) -- (55,629)
Loss on purchasers
rescissions of sales
contracts................... (1,541) -- -- -- -- -- (1,541)
Gain (loss) from
operations and
holdings of real
estate assets, net ......... (743) -- -- -- (1,953) -- (2,696)
Operating income............ 5,835 31,360 23,809 2,868 33,617 -- 97,489
Financial results, net .... (17,938) (15,599) (21,807) (7,565) 4,808 (775) (58,876)
Net income in related
companies .................. -- -- (20) -- (1,408) -- (1,428)
Other income
(expenses), net ............ -- -- (1,076) 395 (4,536) (6,690) (11,907)
Income before taxes ........ (12,103) 15,761 906 (4,302) 32,481 (7,465) 25,278
Income tax ................. (2,439) (2,043) (2,134) (503) (6,608) -- (13,727)
Net (loss) income for
the year ................... (14,542) 13,717 (1,228) (4,804) 25,873 (7,465) 11,551
Additions of fixed
assets ..................... 2,193 2,140 -- 5,886 -- -- 10,219
Depreciation and
amortization (a)............ 1,766 6,690 25,795 7,150 (4,398) -- 37,003
Non-current
investments in
jointly controlled
companies .................. 9,315 -- 297,753 11,725 256,627 -- 575,420
Operating assets............ 439,998 343,722 297,753 126,091 256,626 -- 1,464,190
Non operating assets........ 19,369 13,073 11,325 8,659 9,759 138,852 201,037
----------------------------------------------------------------------------------------------
Total assets................Ps. 459,367 Ps. 356,795 Ps. 309,078 Ps. 134,749 Ps. 266,386 Ps. 138,852 Ps. 1,665,227
----------------------------------------------------------------------------------------------
(a) Included in operating loss (income)
F-31
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8. LOSS FROM OPERATIONS AND HOLDINGS OF REAL ESTATE ASSETS, NET:
YEARS ENDED JUNE 30,
-------------------------------------------------------------
2002 2001 2000
----------------- ---------------- -----------------
Income (loss) from transactions related to
shares of jointly controlled, affiliated and
related companies........................... Ps. 31,854 Ps. (634) Ps. (184)
Results from holding of investment in real
estate...................................... (96,810) (5,671) (2,881)
Other....................................... -- -- 369
----------------- ---------------- -----------------
Ps. (64,956) Ps. (6,305) (2,696)
================= ================ =================
9. FINANCIAL RESULTS, NET:
YEARS ENDED JUNE 30,
---------------------------------------------------------------
2002 2001 2000
------------------- ------------------ -------------------
GENERATED BY ASSETS:
Interest income............................. Ps. 9,656 Ps. 8,141 Ps. 7,631
Financial operating net results............. (117,386) (4,014) 6,164
(Loss) gain on exposure to inflation........ (151,448) 19,988 71,362
Exchange loss............................... 50,327 (18,901) (24,529)
Other....................................... (265) -- --
----------------- ----------------- ------------------
Ps. (209,116) Ps. 5,214 Ps. 60,628
----------------- ----------------- ------------------
GENERATED BY LIABILITIES:
Gain (loss) on exposure to inflation........ Ps. 98,397 Ps. (7,610) (31,786)
Exchange loss............................... (305,415) (6,686) (7,615)
Interest expense............................ (16,095) (100,674) (79,208)
Other....................................... 9 (546) (895)
----------------- ----------------- ------------------
Ps. (223,104) Ps. (115,516) Ps. (119,504)
----------------- ----------------- ------------------
FINANCIAL RESULTS, NET...................... Ps. (432,220) Ps. (110,302) Ps. (58,876)
=================== ================== ==================
10. OTHER EXPENSES, NET:
YEARS ENDED JUNE 30,
--------------------------------------------------------------
2002 2001 2000
------------------- ------------------ ------------------
Loss (gain) on early redemption of debt (i). Ps. (174) Ps. 1,166 Ps. (3,486)
Gain (loss) from the sale of fixed assets.. -- 166 (39)
Unrecoverable VAT........................... (1,344) (3,288) (2,471)
Donations................................... (263) (1,997) (2,631)
Other....................................... (6,730) (1,671) (3,280)
----------------- ---------------- -----------------
Ps. (8,511) Ps. (5,624) Ps. (11,907)
================= ================ =================
(i) For the years ended June 30, 2002 and 2001, this line item includes
the proportionate share of the net (loss) gain on early redemption
of debt recorded by a company's subsidiary during such periods.
During the year ended June 30, 2000, the Company redeemed
convertible negotiable obligations for a face value of US$ 61.9
million. In this connection, the Company recorded a loss of Ps. 3.5
million.
11. CONVERTIBLE DEBT
The Shareholders meeting held on March 8, 2002 approved the issuance of
up to US$ 100.0 million unsecured convertible debt securities for a five-year
term at a fixed annual interest rate of 6% to 12% with semi-annual payments. At
the option of the holders, debt may be converted into shares of common stock of
the Company at up to 110% of the volume weighted average price on the BASE
during twenty consecutive trading days immediately preceding the beginning of
the subscription period.
In this connection the Shareholders' meeting held on March 8, 2002
approved the issuance to thE convertible debt holders of warrants to purchase
the Company's common stock. Each warrant entitles the holder to purchase one
share of common stock at an exercise price of Ps. 1 per share. These warrants
are to be exercisable within 15 days after the finalization of the conversion
period.
No securities were issued in connection with this approval as of June 30,
2002
F-32
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. BALANCES AND TRANSACTIONS WITH RELATED PARTIES
The following is a summary of the balances and transactions with related
parties:
INCOME (LOSS) INCLUDED IN THE
STATEMENTS OF OPERATIONS FOR THE BALANCE RECEIVABLE
YEAR ENDED JUNE 30, (PAYABLE)AS OF JUNE 30,
-------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF
COMPANY RELATION TRANSACTION / CAPTION 2002 2001 2000 2002 2001
--------------------------------------------------------------- --------- ---------- ----------- -----------
APSA ........ An equity Current mortgages and
investee of leases receivables, net Ps. -- Ps. -- Ps. -- Ps. 384 Ps. 188
the Company Non-current mortgages
(i) and leases receivables,
net -- -- -- 1,638 --
Other non-current
receivables -- -- -- 73,160 --
Current account payable -- -- -- (140) (96)
Other current
liabilities -- -- -- (28) --
Other non-current
liabilities -- -- -- (503) --
Sales and developments -- 153 123 -- --
Accrued interest 10,691 -- 374 -- --
--------------------------------------------------------------- --------- ---------- ----------- -----------
BHSA......... Related Investments current -- -- -- 11,522 21,051
party(ii) Investments non-current -- -- -- 6,500 32,015
Current mortgages and
leases receivables, net -- -- -- 2 2
Other current
receivables -- -- -- 1 --
Results from holding
and operations (38,103) (15,339) -- -- --
--------------------------------------------------------------- --------- ---------- ----------- -----------
Banco de
Credito y Related
Securiti- party
zacion S.A... Investments non-current -- -- -- 6,236 9,781
--------------------------------------------------------------- --------- ---------- ----------- -----------
Cresud Shareholder
S.A.C.I.F. y of the Current mortgages and
A. ......... Company(iii) leases receivables, net -- -- -- 132 254
Current account payable -- -- -- (42) --
Other current
liabilities -- -- -- (5) --
Accrued interest 410 -- -- -- --
Rental income 147 329 -- -- --
Sales and developments -- 125 -- -- --
--------------------------------------------------------------- --------- ---------- ----------- -----------
Subsidiary Current mortgages and
of APSA, an leases receivables, net -- -- -- -- 23
Alto Invest equity Rental income -- 18 33 -- --
S.A. ........ investee of
the Company
--------------------------------------------------------------- --------- ---------- ----------- -----------
Subsidiary Current mortgages and
of leases receivables, net -- -- -- 54 180
E-Commerce Other current
Altocity.com S.A., an liabilities -- -- -- -- (37)
S.A.......... equity Rental income 207 329 65 -- --
investee of Sale and developments -- 139 -- -- --
APSA
--------------------------------------------------------------- --------- ---------- ----------- -----------
Subsidiary Current mortgages and
of APSA, an leases receivables, net -- -- -- 11 39
Tarshop S.A.. equity Other current
investee of liabilities -- -- -- (3) --
the Company Rental income 72 -- -- -- --
Sale and developments -- 98 -- -- --
--------------------------------------------------------------- --------- ---------- ----------- -----------
Subsidiary Current mortgages and
of Cresud, leases receivables, net -- -- -- -- 4
Cactus S.A. . an equity Sales and developments -- 8 -- -- --
investee of
the Company
--------------------------------------------------------------- --------- ---------- ----------- -----------
Dolphin Fund Current mortgages and
Management Related leases receivables, net -- -- -- 128 309
S.A.......... party Other current
receivables -- -- -- 58 --
Current account payable -- -- -- (45) --
Rental income 134 59 -- -- --
Sale and developments -- 119 -- -- --
--------------------------------------------------------------- --------- ---------- ----------- -----------
Subsidiary Current mortgages and
Emprendi- of APSA, an leases receivables, net -- -- -- -- 25
mientos equity Other current
Recoleta S.A. investee of receivables -- -- -- 20 --
the Company Current account payable -- -- -- (4) --
Sale and developments -- 80 -- -- --
--------------------------------------------------------------- --------- ---------- ----------- -----------
Subsidiary Current mortgages and
of APSA, an leases receivables, net -- -- -- -- 10
Fibesa S.A... equity Current account payable -- -- -- (2) --
investee of Sale and developments -- 29 -- -- --
the Company
--------------------------------------------------------------- --------- ---------- ----------- -----------
Subsidiary Current mortgages and
Futuros y of Cresud, leases receivables, net -- -- -- 12
opciones.com. an equity Sales and developments -- 43 -- -- --
investee of
the Company
--------------------------------------------------------------- --------- ---------- ----------- -----------
Hoteles Other current
Argentinos Related receivables -- -- -- -- 10
S.A.......... party Current account payable -- -- -- -- (23)
Accrued interests -- (1,716) 2,007 -- --
--------------------------------------------------------------- --------- ---------- ----------- -----------
Latin Current mortgages and
American Equity leases receivables, net -- -- -- -- 105
Econetworks investee Rental income -- 207 -- -- --
N.V.......... Sale and developments -- 31 -- -- --
--------------------------------------------------------------- --------- ---------- ----------- -----------
Alternativa Current mortgages and
Gratis S.A. . leases receivables, net -- -- -- 1 8
Accrued interest -- (1) -- -- --
Rental income 112 129 18 -- --
Sale and developments -- 39 -- -- --
--------------------------------------------------------------- --------- ---------- ----------- -----------
Red Current mortgages and
Alternativa Related leases receivables, net -- -- -- 5 18
S.A. ........ party Rental income 47 -- 14 -- --
Sale and developments -- 88 -- -- --
--------------------------------------------------------------- --------- ---------- ----------- -----------
Managers, Other current
directors receivables (personnel
and other Related loans) -- -- -- 182 792
staff of the parties(iv) Other non-current
Company...... receivables (personnel
loans) -- -- -- 149 2,551
Interests 120 311 -- -- --
--------------------------------------------------------------- --------- ---------- ----------- -----------
F-33
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. BALANCES AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
(i) On July 20, 2001, the Company's board of directors approved to grant APSA
several loans to finance transactions related to its swap agreement (the
"Loan Agreements"). On February 8, 2002 the Company and Parque Arauco
signed subordination agreements in order to subordinate the payment of
that Loans Agreements to the payment of the Senior Notes. The interest
rate associated to the Loan Agreements is the lesser of (i) variable cost
of money for us in operations of up to 30 days and, (ii) the average of
the last five BADLAR rates for US dollar transactions, plus 200 annual
nominal basis points for operations in foreign and local currency
according to market conditions. At June 30, 2002, the outstanding balance
of these loans amounted to Ps. 73.1 million and beared an annual interest
rate of 10 % plus CER. On August 20, 2002 the Company subscribed
convertible notes issued by APSA mainly applying the loan above-mentioned
for a total amount of US$ 27.2 million.
(ii) The Company is a shareholder of BHSA.
(iii) Included in net revenues for the year ended June 30, 2002, are Ps. 410,
in office space lease and fees billed to Cresud S.A.C.I.F. y A
("Cresud"). Amounts receivable as of June 30, 2002 totaled Ps. 132.
(iv) The Company provided loans and advances to employees and directors, the
balances of which amounted to Ps.331 and Ps.3,343 as of June 30, 2002 and
2001, respectively. Such balances are to be repaid via scheduled payroll
deductions.
F-34
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13. ADDITIONAL INFORMATION ON ASSETS AND LIABILITIES
The breakdown of main assets and liabilities as of June 30, 2002 is as
follows:
To mature To mature To mature
between between Between To mature in
To mature in 4 and 6 7 and 9 10 and 12 greater than
3 months months months months 1 year Past due
---------------------------- ------------- ------------------------------------------
ASSETS
Investments Ps. 17,669 Ps. - Ps. 158 Ps. - Ps. 9,798 Ps. -
Mortgages and leases
receivable, net 8,971 1,477 442 115 1,664 262
Other receivables and
prepaid expenses 34,525 686 533 529 13,646 432
----------- ----------- ---------- ----------- ----------- -----------
Ps. 61,165 Ps. 2,163 Ps. 1,133 Ps. 644 Ps. 25,108 Ps. 694
----------- ----------- ---------- ----------- ----------- -----------
LIABILITIES
Trade accounts payable Ps. 11,331 Ps. 242 Ps. 6 Ps. 7 Ps. - Ps. 331
Customer advances 1,931 - - - - -
Salaries and social
security payable 1,011 9 4 - - -
Short and long term
debt 521,961 - - - - 42,778
Taxes payable 9,237 3,223 138 - - -
Other liabilities 5,004 1,100 199 265 1,560 6,614
----------- ----------- ---------- ----------- ----------- -----------
Ps. 550,475 Ps. 4,574 Ps. 347 Ps. 272 Ps. 1,560 Ps. 49,723
----------- ----------- ---------- ----------- ----------- -----------
No fixed term
--------------------------------------------
Current Non-Current Total
------------ ------------- -------------
ASSETS
Investments Ps. 18,969 Ps. 516,550 Ps. 563,144
Mortgages and leases
receivable, net 737 1,471 15,139
Other receivables and
prepaid expenses 1,842 75,975 128,168
----------- ------------ ------------
Ps. 21,548 Ps. 593,996 Ps. 706,451
----------- ------------ ------------
LIABILITIES
Trade accounts payable Ps. 307 Ps. - Ps. 12,224
Customer advances - - 1,931
Salaries and social
security payable - - 1,024
Short and long term
debt - 142 564,881
Taxes payable - - 12,598
Other liabilities 362 1,319 16,423
----------- ------------ ------------
Ps. 669 Ps. 1,461 Ps. 609,081
----------- ------------ ------------
Accruing interest at a Accruing interest at a
fixed rate variable rate Not accruing interest
--------------------------- -------------------------- --------------------------
Current Non-Current Current Non-Current Current Non-Current Total
--------------------------- ---------- ----------- ----------- ----------- ----------
ASSETS
Investments Ps. 17,890 Ps. 3,624 Ps. 7,384 Ps. 6,174 Ps. 11,522 Ps. 516,550 Ps.563,144
Mortgages and leases
receivable, net 7,710 1,672 - - 4,294 1,463 15,139
Other receivables and
prepaid expenses 27,503 73,908 - - 11,044 15,713 128,168
----------- ----------- ---------- ----------- ----------- ----------- ----------
Ps. 53,103 Ps. 79,204 Ps. 7,384 Ps. 6,174 Ps. 26,860 Ps. 533,726 Ps.706,451
----------- ----------- ---------- ----------- ----------- ----------- ----------
LIABILITIES
Trade accounts payable Ps. - Ps. - Ps. - Ps. - Ps. 12,224 Ps. - Ps. 12,224
Customer advances - - - - 1,931 - 1,931
Salaries and social
security payable - - - - 1,024 - 1,024
Short and long term
debt 207,998 - 356,741 - - 142 564,881
Taxes payable - - - - 12,598 - 12,598
Other liabilities 786 1,228 - - 12,758 1,651 16,423
----------- ----------- ---------- ----------- ----------- ----------- ----------
Ps. 208,784 Ps. 1,228 Ps.356,741 Ps. - Ps. 40,535 Ps. 1,793 Ps.609,081
----------- ----------- ---------- ----------- ----------- ----------- ----------
F-35
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
14. CONSOLIDATION
As discussed in Note 3.b., the consolidated statements of income were
prepared on a proportionate consolidation basis. As from July 1, 1996, the
Company used the "proportionate-consolidation method" of accounting for its
investments in which the Company exercises control and other jointly-controlled
investments. This method has not been used for balance sheet and cash flows
purposes. The Company calculates the proportionate-consolidation method by
applying its percentage ownership interest to the historical financial
statements of its equity method investments. The following table presents the
Company's statements of income for the three years in the period ended June 30,
2002 reporting (i) the jointly-controlled investments accounted for by the
equity method, with the earnings or losses included as earnings or losses from
equity investees, and (ii) minority interest in earnings or losses of controlled
subsidiaries.
YEAR ENDED JUNE 30,
-----------------------------------------------------------
2002 2001 2000
-------------------------------------- -------------------
SALES.................................................. Ps. 123,462 Ps. 195,657 Ps. 222,895
COSTS (Note 20.d.)..................................... (74,836) (111,378) (117,255)
-------------------------------------- -----------------
GROSS PROFIT........................................... 48,626 84,279 105,640
-------------------------------------- -----------------
Selling expenses (Note 20.f.).......................... (7,978) (15,546) (14,679)
Administrative expenses (Note 20.f.)................... (28,528) (35,593) (42,156)
-------------------------------------- -----------------
(36,506) (51,139) (56,835)
-------------------------------------- -----------------
Loss from operations and holdings of real estate
assets, net............................................ (41,684) (6,342) (2,696)
-------------------------------------- -----------------
OPERATING (LOSS) INCOME................................ (29,564) 26,798 46,109
-------------------------------------- -----------------
Losses from equity investees........................... (17,797) 6,471 10,810
Financial results, net................................. (445,821) (83,358) (24,719)
Other income(expenses), net............................ (4,322) (5,266) (6,371)
-------------------------------------- -----------------
(LOSS) INCOME BEFORE INCOME TAX AND MINORITY INTEREST.. (497,504) (55,355) 25,829
-------------------------------------- -----------------
Minority interest...................................... 5,118 (1,459) (4,818)
Income tax............................................. (7,233) (3,140) (9,460)
-----------------
--------------------------------------
NET (LOSS) INCOME..................................... Ps. (499,619) Ps. (59,954) Ps. 11,551
-------------------------------------- -----------------
15. RESTRICTED ASSETS
(i) In a series of transactions, which occurred between 1999 and 2000,
the Company acquired from an unrelated party, Puerto Retiro, the sole asset of
which is an undeveloped parcel of land in Retiro, Buenos Aires. Prior to the
acquisition of Puerto Retiro by the Company, Puerto Retiro had acquired the
abovementioned land from Tandanor S.A. ("Tandanor"), a formerly state-owned
entity, which had been acquired by Inversora Darsena Norte S.A. ("Indarsa") in
1991 through a privatization process. Indarsa did not cancel the outstanding
balance of the purchase price of Tandanor, and as a result, the Federal
Government, through its Ministry of Defense, petitioned the bankruptcy of
Indarsa. Since the sole asset of Indarsa was its ownership interest in Tandanor,
the government is seeking to extend the bankruptcy procedures to any company or
individual, which, according to its view, acted as a group, and therefore,
requested the bankruptcy of Puerto Retiro. In this connection, the bankruptcy
court for the Buenos Aires District issued an order restraining the ability of
Puerto Retiro to sell or dispose in any manner the land previously acquired from
Tandanor.
The Company is vigorously defending against this case. While there can be
no assurance of success, the Company believes it is likely to prevail on the
case and obtain a judgment in its favor.
(ii) On November 9, 2001, IRSA Inversiones y Representaciones S.A. ("the
Company") and GSEM/AP Holdings L.P. ("GSEM") entered into a first amendment to
the Shareholders' Agreement entered into on February 25, 1998, which was
followed by a second amendment dated November 27, which established, among other
issues, the Company's obligation to pay a total amount of US$ 13,135 to GSEM
(called "GSEM Credit"), to be settled in two equal installments for a total
amount of US$ 6,567 each, plus interest accrued at the time of payment, the
first installment falling due on January 31, 2002 and the second on April 30,
2002. As a consequence of that obligation, the Company entered into a Share
Trust Agreement pursuant to which the Company has assigned in trust, under the
terms of Law No. 24,441, in favor of the Trustee (ABN AMRO BANK N.V.), all the
shares it owns in Palermo Invest S.A. The Trustee shall not in any way transfer,
pledge or otherwise assign all or part of the Company's Shares to any Person and
at all times shall vote the Shares in the manner instructed by the Company.
Additionally, in no event shall GSEM be granted any rights under the terms of
the Trust to request the Trustee to foreclose on the Company's Shares. Upon the
Company's total fulfillment of its obligations to GSEM, the trustee must return
the shares to IRSA under the terms and conditions of the trust agreed with the
Trustee.
(iii) In connection with the acquisition of additional interest in Santa
Maria del Plata S.A., the Company pledged 2,460,041 shares of its interest in
that company to secure the balance owed until it is fully paid.
(iv) The Labor Court N(degree) 55 decided the embargo of units N(degree)
14 and 20 located in Sarmiento 517, property of the Company, in connection with
a lawsuit in which the Company is codefendant.
F-36
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16. EXTRAORDINARY LOSS
As discussed in Note 3.b., the consolidated statements of income were
prepared on a proportionate consolidation basis. As such, this line item
represents the proportionate share of an extraordinary loss recorded by one of
the Company's subsidiaries, LLR., relating to the judgment against it in the
amount of Ps. 5.7 million entered by Parques Nacionales, a governmental agency,
following a dispute on the amount of the selling price of the hotel Llao Llao,
sole asset of the subsidiary.
LLR had filed an appeal contending the verdict was erroneous as a matter
of law, both as to liability and damages, and the plaintiff filed a cross
appeal, which outcome resulted adverse to the subsidiary.
17. DERIVATIVE INSTRUMENTS
From time to time, the Company utilizes certain financial instruments,
primarily foreign currency forward-exchange contracts, as a supplement to reduce
its overall financing costs. The counterparties to these instruments generally
are major financial institutions. The Company does not hold or issue derivative
instruments for trading purposes. In entering into these contracts, the Company
has assumed the risk that might arise from the possible inability of
counterparties to meet the terms of their contracts. The Company does not expect
any losses as a result of counterparty defaults. In the past, the Company also
utilized foreign currency forward-exchange contracts to manage its exposure
associated with its net investment in foreign operations.
At June 30, 2002, there were no operations with derivative instruments.
At June 30, 2001, the Company had the following derivative activity:
(i) Forward-exchange contract to hedge a portion of its net investment
in a foreign operation
On February 7, 2000, the Company entered into a six-month foreign
currency forward-exchange contract to sell Brazilian Reais ("BR") 28,050,000 at
1US$=1.87BR, when the spot rate was 1US$=1.77BR. The Company considered this
forward contract as an economic hedge of a portion of its net investment in
Brazil Realty. For the years ended June 30, 2001 and 2000, the Company
recognized a loss of approximately Ps. 0.6 million and Ps. 1.4 million relating
to this contract, respectively. At June 30, 2002 and 2001, the Company had no
outstanding contracts designated as hedges of a net investment in a foreign
operation.
(ii) Foreign currency forward-exchange contracts
The Company uses foreign currency forward-exchange contracts as a
supplement to reduce its overall financing costs. Premiums on foreign currency
forward-exchange contracts are amortized over the life of the respective
contract. At June 30, 2001, the Company had three outstanding foreign currency
forward-exchange contracts with financial institutions to sell an aggregate
amount of US$ 16.8 million maturing August 2001, and one foreign currency
forward-exchange contract to sell US$ 10.0 million maturing in September 2001.
The Company recognized a net gain of Ps. 5.3 million and Ps. 0.4 million for the
years ended June 30, 2002 and 2001, respectively, related to these contracts.
(iii) Interest rate swap
In order to minimize its financing costs and to manage interest rate
exposure, the Company entered into an interest rate swap agreement to
effectively convert a portion of its peso-denominated fixed-rate debt to
peso-denominated floating rate debt. As of June 30, 2001, the Company had an
interest rate swap agreement outstanding with an aggregate notional amount of
Ps. 29.3 million with maturities through August 2001. As of June 30, 2001,
interest rate payable was at a variable rate of 22.3% and interest rate
receivable was at a fixed rate of 10.15%. Any differential to be paid or
received was accrued and was recognized as an adjustment to interest expense in
the statement of operations. The related accrued receivable or payable was
included as an adjustment to interest payable. The fair value of the swap
agreement was not recognized in the financial statements.
18. MORTGAGE RECEIVABLE SECURITIZATION
On November 2, 2001 the Company entered into a securitization program
with Banco Sudameris ("BS").
Under this program, during the year ended June 30, 2002, the Company sold
an aggregate amount of US$ 26.6 million mortgages receivable to a Trust in
exchange for US$ 10.0 million in cash, US$ 3.3 million senior debt certificates
and US$ 13.3 million subordinated debt certificates. Such US denominated
certificates were converted into Argentine pesos at the exchange rate Ps. 1 to
US$ 1 as a result of Government economic measures summarized in Note 2.
Accounts receivable sold under this program are excluded from accounts
receivable in the consolidated financial statements.
F-37
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP
The Company's consolidated financial statements are prepared in
accordance with Argentine GAAP, which differs in certain significant respects
from US GAAP. Such differences involve methods of measuring the amounts shown in
the financial statements, as well as additional disclosures required by US GAAP
and Regulation S-X of the Securities and Exchange Commission (SEC).
I. Differences in measurement methods
The following reconciliation to US GAAP does not include the reversal of
the adjustments to the consolidated financial statements for the effects of
inflation required under Argentine Technical Resolution No. 6, with the
modification established in the Argentine Technical Resolution No. 19, because
the application of this Resolution represents a comprehensive measure of the
effects of price level changes in the Argentine economy.
The principal differences, other than inflation accounting, between
Argentine GAAP and US GAAP are described below, together with an explanation,
where appropriate, of the method used in the determination of the necessary
adjustments.
YEAR ENDED JUNE 30,
-------------------------------------------------------------
RECONCILIATION OF NET (LOSS) INCOME: 2002 2001 2000
------------------- ------------------- -------------------
Net (loss) income as reported under Argentine GAAP.... Ps. (499,619) Ps. (59,954) Ps. 11,551
US GAAP ADJUSTMENTS:
Impact of US GAAP adjustments on equity investees
(Note 19.I.a))........................................ (119,245) 76,241 (17,588)
Accounting for marketable securities (Note 19.I.b))... (3,727) 21,250 13,912
Accounting for derivatives and hedging activities
(Note 19.I.c))........................................ (7,257) 1,037 4,153
Accounting for options to acquire marketable
securities (Note 19.I.d))............................. (6,789) 9,421 (2,150)
Non-contributory management stock ownership plan
(Note 19.I.e))........................................ (11,551) (15,679) (12,377)
Depreciation of fixed assets (Note 19.I.f))........... 8,314 (2,318) (2,345)
Preoperating and organization expenses (Note 19.I.g)). 1,545 (736) (18)
Depreciation expense (Notes 19.I.h) and j))........... 119 119 119
Securitization accounting (Note
19.I.i)........................................ (2,015) - - - -
Deferred income tax (Note 19.I..k.))................. (23,582) (3,777) (11,933)
Minority interest (Note 19.I.l))..................... 12,859 (5,580) (222)
------------------- ------------------- -------------------
Net (loss) income under US GAAP....................... Ps. (650,948) Ps. 20,024 Ps (16,898)
=================== =================== ===================
Basic and diluted earnings per share under US GAAP:
(Loss) income before accounting change................ Ps. (3.138) Ps. (0.002) Ps. (0.083)
Accounting change..................................... - - 0.100 - -
------------------- ------------------- -------------------
Net (loss) income per share........................... Ps. (3.138) Ps. 0.098 Ps. (0.083)
=================== =================== ===================
F-38
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
AS OF JUNE 30,
------------------------------------------------
2002 2001
---------------------- -----------------------
RECONCILIATION OF SHAREHOLDERS' EQUITY:
Total shareholders' equity under Argentine GAAP.................... Ps. 460,416 Ps. 960,035
Impact of US GAAP adjustments on equity investees (Note 19.I.a)).. (69,129) (43,527)
Accounting for derivatives and hedging activities (Note 19.I.c))... - - 505
Accounting for options to acquire marketable securities (Note
19.I.d)).......................................................... (985) 5,804
Depreciation of fixed assets (Note 19.I.f))....................... (2,866) (11,180)
Preoperating and organization expenses (Note 19.I.g))............. (2,988) (4,533)
Mortgage payable with no stated interest rate (Note 19.I.h))...... (1,806) (1,806)
Differences in basis related to purchase accounting (Note 19.I.j)) (3,290) (3,290)
Depreciation expense (Note 19.I.h) and j))........................ 567 448
Securitization accounting (Note
19.I.i))............................................................... (2,945) - -
Deferred income tax (Note 19.I.k))................................ (55,807) (19,955)
Minority interest (Note 19.I.l))................................. 8,325 (4,564)
---------------------- -----------------------
Shareholders' equity under US GAAP................................ Ps. 329,492 Ps. 877,937
====================== =======================
Description of changes in shareholders' equity under US GAAP:
FOR THE YEAR ENDED JUNE 30,
------------------------------------------------
2002 2001
---------------------- -----------------------
Shareholders' equity under US GAAP as of beginning of year......... Ps. 877,937 Ps. 1,024,427
Amortization of deferred compensation expense...................... 11,551 15,679
Purchase of treasury stock......................................... - - (80,431)
Additional paid-in-capital......................................... - - (489)
Foreign currency translation adjustment............................ 100,026 (67,922)
Unrealized loss on available-for-sale securities................... (7,560) (34,298)
Unrealized loss on retained interest in transferred mortgage
receivables........................................................ (575) - -
Unrealized loss on available-for-sale securities on equity
investees.......................................................... (939) 947
Net (loss) income under US GAAP.................................... (650,948) 20,024
---------------------- -----------------------
Shareholders' equity under US GAAP as of end of year............... Ps. 329,492 Ps. 877,937
====================== =======================
(A) IMPACT OF US GAAP ADJUSTMENTS ON EQUITY INVESTEES
Under Argentine GAAP, investments in companies in which it exercises
significant influence, but not control, are accounted for under the equity
method. Under the equity method, the investment is recorded at original cost and
periodically increased (decreased) by the investor's proportionate share of
earnings (losses) of the investee and decreased by all dividends received from
the investor by the investee. The Company applies its percentage ownership
interest to the financial statements of its equity method investments prepared
under Argentine GAAP. For purposes of this reconciliation, the Company has
assessed the impact of US GAAP adjustments on the Argentine GAAP financial
statements of its equity investees. As a consequence of this assessment, the
Company recognized a net (loss) gain of Ps. (119.2) million, Ps. 76.2 million
and Ps. (17.6) million for the years ended June 30, 2002, 2001 and 2000,
respectively. Following is a description of the significant differences between
Argentine GAAP and US GAAP as they relate to the Company's equity investees:
F-39
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(A) IMPACT OF US GAAP ADJUSTMENTS ON EQUITY INVESTEES (CONTINUED)
(i) Foreign currency translation adjustments
Under Argentine GAAP, financial statements of foreign unconsolidated
equity investees have been translated to Argentine pesos on the basis of the
financial statements of such subsidiaries expressed in the local currency of the
country of origin. The method of translation involves the translation of
monetary assets and liabilities at the exchange rate prevailing at the end of
each period, and non-monetary assets and liabilities and equity accounts on the
basis of the inflation-adjusted amounts at the exchange rate prevailing at the
end of each period. Average exchange rates have been used for the translation of
the accounts which make up the results of the periods. The net gain on
translation is included within financial results, net, as gain/(loss) on
exposure to inflation.
Under US GAAP, financial statements of foreign unconsolidated
subsidiaries have been translated into Argentine pesos following the guidelines
established in SFAS No. 52, "Foreign Currency Translation". Under SFAS No. 52,
there are two methods of translation: the current rate method and the
monetary/non-monetary method.
- In the case of foreign subsidiaries whose local currency is the
functional currency, the current rate method of translation has been used. This
method involves the translation of assets and liabilities at the exchange rate
in effect at the end of each period. Average exchange rates have been applied
for the translation of the accounts that make up the results of the periods. In
this case, translation adjustments are recorded as a separate component of
shareholders' equity. The Company has applied the current rate method to
translate financial information of its Brazilian equity investee. As discussed
in Note 3.f., the Company sold its equity ownership interest in its Brazilian
subsidiary effective February 28, 2002.
- In the case of foreign subsidiaries operating in economies which the
Company has designated as highly inflationary, pursuant to SFAS No. 52 and
Emerging Issues Task Force ("EITF") D-55, "Determining a Highly Inflationary
Economy", the monetary/non-monetary method of translation has been used. This
method involves the translation of monetary assets and liabilities at the
exchange rate in effect at the end of each period, and the non-monetary assets
and liabilities and equity at historical exchange rates (i.e., the exchange
rates in effect when the transactions occur). Average exchange rates have been
applied for the translation of the accounts that make up the results of the
periods, except for those charges related to non-monetary assets and
liabilities, which have been translated using historical exchange rates.
Translation adjustments are included in the consolidated statement of income.
The Company has applied the monetary/non-monetary method to translate financial
information of its Venezuelan equity investee. As discussed in Note 3.f., the
Company sold its equity ownership interest in its Venezuelan subsidiary
effective December 18, 2000.
(ii) Accounting for mandatorily redeemable convertible securities
As discussed in Note 3.e., on December 27, 2000, the shareholders of ITNV
entered into an agreement with the Investors, under which the Investors
contributed US$ 4.0 million in cash in exchange for 1,751,453 shares of Series A
mandatorily redeemable convertible preferred stock and an option to purchase
2,627,179 additional shares of mandatorily redeemable convertible preferred
stock. On or after December 27, 2005, ITNV is required, at the written request
of holders of the then outstanding Series A preferred stock to redeem such
holders' outstanding shares of series A preferred stock for cash at the greater
of (i) 200% of the original issue price multiplied by the number of preferred
stock to be redeemed, and (ii) the fair market value of the common shares each
holder of Series A preferred stock would have been entitled to receive if such
holder had converted the number of Series A preferred stock to be redeemed into
common stock at the redemption date; plus in the case of (i) and (ii), any
accrued or declared but unpaid dividends.
F-40
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(A) IMPACT OF US GAAP ADJUSTMENTS ON EQUITY INVESTEES (CONTINUED)
(ii) Accounting for mandatorily redeemable convertible securities
(continued)
Under Argentine GAAP, the issuance of preferred stock by ITNV to the
Investors decreased the Company's percentage of ownership in ITNV from 62% to
49% and the value assigned to the ITNV's preferred stock issued under the
transaction was substantially more than the Company's carrying amount per share
of ITNV stock, thus triggering a change in the Company's interest in ITNV. The
change in the Company's interest resulted in the recognition of a deferred gain
of Ps. 3.3 million since ITNV is in the early stage of development and the
realizability of the gain is not assured. This gain is being amortized to income
as the investee incurs operating losses.
Under US GAAP, the issuance of preferred stock by ITNV to the Investors
did not change the Company's percentage of ownership in ITNV as the Series A
mandatorily redeemable convertible stock was recorded as temporary equity in
ITNV and is being accreted to its redemption value. Accretion was included in
minority interest as a charge against income. In relation with the options
granted, at June 30, 2002, exercise price exceeds the fair market value and,
accordingly, no compensation expense has been recognized.
(iii) Other US GAAP adjustments
Other significant differences that give rise to US GAAP adjustments on
equity investees are as follows: (i) the deferral of certain preoperating and
advertising expenses under Argentine GAAP which are expensed as incurred under
U.S. GAAP; (ii) the accounting for securitized credit card receivables in
accordance with SFAS No. 140; (iii) the accounting for derivatives and hedging
activities under SFAS No. 133; and (iv) the application of SFAS No 109 "Deferred
Income Taxes".
(B) ACCOUNTING FOR MARKETABLE SECURITIES
As of June 30, 2002, the Company has certain investments in equity
securities and mutual funds. Under Argentine GAAP, the Company is carrying these
investments at market value with unrealized gains and losses, if any, included
in the statement of operations.
Under US GAAP, the Company has classified these investments as
available-for-sale and is carrying these investments at market value with
material unrealized gains and losses, if any, included in stockholders' equity
in accordance with Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"). Specific identification was used to determine cost in computing realized
gain or loss. The Company's investments are considered available for sale as
these securities could potentially be sold in response to needs for liquidity,
changes in the availability of and the yield on alternative instruments or
changes in funding sources or terms. Management determines the appropriate
classification of debt and equity securities at the time of purchase and
reevaluates such designation as of each balance sheet date. SFAS No. 115 also
states that for individual securities classified as available-for-sale an
enterprise shall determine whether a decline in fair value below the amortized
cost basis is other than temporary. In such event, accumulated unrealized losses
included in other comprehensive income shall be reclassified into the statement
of operations. Accordingly, unrealized holding losses recognized in earnings for
the year ended June 30, 2002 amounted to Ps. 45,746.
During the years ended June 30, 2002, 2001 and 2000, proceeds
from the sale of available-for-sale securities were Ps. 4.6 million, Ps. 42.4
million and Ps. 50.7 million, respectively. Gross realized (loss) gain were Ps.
(15.0) million, Ps. 3.1 million and Ps. 12.3 million for the years ended June
30, 2002, 2001 and 2000, respectively.
F-41
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(B) ACCOUNTING FOR MARKETABLE SECURITIES (CONTINUED)
The Company's investments consist of the following (in thousands):
Gross Unrealized
------------------------------------
Cost Fair Value Gain Loss
--------------- ---------------- ------------- ----------------
JUNE 30, 2000
Dolphin Fund 15,755 21,851 6,096 - -
BHSA 58,536 67,051 8,515 - -
--------------- ---------------- ------------- ----------------
74,291 88,902 14,611 - -
--------------- ---------------- ------------- ----------------
JUNE 30, 2001
Dolphin Fund 11,446 13,545 2,099 - -
BHSA 57,364 50,427 - - 6,937
Telecom Argentina 18,062 17,351 - - 711
Perez Companc 894 784 - - 110
Bocon PRO 1 13,797 12,817 - - 980
--------------- ---------------- ------------- ----------------
101,563 94,924 2,099 8,738
--------------- ---------------- ------------- ----------------
JUNE 30, 2002
Dolphin Fund 27,764 24,852 - - 2,912
BHSA 61,131 15,385 - - 45,746
--------------- ---------------- ------------- ----------------
88,895 40,237 - - 48,658
--------------- ---------------- ------------- ----------------
(C) ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
As discussed in Note 17, from time to time, the Company utilizes certain
financial instruments, primarily foreign currency forward-exchange contracts, as
a supplement to reduce its overall financing costs. In the past, the Company
also utilized foreign currency forward-exchange contracts to manage its exposure
associated with its investment in foreign operations.
Following is a description of the Company's derivative activity during
the years ended June 30, 2002, 2001 and 2000.
(i) Foreign currency forward-exchange contracts
During the years ended June 30, 2002 and 2001, the Company used foreign
currency forward-exchange contracts as a supplement to reduce its overall
financing costs. At June 30, 2001, the Company had three outstanding foreign
currency forward-exchange contracts with financials institutions to sell an
aggregate amount of US$ 16.8 million maturing August 2001, and one foreign
currency forward-exchange contract to sell US$ 10.0 million maturing September
2001. Under Argentine GAAP, premiums on foreign currency forward-exchange
contracts are amortized over the life of the respective contract. The Company
recognized net gains of Ps. 5.3 million and Ps. 0.4 million for the years ended
June 30, 2002 and 2001, respectively, related to these contracts. As of June 30,
2002, the Company had no outstanding foreign currency forward-exchange
contracts.
F-42
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(C) ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED)
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.
SFAS No. 133 was subsequently amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133, and is now effective for fiscal years beginning after
June 15, 2000, but may be implemented as of the beginning of any fiscal quarter
after issuance. Retroactive application is not permitted. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997. Changes in accounting methods will be required
for derivative instruments utilized by the Company to hedge foreign currency
exchange rate and interest rate risks. Such derivatives include foreign currency
forward contracts and interest rate swaps. In June 2000, the FASB issued
Statement 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities", which addresses a limited number of implementation issues
arising from SFAS No. 133.
Under US GAAP, the Company adopted SFAS No. 133 and its corresponding
amendments under SFAS No. 138, on July 1, 2000.
Under US GAAP, these forward contracts did not qualify for hedge
accounting treatment under SFAS No. 133. However, these derivatives, although
not designated in a hedging relationship, are required to be recorded on the
balance sheet at fair value, with related gain and losses recognized in
earnings. As the Company did not have any open forward exchange contracts at
June 30, 2000, no cumulative-effect type adjustment was recorded in accordance
with the transition provisions of SFAS No. 133.
(ii) Forward-exchange contract to hedge a portion of its net investment
in a foreign operation
On February 7, 2000, the Company entered into a six-month foreign
currency forward-exchange contract to sell Brazilian Reais ("BR") 28,050,000 at
1US$=1.87BR, when the spot rate was 1US$=1.77BR. The Company considered this
forward contract as a economic hedge of a portion of its net investment in its
Brazilian subsidiary. At June 30, 2002 and 2001, the Company had no outstanding
contracts designated as hedges of a net investment in a foreign operation.
Under Argentine GAAP, premiums on foreign currency forward-exchange
contracts are amortized over the life of the respective contract. Gains and
losses under these contract are recognized in earnings. For the years ended June
30, 2001 and 2000, the Company recognized losses of approximately Ps. 0.6
million and Ps. 1.4 million, respectively.
Under US GAAP, until June 30, 2000 the Company recorded premiums and
gains and losses on forwards exchange contracts in other comprehensive income
(OCI) in the same manner as the translation adjustment was recorded. Effective
July 1, 2000, the Company adopted SFAS No. 133, and its corresponding amendments
under SFAS No. 138. SFAS No. 133 requires that forward contracts qualifying for
hedge accounting of a net investment in a foreign operation be recorded on the
balance sheet as an asset at fair value with the corresponding gain or loss
recorded in OCI. Accordingly, the adoption of SFAS No. 133 has not had any
impact on the Company's financial position and results of operations.
F-43
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(C) ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED)
Prospectively, under US GAAP, the effective portion of the change in the
fair value of the forward contract is recorded in OCI in the same manner as the
translation adjustment is recorded. The entire cumulative change in the fair
value of the instrument that hedges a net investment in a foreign operation can
be recorded in OCI as long as it does not exceed the translation adjustments for
the net investment on an after-tax basis. Any excess of the hedging derivative's
changes in fair value, however, must be recorded in current earnings. As
discussed in Note 3.f., the Company sold its equity ownership interest in its
Brazilian subsidiary during the year ended June 30, 2002. Therefore, the
accumulated after-tax loss recorded within other comprehensive income at June
30, 2001 was reclassified into earnings during the year ended June 30, 2002.
(iii) Interest rate swap
As of June 30, 2001, the Company held a pay-floating interest rate swap
to hedge the change in fair value of a Ps. 29.3 million original debt due August
2001 related to fluctuations in interest rates. Under this agreement, the
Company paid interest at a variable rate in exchange for fixed rate payments,
transforming the debt to a floating rate obligation. The notional amount of this
swap agreement was Ps. 29.3 million. The notional amount of this derivative
instrument did not represent an asset or liability of the Company, but, rather,
was the basis for the settlements under the contract terms. This contract
matured in September 2001. At June 30, 2001, interest rate payable was at a
variable rate of 22.3% and interest rate receivable was fixed at 10.15%.
Under Argentine GAAP, any differential to be paid or received is accrued
and is recognized as an adjustment to interest expense in the statement of
operations. The related accrued receivable or payable is included as an
adjustment to interest payable. The fair value of the swap agreement is not
recognized in the consolidated financial statements.
Under US GAAP, the interest rate swap was designated as a hedge of the
change in fair value of the fixed rate debt related to fluctuations in interest
rates. Under SFAS No. 133, the swap is required to be recorded on the balance
sheet at fair value. The swap was classified as a fair value hedge, and
accordingly, changes in the fair value of the swap and of the hedged fixed rate
debt were recognized in earnings. Differences, if any, between the changes in
the fair value of the swap and the hedged fixed rate debt represent hedge
ineffectiveness and are recognized in realized gain or loss. Fair value hedge
ineffectiveness resulted in a loss of Ps. 23.4 for the year ended June 30, 2001.
(iv) Additional disclosure requirements
The Company's policy requires that contracts used as hedges must be
effective at reducing the risk associated with the exposure being hedged and
must be designated as a hedge at the inception of the contract. Hedging
effectiveness is assessed periodically. Any contract that is either not
designated as a hedge, or is so designated but is ineffective, is marked to
market and recognized in earnings immediately. The Company will discontinue
hedge accounting prospectively if it is determined that the derivative is no
longer effective in offsetting changes in the fair value or cash flows of a
hedged item; when the derivative expires or is sold, terminated, or exercised;
when the derivative is dedesignated as a hedge instrument, because it is
probable that the forecasted transaction will not occur; or management
determines that designation of the derivative as a hedge instrument is no longer
appropriate.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. In this documentation, the
Company specifically identifies the asset, liability, firm commitment, or
forecasted transaction that has been designated as a hedged item and states how
the hedging instrument is expected to hedge the risks related to the hedged
item. The Company formally measures effectiveness of its hedging relationships
both at the hedge inception and on an ongoing basis in accordance with its risk
management policy.
F-44
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(C) ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED)
When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will continue to be
carried on the balance sheet at its fair value, and gains and losses that were
accumulated in OCI will be recognized immediately in earnings. When the hedged
forecasted transaction is no longer probable, but is reasonably possible, the
accumulated gain or loss remains in OCI and will be recognized when the
transaction affects earnings; however, prospective hedge accounting for this
transaction is terminated. In all other situations in which hedge accounting is
discontinued, the derivative will be carried at its fair value on the balance
sheet, with changes in its fair value recognized in current-period earnings.
(D) ACCOUNTING FOR OPTIONS TO ACQUIRE MARKETABLE SECURITIES
As discussed in Note 5.b. (i), in February 1999 the Company acquired
3,697,500 options to purchase certain marketable securities for Ps. 3.6 million
in cash, of which 1,000,000 were sold in June 2001 for a total consideration of
Ps. 3.1 million, resulting in a gain of Ps. 2.2 million. Under Argentine GAAP,
these options were recorded at cost.
Under US GAAP, the Emerging Issues Task Force ("EITF") reached a
consensus in EITF No. 96-11 "Accounting for Forward Contracts and Purchased
Options to Acquire Securities covered by FASB Statement No. 115", that forward
contracts and purchased options with no intrinsic value at acquisition that are
entered into to purchase securities, requiring physical settlement of the
securities and that will be accounted for under Statement No. 115, should, at
inception, be designated as held-to-maturity, available-for-sale, or trading and
accounted for in a manner consistent with the accounting prescribed by Statement
No. 115 for that category of securities. Accordingly, options were designated as
available-for-sale securities and recorded at fair value with unrealized gains
and losses excluded from income and reported as a separate component of
shareholders' equity. In addition, the time value component of the cost of such
options was amortized over the life of the respective options.
As discussed in Note 19.(c)(i), the Company adopted SFAS No. 133 and its
corresponding amendments under SFAS No. 138, on July 1, 2000. SFAS No. 133
partially nullified EITF 96-11 and stated that if the asset to which the
underlying to the derivative contract is readily convertible to cash, the
related options addressed in EITF 96-11 are derivative instruments within the
scope of SFAS No. 133. As such, purchased options that are derivatives subject
to SFAS No. 133 should be recognized as assets and measured at fair value. SFAS
No. 133 addresses the accounting for changes in the fair value of a derivative.
The accounting for changes in the fair value (that is gains or losses) of a
derivative depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, on the reason for holding it. The Company has
not designated this derivative-type contract as a hedge. As such, gains and
losses should be recognized currently in earnings.
In accordance with the transition provisions of SFAS No. 133, the Company
recorded a net of tax cumulative-effect type adjustment of Ps. 20.5 million
(gain) in earnings during the year ended June 30, 2001 to reclassify the amount
accumulated in OCI at June 30, 2000. As from July 1, 2000, changes in fair value
are being recognized in earnings.
F-45
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(E) NONCONTRIBUTORY MANAGEMENT STOCK OWNERSHIP PLAN
As discussed in Note 6.e., on October 30, 1997, the shareholders
authorized the Company to enter into a Noncontributory Management Stock
Ownership Plan ("NMSOP") with eight executive officers of the Company (the
"Beneficiaries"), pursuant to which the Beneficiaries were granted options to
purchase up to 24 million shares of common stock (the "Participation Shares"),
at a purchase price equal to Ps. 1.0 per share, subject to the implementation of
an Equity Participation Agreement ("EPA"). Under Argentine law, the Company
established a special purpose trust in this connection (the "Trust"). On April
7, 1998, the Company's shareholders, at an extraordinary shareholders' meeting,
approved a capital increase of 24 million shares to permit the Beneficiaries to
purchase all of the Participation Shares to which they were entitled under the
EPA. As of June 30, 1998, the EPA had not yet been implemented. On October 1,
1998, the Company issued 21,090,024 shares to be subscribed by the Beneficiaries
and, on August 31, 1999, the Company and the Beneficiaries entered into a
Subscription Agreement pursuant to which the Beneficiaries purchased from the
Company the abovementioned amount of shares at Ps. 1.0 per share.
Under the Subscription Agreement, the Participation Shares were placed
into the Trust. The Trust has an original term of six years. According to the
terms of the NMSOP and the Trust, Beneficiaries are not entitled to receive any
distributions (either in the form of shares, cash or otherwise) from the Trust
during its term, although, Beneficiaries are allowed to cause the Trust to sell
their designated shares of common stock held by the Trust in certain cases, such
as, to prepay the loans obtained to finance the purchase of the Participation
Shares. The Trust will release the shares to the Beneficiaries on the sixth
anniversary of the inception of the Trust on a pro rata basis.
Under Argentine GAAP, the Company accounted for the issuance of the
Participation Shares at the price of Ps. 1.0 per share. Consequently, no
compensation expense was recognized in the statement of operations.
Under US GAAP, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." This Statement gave the Company the option of either
(1) continuing to account for stock-based employee compensation plans in
accordance with the guidelines established by Accounting Principles Board
("APB") No. 25, "Accounting for Stock Issued to Employees" and related
interpretations while providing the disclosures required under SFAS No. 123, or
(2) adopting SFAS No. 123 accounting for all employee and non-employee stock
compensation arrangements. The Company opted to continue to account for its
stock-based awards using the intrinsic value method in accordance with APB No.
25.
In connection with the Company's issuance of restricted stock to
executive officers during the year ended June 30, 1999, the Company recorded
unearned stock compensation of Ps.86,638 for the difference between the issuance
price of the restricted stock at date of issuance and the fair value of the
shares of common stock subject to the awards. This amount was included as a
reduction of stockholder's equity and is being amortized on a straight-line
basis over 7 years. The Company recognized stock compensation expense of Ps.
12,377 for each of the two years in the period ended June 30, 2000.
On May 31, 2001, the Company entered into a Confidential Separation
Agreement and General Release (the "Agreement") with its Chief Financial Officer
(the "CFO") pursuant to which the Company and the CFO set forth therein their
mutual agreement with respect to all matters relating to the CFO's resignation
and cessation of employment with the Company and the CFO's release of claims
upon the terms set forth therein. The CFO formed part of one of the eight
members of management who had been granted restricted shares pursuant to the
NMSOP.
F-46
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(E) NONCONTRIBUTORY MANAGEMENT STOCK OWNERSHIP PLAN (CONTINUED)
Pursuant to the Agreement, the Company accelerated the vesting of all of
the restricted shares so as to allow the CFO to sell the shares as part of its
termination settlement. On May 24, 2001, the CFO entered into a Purchase
Agreement (the `Purchase Agreement") with one of the principal shareholders of
the Company and also a Beneficiary under the EPA, pursuant to which the CFO sold
its respective shares in the Trust at a fixed price per share below the fair
market value per share at the date of the Purchase Agreement. Therefore, no
additional compensation cost was recognized.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation" - an interpretation of APB Opinion No. 25 (FIN 44). FIN 44
clarifies the application of APB No. 25 for only certain issues. Among other
issues, FIN 44 clarifies the definition of employee for purposes of applying APB
No. 25, the criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequences of various modifications to
the terms of a previously fixed stock options or awards, and the accounting for
an exchange of stock compensation awards in a business combination. The Company
adopted FIN 44 beginning July 1, 2000. FIN 44 stipulates that a modification to
accelerate the vesting of a fixed award effectively results in the renewal of
that award if, after the modification, an employee is able to exercise (vest in)
an award that, under the original terms, would have expired unexercisable
(unvested). Compensation cost is measured on the modification date. That cost is
calculated as the excess of the award's intrinsic value on the modification date
over the award's intrinsic value on the original measurement date, if any. That
cost would be recognized as compensation cost if, absent the acceleration, the
award would have been forfeited unexercisable (unvested) pursuant to the
original terms. On September 11, 2000, the EITF issued EITF 00-23 "Issues
Related to the Accounting for Stock Compensation" which further clarified this
matter. The Task Force reached a consensus in EITF 00-23 that if the former
employee is providing no substantive services to the grantor subsequent to the
termination, the award should continue to be accounted for under Opinion 25, and
the modification should be accounted for under FIN 44. Since the award's
intrinsic value on the modification date (Ps. 0.92 per share) is less than the
award's intrinsic value on the original measurement date (Ps. 4.11 per share),
no additional compensation cost is to be recognized on the modification.
However, the unearned compensation expense should be recognized to expense on
the date the accelerated vesting occurs. As such, the Company recorded an
additional loss of Ps.3,302 for the year ended June 30, 2001. Total compensation
expense was Ps. 11,551 and Ps. 15,679 for the years ended June 30, 2002 and
2001, respectively.
At June 30, 2002, the remaining unearned compensation of Ps. 34,654
million will be amortized ratably through fiscal year 2005. The amount of
unearned compensation expense to be recorded in future periods could decrease if
restricted stock awards for which accrued but unvested compensation has been
recorded, are forfeited.
Had compensation cost for the awards under the NMSOP been determined
based on the grant date fair values consistent with the method required under
SFAS No 123, the Company's net (loss) income under US GAAP would have been
decreased to the pro forma amounts indicated below:
YEAR ENDED JUNE 30, 2002 YEAR ENDED JUNE 30, 2001 YEAR ENDED JUNE 30, 2000
-----------------------------------------------------------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
-----------------------------------------------------------------------------------
Net (loss) income (650,948) (649,948) 20,024 21,382 (16,898) (15,826)
Net (loss) income before
accounting changes (650,948) (649,948) (462) 896 (16,898) (15,826)
Basic and diluted net income
(loss) per share (3.138) (3.134) 0.098 0.105 (0.083) (0.077)
Basic and diluted net (loss)
income per share before
accounting changes (3.138) (3.134) (0.002) (0.004) (0.083) (0.077)
F-47
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(E) NONCONTRIBUTORY MANAGEMENT STOCK OWNERSHIP PLAN (CONTINUED)
The fair value of each option was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
Expected lives in days 129 days
Risk free interest rates 9.00%
Dividend yield 0.00%
Volatility 36.72%
Because option grants might be made in subsequent years, the above pro
forma disclosures are not representative of the pro forma effects of option
grants on reported results for future years.
(F) DEPRECIATION OF FIXED ASSETS
Under Argentine GAAP, the Company depreciates buildings, including office
and apartment complexes, over 50 years. For US GAAP purposes, determination of
the useful lives of assets is judgmental and considers such factors as the
condition and age of the buildings, the type of construction and the effects of
usage by its owners or tenants. Accordingly, for US GAAP purposes, buildings
would have been depreciated using an estimated useful life of 40 years.
As discussed in Note 4.e., during the year ended June 30, 2002 the
Company recognized an impairment charge relating to certain properties. Since
the net book value of such properties under US GAAP was lower than the net book
value under Argentine GAAP, the US GAAP adjustment for the year ended June 30,
2002 also includes the partial reversal of such impairment.
(G) PREOPERATING AND ORGANIZATION EXPENSES
Under Argentine GAAP, the Company capitalized certain expenses incurred
relating to pre-opening activities and/or organization of subsidiaries and other
expenses incurred in connection with project evaluations. These expenses are
amortized on a straight-line basis over a 3/6-year period commencing upon the
launching of the project. Under US GAAP, these expenses are charged to expense
as incurred.
F-48
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(H) MORTGAGE PAYABLE WITH NO STATED INTEREST
Under Argentine GAAP, the Company has not made any fair value adjustments
for certain non-interest bearing mortgages. Under US GAAP however, and in
accordance with Accounting Principles Board ("APB") Opinion No. 21, "Interest on
Receivables and Payables", non-interest bearing mortgages held by the Company
have been recorded at the estimated market value of the note.
In 1991, the Company obtained non-interest bearing mortgage with a face
value of US$ 3.3 million to acquire a property (Suipacha 652/64). The Company
used an interest rate of 12%, which approximated their weighted average
borrowing rate, in determining the present value of this debt (calculated at Ps.
1,806 as of the date of issuance). This mortgage was fully repaid in November
1996. This adjustment gives rise to differences in depreciation expense.
(I) SECURITIZATION ACCOUNTING
As discussed in Note 18, on November 2, 2001 the Company entered into a
securitization program with Banco Sudameris ("BS"), through which the Company
sold a portion of its mortgage receivable balances to a Trust that issued
certificates to public and private investors.
Under Argentine GAAP, mortgage receivables sold under this program were
excluded from accounts receivable in the consolidated financial statements. The
Company's retained interest in Class A, B and C debt securities are valued at
cost plus accrued interest while the retained interest in Class D securities is
accounted for under the equity method.
Under US GAAP, the Company applies Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments Of Liabilities" ("SFAS No. 140"). SFAS No. 140 requires an
entity to recognize the financial and servicing assets it controls and the
liabilities it has incurred and to derecognize financial assets when control has
been surrendered. The proceeds of securitized financial assets are allocated to
the assets sold, the servicing asset or liability and retained interest, based
on their relative estimated fair values at the transfer date in determining the
gain on the securitization transaction. SFAS No. 140 also requires an entity to
recognize a servicing asset or servicing liability each time it undertakes an
obligation to service financial assets that have been securitized and amortize
it over the period of estimated net servicing income or loss. The Company has
not recognized any servicing asset or liability since the estimated fair value
of the servicing right was zero. In determining the estimated fair value, the
Company considered the fees received as compensation just adequate to compensate
the Company for its servicing responsibilities (i.e. the fees received as
compensation for the services rendered are similar to those that would be paid
to a substitute servicer, should one be required, according to estimated market
values). The retained interests in mortgage receivables are treated as a debt
security classified as available-for-sale in accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for Certain
Investments in Debt and Equity Securities", and are carried at fair value. At
the time of securitization, the retained interest is initially recorded at the
basis allocated in accordance with SFAS No. 140. This original cost basis is
periodically adjusted to fair value, which is based on the discounted
anticipated future cash flows on a "cash out" basis. The cash out method
projects cash collections to be received only after all amounts owed to
investors have been paid. Adjustments to fair value (net of related deferred
income taxes) are recorded as a component of other comprehensive income. A loss
of Ps. 6.5 million was recognized from the sale of mortgages receivables during
the year ended June 30, 2002.
F-49
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(I) SECURITIZATION ACCOUNTING (CONTINUED)
The following summarizes the Company's securitization activity:
YEAR ENDED
JUNE 30, 2002
---------------------
Proceeds from securitizations Ps. 16,696
Servicing fees received (i) 178
(i) As from April 1, 2002, the Company is no longer the servicer on the
accounts.
The following summarizes the changes in the balance of the Company's
retained interest for the year ended June 30, 2002:
ESTIMATED
COST UNREALIZED LOSS FAIR VALUE
-------------------- --------------------- --------------------
Balance at June 30, 2001 Ps. - Ps. - Ps. -
Retained interest in portfolios 4,158 - 4,158
sold
Unrealized loss - (930) (930)
-------------------- --------------------- --------------------
Balance at June 30, 2002 Ps. 4,158 Ps. (930) Ps. 3,228
==================== ===================== ====================
As of June 30, 2002, the gross net unrealized loss has been offset by a
deferred tax benefit of Ps. 325.
The key economic assumptions used in measuring the fair value of retained
interests at the time of and subsequent to a securitization are the estimated
cash flows and the discount rate. The estimated cash flows have been discounted
at 25%. The following represents the sensitivity of the current fair value of
retained interest in securitizations at June 30, 2002 to changes to key
assumptions:
IMPACT ON FAIR VALUE OF
-----------------------------------------------
5% ADVERSE CHANGE 10% ADVERSE CHANGE
----------------------- -----------------------
Discount rate 25% Ps. (546) Ps. (993)
The above sensitivities are hypothetical and should be used with caution.
As the amounts indicate, changes in fair value based on variations in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also, in
this table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption. In reality, changes in one factor may result in changes in another,
which might magnify or counteract the sensitivities.
The Company's managed mortgage receivables consist of retained interest
in mortgage receivable securitization and investor's share of securitizations
sold to unrelated parties without recourse. The Company records its retained
interest in mortgage receivable securitizations on the consolidated balance
sheet.
F-50
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(J) DIFFERENCES IN BASIS RELATING TO PURCHASE ACCOUNTING
Under Argentine GAAP and US GAAP, the Company applied the purchase method
of accounting to the acquisition of businesses mentioned in Note 3.e.
Accordingly, the fair market value of assets and liabilities acquired was
estimated and the excess of the purchase price over the fair value, if any, was
considered goodwill. The US GAAP adjustment for "Differences in basis relating
to purchase accounting" reflects the application of US GAAP adjustments such as
the accounting for deferred income taxes when estimating the fair value of such
assets and liabilities. This adjustment gives rise to differences in
depreciation expense.
(K) DEFERRED INCOME TAX
As discussed in Note 4.i., the Company and its subsidiaries calculate
their income taxes on a separate tax basis. The statutory income tax rate was
35% for all the periods presented. Under Argentine GAAP, income taxes are
recognized on the basis of amounts currently due in accordance with Argentine
tax laws and regulations. Under US GAAP, the Company records income taxes using
the method required by Statement of Financial Accounting Standards No. 109
("SFAS 109"), "Accounting for Income Taxes". Accordingly, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. SFAS 109 requires companies to
record a valuation allowance for that component of net deferred tax assets which
does not meet the more likely than not criterion for realization.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning in making these assessments. In accordance with
SFAS 109, the Company is required to continuously evaluate the recoverability of
deferred tax assets. This evaluation is made based on internal projections which
are routinely updated to reflect more recent operating trends. Based on current
financial projections, the Company is uncertain that it will recover its
deferred tax assets through future taxable income. Accordingly, the Company has
established a valuation allowance against its deferred tax assets.
F-51
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(K) DEFERRED INCOME TAX (CONTINUED)
2002 2001
--------------------------------------- ----------------------------------------
SFAS 109 SFAS 109
APPLIED TO SFAS 109 APPLIED TO SFAS 109
ARGENTINE APPLIED TO ARGENTINE APPLIED TO
GAAP US GAAP GAAP US GAAP
BALANCES ADJUSTMENTs SFAS 109 BALANCES ADJUSTMENTs SFAS 109
------------- ------------ ------------ ------------ ------------ ------------
Deferred tax assets:
Tax loss carryforwards..... Ps. 147,349 Ps. - - Ps. 147,349 Ps. 31,516 Ps. - - Ps. 31,516
Short-term and long-term 16,702 - - 16,702 - - - - - -
debt.......................
Provisions................. 1,277 - - 1,277 1,733 - - 1,733
Other...................... 5,841 - - 5,841 9,334 - - 9,334
------------- ------------ ------------ ------------ ------------ ------------
Total gross deferred tax
assets..................... 171,169 - - 171,169 42,583 - - 42,583
Deferred tax liabilities:
Investments................ (17,785) 11,229 (6,556) (2,203) 7,314 5,111
Mortgage receivables....... (379) - - (379) (6,960) - - (6,960)
Inventories................ (2,430) - - (2,430) (426) - - (426)
Fixed assets............... (69,241) 1,635 (67,606) (25,773) 4,544 (21,229)
Intangible assets.......... (1,057) 847 (210) (1,553) 1,432 (121)
------------- ------------ ------------ ------------ ------------ ------------
Total gross deferred tax
liabilities................ (90,892) 13,711 (77,181) (36,915) 19,290 (23,625)
------------- ------------ ------------ ------------ ------------ ------------
Valuation allowance........ (149,795) - - (149,795) (38,913) - - (38,913)
------------- ------------ ------------ ------------ ------------ ------------
Net deferred income tax Ps. (69,518) Ps. 13,711 Ps. (55,807) Ps (33,245) Ps. 13,290 Ps. (19,955)
liability.................. ============= ============ ============ ============ ============ ============
As of June 30, 2002 and 2001, Ps. 1,545 and Ps. 1,946 were classified
as current assets and Ps. 57,352 and Ps. 21,901 were classified as non-current
liabilities, respectively.
A reconciliation of income taxes computed at the statutory rate to the
income tax amount recorded for the years ended June 30, 2002, 2001 and 2000 is
as follows:
2002 2001 2000
------------------- ------------------ -------------------
Income tax at statutory tax rate on pretax
income in accordance with US GAAP.............. Ps. (223,338) Ps. 11,894 Ps. 3,337
Non taxable income/(loss)...................... 43,035 (35,875) 2,539
Amortization expense........................... 6,856 348 319
Valuation allowance............................ 110,882 27,911 13,779
Inflation adjustment........................... 88,650 - - - -
Non deductible expenses........................ 1,440 3,322 1,418
------------------- ------------------ -------------------
Income tax expense............................. Ps. 27,525 Ps. 7,600 Ps. 21,392
=================== ================== ===================
(L) MINORITY INTEREST
This adjustment represents the effect on minority interest of the
foregoing reconciling items.
F-52
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
II. Additional disclosure requirements
(A) BALANCE SHEET CLASSIFICATION DIFFERENCES
Under Argentine GAAP, assets and liabilities are classified as current or
non-current depending on their respective settlement dates. Under US GAAP,
balance sheets of real estate entities typically are unclassified.
As discussed in Note 19.II. (p), under Argentine GAAP, the Company's
investments in LLR and ITNV were not consolidated for any of the periods
presented. For US GAAP purposes, the Company poses controlling financial
interests in these companies. Accordingly, consolidation is appropriate under US
GAAP.
As these differences have no effect on net (loss) income or on
shareholders' equity, no reconciling items are presented for US GAAP
purposes.
(B) STATEMENT OF OPERATIONS CLASSIFICATION DIFFERENCES
OPERATING INCOME
As discussed in Note 19.II. (o), under Argentine GAAP the Company uses
the "proportionate-consolidation method" of accounting for its investments in
which the Company exercises control and other jointly controlled investments.
Under US GAAP, the equity in income (loss) of jointly-controlled companies would
have been reported as a separate line item in the statement of operations, and
the ownership percentages the Company does not own in the majority-owned
companies would have been reflected as minority interest.
As discussed in Note 19.II. (p), under Argentine GAAP, the Company's
investments in LLR and ITNV were not consolidated for any of the periods
presented. For US GAAP purposes, the Company possesses controlling financial
interests in these companies. Accordingly, consolidation is appropriate under US
GAAP.
In addition, (i) certain financial results and other income and expense
items included in the Argentine GAAP financial statements of the Company, would
be included in the determination of operating income under US GAAP, and (ii)
certain gains or losses on the sale of real estate properties and equity
investees were included as operating income under Argentine GAAP while they
should be recognized as separate line items and designated as non-operating
income under US GAAP.
Accordingly, operating (loss) income under US GAAP would have been Ps.
(31.5) million, Ps. 17.6 million and Ps. 46.2 million for the years ended June
30, 2002, 2001 and 2000, respectively.
EXTRAORDINARY ITEMS
As discussed in Note 19.II.j), the Company adopted SFAS No. 145 on April
1, 2002. As such, under US GAAP, gains and losses on extinguishment of debt
recorded in prior periods are no longer reported as extraordinary items.
As discussed in Note 16, under Argentine GAAP, the Company recognized an
extraordinary loss of Ps. 5,653 during the year ended June 30, 2001. Under US
GAAP, as required by APB 30, this charge does not qualify as extraordinary item
and should be reported as operating loss.
F-53
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(C) STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY CLASSIFICATION
DIFFERENCES
As discussed in Note 6.b., from time to time the Company repurchases
shares of common stock outstanding when it believes that its stock price is
undervalued in the marketplace. During fiscal years 2001 and 2000, the Company
(i) repurchased 19,079,995 and 6,236,762 outstanding shares of common stock for
a total consideration of Ps. 80.4 million and Ps.29.9 million, respectively, and
(ii) distributed 20,729,472 and 2,432,932 shares of common stock on a pro rata
basis to its shareholders. Under Argentine GAAP, the Company recorded these
acquisitions as a reduction in retained earnings. Under US GAAP, these
acquisitions were accounted for under the cost method, resulting in a reduction
of capital stock.
(D) SEGMENT INFORMATION
Under Argentine GAAP, when an entity has different activities, it is
recommended practice (but not compulsory) to disclose the revenues and expenses
for each activity in the financial statements or as supplementary information.
Furthermore, the Company believes that the presentation of segment information
facilitates a clearer understanding of the Company's performance by readers.
Argentine GAAP does not prescribe any guidance in presenting segment
information. Accordingly, the Company has chosen to follow the guidance set
forth under US GAAP in SFAS No. 131 "Disclosures About Segments of an Enterprise
and Related Information" in determining the number and nature of reportable
operating segments presented in the primary financial statements. SFAS No. 131,
which was issued by the FASB in June 1997, establishes standards for reporting
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
reports issued to shareholders. Operating segments are components of a company
about which separate financial information is available that is regularly
evaluated by the chief operating decision marker(s) in deciding how to allocate
resources and assess performance. The Statement also establishes standards for
related disclosures about a company's products and services, geographical areas
and major customers. As such, no additional disclosure requirements are
necessary. See Note 7 for details.
(E) MATURITIES OF LONG-TERM DEBT
Aggregate annual maturities during the next five years, as of June 30,
2002, are as follows:
2004 Ps. --
2005 --
2006 --
2007 --
2008 142
------------------------
Ps. 142
========================
(F) OPERATING LEASES
As discussed in Note 3.b., the consolidated statements of income were
prepared on a proportionate consolidation basis. As from July 1, 1996, the
Company uses the "proportionate-consolidation method" of accounting for the
investments in which the Company exercises control and other jointly controlled
investments. This method has not been used for balance sheet and cash flows
purposes. Accordingly, this note discloses operating leases information of the
Company and its controlled and jointly controlled subsidiaries.
F-54
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(F) OPERATING LEASES (CONTINUED)
- Operating lease revenue information:
o Leases and services from office and other buildings
The Company enters into cancelable commercial leases with its tenants for
terms ranging from three to five years, with most leases having terms of no more
than 5 years. Tenants are charged a base rent on a monthly basis. No contingent
rentals were recorded for the years ended June 30, 2002, 2001 and 2000.
o Leases and services from shopping center operations
The Company enters into cancelable commercial leases with its tenants for
terms ranging from three to ten years, with most leases having terms of no more
than five years. Tenants are generally charged a rent which consists of the
higher of (i) the base rent and (ii) the percentage rent (which generally ranges
between 4% and 8% of the tenants sales). Furthermore, pursuant to the rent
escalation clause in most leases, a tenant's base rent generally increases
between 4% and 7% each year during the term of the lease. Included in lease
revenues for the years ended June 30, 2002, 2001 and 2000 were contingent
rentals of Ps. 2.6 million, Ps. 3.6 million and Ps. 4.1 million, respectively.
- Operating lease expense information:
The Company leases office space under cancelable operating leases that
expire on various dates through January 2004. Rent expense is recognized ratably
over the lease term. Rent expense for the years ended June 30, 2002, 2001 and
2000 amounted to Ps.0.5 million, Ps.1.0 million and Ps.0.2 million,
respectively.
(G) DISCLOSURE OF RELATED PARTY TRANSACTIONS
The following disclosures of transactions with related parties are
required under US GAAP.
- Executive Employment Agreement: On October 30, 1997, the Company
entered into Master Executive Employment Agreements (the "Employment
Agreements") with Eduardo S. Elsztain, M. Marcelo Mindlin, Saul Zang and Oscar
P. Bergotto (collectively herein referred to as the "Employees"), pursuant to
which each such person will serve in his current capacity as director or
executive officer. The term of the Employment Agreements is seven years; however
either the Company or the relevant executive may terminate the Employment
Agreements prior to the expiration of their respective terms. If the Company
terminates the Employment Agreements without cause it will be liable to the
relevant executive for two years of compensation. Under the Employment
Agreements, the Employees will each be entitled to receive from the Company
annual compensation in the aggregate of approximately Ps.750,000, subject to an
annual 4% increase. The Employment Agreements also restrict the Employees from
participating in real estate activities in Argentina that are in the same line
of business as IRSA. The Employment Agreements were executed in December 1997
and approved by the Company's shareholders at an extraordinary shareholders'
meeting on April 7, 1998.
- APSA loan: On July 20, 2001, Company's board of directors approved to
grant APSA several loans to finance transactions related to its swap agreement.
On February 8, 2002 the Company and Parque Arauco signed subordination
agreements subordinating the repayment of our respective loans to the payment of
APSA's senior notes. The interest rate on such loans till February 1, 2002 was
the lesser of (i) variable cost of money for the Company in operations of up to
30 days and (ii) the average of the last five BADLAR rates for U.S. dollar
transactions, plus 200 annual nominal basis points for operations in foreign and
local currency according to market conditions. The interest rate on such loans
from February 1, 2002 till August 20, 2002 was 10.23% plus an inflation
adjustment. At August 20, 2002, the outstanding principal of these loans was Ps.
43.6 million.
F-55
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(G) DISCLOSURE OF RELATED PARTY TRANSACTIONS (CONTINUED)
In May and July, 2002 the Company advanced APSA a US$ 10.1 million loan
that was applied on August 20, 2002 to our subscription for US$27.2 million of
APSA's convertible notes. From May, 2002 to August 20, 2002 the interest rate on
such loans was 10%.
- Subscription of convertible notes issued by APSA: In August 2002, the
Company subscribed for US$ 27.2 million convertible notes issued by APSA. The
payment was made by cancelling a loan APSA has borrowed from the Company for US$
22.3 million and of US$4.9 million in cash. At June 30, 2002, the Company owned
49.7% of APSA's common shares. Immediately following APSA's offering (assuming
the Company exercise its conversion rights of all of its convertible notes and
no exercise of such rights by any of APSA's other bondholders), the Company
would own 77.1% of APSA's common shares. In the case all shareholders exercise
their conversion rights and the Company exercise them as well, the Company would
own 53.01% of APSA's common stock.
- Purchase of the Company's shares by Cresud: During the years ended
June 30, 2002 and 2001, Cresud invested in shares of the Company for a total
amount of Ps. 111.8 million, resulting in a 19.85 % ownership at June 30, 2002.
Eduardo S. Elsztain, M. Marcelo Mindlin and Saul Zang, are Chairman, First
Vice-Chairman and Second Vice-Chairman, respectively, of the Board of Directors
as well as shareholders of the Company. They are also Chairman, First
Vice-Chairman and Second Vice-Chairman, respectively, of the Board of Directors
of Cresud. Mr. Eduardo S. Elsztain and Saul Zang are also shareholder of Cresud.
- Donations: During the years ended June 30, 2002, 2001, and 2000, the
Company made donations to two not-for-profit organizations, namely Fundacion
IRSA and Museo de los Ninos, for a total amount of Ps. 0.08 million, Ps. 1.9
million and Ps. 1.2 million, respectively. Eduardo S. Elsztain is the President
of these organizations.
- Lease agreements: IRSA leases a portion of its headquarters office
space from DFM for a monthly rent of Ps. 11.9 under two lease contracts expiring
on June 30, 2007. DFM leases such offices both from Elsztain e Hijos S.C.A., a
company controlled by relatives of Eduardo S. Elsztain, Chairman of the Company,
and also from Hamonet S.A., a company controlled by Fernando A. Elsztain, the
Company's Chief Commercial Officer, and certain of his relatives. Rental expense
incurred during the years ended June 30, 2002, 2001 and 2000 amounted to Ps.
244, Ps. 280 and Ps. 280, respectively.
The Company leased office space to Cresud until December 2001. Eduardo
Elsztain, Marcelo Mindlin and Saul Zang, Chairman, First Vice-Chairman and
Second Vice-Chairman, respectively, of the Board of Directors as well as
shareholders of the Company are directors of Cresud. Mr. Eduardo Elsztain is
also shareholder of Cresud. Rent income is recognized ratably over the lease
term. Rental income amounted to Ps. 147 and Ps. 329 for the year ended June 30,
2002 and for each of the two years in the period ended June 30, 2001,
respectively.
The Company has entered into lease agreements for offices located in the
Costero, a building located in Puerto Madero with Altocity.Com, Alternativa
Gratis S.A y Dolphin Interventures S.A. The first agreement expires in May 2003
and the second in May 2004. Both of them may be extended by the lessees for up
to seven additional consecutive twelve - month periods. The leases are for
monthly rents of Ps. 9.5 and Ps. 10.0, respectively.
The Company leases to Tarshop the seventh floor of the Company's property
located in Suipacha 664. Monthly rent income amounts to Ps. 3.7 and the lease
agreement expires on August 10, 2004.
F-56
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(G) DISCLOSURE OF RELATED PARTY TRANSACTIONS (CONTINUED)
- Mutual investment fund: Since 1996, the Company has investments in
Dolphin Fund Plc, an open - ended investment fund which is related to the
Company's directors. These investments are carried at market value as of
year-end. Unrealized gains and losses related to investment funds are included
in financial results, net, in the consolidated statements of operations.
The amounts relating to the Company's net gain on holding Dolphin Fund
investments for the years ended June 30, 2002, 2001 and 2000 are Ps. 25.1
million, Ps. 2.9 million and Ps. 1.6 million, respectively.
- Investment in Banco Hipotecario S.A.: As of June 30, 2002 the Company
owns 5.73 % of Banco Hupotecario S.A. Additionally, as of the same date the
Company owns 2,697,500 options to purchase Banco Hipotecario S.A.'s American
Depositary Shares (ADS). Each option represents the right to purchase 100 ADS's
at an exercise price of Ps. 10.4 per ADS. These options are exercisable through
February 2, 2004. Some of the Company's directors are also directors of Banco
Hipotecario S.A.
- Agreement with APSA for the commercialization of Torres de Abasto: On
May 1, 2000, the Company entered into an agreement with APSA for the
commercialization of the units of Torres de Abasto. The services rendered by us
include:
o commercial operation services such as implementation of sale and
lease strategy pursuant to the prices, terms and conditions set by
APSA;
o selection of suppliers and hire of advertising agencies, real
estate brokers, notary public and appraisers; and
o coordination of the subscription of sale agreements, deeds of sale
and lease agreements according to the terms set by APSA.
The monthly fee for the commercialization services is Ps. 2.5 plus value
added tax, and an additional fee of:
o Sales: 1% plus value added tax, of the sale price of each unit; or
o leases: 2% plus value added tax, of the total lease price of each
unit.
Since the commercialization of the units is completed, the agreement
between both companies has expired.
- Corporate services: In order to reduce administrative expenses and to
achieve a more efficient allocation of corporate resources,as of June 30, 2002,
the Company and APSA provide corporate services in the areas of institutional
relations, finance and human resources to the Company and Cresud.
In the future and in order to continue with the Company's policy of
achieving a more efficient allocation of corporate resources, the Company may
extend the areas in which the Company share corporate services with APSA and
Cresud. The Company's chairman and vice-chairman are also chairman and
vice-chairman of Cresud.
- Legal services: During the years ended June 30, 2002, 2001 and 2000,
the Company paid the law firm Zang, Bergel & Vines an aggregate amount of
approximately Ps. 0.5 million, Ps. 0.9 million and Ps. 1.0 million for legal
services. Saul Zang and Ernesto M. Vines, directors of the Company, and Salvador
D.Bergel and Juan C. Quintana Teran, alternate directors of the Company, are
partners of the law firm.
F-57
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(H) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Under Argentine GAAP, there are no specific rules regarding disclosure of
fair value of financial instruments.
Under US GAAP, SFAS No. 105 requires reporting entities to disclose
certain information about financial instruments with off-balance sheet risk of
accounting loss. SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments", requires disclosure of fair value information about financial
instruments whether or not recognized in the balance sheet, for which it is
practicable to estimate fair value. Financial instruments include such items as
to cash and cash equivalents and accounts receivable and other instruments. SFAS
No. 107 excludes from its disclosure requirements lease contracts and various
significant assets and liabilities that are not considered to be financial
instruments. SFAS No. 119 requires reporting entities to disclose certain
information for derivative financial instruments. SFAS No. 133, which is
effective July 1, 2000, supersedes SFAS No. 105 and SFAS No. 119 and amends SFAS
No. 107 to include in SFAS No. 107 the disclosure requirements of credit risk
concentrations from SFAS No. 105. See Note 19.II.(i) for details of
concentration of credit risk.
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and the relevant market
information. Where available, quoted market prices are used. In other cases,
fair values are based on estimates using other valuation techniques, such as
discounting estimated future cash flows using a rate commensurate with the risks
involved or other acceptable methods. These techniques involve uncertainties and
are significantly affected by the assumptions used and the judgements made
regarding risk characteristics of various financial instruments, prepayments,
discount rates, estimates of future cash flows, future expected loss experience,
and other factors. Changes in assumptions could significantly affect these
estimates. Derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in an immediate
sale of the instrument. Also, because of differences in methodologies and
assumption used to estimate fair value, the Company's fair values should not be
compared to those of other companies.
Under the Statement, fair value estimates are based on existing financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Accordingly, the aggregate fair value amount presented
does not represent the underlying value of the Company. For certain assets and
liabilities, the information required under the Statement is supplemental with
additional information relevant to an understanding of the fair value.
The methods and assumptions used to estimate the fair values of each
class of financial instruments as of June 30, 2002 and 2001 are as follows:
- Cash and cash equivalents
The Company considers all highly liquid investments with original
maturities of three months or less, consisting primarily of time deposits, to be
cash and cash equivalents. The carrying amount reported in the balance sheet
approximates fair value.
- Marketable securities
The fair value of marketable securities is based on quoted market prices
for those or similar investments.
- Options to purchase marketable securities
The fair value of options to purchase marketable securities is based on
the terms and conditions of the underlying contracts, -i.e. strike price,
maturities, expected dividends and vesting period-, available market
information, -i.e. quoted market price of underlying shares and expected
volatility. The Company used the binomial tree valuation method to estimate fair
value.
F-58
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(H) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
- Mortgages and leases receivable, net
The estimated fair value of mortgage notes receivable collateralized by
real property is based on discounting the future cash flows at a year-end risk
adjusted lending rate that the Company would utilize for loans of similar risk
and duration. It is not practicable to estimate the fair value of leases
receivable because of the inability to estimate it without incurring excessive
costs.
- Retained interest in transferred mortgage receivables
Fair value is estimated by discounting anticipated future cash flows
using a discount rate based on specific factors. The anticipated future cash
flows are projected on a "cash out" basis to reflect the restriction of cash
flows until the investors have been fully paid.
- Accounts payable
The carrying amount of accounts and notes payable reported in the balance
sheet approximates its fair value.
- Short-term debt
The carrying amount of short-term debt reported in the balance sheet
approximates fair value due to its short-term nature.
- Long-term debt
The fair values of the Company's long-term debt are based on quoted
market prices, where available, or discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
- Other receivables and other liabilities
The carrying amount of other receivables and other liabilities reported
in the balance sheet approximates fair value due to their short-term nature.
- Forward foreign currency exchange contracts
The fair value of the forward foreign currency exchange contracts is
based on the estimated amount at which they could be settled based on forward
market exchange rates.
F-59
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(H) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
- Interest rate swap agreement
The fair value of the interest rate swap agreement was determined based
on the present value of the estimated future net cash flows using implied rates
in the applicable yield curve as of the valuation date.
- Seller financing
The fair value of the seller financing obtained in the acquisition of SMP
is estimated based on quoted market prices for the same or similar issues or on
current rates offered to the Company for debt of the same remaining maturities.
The fair value of the seller financing obtained in the acquisition of an
additional interest in Puerto Retiro is estimated based on quoted market prices
for the same or similar issues or on current rates offered to the Company for
debt of the same remaining maturities.
The following table summarizes financial instruments by individual
balance sheet account:
June 30, 2002 June 30, 2001
------------------------------ -------------------------------
Carrying Carrying
Fair Value Amount Fair Value Amount
------------- -------------- -------------- --------------
Financial assets:
Cash, banks and short term investments 61,627 61,627 100,237 100,237
Mortgages and leases receivable, net:
Mortgages receivable 8,122 8,771 90,146 92,233
Leases receivables (*) 1,125 (*) 2,484
Other receivables and prepaid expenses:
Retained interest in securitization 3,228 6,173 -- --
Receivable from the sale of Brazil 26,129 16,129 -- --
Realty
Foreign exchange forward contracts -- -- 522 939
------- ------- ------- -------
Total financial assets 99,106 93,825 190,905 195,893
Financial liabilities:
Trade accounts payable 12,224 12,224 11,205 11,205
Loans 199,499 207,998 96,846 111,126
Other liabilities
Total financial liabilities 213,011 221,733 111,673 127,464
(*) Not practicable to estimate fair value.
F-60
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(I) CONCENTRATION OF CREDIT RISK
In the normal course of its business, the Company grants mortgages to
individuals in connection with its sales of residential properties. These
properties are located principally in Buenos Aires, Argentina. The Company is
subject to credit risk in the event of non-performance by the counterparties to
the mortgages; however, in the opinion of management, the values of the
properties that collateralize the mortgages are presently adequate to protect
the Company from material losses resulting from such non-performance. The
company has not experienced any significant losses resulting from
non-performance of any counterpart to the mortgage contracts.
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents, accounts
receivable and short-term investments. The Company maintains cash and cash
equivalents, investments, and other financial investments with various high
credit quality financial institutions, thus mitigating the amount of credit
exposure to any one institution. The Company has not experienced any significant
losses in such accounts.
The Company's accounts receivable are primarily derived from real estate
revenues from customers located in Argentina. The Company is not dependent on
any single customer. The Company maintains reserves for potential credit losses
based on impaired accounts, historical charge-off patterns and management
judgement; historically such losses have not been significant and within
management's expectations.
F-61
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(J) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998 SFAS No. 133 was issued. This statement, as amended,
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair market value. SFAS No. 133 requires that changes in the
derivative's fair market value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the income statement and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. The Company adopted this statement on July 1, 2000. See Note
19.I.c. for details on the implementation of this standard.
In March 2000, FASB issued Interpretation No. 44 "Accounting for Certain
Transactions involving Stock Compensation, an interpretation of Accounting
Principles Board Opinion No. 25 ("APB No. 25")". This interpretation clarifies
the definition of employee for purposes of applying APB No. 25, the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. The Company adopted this standard beginning July 1,
2000. The adoption of this pronouncement did not have a material impact on the
Company's results of operations and financial position.
In June 1999, the FASB issued SFAS No. 136, "Transfers of Assets to a
Not-for-Profit Organization or Charitable Trust That Raises or Holds
Contributions for Other". This Statement establishes standards for transactions
in which an entity -the donor- makes a contribution by transferring assets to a
not-for-profit organization or charitable trust -the recipient organization-
that accepts the assets from the donor and agrees to use those assets on behalf
of or transfer those assets, the return on investment of those assets, or both
to another entity -the beneficiary- that is specified by the donor. It also
establishes standards for transactions that take place in a similar manner but
are not contributions because the transfers are revocable, repayable, or
reciprocal. The Company adopted SFAS 136 effective July 1, 2000. Its adoption
did not have a material effect on its results of operations and financial
condition.
In June 2001, SFAS No. 141, "Business Combinations," was issued. This
statement eliminates pooling of interests accounting and requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. The Company adopted this standard on July 1, 2001 and adoption
of this standard did not have a significant effect on the Company's financial
statements.
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets," was
issued establishing accounting and reporting standards that address how goodwill
and intangible assets should be accounted for within the financial statements.
The statement requires companies to not amortize goodwill and intangible assets
with infinite lives, but to test such assets for impairment on a regular basis.
An intangible asset that has a finite life should be amortized over its useful
life and evaluated for impairment on a regular basis. This statement is
effective for fiscal years beginning after December 15, 2001. The Company does
not anticipate that the adoption of SFAS No. 142 will have a significant impact
on the Company's financial statements.
In August, 2001, FASB issued Statement of Financial Accounting Standards
("SFAS") No. 143, "Accounting for Asset Retirement Obligations," which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 requires an enterprise to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of tangible long-lived assets. The
Company is required to adopt the provisions of SFAS No. 143 for fiscal year
beginning on July 1, 2002. The Company does not anticipate that SFAS No. 143
will significantly impact the Company's consolidated financial statements.
F-62
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(J) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
On October 3, 2001, FASB issued SFAS No. 144. "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", it retains many
of the fundamental provisions of the Statement. The Statement is effective for
fiscal years beginning after December 15, 2001. The Company does not anticipate
that the initial adoption of SFAS No. 144 will have a significant impact on the
Company's financial statements.
On May 1, 2002, the FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and
64, Amendment of SFAS No. 13, and Technical Corrections as of April 2002" (SFAS
No. 145), which, among other things, eliminates the exception of applying APB
Opinion No. 30 (APB 30) to all gains and losses related to extinguishments of
debt (other than extinguishments of debt to satisfy sinking-fund requirements).
As a result, gains and losses from extinguishment of debt should be classified
as extraordinary items only if they meet the criteria set forth in APB 30. These
provisions are effective for fiscal years beginning after May 15, 2002, with
early application encouraged. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods that does not meet the
criteria in APB 30 for classification as an extraordinary item should be
reclassified. The Company adopted this standard on April 1, 2002. As such, gains
and losses on extinguisment of debt recorded in prior periods are no longer
reported as extraordinary items. See Note 19.II.b).
(K) NET (LOSS) INCOME PER SHARE
Under Argentine GAAP, the Company is not required to present earnings per
share information. Under US GAAP, basic and diluted net (loss) income per share
are presented in conformity with SFAS No. 128 "Earnings per Share" and SEC Staff
Accounting Bulletin No. 98 ("SAB No. 98") for all periods presented.
Basic net (loss) income per share is computed by dividing the net (loss)
income available to common shareholders for the period by the weighted average
shares of common stock outstanding during the period. Diluted net (loss) income
per share is computed by dividing the net (loss) income for the period by the
weighted average number of common and dilutive potential common shares then
outstanding during the period. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 98, ordinary shares and convertible
preferred shares issued or granted for nominal consideration prior to the
anticipated effective date of an initial public offering must be included in the
calculation of basic and diluted net loss per share as if they had been
outstanding for all periods presented. To date, the Company has not had any
issuance or grants for nominal consideration.
Since the Company has no dilutive potential common stock outstanding,
there are no dilutive earnings per share amounts as described in SFAS No. 128.
As discussed in Note 19.II.j), under US GAAP gains and losses on
extinguishment of debt recorded in prior periods are no longer reported as
extraordinary items. Thus, the Company reflected the impact of such
reclassification in the presentation of earnings per share.
F-63
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(K) NET (LOSS) INCOME PER SHARE (CONTINUED)
The following tables set forth the computation of basic and diluted net
income (loss) per share under US GAAP for the periods indicated:
YEAR ENDED JUNE 30,
---------------------------------------------------------
2002 2001 2000
------------------ ------------------ ----------------
Numerator:
---------
(Loss) income before accounting changes................ Ps (650,948) Ps. (462) Ps. (16,898)
Accounting changes..................................... -- 20,486 --
----------------- ----------------- -----------------
Net (loss) income available to common shareholders..... Ps (650,948) Ps. 20,024 Ps. (16,898)
================= ================= =================
Denominator:
-----------
Basic and diluted weighted average shares
outstanding............................................ 207,412 204,189 204,652
Basic and diluted earnings per share under US GAAP:
--------------------------------------------------
(Loss) income before accounting changes................ Ps (3.138) Ps. (0.002) Ps. (0.083)
Accounting changes..................................... -- 0.100 --
----------------- ----------------- -----------------
Basic and diluted net (loss) income per common
share.............................................. Ps. (3.138) Ps. 0.098 Ps. (0.083)
================= ================= =================
The following tables set forth the proforma effects of the retroactive
application of a change in accounting principle on earnings per share under US
GAAP:
YEAR ENDED JUNE 30,
--------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Basic and diluted net (loss) income per share.......... Ps. (3.138) Ps. (0.002) Ps. (0.127)
F-64
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(L) RISKS AND UNCERTAINTIES
The Company is subject to certain business risks arising in connection
with its operations which include, among others:
Risks associated with Argentine operations. A substantial part of the
Company's operations and properties are located in Argentina. As a result,
the Company financial condition and results of operations depend to a
significant extent on macroeconomic and political conditions prevailing in
Argentina. The Argentine economy has experienced a persistent recession since
1988, and in recent months the recession has deepened into an unprecedented
political and economic crisis which has disrupted Argentina's financial system
and effectively paralyzed the economy.
Risks associated with office and other buildings leases: The Company's
lease sales from its real estate operations may be adversely affected by (i)
local or national economic conditions in the areas in which the properties are
located, (ii) oversupply of office space or a reduction in demand for such
space, (iii) increased competition from other real estate operators, (iv)
changes in the ability of the Company or the tenants to provide for adequate
maintenance and/or insurance, (v) increases in operating expenses, (vi) adverse
changes in the regional or national economy, (vii) the bankruptcy or insolvency
of, or a downturn in the business of, any of its major tenants, and/or (vii) the
possibility that such tenants will not renew their leases as they expire.
Unfavorable economic conditions could also result in the inability of tenants in
certain sectors to meet their lease obligations and otherwise could adversely
affect the Company's ability to attract and retain desirable tenants.
Risks associated with development properties activities: Include (i) the
potential abandonment of development opportunities; (ii) construction costs may
exceed the Company's original estimates, possibly making a project uneconomical;
(iii) occupancy rates and rents at a newly completed project may be insufficient
to make the project profitable; (iv) the Company's inability to obtain financing
on favorable terms for the development of the project; (v) construction and
lease-up may not be completed on schedule, resulting in increased debt service
expense and construction costs; and (vi) the Company's inability to obtain, or
the delays in obtaining, all necessary zoning, land-use, building, occupancy and
other required governmental permits and authorizations.
Risks associated with retail space leases: The Company has investments in
companies which business is the ownership and operation of shopping centers. The
Company is subject to certain business risks arising in this connection which
include, among others, (i) the bankruptcy or insolvency of, or a downturn in the
business of, any of its major tenants, (ii) the possibility that such tenants
will not renew their leases as they expire, (iii) vacated anchor space affecting
the entire shopping center because of the loss of the departed anchor tenant's
customer drawing power, (iv) unfavorable economic conditions could also result
in the inability of tenants in certain retail sectors to meet their lease
obligations and otherwise could adversely affect the Company's ability to
attract and retain desirable tenants. The Company believes that its shopping
centers are relatively well positioned to withstand adverse economic conditions
since they typically are anchored by grocery stores, drug stores and discount
department stores that offer day-to-day necessities rather than luxury goods.
Risks associated with the hotel industry. The success of the Company's
operated hotels will depend, in large part, upon the Company's ability to
compete in areas such as access, location, quality of accommodations, room rate
structure, quality and scope of food and beverage facilities and other services
and amenities. The Company's hotels may face additional competition if other
companies decide to build new hotels or improve their existing hotels such that
they are more attractive to potential guests. In addition, the profitability of
the Company's hotels depends on (i) the Company's ability to form successful
relationships with international operators to run the hotels; (ii) changes in
travel patterns, including seasonal changes; and (iii) taxes and governmental
regulations which influence or determine wages, prices, interest rates,
construction procedures and costs.
F-65
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(L) RISKS AND UNCERTAINTIES (CONTINUED)
Risks associated with international operations. A substantial part of the
Company's real estate activities is conducted through subsidiaries and strategic
alliances with other companies. As a result, the Company depends to a certain
extent on the successful operation of subsidiaries and strategic alliances and
upon income, dividends and other distributions from them to maintain the
Company's profitability, liquidity and growth. Conducting business in Brazil and
other Latin American countries involves economic conditions and regulatory
requirements that may be different from those in Argentina and subjects the
Company to risks that could have an adverse effect on the business. For example,
entering these markets subjects the Company to the risks of currency
fluctuation, exchange rate controls, inflation, restrictions on repatriation of
dividends and capital, political instability, and deteriorating economic
conditions. As described in Note 3.f. on February 28, 2002 the Company sold its
interests in Brazil Realty.
The Company, as well as the home-building industry in general, may be
adversely affected during periods of high inflation, primarily because of higher
land and construction costs. In addition, higher mortgage interest rates may
significantly affect the affordability of permanent mortgage financing to
prospective purchasers. Inflation also increases the Company's interest costs
and costs of labor and materials. The Company attempts to pass through to its
customers any increases in its costs through increased selling prices and, to
date, inflation has not had a material adverse effect on the Company's results
of operations. However, there is no assurance that inflation will not have a
material adverse impact on the Company's future results of operations.
The Company's operations are interest-rate sensitive. Overall demand is
adversely affected by an increase in interest costs. If mortgage interest rate
increases significantly, this may negatively impact the ability of a homebuyer
to secure adequate financing. Such results of higher interest rates may result
in adversely affecting the Company's revenues, gross margins and net income.
(M) SELECTED UNAUDITED PRO-FORMA INFORMATION
The following selected unaudited pro forma information is being provided
to present a summary of the consolidated results of the Company as if the
acquisitions discussed in Note 3.e. had occurred as of the beginning of the
periods immediately preceding the respective acquisitions, giving effect to
purchase accounting adjustments. The pro forma data is for informational
purposes only and may not necessarily reflect the results of operations of the
Company had the acquired businesses operated as part of the Company for the
periods presented. This information has been prepared in accordance with
Argentine GAAP.
YEAR ENDED JUNE 30,
-----------------------------------------------
2001 2000
---------------------- -----------------------
Sales .......................... Ps. 339,843 Ps. 361,930
Net income...................... (59,954) 11,551
Net (loss) income per share..... (0.29) 0.06
F-66
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(N) SUMMARIZED FINANCIAL INFORMATION OF UNCONSOLIDATED EQUITY INVESTEES
Equity investments in unconsolidated affiliated companies, representing
between 20% and 50% of the capital stock in such companies, have been accounted
for under the equity method, wherein the investment is recorded at the amount of
the underlying equity in the net assets of the investments and adjusted to
recognize the Company's share of the undistributed earnings or losses. As
indicated in Note 3.b., the consolidated statements of operations were prepared
on a proportionate consolidation basis. The Company used the
"proportionate-consolidation method" of accounting for its investments in which
the Company exercises control and other jointly controlled investments. This
method has not been used for balance sheet and cash flows purposes.
The Company's share of the (loss) income of these affiliates was Ps. 21.1
million in 2002, Ps. 20.1 million in 2001 and Ps. 3.5 million in 2000, and its
investment in these companies totaled Ps. 307.2 million at June 30, 2002 and Ps.
452.3 million at June 30, 2001. The Company's share of undistributed losses of
these affiliates totaled Ps. 4.5 million at June 30, 2002 and Ps. 19.6 million
at June 30, 2001.
Summarized financial information of the Company's equity investees (on a
100% basis) is as follows:
As of and for the year As of and for the year ended
ended June 30, 2002 June 30, 2001
-------------------------- ----------------------------------------
(in thousands of pesos) (in thousands of pesos)
-------------------------- ----------------------------------------
Brazil Brazil
APSA Realty APSA F.V.I. Realty
(i) (ii)
------------ ------------ ------------ ------------ ------------
Current assets............... 49,586 -- 160,350 -- 99,175
Non-current assets........... 969,934 -- 1,097,473 -- 323,002
Total assets................. 1,019,520 -- 1,257,823 -- 422,177
Current liabilities.......... 84,289 -- 190,418 -- 86,108
Non-current liabilities...... 319,441 -- 403,897 -- 82,892
Total liabilities............ 403,730 -- 594,315 -- 169,000
Minority interest............ 14,582 -- 19,898 -- - -
Retained earnings............ (9,079) -- 33,598 -- 7,269
Net sales.................... 169,828 -- 345,987 -- 133,104
Gross profit................. 84,486 -- 131,472 -- 69,208
Net income (loss)............ (42,403) -- 5,462 -- 25,309
(i) The Company sold its equity interest in Brazil Realty in February
2002. Income statement line items reflect the results of operations
of Brazil Realty from July 1, 2001 through February 28, 2002.
(ii) The Company sold its equity interest in FVI in December 2000. Income
statement line items reflect the results of operations of FVI from
July 1, 2000 through December 18, 2000.
(O) USE OF PROPORTIONATE CONSOLIDATION METHOD OF ACCOUNTING FOR
CONTROLLED AND JOINTLY CONTROLLED INVESTMENTS
As discussed in Note 3.b., under Argentine GAAP, the consolidated
statements of operations were prepared on a proportionate consolidation basis.
As from July 1, 1996, the Company uses the "proportionate-consolidation method"
of accounting for its investments in which the Company exercises control and
other jointly controlled investments. This method has not been used for balance
sheet and cash flows purposes. All notes to the consolidated financial
statements relating to income-statement items have been also prepared on a
proportionate consolidation basis. The Company calculates the
proportionate-consolidation method by applying its percentage ownership interest
to the financial statements of its equity method investments.
Under US GAAP, the equity in income (loss) of jointly controlled
companies would have been reported as a separate line item in the statement of
operations. For all the periods presented, the ownership percentages the Company
does not own in the majority-owned companies would have been reflected as
minority interest and the pro-rata gains or losses attributed to the minority
holders.
F-67
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(O) USE OF PROPORTIONATE CONSOLIDATION METHOD OF ACCOUNTING FOR
CONTROLLED AND JOINTLY CONTROLLED INVESTMENTS (CONTINUED)
Although the use of the proportionate consolidation method as compared to
the equity method of accounting from a financial presentation perspective
impacts almost all areas of the Company's consolidated statements of operations,
it does not impact the Company's consolidated shareholders' equity or net
earnings. Note 14 presents the Company's statements of operations for the three
years in the period ended June 30, 2002 reporting (i) the jointly-controlled
investments accounted for by the equity method, with the earnings or losses
included as earnings or losses from equity investees, and (ii) minority interest
in earnings or losses of controlled subsidiaries.
(P) EQUITY INVESTMENTS IN LLR AND ITNV
As from June 30, 2002 and 2001, the Company had a 50% equity interest in
LLR. Under Argentine GAAP, the Company did not consolidate LLR for any of the
periods presented. For US GAAP purposes, and, in view of the guidance in SFAS
No. 94, "Consolidation of All Majority-Owned Subsidiaries" and Rules 1-02 and
3A-02 of Regulation S-X of the Securities and Exchange Commission, the Company
possesses a controlling financial interest in LLR regardless its 50% ownership
interest. Accordingly, consolidation is appropriate under US GAAP.
In addition, the Company's investment in ITNV was not consolidated under
Argentine GAAP as of and for the years ended June 30, 2002 and 2001 as the
Company had a 49% equity interest in such company. Under US GAAP, this
investment would be consolidated considering that the issuance of mandatorily
redeemable preferred stock did not change the Company's ownership interest (See
Note 19.I.(a) (ii) for details).
Presented below is the consolidated condensed information of the Company,
LLR and ITNV as of June 30,:
2002
------------------------------------------------------------------------------
COMPANY LLR ITNV ELIMINATIONS CONSOLIDATED
Current assets.............. 136,308 4,272 5,719 (22) 146,277
Non-current assets.......... 1,008,407 25,527 1,431 (11,985) 1,023,380
Total assets................ 1,144,715 29,799 7,150 (12,007) 1,169,657
Current liabilities......... 606,060 11,136 1,773 (22) 618,947
Non-current liabilities..... 3,021 -- -- -- 3,021
Total liabilities........... 609,081 11,136 1,773 (22) 621,968
Minority interest........... 75,218 -- -- 12,055 87,273
2001
------------------------------------------------------------------------------
COMPANY LLR ITNV ELIMINATIONS CONSOLIDATED
Current assets.............. 221,875 3,914 8,631 (12) 234,408
Non-current assets.......... 1,272,674 27,966 2,547 (8,069) 1,295,118
Total assets................ 1,494,549 31,880 11,178 (8,081) 1,529,526
Current liabilities......... 385,661 22,518 4,315 (12) 412,482
Non-current liabilities..... 34,497 -- -- -- 34,497
Total liabilities........... 420,158 22,518 4,315 (12) 446,979
Minority interest........... 114,356 -- -- 8,155 122,511
F-68
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(Q) SEVERANCE INDEMNITIES
Under Argentine law and labor agreements, the Company is required to make
minimum severance payments to its dismissed employees without cause and
employees leaving its employment in certain other circumstances. Under Argentine
GAAP, severance payments are expensed as incurred. Under US GAAP, the Company
follows the guidelines established by SFAS No. 112, "Employers' Accounting for
Post-employment Benefits", and SFAS No. 43, "Accounting for Compensated
Absences", which requires the accrual of severance costs if they relate to
services already rendered, are related to rights that accumulate or vest, are
probable of payment and are reasonably estimable. While the Company expects to
make severance payments in the future, it is impossible to estimate the number
of employees that will be dismissed without proper cause in the future, if any,
and accordingly the Company has not recorded such liability.
(R) STATEMENTS OF CASH FLOWS
The Company has elected to present the statements of cash flows in the
primary financial statements using the guidance set forth in SFAS No. 95
"Statement of Cash Flows" but using Argentine GAAP numbers. As further described
in Note 4.b, the Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Under US GAAP, the total amounts of cash and cash equivalents at the
beginning and end of the periods shown in the statements of cash flows are
required to be the same amounts as similarly titled line items shown in the
balance sheets, as of those dates. The following table reconciles the balances
included as cash and banks in the balance sheet to the total amounts of cash and
cash equivalents at the beginning and end of the periods shown in the statements
of cash flows:
AS OF JUNE 30,
------------------------------------------------------------------
2002 2001 2000
--------------------- -------------------- --------------------
Cash and banks.......................... Ps. 24,831 Ps. 10,530 Ps. 11,254
Cash equivalents:
Time deposits........................ 422 22,741 18,021
--------------------- -------------------- --------------------
Total cash and cash equivalents......... Ps. 25,253 Ps. 33,271 Ps. 29,275
===================== ==================== ====================
As discussed in Note 19.II.(p), under Argentine GAAP, the Company's
investments in LLR and ITNV were not consolidated for any of the periods
presented. Under US GAAP, these investments would have been consolidated. As a
result, differences exist between cash flows reported in the primary financial
statements and cash flows that would be reported in a statement of cash flows
prepared using US GAAP numbers. In addition, under Argentine GAAP, cash flow
from purchases, sales and maturities of available-for-sale securities were
reported as operating activities. Under US GAAP, these transactions would be
classified as cash flows from investing activities. Also, under Argentine GAAP
nor the effect of exchange rate changes on cash and cash equivalents, neither
the effects of inflation were disclosed by presenting additional cash flow
statement categories as required by US GAAP. The following table presents the
cash flows from operating, investing and financing activities, the effects of
inflation accounting and exchange rate changes on cash and cash equivalents that
would be reported in the statement of cash flows, which contemplate
classification differences under US GAAP.
FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Net cash provided by operating activities .............. Ps. 10,564 Ps. 87,478 Ps. 90,915
Net cash (used in) provided by investing activities .... (18,732) 71,841 (370)
Net cash used in financing activities................... (36,867) (154,808) (104,471)
Effect of exchange rate changes on cash and cash
equivalents ......................................... 1,818 -- --
Effect of inflation accounting.......................... 34,808 -- --
------------------ ------------------ ------------------
Net (decrease) increase in cash and cash equivalents.... Ps. (8,409) Ps. 4,511 Ps. (13,926)
================== ================== ==================
F-69
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(S) COMPREHENSIVE INCOME
On July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes guidelines for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income represents the change in
shareholder's equity of the Company during the period from transactions and
other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners. The adoption of SFAS No. 130 had no impact on total
shareholders' equity. The following table summarizes the components of
comprehensive income for the years ended June 30, 2002, 2001 and 2000.
YEAR ENDED JUNE 30,
----------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
NET (LOSS) INCOME UNDER US GAAP.................. Ps. (650,948) Ps. 20,024 Ps. (16,898)
Other comprehensive income (loss):
Foreign currency translation adjustments......... 100,026 (67,921) 5,630
Unrealized loss on available-for-sale-securities. (7,560) (34,298) (18,179)
Unrealized loss on retained interest in
transferred mortgage receivables................. (575) -- --
Unrealized gain on available-for-sale-securities
on equity investees.............................. (939) 947 --
------------------ ------------------ ------------------
COMPREHENSIVE LOSS Ps. (559,996) Ps. (81,248) Ps. (29,447)
================== ================== ==================
Accumulated nonowner changes in equity (accumulated other comprehensive
income) at June 30 were as follows:
2002 2001 2000
------------------ ------------------ ------------------
Foreign currency translation adjustment......... Ps. -- Ps. (100,026) Ps. (32,105)
Unrealized (loss) gain on available-for-sale
securities...................................... (1,893) 5,667 39,965
Unrealized loss on retained interest in
transferred mortgage receivables................ (575) -- --
Unrealized gain on available-for-sale-securities
on equity investees............................. 8 947 --
------------------ ------------------ ------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)... Ps. (2,460) Ps. (93,412) Ps. 7,860
================== ================== ==================
F-70
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(T) INVESTMENTS IN REAL ESTATE AND ACCUMULATED DEPRECIATION
The following is a summary of the Company's investments in real estate as
of June 30, 2002 prepared in accordance with SEC Regulation S-X 12-28.
Total Net
Buildings buildings carrying
and and Accumulated value as
Description Land improvement Improvements improvements Total depreciation of June 30
--------------------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
Suipacha 652 Ps. 2,254 Ps. 5,668 Ps. 3,867 Ps. 9,535 Ps. 11,789 Ps. 2,768 Ps. 9,021
Av. de Mayo 595 604 878 3,488 4,366 4,970 1,232 3,738
Alsina 934 315 1,265 - - 1,265 1,580 233 1,347
Constitucion 1111 520 - - - - - - 520 148 372
Reconquista 823 4,398 14,460 - - 14,460 18,858 3,051 15,807
Sarmiento 517 41 192 35 227 268 39 229
Av. Madero 942 1,160 3,687 43 3,730 4,890 743 4,147
Libertador 602 622 1,926 - - 1,926 2,548 300 2,248
Maipu 1300 9,161 31,739 1,138 32,877 42,038 5,116 36,922
Madero 1020 5,537 4,800 104 4,904 10,441 1,416 9,025
Libertador 498 10,440 27,663 720 28,383 38,823 5,079 33,744
Laminar 5,869 20,163 617 20,780 26,649 1,306 25,343
Edificios Costeros 5,293 15,920 689 16,609 21,902 705 21,197
Intercontinental 7,715 43,706 418 44,124 51,839 (6,076) 57,915
Plaza
Alto Palermo Plaza 799 101 - - 101 900 146 754
Alto Palermo Park 687 64 - - 64 751 37 714
Hotel Libertador 2,694 53,750 190 53,940 56,634 24,955 31,679
Hotel 7,717 26,622 23 26,645 34,362 (1,963) 36,325
Intercontinental
Dock IV 2,426 13,763 - - 13,763 16,189 312 15,877
Advances payment on 104 414 - - 414 518 - - 518
Hotel Piscis
---------------------------------------------------------------------------------------------
Ps. 68,356 Ps. 266,781 Ps. 11,332 Ps. 278,113 Ps. 346,469 Ps. 39,547 Ps. 306,922
=============================================================================================
Life on which
depreciation
in latest income
Date of statements
Description construction Date acquired is computed
--------------------- --------------- --------------- ------------------
Suipacha 652 April-June 1994 November 1991 50
Av. de Mayo 595 July 1992 March 1992 50
Alsina 934 - August 1991 50
Constitucion 1111 September 1994 June 1994 50
March 1995 January 1994
Reconquista 823 June 1995 November 1993 50
Sarmiento 517 March 1995 December 1994 50
July 1994
August 1994
Av. Madero 942 - July 1994 50
August 1994
Libertador 602 - May 1996 50
Maipu 1300 - September 1995 50
Madero 1020 - December 1995 50
Libertador 498 - December 1995 50
Laminar N/A March 1999 50
Edificios Costeros September 1998 March 1997 50
Intercontinental Plaza June 1996 November 1997 50
Alto Palermo Plaza December 1996 November 1997 50
March 1997 -
September 1997 -
Alto Palermo Park June 1996 November 1997 50
Hotel Libertador October 1973 March 1998 50
November 1990 -
December 1997 -
Hotel Intercontinental December 1994 November 1997 50
Dock IV June 2001
Advances payment on Hotel Piscis May 2002
F-71
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(T) INVESTMENTS IN REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------
2002 2001 2000
----------------------- ------------------------ -----------------------
Balance, beginning of the year......... Ps. 442,645 Ps. 465,493 Ps. 505,539
Additions during the year:
Improvements.................. 119 2,953 1,567
Transfers from real estate -- 2,615 29,318
inventory.....................
Advance payments on properties 18,863 -- --
----------------------- ------------------------ -----------------------
461,627 471,061 536,424
----------------------- ------------------------ -----------------------
Deductions during the year:
Transfers to real estate (41,799) (26,538) (23,479)
inventory.....................
Impairment loss (73,359) -- --
Sales......................... -- (1,878) (47,452)
--------------------------------------------------------------------------
(115,158) (28,416) (70,931)
--------------------------------------------------------------------------
Balance, end of the year............... Ps. 346,469 Ps. 442,645 Ps. 465,493
======================= ======================== =======================
F-72
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(U) MORTGAGE LOANS ON REAL ESTATE
Prepared in accordance with SEC Regulation S-X 12-29
Col. A. Col. B. Col. C. Col. D. Col. E.
------------------------ ------------ ------------------ ----------------- ----------------
Interest Final maturity Periodic
Description Rate date payment term Prior liens
------------------------ ------------ ------------------ ----------------- ----------------
Customer A 10-15% July 2002 Monthly None
Customer B 10-15% July 2002 Monthly None
Customer C 10-15% June 2003 Monthly None
Customer D 10-15% March 2003 Monthly None
Customer E 10-15% December 2007 Monthly None
Customer F 10-15% June 2010 Monthly None
Mortgage loans
under US$ 20,000 10-15% May 2008 Monthly None
Mortgage loans
US$ 20,000-49,999 10-15% August 2014 Monthly None
Mortgage loans
US$ 50,000-99,999 10-15% May 2014 Monthly None
Mortgage loans
over US$ 100,000 10-15% May 2020 Monthly None
Col. A. Col. F. Col. G. Col. H.
------------------------ --------------------- --------------------- -------------------
Principal amount
of loans subject
Face amount of Carrying amount of to delinquent
Description mortgages mortgages principal
or interest
------------------------ --------------------- --------------------- -------------------
Customer A 1,706 1,518 None
Customer B 879 782 None
Customer C 548 548 None
Customer D 513 435 None
Customer E 233 199 None
Customer F 194 137 None
Mortgage loans
under US$ 20,000 Open 96 None
Mortgage loans
US$ 20,000-49,999 Open 92 None
Mortgage loans
US$ 50,000-99,999 Open 462 None
Mortgage loans
over US$ 100,000 Open 225 None
--------------------- ---------------------
Ps. 4,073 Ps. 4,494
===================== =====================
F-73
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(U) MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
The summary of activity in mortgage receivables is as follows:
YEAR ENDED JUNE 30,
----------------------------------------------------------------------
2002 2001 2000
----------------------- ----------------------- ---------------------
Balance, beginning of year................ Ps. 59,341 Ps. 69,848 Ps. 90,144
Additions during the year:
New mortgage loans................... 1,461 13,912 9,445
Deductions during the year:
Securitization....................... (38,374) -- --
Collections of principal............. (17,934) (24,419) (29,741)
----------------------- ----------------------- ---------------------
Balance, end of year...................... Ps. 4,494 Ps. 59,341 Ps. 69,848
======================= ======================= =====================
20 OTHER FINANCIAL STATEMENT INFORMATION
The following tables present additional financial statement disclosures
required under Argentine GAAP:
a. Fixed assets, net
b. Intangible assets, net
c. Allowances and provisions
d. Cost of sales, leases and services
e. Foreign currency assets and liabilities
f. Other expenses
NOTE:
Schedules d. and f. have been prepared based on the Company's results
excluding the proportionate share of the income and expenses of unconsolidated
affiliated companies.
F-74
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. OTHER FINANCIAL STATEMENT INFORMATION
a. FIXED ASSETS, NET
Original value Depreciation
----------------------------------------------------- ---------------------------------------
Current year
-------------------------
Deductions,
transfers Accumulated Increases/
Value as of Additions and as of (decreases)
Beginning and impairment Value as of beginning and
Principal account of year transfers loss (i) end of year of year transfers Amount (ii)
--------------------------- ------------ ------------ ------------ ------------ ------------ ----------- ------------
Facilities................ Ps. 40,300 Ps. 782 Ps. (58) Ps. 41,024 Ps. 23,368 Ps. (10) Ps. 2,131
Furniture and fixtures.... 23,317 208 - - 23,525 16,458 - - 1,929
Computer equipment........ 6,635 519 - - 7,154 5,585 87 868
Leasehold improvements.... 6,201 162 - - 6,363 3,718 - - 580
Machinery and equipment... 3,664 2 - - 3,666 3,204 - - 195
Vehicles.................. 175 - - - - 175 175 - - - -
Advances to suppliers..... 920 5 (607) 318 12 1 - -
Properties:
-----------
Suipacha 652.............. 15,138 - - (3,349) 11,789 2,112 - - 656
Montevideo 1975........... - - - - - - - - - - - - - -
Av. de Mayo 701........... - - - - - - - - - - - - - -
Av. de Mayo 595........... 6,531 - - (1,561) 4,970 868 - - 364
Alsina 934................ 1,581 - - (1) 1,580 209 - - 24
Rivadavia 2243............ 8,339 - - (8,339) - - 998 (1,069) 71
Rivadavia 2768............ 351 - - (352) (1) 50 (55) 4
Constitucion 1111......... 6,383 - - (5,863) 520 923 (908) 133
Florida 291............... - - - - - - - - - - - - - -
Reconquista 823........... 21,991 - - (3,133) 18,858 2,699 - - 352
Av. Santa Fe 1588......... 8,339 - - (8,340) (1) 881 (915) 33
Sarmiento 517............. 584 - - (316) 268 65 (34) 8
Av. Madero 942............ 5,847 - - (957) 4,890 646 - - 97
Puerto Madero Dock 5...... 2,392 - - (2,393) (1) 244 (309) 64
Puerto Madero Dock 6 ..... - - - - - - - - - - - - - -
Libertador 602............ 3,106 - - (558) 2,548 252 - - 48
Serrano 250............... - - - - - - - - - - - - - -
Maipu 1300................ 46,956 103 (5,021) 42,038 4,351 1 764
Madero 1020............... 20,248 - - (9,807) 10,441 1,787 (693) 322
Libertador 498............ 52,920 16 (14,113) 38,823 4,757 (513) 835
Laminar Plaza............. 29,961 - - (3,312) 26,649 828 - - 478
Dock II - A and B building 18,910 - - (1,960) 16,950 280 - - 425
Dock II - C and D
buildings............... 5,475 - - (523) 4,952 - - - - - -
Dock IV................... 2,425 18,345 (4,581) 16,189 - - - - 312
Intercontinental Plaza.... 71,242 - - (19,403) 51,839 6,417 (13,936) 1,443
Alto Palermo Plaza........ 4,191 - - (3,291) 900 444 (383) 85
Alto Palermo Park......... 2,804 - - (2,053) 751 68 (64) 33
Hotel Libertador.......... 56,730 - - (96) 56,634 24,148 (100) 907
Hotel Intercontinental.... 50,191 - - (15,829) 34,362 7,174 (10,101) 964
Advances payments on
properties
Hotel Piscis........... - - 518 - - 518 - - - - - -
Other..................... 10,367 398 (218) 10,547 2,118 (429) 910
------------ ------------ ------------ ------------ ------------ ----------- ------------
Total as of June 30, 2002. Ps. 534,214 Ps. 21,058 (116,034) Ps. 439,238 Ps. 114,839 Ps.(29,430) Ps. 15,035
============ ============ ============ ============ ============ =========== ============
Total as of June 30, 2001. Ps. 553,479 Ps. 9,489 Ps. (28,754) Ps. 534,214 Ps. 101,996 Ps. (2,830) Ps. 15,673
============ ============ ============ ============ ============ =========== ============
Total as of June 30, 2000. Ps. 608,335 Ps. 39,537 Ps. (94,393) Ps. 553,479 Ps. 101,544 Ps.(16,207) Ps. 16,659
============ ============ ============ ============ ============ =========== ============
Depreciation Net carrying value as of June 30,
-------------- ----------------------------------------
Accumulated
as of end
Principal account of year 2002 2001 2000
--------------------------- ------------ ------------ ------------ ------------
Facilities................ Ps. 25,489 Ps. 15,535 Ps. 16,932 Ps. 18,578
Furniture and fixtures.... 18,387 5,138 6.859 8,120
Computer equipment........ 6,540 614 1,050 1,164
Leasehold improvements.... 4,298 2,065 2,483 3,112
Machinery and equipment... 3,399 267 460 786
Vehicles.................. 175 - - - - --
Advances to suppliers..... 13 305 908 653
Properties:
-----------
Suipacha 652.............. 2,768 9,021 13,026 13,285
Montevideo 1975........... - - - - - - 1,635
Av. de Mayo 701........... - - - - - - 2,760
Av. de Mayo 595........... 1,232 3,738 5,663 5,779
Alsina 934................ 233 1,347 1,372 1,395
Rivadavia 2243............ - - - - 7,341 7,481
Rivadavia 2768............ (1) - - 301 606
Constitucion 1111......... 148 372 5,460 7,479
Florida 291............... - - - - - - 10,335
Reconquista 823........... 3,051 15,807 19,292 19,644
Av. Santa Fe 1588......... (1) - - 7,458 7,598
Sarmiento 517............. 39 229 519 528
Av. Madero 942............ 743 4,147 5,201 5,297
Puerto Madero Dock 5...... (1) - - 2,148 2,195
Puerto Madero Dock 6 ..... - - - - - - 274
Libertador 602............ 300 2,248 2,854 2,901
Serrano 250............... - - - - - - 2,525
Maipu 1300................ 5,116 36,922 42,605 43,240
Madero 1020............... 1,416 9,025 18,461 20,697
Libertador 498............ 5,079 33,744 48,163 49,009
Laminar Plaza............. 1,306 25,343 29,133 29,556
Dock II - A and B building 705 16,245 18,630 23,989
Dock II - C and D
buildings................. - - 4,952 5,475 - -
Dock IV................... 312 15,877 2,425 - -
Intercontinental Plaza.... (6,076) 57,915 64,825 66,188
Alto Palermo Plaza........ 146 754 3,747 5,029
Alto Palermo Park......... 37 714 2,736 3,513
Hotel Libertador.......... 24,955 31,679 32,582 33,510
Hotel Intercontinental.... (1,963) 36,325 43,017 43,821
Advances payments on
properties
Hotel Piscis........... - - 518 - - - -
Other..................... 2,599 7,948 8,249 8,801
------------ ------------ ------------ -------------
Total as of June 30, 2002. Ps. 100,444 Ps. 338,794 - - - -
============ ============ ============ =============
Total as of June 30, 2001. Ps. 114,839 - - Ps. 419,375 - -
============ ============ ============ =============
Total as of June 30, 2000. Ps. 101,996 - - - - Ps. 451,483
============ ============ ============ =============
(i) The book value of fixed assets at June 30, 2002 are net of the impairment
loss mentioned in Note 4.d.
(ii) See notes 20 (f) Other expenses and 20 (b) Intangible assets, net.
F-75
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
b. INTANGIBLE ASSETS, NET:
Original value Amortization
----------------------------------------------- ----------------------------
For the year
------------
Accumulated
Value as of Value as of as of
beginning Additions/ End beginning Increases/
Principal account Of year (Deductions) of year of year (decreases)
----------------------------------------- ---------------- -------------- -------------- -------------- ------------
Fees and expenses relating to the
issuance of PARCKS.................. Ps. 7,182 Ps. - - Ps. 7,182 Ps. 7,182 Ps. - -
Preoperating and organization expenses.. 10,988 (9,050) 1,938 10,601 (9,051)
Deferred financing costs ............... 13,996 3,029 17,025 9,415 - -
Selling and advertising expenses........ 6,887 2 6,889 4,938 - -
---------------- -------------- -------------- -------------- ------------
Total as of June 30, 2002............... Ps. 39,053 Ps. (6,019) Ps. 33,034 Ps. 32,136 Ps. (9,051)
================ ============== ============== ============== ============
Total as of June 30, 2001............... Ps. 34,245 Ps. 4,808 Ps. 39,053 Ps. 24,703 Ps. 3
================ ============== ============== ============== ============
Total as of June 30, 2000............... Ps. 26,385 Ps. 10,481 Ps. 36,866 Ps. 17,960 Ps. --
================ ============== ============== ============== ============
Amortization Net carrying value as of June 30,
------------------------------ ----------------------------------
For the year
-----------------
Accumulated
as of end
Principal account Amount (i) of year 2002 2001 2000
----------------------------------------- -------------- ------------ ----------- --------- -------------
Fees and expenses relating to the
issuance of PARCKS.................. Ps. -- Ps. 7,182 Ps. -- Ps. -- Ps. --
Preoperating and organization expenses.. 232 1,782 156 387 745
Deferred financing costs ............... 5,081 14,496 2,529 4,581 5,745
Selling and advertising expenses........ 685 5,623 1,266 1,949 3,052
-------------- ------------ ----------- --------- -----------
Total as of June 30, 2002............... Ps. 5,998 Ps. 29,083 Ps. 3,951 Ps. -- Ps. --
============== ============ =========== ========= ===========
Total as of June 30, 2001............... Ps. 7,430 Ps. 32,136 Ps. -- Ps. 6,917 Ps. --
============== ============ =========== ========= ===========
Total as of June 30, 2000............... Ps. 9,364 Ps. 27,324 Ps. -- Ps. -- Ps. 9,542
============== ============ =========== ========= ===========
(i) The allocation of amortization charges in the consolidated statement of
income is included in Note 20.f., except for Ps. 85, Ps. 172 and Ps. 2,347,
for the years ended June 30, 2002, 2001 and 2000, respectively, included in
Other income (expenses), net.
F-76
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
c. ALLOWANCES AND PROVISIONS
BALANCES AS OF CARRYING VALUE OF JUNE 30,
BEGINNING OF -----------------------------------
ITEM YEAR ADDITIONS (i) DEDUCTIONS 2002 2001 2000
------------------------------------------------ ------------ -------------------------- ---------- ----------- ----------
DEDUCTED FROM CURRENT ASSETS:
Allowance for doubtful accounts................ Ps. 1,796 Ps. 472 Ps. (1,047) Ps. 1,221 Ps. 1,796 Ps. 1,641
Allowance for impairment of fixed assets....... -- 49,743 -- 49,743 -- --
Allowance for impairment of inventories........ -- 15,494 (4,262) 11,232 -- --
Allowance for impairment of undeveloped plots
of land........................................ -- 8,301 -- 8,301 -- --
------------ ------------ ------------- ----------- ---------- ----------
Total as of June 30, 2002...................... Ps. 1,796 Ps. 74,010 Ps. (5,309) Ps. 70,497 -- --
============ ============ ============= =========== ========== ==========
Total as of June 30, 2001...................... Ps. 1,641 Ps. 413 Ps. (258) -- Ps. 1,796 --
============ ============ ============= =========== ========== ==========
Total as of June 30, 2000...................... Ps. 880 Ps. 1,195 Ps. (434) -- -- Ps. 1,641
============ ============ ============= =========== ========== ==========
INCLUDED IN CURRENT LIABILITIES:
Provision for contingencies................... Ps. 133 Ps. 512 Ps. (205) Ps. 440 Ps. 133 Ps. 88
------------ ------------ ------------- ----------- ---------- ----------
Total as of June 30, 2002...................... Ps. 133 Ps. 512 Ps. (205) Ps. 440 -- --
============ ============ ============= =========== ========== ==========
Total as of June 30, 2001...................... Ps. 88 Ps. 514 Ps. (469) -- Ps. 133 --
============ ============ ============= =========== ========== ==========
Total as of June 30, 2000...................... Ps. 473 Ps. 401 Ps. (786) -- -- Ps. 88
============ ============ ============= =========== ========== ==========
INCLUDED IN NON-CURRENT LIABILITIES:
Provision for contingencies................... Ps. 207 Ps. 330 Ps. (180) Ps. 357 Ps. 207 Ps. 2,113
------------ ------------ ------------- ----------- ---------- ----------
Total as of June 30, 2002...................... Ps. 207 Ps. 330 Ps. (180) Ps. 357 -- --
============ ============ ============= =========== ========== ==========
Total as of June 30, 2001...................... Ps. 2,113 Ps. 66 Ps. (1,972) -- Ps. 207 --
============ ============ ============= =========== ========== ==========
Total as of June 30, 2000...................... Ps. 7,973 Ps. -- Ps. (5,860) -- -- Ps. 2,113
============ ============ ============= =========== ========== ==========
(i) The accounting allocation of the charges for the year ended June 30,
2002, 2001 and 2000 is a follows:
- Doubtful accounts are deducted of leases
- Debtors under legal proceedings is disclosed in Note 20.f.
- Impairment of assets are included in Gain (loss) from operations and
holdings of real estate assets.
F-77
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
d. COST OF SALES, LEASES AND SERVICES (i)
YEAR ENDED JUNE 30,
------------------------------------------------------------
2002 2001 2000
----------------- ------------------- --------------------
I. COST OF SALES
Stock as of beginning of year.......................... Ps. 91,750 Ps. 129,203 Ps. 153,094
Plus:
Purchase of the year................................... -- 687 13,967
Expenses (Note 20.f.).................................. 8,803 9,155 10,532
Transfers to fixed assets.............................. -- (2,408) (29,181)
Transfers to intangible assets......................... -- (595) (2,655)
Transfers from fixed assets............................ 36,860 23,809 23,214
Transfers from plots of land........................... -- -- 2,973
Less:
Adjustment to purchase price of inventory.............. (12,745) -- --
Stock as of end of year................................ (70,445) (91,750) (129,203)
----------------- ------------------- --------------------
Subtotal............................................... 54,223 68,101 42,741
----------------- ------------------- --------------------
Plus:
Cost of sale of Llao Llao resorts...................... -- -- 11,725
Cost of sale of fixed assets (ii) -- -- 290
Results from holding of real estate assets............. (15,494) (3,830) (743)
----------------- ------------------- --------------------
COST OF PROPERTIES SOLD......................... 38,729 64,271 54,013
----------------- ------------------- --------------------
II. COST OF LEASES
Expenses (Notes 20.f.)................................. 11,028 10,035 8,805
----------------- ------------------- --------------------
COST OF PROPERTIES LEASED....................... 11,028 10,035 8,805
----------------- ------------------- --------------------
III. COST OF FEES FOR SERVICES
Expenses (note 20.f)................................... 683 3,779 980
----------------- ------------------- --------------------
COST OF FEES FOR SERVICES....................... 683 3,779 980
----------------- ------------------- --------------------
IV. COST OF HOTEL ACTIVITIESS
Stock as of beginning of year.......................... 432 648 1,103
Plus:
Purchases of the year.................................. -- 215 1,223
Expenses (Note 20.f)................................... 24,207 32,862 51,779
Stock as of end of year................................ (243) (432) (648)
----------------- ------------------- --------------------
COST OF HOTEL ACTIVITIES........................ 24,396 33,293 53,457
----------------- ------------------- --------------------
TOTAL COSTS............................................ 74,836 111,378 117,255
================= =================== ====================
(i) The book value of inventories at June 30, 2002 are net of the impairment
loss mentioned in Note 4.d.
(ii) Included in this Schedule as it corresponds to transactions involving
properties sold.
F-78
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
e. FOREIGN CURRENCY ASSETS AND LIABILITIES
Amount of Current Total as of June 30,
foreign Exchange -----------------------------------
Captions Currency currency rate (i) 2002 2001
------------------------------------------------ ----------- ------------- ------------------- ------------------
ASSETS
CURRENT ASSETS
Cash and banks:
Cash .......................... US$ 2,022,416 0.0037 Ps. 7,483 Ps. 49
Bank accounts ................. US$ 517,047 0.0037 1,913 6,945
Checks to be deposited ........ US$ 511,595 0.0037 1,893 57
Investments:
Time deposits ................. US$ -- 0.0037 -- 19,715
Banco Hipotecario S.A. ("BHSA") US$ -- 0.0037 -- 21,051
Mutual funds .................. US$ 1,985,022 0.0037 7,345 13,545
Commercial bonds .............. US$ -- 0.0037 -- 1,414
Mortgages and leases receivable, net:
Mortgages and leases
receivable .................. US$ -- 0.0037 -- 57,328
Other receivables and prepaid
expenses:
Stock operations............... US$ -- 0.0037 -- 13,459
Debtors under legal proceedings US$ -- 0.0037 -- 25
Prepaid expenses .............. US$ 4,138 0.0037 15 96
Personnel loans and prepayments US$ -- 0.0037 -- 651
Other.......................... US$ -- 0.0037 -- 571
------------------- ------------------
TOTAL CURRENT ASSETS Ps. 18,649 Ps. 134,906
------------------- ------------------
NON-CURRENT ASSETS
Mortgages and leases receivable, net:
Mortgages receivable .......... US$ -- 0.0037 -- 44,326
Other receivables and prepaid
expenses:
Related parties................ US$ 9,643,556 0.0038 36,646 --
Personnel loans................ US$ -- 0.0037 -- 2,541
Other.......................... US$ -- 0.0037 -- 74
Investments:
Brazil Realty ................. US$ -- 0.0037 -- 133,800
BHSA........................... US$ -- 0.0037 -- 32,015
Latin American Econetworks N.V. US$ -- 0.0037 -- 9,658
IRSA Telecomunicaciones S.A.... US$ -- 0.0037 -- 3,388
Fixed assets....................... US$ 140,000 0.0037 518 --
------------------- ------------------
TOTAL NON-CURRENT ASSETS........... Ps. 37,164 Ps. 225,802
------------------- ------------------
TOTAL ASSETS AS OF JUNE 30, 2002... Ps. 55,813 --
=================== ==================
TOTAL ASSETS AS OF JUNE 30, 2001... -- Ps. 360,708
=================== ==================
(i) Official exchange rate prevailing as of June 30, 2002, except otherwise
indicated.
F-79
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
e. FOREIGN CURRENCY ASSETS AND LIABILITIES (CONTINUED)
Amount of Current Total as of June 30,
foreign Exchange --------------------------------------
Captions Currency currency rate (i) 2002 2001
------------------------------------------------------------- ------------- ----------------- -------------------
LIABILITIES
CURRENT LIABILITIES
Trade accounts payable.............. US$ 54,947 0.0038 Ps. 209 Ps. 802
Customer advances................... US$ -- 0.0038 -- 3,181
Short term debt..................... US$ 147,684,628 0.0038 561,202 330,140
Taxes payable....................... US$ 1,665,402 0.0038 6,329 --
Other liabilities:
Customer advances............... US$ -- 0.0038 -- 2,306
Deferred gain................... US$ -- 0.0038 -- 1,958
Seller financing ............... US$ -- 0.0038 -- 1,626
Lessee deposits ................ US$ -- 0.0038 -- 1,240
Collections on behalf of third
parties ........................ US$ -- 0.0038 -- 188
Accruals........................ US$ -- 0.0038 -- 671
Other .......................... US$ 213,674 0.0038 812 135
----------------- -------------------
TOTAL CURRENT LIABILITIES Ps. 568,552 Ps. 342,247
----------------- -------------------
NON-CURRENT LIABILITIES
Trade accounts payable.............. US$ -- 0.0038 -- 374
Long term debt...................... US$ -- 0.0038 -- 26,012
Customer advances................... US$ -- 0.0038 -- 360
Other liabilities:
Lessee deposits................. US$ -- 0.0038 -- 3,468
Seller financing ............... US$ -- 0.0038 -- 2,836
Deferred gain................... US$ -- 0.0038 -- 370
Other .......................... US$ -- 0.0038 -- 831
----------------- -------------------
TOTAL NON-CURRENT LIABILITIES....... Ps. -- Ps. 34,251
----------------- -------------------
TOTAL LIABILITIES AS OF JUNE 30, 2002 Ps. 568,552 --
================= ===================
TOTAL LIABILITIES AS OF JUNE 30, 2001 -- Ps. 376,498
================= ===================
(i) Official exchange rate prevailing as of June 30, 2002
F-80
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
f. OTHER EXPENSES
EXPENSES
--------------------------------- -------------------------------------------------------------------------------------------------
Cost of Cost of Cost of Cost of Administrative Selling Financing
Items properties properties fees for hotel
sold leased services activities
--------------------------------- ------------ ------------ ------------ ------------ ----------------- ----------- -----------
Interest and index - adjustment.. Ps. -- Ps. -- Ps. -- Ps. -- Ps. 425 Ps. -- Ps. 47,100
Salaries and bonuses............. 277 -- -- 7,269 10,567 1,470 --
Depreciation and amortization.... 272 7,865 -- 4,247 3,040 596 4,928
Fees and payments for services... 60 -- -- 1,618 7,040 130 --
Lease expense.................... -- -- -- -- 451 -- --
Maintenance of buildings......... 3,184 3,163 -- 1,864 335 33 --
Social security contributions.... 61 -- -- 1,669 565 267 --
Commissions and property sales
charges.......................... 3,350 -- -- 1,711 794 2,255 --
Advertising ..................... -- -- -- -- 74 2,161 --
Taxes, rates and contributions... 9 -- -- 917 994 -- --
Mail and telephone............... -- -- -- 1,005 162 66 --
Travel expenses.................. -- -- -- 2,320 168 16 --
Bank charges..................... 27 -- -- -- -- -- 677
Safe deposits box................ -- -- -- -- 138 -- 43
Allowance for doubtful accounts.. -- -- -- -- 106 366 --
Freight and transportation ...... -- -- -- 329 312 11 --
Director's fees.................. -- -- -- -- 1,037 -- --
Bids lost........................ -- -- -- -- -- -- --
Other............................ 1,563 -- 683 1,258 2,320 503 4,469
------------ ------------ ------------ ------------- -------------- ------------ -----------
Total as of June 30, 2002........ Ps. 8,803 Ps. 11,028 Ps. 683 Ps. 24,207 Ps. 28,528 Ps. 7,978 Ps. 57,217
============ ============ ============ ============= ============== ============ ===========
Total as of June 30, 2001........ Ps. 9,155 Ps. 10,035 Ps. 3,779 Ps. 32,862 Ps. 35,593 Ps.15,546 Ps. 63,697
============ ============ ============ ============= ============== ============ ===========
Total as of June 30, 2000........ Ps. 10,532 Ps. 8,805 Ps. 980 Ps. 51,779 Ps. 42,156 Ps.14,679 Ps. 46,943
============ ============ ============ ============= ============== ============ ============
--------------------------------- -------------- ------------- -------------
Total for Total for Total for
Items the year the year the year 2000
2002 2001
--------------------------------- -------------- ------------- -------------
Interest and index - adjustment.. Ps. 47,525 Ps. 56,826 Ps. 40,926
Salaries and bonuses............. 19,583 27,684 34,926
Depreciation and amortization.... 20,948 22,931 23,676
Fees and payments for services... 8,848 10,747 12,126
Lease expense.................... 451 1,049 280
Maintenance of buildings......... 8,579 15,028 17,322
Social security contributions.... 2,562 3,822 7,672
Commissions and property sales
charges.......................... 8,110 9,329 4,873
Advertising ..................... 2,235 3,347 5,004
Taxes, rates and contributions... 1,920 3,052 2,338
Mail and telephone............... 1,233 976 3,899
Travel expenses.................. 2,504 2,670 5,014
Bank charges..................... 704 806 1,491
Safe deposits box................ 181 356 540
Allowance for doubtful accounts.. 472 407 1,017
Freight and transportation ...... 756 1,092 781
Director's fees.................. 1,037 1,410 1,457
Bids lost........................ -- -- 184
Other............................ 10,796 9,135 12,348
------------- ------------ -----------
Total as of June 30, 2002........ Ps. 138,444 -- --
============= ============ ===========
Total as of June 30, 2001........ -- Ps.170,667 --
============ ============ ===========
Total as of June 30, 2000........ -- -- Ps. 175,874
============= ============ ===========
F-81
REPORT OF INDEPENDENT ACCOUNTANTS
To the shareholders of
Alto Palermo S.A. (APSA):
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in shareholders'
equity and of cash flows present fairly, in all material respects, the financial
position of Alto Palermo S.A. (APSA) and its subsidiaries at June 30, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 2002 in conformity with accounting
principles generally accepted in Argentina. 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 of these statements in accordance with auditing standards generally
accepted in the United States, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Accounting principles generally accepted in Argentina vary in certain
significant respects from the accounting principles generally accepted in the
United States and as allowed by Item 18 to Form 20-F. The application of the
latter would have affected the determination of consolidated net (loss) income
expressed in Argentine pesos for each of the three years in the period ended
June 30, 2002 and the determination of consolidated shareholders' equity and
consolidated financial position also expressed in Argentine pesos at June 30,
2002 and 2001 to the extent summarized in Note 15 to the consolidated financial
statements.
PricewaterhouseCoopers
Buenos Aires, Argentina
September 9, 2002
F-82
ALTO PALERMO S.A. (APSA)
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002 AND 2001
(Adjusted for price-level changes and expressed
in constant Argentine Pesos of June 30, 2002)
2002 2001
------------------- -------------------
ASSETS
CURRENT ASSETS
Cash and banks (Notes 5.a. and 16.e.)........................ Ps. 12,841,574 Ps. 13,445,875
Investments (Notes 5.b. and 16.e.)........................... 9,186,582 16,111,641
Accounts receivable, net (Notes 5.c. and 16.e.).............. 21,383,921 101,240,218
Inventory (Note 16.d.)....................................... 1,170,481 7,486,739
Other receivables and prepaid expenses (Notes 5.d. and 16.e.) 5,003,496 22,066,242
------------------ ------------------
TOTAL CURRENT ASSETS......................................... 49,586,054 160,350,715
------------------ ------------------
NON-CURRENT ASSETS
Accounts receivable, net (Notes 5.c. and 16.e.).............. 4,651,071 9,499,406
Other receivables and prepaid expenses, net (Notes 5.d. and
16.e.)....................................................... 25,318,110 28,586,477
Investments (Note 5.b.)...................................... 22,375,913 30,449,997
Inventory, net (Note 16.d.).................................. 22,141,284 27,343,860
Fixed assets, net (Note 16.a.)............................... 850,731,493 947,484,376
Intangible assets, net (Note 16.b.).......................... 44,715,662 54,108,811
------------------- -------------------
TOTAL NON-CURRENT ASSETS..................................... 969,933,533 1,097,472,927
------------------- -------------------
TOTAL ASSETS........................................................... Ps. 1,019,519,587 Ps. 1,257,823,642
=================== ===================
LIABILITIES
CURRENT LIABILITIES
Trade accounts payable (Notes 5.e. and 16.e.)................ Ps. 16,993,188 Ps. 33,912,361
Customer advances (Notes 5.f. and 16.e.)..................... 9,034,842 31,723,948
Short-term debt (Notes 5.g. and 16.e.)....................... 39,137,558 109,220,361
Related parties (Notes 7 and 16.e.).......................... 633,852 865,825
Salaries and social security payable (Note 5.h.)............. 1,422,635 6,123,489
Taxes payable (Note 5.i.).................................... 11,356,917 5,330,409
Other liabilities (Note 5.j.)................................ 5,710,423 3,242,652
------------------- -------------------
TOTAL CURRENT LIABILITIES.................................... 84,289,415 190,419,045
------------------- -------------------
NON-CURRENT LIABILITIES
Trade accounts payable (Notes 5.e. and 16.e.)................ 6,117,088 3,776,183
Customer advances (Notes 5.f. and 16.e.)..................... 25,261,468 58,423,737
Long-term debt (Notes 5.g. and 16.e.)........................ 168,748,690 336,584,550
Related parties (Notes 7 and 16.e.).......................... 113,880,253 - -
Other liabilities (Note 5.j.)................................ 5,433,644 5,112,020
------------------- -------------------
TOTAL NON-CURRENT LIABILITIES................................ 319,441,143 403,896,490
------------------- -------------------
TOTAL LIABILITIES...................................................... 403,730,558 594,315,535
=================== ===================
Minority interest............................................ 14,581,843 19,898,001
------------------- -------------------
SHAREHOLDERS' EQUITY................................................... 601,207,186 643,610,106
------------------- -------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. Ps. 1,019,519,587 Ps. 1,257,823,642
=================== ===================
The accompanying notes are an integral part of these consolidated
financial statements.
F-83
ALTO PALERMO S.A. (APSA)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(Adjusted for price-level changes and expressed
in constant Argentine Pesos of June 30, 2002)
2002 2001 2000
(NOTE 10) (NOTE 10) (NOTE 10)
------------------ ------------------ -------------------
SALES:
Leases and services................................ Ps. 125,471,197 Ps. 175,139,270 Ps. 181,545,166
Sales and development properties................... 3,562,531 11,530,659 9,892,965
Credit card operations............................. 40,794,169 41,945,091 26,392,377
------------------ ------------------ -------------------
TOTAL SALES (net of gross sales tax of Ps. 6.6
million, Ps. 6.3 million and Ps. 6.1 million,
respectively)...................................... 169,827,897 228,615,020 217,830,508
------------------ ------------------ -------------------
COSTS:
Leases and services (Note 16.d.)................... (69,108,451) (70,597,841) (69,824,343)
Sales and development properties (Note 16.d.)...... (4,803,722) (12,566,463) (10,396,976)
Credit card operations (Note 16.d.)................ (11,429,544) (13,977,878) (8,734,312)
------------------ ------------------ -------------------
TOTAL COSTS........................................ (85,341,717) (97,142,182) (88,955,631)
------------------ ------------------ -------------------
GROSS PROFIT:
Leases and services................................ 56,362,746 104,541,429 111,720,823
Sales and development properties................... (1,241,191) (1,035,804) (504,011)
Credit card operations............................. 29,364,625 27,967,213 17,658,065
------------------ ------------------ -------------------
TOTAL GROSS PROFIT .......................................... 84,486,180 131,472,838 128,874,877
------------------ ------------------ -------------------
Selling expenses (Note 16.f.)................................ (51,687,468) (27,581,723) (44,780,794)
Administrative expenses (Note 16.f.)......................... (22,589,212) (30,831,832) (27,608,310)
Torres de Abasto unit contracts' rescissions................. 53,746 (26,166) (3,373,901)
Net (loss) income in credit card trust....................... (3,620,884) 2,058,932 522,839
------------------ ------------------ -------------------
OPERATING INCOME............................................. 6,642,362 75,092,049 53,634,711
------------------ ------------------ -------------------
Net loss in equity investments .............................. (4,684,399) (3,024,280) (44,324)
Financial results, net (Note 8).............................. (38,904,576) (63,130,111) (49,600,558)
Other expense, net (Note 9) ................................. (9,646,053) (272,906) (850,204)
------------------ ------------------ -------------------
(LOSS) INCOME BEFORE TAXES AND MINORITY INTEREST............. (46,592,666) 8,664,752 3,139,625
------------------ ------------------ -------------------
Income tax................................................... (1,290,443) (2,356,802) (8,349,736)
Minority interest............................................ 5,480,189 (845,352) (364,591)
------------------ ------------------ -------------------
NET (LOSS) INCOME............................................ Ps. (42,402,920) Ps. 5,462,598 Ps. (5,574,702)
================== ================== ===================
The accompanying notes are an integral part of these consolidated
financial statements.
F-84
ALTO PALERMO S.A. (APSA)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(Adjusted for price-level changes and expressed
in constant Argentine Pesos of June 30, 2002)
Shareholders' contributions
----------------------------------------------------------------------------------
Inflation
adjustment
Common of common Additional Irrevocable
stock stock paid-in-capital contributions
Items (Note 6.a.) (Note 6.b.) (Note 6.a.) (Note 6.c.) Total
----------------------------------------------- ------------- ------------- -------------- -------------- --------------
BALANCES AS OF JUNE 30, 1999................. Ps.63,500,000 Ps.61,384,082 Ps.380,697,465 Ps. - - Ps.505,581,547
------------- ------------- -------------- -------------- --------------
Irrevocable contribution for future
subscription of shares....................... - - - - - - 73,764,605 73,764,605
Subscription of shares resolved by
shareholder's meeting held on August 6, 1999. 6,500,000 6,215,300 84,554,789 (73,764,605) 23,505,484
Approved by shareholder's meeting held on
October 29, 1999:
- Cash dividends (Ps. 0.0075 per share)...... - - - - - - - - - -
- Increase in legal reserve.................. - - - - - - - - - -
Net loss for the year........................ - - - - - - - - - -
------------- ------------- -------------- -------------- --------------
BALANCES AS OF JUNE 30, 2000................. Ps.70,000,000 Ps.67,599,382 Ps.465,252,254 Ps. - - Ps.602,851,636
============= ============= ============== ============== ==============
Net income for the year...................... - - - - - - - - - -
------------- ------------- -------------- -------------- --------------
BALANCES AS OF JUNE 30, 2001................. Ps.70,000,000 Ps.67,599,382 Ps.465,252,254 Ps. - - Ps.602,851,636
============= ============= ============== ============== ==============
Increase in legal reserve.................... - - - - - - - - - -
Net loss for the year........................ - - - - - - - - - -
------------- ------------- -------------- -------------- --------------
BALANCES AS OF JUNE 30, 2002................. Ps.70,000,000 Ps.67,599,382 Ps.465,252,254 Ps. - - Ps.602,851,636
============= ============= ============== ============== ==============
Legal
Appraisal Accumulated retained
revaluation reserve earnings Shareholders'
Items (Note 4.e.) (Note 6.d.) (deficit) equity
----------------------------------------------- ------------ ------------ ------------- --------------
BALANCES AS OF JUNE 30, 1999................. Ps.3,517,461 Ps.2,359,778 Ps.45,263,555 Ps.556,722,341
------------ ------------ ------------- --------------
Irrevocable contribution for future
subscription of shares....................... - - - - - - 73,764,605
Subscription of shares resolved by
shareholder's meeting held on August 6, 1999. - - - - - - 23,505,484
Approved by shareholder's meeting held on
October 29, 1999:
- Cash dividends (Ps. 0.0075 per share)...... - - - - (10,270,220) (10,270,220)
- Increase in legal reserve.................. - - 1,283,778 (1,283,778) - -
Net loss for the year........................ - - - - (5,574,702) (5,574,702)
------------ ------------ ------------- --------------
BALANCES AS OF JUNE 30, 2000................. Ps.3,517,461 Ps.3,643,556 Ps.28,134,855 Ps.638,147,508
============ ============ ============= ==============
Net income for the year...................... - - - - 5,462,598 5,462,598
------------ ------------ ------------- --------------
BALANCES AS OF JUNE 30, 2001................. Ps.3,517,461 Ps.3,643,556 Ps.33,597,453 Ps.643,610,106
============ ============ ============= ==============
Increase in legal reserve.................... - - 273,129 (273,129) - -
Net loss for the year........................ - - - - (42,402,920) (42,402,920)
------------ ------------ ------------- --------------
BALANCES AS OF JUNE 30, 2002................. Ps.3,517,461 Ps.3,916,685 Ps.(9,078,596) Ps.601,207,186
============ ============ ============= ==============
The accompanying notes are an integral part of these consolidated
financial statements.
F-85
ALTO PALERMO S.A. (APSA)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(Adjusted for price-level changes and expressed
in constant Argentine Pesos of June 30, 2002)
2002 2001 2000
----------------- ----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income for the year................................. Ps. (42,402,920) Ps. 5,462,598 Ps. (5,574,702)
Adjustments to reconcile net (loss) income to net cash flow
from operating activities:
Financial results....................................... (109,552,698) - - - -
Impairment of long-lived assets......................... 55,860,977 - - - -
Depreciation and amortization........................... 63,504,982 64,273,283 59,117,565
Loss (gain) from sale of fixed assets .................. 10,628 (313,221) - -
Allowance for doubtful accounts......................... 47,050,515 17,950,979 19,701,516
Provision for contingencies............................. 6,402,818 177,249 174,202
Recovery of allowance for doubtful accounts ............ (78,356) - - (92,863)
Recovery of provision for contingencies................. (104,393) (145,330) - -
Allowance for doubtful mortgage receivable.............. 2,541,454 1,778,374 - -
Gain on early redemption of debt........................ (297,762) (3,561,565) - -
Net loss in investee companies.......................... 4,684,399 2,421,752 44,324
Net income in credit card trust......................... (716,994) (1,495,159) (522,839)
Minority interest....................................... (5,480,189) 845,352 364,591
Changes in certain assets and liabilities, net of non-cash
transactions and the effects of acquisitions:
Increase in accounts receivable......................... (108,225,491) (94,208,903) (39,035,951)
Proceeds from accounts receivable securitization........ 96,219,348 55,589,795 23,278,780
Increase in other receivables and prepaid expenses...... (5,856,469) (6,154,068) (5,960,690)
Increase in intangible assets........................... (4,639,825) (3,023,968) (4,926,572)
Decrease in investments................................. 3,287,928 1,173,720 586,860
Decrease in inventory................................... 6,316,258 11,873,561 30,466,238
Increase/(decrease) in trade accounts payable........... 11,949,358 (3,907,007) 11,903,305
Decrease in customer advances........................... (16,047,398) (17,333,022) (3,470,868)
Increase/(decrease) in taxes payable.................... 12,683,802 (8,295,724) 816,632
(Decrease)/increase in salaries and social security
payable............................................... (1,240,659) 2,831,916 (285,693)
Decrease in other liabilities........................... (484,062) (2,018,583) (1,932,819)
Increase/(decrease) in related parties.................. 2,412,817 86,210 (160,676)
Increase in accrued interest............................ 30,126,656 4,329,948 1,171,969
----------------- ----------------- ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................... 47,924,724 28,338,187 85,662,309
----------------- ----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets............................. (3,106,258) (20,522,484) (41,137,271)
Increase in inventory................................... (384,290) - - - -
Net proceeds from sale of fixed assets.................. 157,857 643,439 - -
Payment for acquisition of subsidiary companies, net of
cash acquired........................................... - - (18,898,103) (6,945,028)
Increase in investments ................................ - - (9,869,029) - -
Formation of affiliate.................................. - - - - (23,474)
----------------- ----------------- ------------------
NET CASH USED IN INVESTING ACTIVITIES.......................... (3,332,691) (48,646,177) (48,105,773)
----------------- ----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term and long-term debt............. 28,756,140 300,958,025 184,277,561
Payment of short-term and long-term debt................ (61,230,895) (233,527,413) (278,952,765)
Payment of loans granted by related parties............. (109,637,302) - - - -
Financing costs......................................... (55,463) (5,520,526) (5,877,505)
Proceeds from loans granted by related parties.......... 221,012,038 - - - -
Cash contributions received from minority shareholders.. 164,031 1,034,820 1,068,647
Derivative instruments collateral deposit............... (97,810,000) - - - -
Redemption of debt...................................... (30,023,337) (36,657,908) - -
Payment of dividends.................................... - - - - (10,270,220)
Payment of cash dividends to minority shareholders...... - - (575,123) (1,918,856)
Issuance of common stock................................ - - - - 48,403,464
----------------- ----------------- ------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES............ (48,824,788) 25,711,875 (63,269,674)
----------------- ----------------- ------------------
(Decrease) increase in cash and cash equivalents............... (4,232,755) 5,403,885 (25,713,138)
Cash and cash equivalents as of the beginning of the year...... 18,880,100 13,476,215 39,189,353
----------------- ----------------- ------------------
Cash and cash equivalents as of the end of the year............ Ps. 14,647,345 Ps. 18,880,100 Ps. 13,476,215
================= ================= ==================
The accompanying notes are an integral part of these consolidated
financial statements.
F-86
ALTO PALERMO S.A. (APSA)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000 (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos of June 30, 2002)
2002 2001 2000
----------------- ----------------- ------------------
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID DURING THE YEARS FOR:
Interest....................................................... Ps. 43,194,942 Ps. 58,488,979 Ps. 44,607,324
Income tax..................................................... 4,817,449 15,690,713 18,568,689
NON-CASH ACTIVITIES:
Increase in fixed assets through a decrease in intangible
assets......................................................... 340,712 - - - -
Retained interest in credit card receivables................... 6,767,401 12,185,774 4,108,020
Increase in other receivables and prepaid expenses through a
decrease in investments........................................ 88,029 - - - -
Increase in other receivables and prepaid expenses through a
decrease in fixed assets....................................... - - 296,501 243,981
Increase in inventory through a decrease in fixed assets....... - - 15,630,762 - -
Conversion of balances with related parties into common shares. - - - - 48,866,625
Dividends receivable........................................... - - - - 146,715
Incurrence of debt for purchase of fixed assets................ - - - - 2,458,083
Incurrence of debt for the acquisition of subsidiary companies. - - - - 6,387,011
Unpaid financing costs......................................... - - - - 6,692,233
2002 2001 2000
----------------- ----------------- ------------------
ACQUISITIONS OF SUBSIDIARY COMPANIES:
Accounts receivable.............................................Ps - - Ps. 2,013,734 Ps. - -
Other receivables and prepaid expenses......................... - - 7,821 190,896
Fixed assets................................................... - - 470,237 12,892,604
Intangible assets.............................................. - - 1,271 250,204
----------------- ----------------- ------------------
TOTAL NON-CASH ASSETS ACQUIRED................................. - - 2,493,063 13,333,704
----------------- ----------------- ------------------
Trade accounts payable......................................... - - (447,471) (1,565)
Salaries and social security payable........................... - - (221,925) - -
Taxes payable.................................................. - - (308,892) (40,096)
Other liabilities.............................................. - - (1,497,999) (1,848,668)
----------------- ----------------- ------------------
TOTAL LIABILITIES ASSUMED...................................... - - (2,476,287) (1,890,329)
----------------- ----------------- ------------------
VALUE OF NET NON-CASH ASSETS ACQUIRED.......................... - - 16,776 11,443,375
Cash and cash equivalents acquired............................. - - 663,897 14,531
----------------- ----------------- ------------------
VALUE OF NET ASSETS ACQUIRED................................... - - 680,673 11,457,906
----------------- ----------------- ------------------
Minority interest.............................................. - - (68) 1,888,664
Goodwill....................................................... - - 18,881,395 - -
----------------- ----------------- ------------------
PURCHASE PRICE OF ACQUIRED SUBSIDIARY COMPANIES................ - - 19,562,000 13,346,570
Cash and cash equivalents acquired............................. - - (663,897) (14,531)
----------------- ----------------- ------------------
Ps. - - Ps. 18,898,103 Ps. 13,332,039
================= ================= ==================
The accompanying notes are an integral part of these consolidated
financial statements.
f-87
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002 AND 2001 AND FOR THE YEARS ENDED JUNE 30, 2002, 2001
AND 2000
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Alto Palermo S.A. (APSA) (formerly Sociedad Anonima Mercado de Abasto
Proveedor ("SAMAP")) an Argentine real estate holding company incorporated under
the laws of Argentina, and subsidiaries (collectively, "APSA" or the "Company")
is primarily involved in the acquisition, development and operation of shopping
center properties in Argentina. APSA was formed in 1889 and, until 1984, was the
operator of the principal fresh product market in the city of Buenos Aires,
Argentina. The Company's principal asset during this period was the historic
Mercado de Abasto building which served as the location of the market from 1889
to 1984, when the Company largely ceased operations. In July 1994, IRSA
Inversiones y Representaciones Sociedad Anonima ("IRSA") acquired a controlling
interest in the Company and, subsequently, the Company resumed its real estate
operations. In December 1994, IRSA sold part of its holdings in the Company to
Parque Arauco S.A. ("Parque Arauco"). As of June 30, 2002, the Company's direct
and indirect principal shareholders are IRSA (49.7%), Parque Arauco (27.8%),
Dolphin Fund Plc (7.3%) and Goldman Sachs Emerging Markets AP/Holdings L.L.P.
("GSEM/AP Holdings L.L.P."), a limited partnership indirectly owned by Goldman
Sachs & Co. (Goldman Sachs Fund) (6.4%). The Company's shares are listed and
traded on the Buenos Aires Stock Exchange. Effective November 2000, the
Company's shares are listed and traded on the NASDAQ under the ticker symbol
"APSA".
Since recommencing operations, the Company has continued to grow through
a series of acquisitions. As of June 30, 2002, the Company owns a majority
interest in, and operates, a portfolio of seven shopping centers in Argentina,
of which five are located in the city of Buenos Aires (Abasto Shopping, Paseo
Alcorta, Alto Palermo Shopping, Patio Bullrich and Buenos Aires Design), one is
located in Greater Buenos Aires (Alto Avellaneda) and the other, in the city of
Salta (Alto NOA). The Company also has an 18.9% interest in Mendoza Plaza
Shopping Center, located in the city of Mendoza, Argentina, through its 18.9%
interest in Perez Cuesta S.A.C.I. ("Perez Cuesta"). The Company also constructs
residential apartment buildings for sale and shopping centers in order to
operate them.
Through Tarshop S.A. ("Tarshop"), a majority-owned subsidiary of the
Company, the Company originates credit card accounts, which makes it more
attractive for customers to purchase goods and services from the Company's
shopping centers retail and services businesses. Tarshop is a limited purpose
credit card company and is not affiliated with any bank. As of June 30, 2002,
"Tarshop card", the credit card, accounted for approximately 17% of the total
receivables of the Company. Tarshop has an ongoing securitization program
through which it transfers a portion of the Company's credit card customer
receivable balances to a master trust (the "Master Trust") that issues
certificates to public and private investors. See Note 12 for details. In
addition, the Company's shopping centers also accept third party credit and
debit cards such as VISA, MasterCard, American Express and others.
The Company is also engaged in e-commerce activities through its equity
investment in E-Commerce Latina S.A. Through the website Altocity.Com, the
Company replicates the shopping experience to consumers by offering the same
selection of goods and services encountered at its shopping center properties.
2. ARGENTINE ECONOMIC SITUATION AND ITS IMPACT ON THE COMPANY'S ECONOMIC AND
FINANCIAL POSITION
ECONOMIC CRISIS
Argentina is immersed in a critical economic climate. The main features
of the current economic context are a major public debt burden, high interest
rates, a significant decline in deposit levels, country risk indicators far
above normal average and an economic recession that has already lasted more than
three years. This situation has led to a significant decrease in the demand for
goods and services and a large rise in the level of unemployment. These
circumstances have affected the Government's ability to comply with existing
commitments and access to bank financing.
As from December 3, 2001 measures were issued to restrict the free
availability and circulation of cash and the transfer of foreign currency
abroad. Subsequently, the Government declared default on the external debt.
F-88
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ARGENTINE ECONOMIC SITUATION AND ITS IMPACT ON THE COMPANY'S ECONOMIC AND
FINANCIAL POSITION (CONTINUED)
On January 6, 2002 after a political crisis that resulted in the
resignation of two presidents, the Government enacted Law No. 25,561 (Law of
public emergency and exchange system reform) that involved an in-depth change of
the prevailing economic model and the amendment of the Convertibility Law in
force since March 1991. In early February the Government announced new economic
measures through Decree No. 214 (Restructuring of the financial system) dated
February 3, 2002 and Decree No. 260 (Exchange Regime) dated February 8, 2002,
substantially modifying some of the measures implemented by the Public Emergency
Law. These decrees are being complemented by other regulations being issued by
the various control agencies, some of which are pending at the date of the
issuance of these consolidated financial statements. In addition, on April 24,
2002 the Government signed an agreement with provincial governors, which,
together with other changes to the National Administration, will lay down the
basis for further measures that have yet to be issued or fully implemented.
Listed below are some of the measures adopted by the Government that are
in force at the date of issuance of these consolidated financial statements and
the effect they have had on the Company's economic and financial situation to
date.
EXCHANGE SYSTEM
On February 8, 2002 the Government issued Decree No. 260 (Exchange
Regime) establishing a single free exchange market system as from February 11,
2002, through which all transactions involving the exchange of currency are to
be traded at a rate of exchange to be freely agreed, observing the requirements
to be laid down by the Argentine Central Bank. At present, most transfers of
funds abroad require the prior approval of the Central Bank.
The new exchange regime replaces the previous convertibility legislation,
under which the previous exchange rate of Ps. 1 to US$ 1 existed for a number of
years. Also, during the six-month period ended June 30, 2002, the Argentine peso
devalued significantly, and at June 30, 2002 the exchange rate was approximately
Ps. 3.8 to US$ 1.
The devaluation of the Argentine peso resulted in a loss of approximately
Ps. 86.4 million during the year ended June 30, 2002. This loss from devaluation
was primarily the result of such devaluation on the Swap agreement described in
Note 13.
DEPOSITS IN ARGENTINE FINANCIAL INSTITUTIONS
Under the terms of Decree No. 214, as from February 3, 2002 deposits
in U.S. dollars or other foreign currencies in Argentine financial institutions
were converted to pesos at the exchange rate of Ps. 1.4 per US$ 1 or its
equivalent in such other currency. Furthermore, there are restrictions on the
availability of certain balances in current accounts and savings accounts in
dollars and fixed term deposits in pesos or dollars. The terms of ultimate
repayment of bank deposits to depositors have not been finalized and is not yet
known in what form such payment, or other compensation, will be made. As from
February 3, 2002 a reference stabilization index (CER) and an interest rate were
to be applied to these rescheduled deposits. The CER is an index that measures
the daily rate of change derived from the monthly change in the Consumer Price
Index (CPI) published by the INDEC. The application of the CER for certain
transactions has met with substantial resistance in Argentina and its
application may change substantially in the future. In addition, the possibility
exists of transforming part or all of the rescheduled deposits into Government
Bonds or other financial institutions.
FINANCIAL DEBTS IN FOREIGN CURRENCY WITH ARGENTINE FINANCIAL INSTITUTIONS
Pursuant to Decree No. 214, debts in U.S. dollars or other foreign
currencies in the Argentine financial system were converted to pesos at the rate
of exchange of Ps. 1 per US$ 1 or its equivalent in another currency. As from
February 3, 2002 a reference stabilization index (CER) and an interest rate will
be applied to these debts.
F-89
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ARGENTINE ECONOMIC SITUATION AND ITS IMPACT ON THE COMPANY'S ECONOMIC AND
FINANCIAL POSITION (CONTINUED)
CREDITS AND DEBTS NOT RELATED TO THE FINANCIAL SYSTEM
The obligation to pay money denominated in dollars or other foreign
currency that are not related to the Argentine financial system, whatever their
origin or nature, were converted to pesos at the exchange rate of Ps. 1 to US$ 1
or its equivalent in such other foreign currency. To these balances must be
applied a reference stabilization index as from February 3, 2002. If through
this provision, the resulting value of the item, good or service is higher or
lower at the time of payment, either of the parties can request a fair
readjustment of the price. If no agreement is reached, the case will be
submitted to the Courts.
At June 30, 2002, the Company had mortgages and leases receivable of
approximately Ps. 26.0 million (Note 5.c), which were originally denominated in
U.S. dollars. As a result of the Government's economic measures, such
receivables were converted to denominated Argentine pesos.
DEFERMENT OF THE DEDUCTION OF THE EXCHANGE DIFFERENCE FOR INCOME TAX
PURPOSES
The net negative results caused by this devaluation will be deductible
from income tax over the next five fiscal years, beginning in the fiscal year
ending June 30, 2002.
VALUATION OF BALANCES IN FOREIGN CURRENCY
As established by Resolution 1/2002 of the Professional Council in
Economic Sciences of the Autonomous City of Buenos Aires and Resolution No. 398
of the National Securities Commission, the Company has given recognition to the
effects of the devaluation of the Argentine currency as from January 6, 2002.
The exchange differences arising during the year were charged to income
and disclosed under "Financial results, net". See Note 8.
IMPACT OF CURRENT ECONOMIC CONDITIONS ON THE COMPANY
The continued deterioration of the Argentine economy, the Argentine
Government's adoption of the described economic measures and the devaluation of
the Argentine Peso negatively impacted the Company.
During the year ended June 30, 2002, the Company has suffered a net loss
of Ps. 42,402,920 and as of this date has a working capital deficiency of Ps.
34,703,361. Additionally, as described in note 5.g., as of June 30, 2002 the
Company was not in compliance with certain restrictive financial covenants
constituting events of default that permits the holders of such notes to
accelerate their maturity. On August 22, 2002, the Company obtained a limited
waiver from the holders of the Senior Notes with respect to such covenant
violations. Management is in the process of negotiating appropriate changes of
certain terms of the Senior Notes with the objective of modify existing
financial covenants. Management estimates that it is more likely than not that
the Senior Notes Agreement will be renegotiated on terms no less favorable to
the Company.
After the end of the year the Company issued unsecured convertible Notes
for US$ 50 million (see Note 14) which will enable it to substantially
restructure the consolidated financial debt, having redeemed Senior Notes on
August 26 and 28, 2002 for a principal amount of Ps. 47.0 million of which Ps.
17.5 million correspond to Class A2 and Ps. 29.5 million to Class B2. This
operation generated consolidated income of Ps. 13.1 million (net of amortization
of deferred financing costs associated with the redeemed obligations) which will
be recognized in the coming year. In addition, short-term bank debt amounting to
Ps. 24.3 million was repaid.
F-90
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PREPARATION OF FINANCIAL STATEMENTS
a. BASIS OF PRESENTATION
The consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles used in Argentina
("Argentine GAAP"), and the regulations of the Comision Nacional de Valores
("CNV"), the National Securities Commission in Argentina, which differ in
certain significant respects from generally accepted accounting principles in
the United States of America ("US GAAP"). Such differences involve methods of
measuring the amounts shown in the consolidated financial statements, as well as
additional disclosures required by US GAAP and Regulation S-X of the Securities
and Exchange Commission (SEC). A description of the significant differences
between Argentine GAAP and US GAAP as they relate to the Company are set forth
in Note 15 to these consolidated financial statements.
b. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries over which the Company has effective control. Investments
in companies in which the Company exercises significant influence, but not
control, are accounted for under the equity method.
All significant intercompany balances and transactions have been
eliminated in consolidation.
A description of the subsidiaries with their respective percentage of
capital stock owned is presented as follows:
SUBSIDIARIES PERCENTAGE OF CAPITAL STOCK OWNED AS OF JUNE 30,
(i)
---------------------------------------------------------- --------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Emprendimiento Recoleta S.A. (iii)....................... 51% 51% 51%
Tarshop S.A.............................................. 80% 80% 80%
Shopping Neuquen S.A..................................... 95% 95% 95%
Inversora del Puerto S.A................................. 100% 100% 100%
Alto Invest S.A.......................................... 76% 76% 61%
Shopping Alto Palermo S.A................................ 100% 100% 100%
Fibesa S.A............................................... 100% 100% --
Tres Ce S.A.............................................. (ii) (ii) 100%
Pentigras S.A............................................ (ii) (ii) 100%
Inversha S.A............................................. (ii) (ii) 100%
Alto Shopping S.A........................................ (ii) (ii) 100%
(i) Percentage of equity interest owned has been rounded.
(ii) These wholly-owned subsidiaries of the Company were merged with and into
the Company effective July 1, 2000. The Company was the surviving entity
after the merger.
(iii) As of June 30, 2002 the shares of Emprendimiento Recoleta S.A. ("ERSA")
are pledged in favor of Banco de la Provincia de Buenos Aires as
collateral for certain obligations of the Company under the concession of
Buenos Aires Design shopping center. These obligations were fulfilled as
of the date of these consolidated financial statements.
c. PRESENTATION OF FINANCIAL STATEMENTS IN CONSTANT PESOS
The consolidated financial statements have been prepared in accordance
with Technical Resolution No. 6 of the Argentine Federation of Professional
Councils in Economic Sciences, as modified by Technical Resolution No. 19, which
require the recognition of the effects of inflation. Accordingly, starting from
January 1, 2002 the Company's financial statements are being prepared in
constant Argentine pesos. Such restatement is computed at each balance sheet
date, using the Argentine general wholesale price index ("WPI") published by the
Argentine Statistics and Census Institute, as follows:
F-91
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PREPARATION OF FINANCIAL STATEMENTS (CONTINUED)
c. PRESENTATION OF FINANCIAL STATEMENTS IN CONSTANT PESOS (CONTINUED)
o Nonmonetary items and statement of operations amounts are adjusted
in terms of the then-current general purchasing power.
o Monetary items are not adjusted as such items are, by their
nature, stated in terms of current general purchasing power in the
financial statements.
o Monetary gains or losses are recognized in the statement of
operations, reflecting the effect of holding monetary items.
The Company used a conversion factor of 1.9562 to restate the financial
statements in constant Argentine pesos of June 30, 2002.
The above pronouncements also required that years ending prior to 2002 be
adjusted for inflation for comparative purposes. Therefore the accompanying
financial statements as of June 30, 2001 and 2000 have been updated to pesos of
general purchasing power at June 30, 2002 to reflect changes in WPI from the
financial statements dates to June 30, 2002.
d. RECLASSIFICATIONS
Certain reclassifications of prior year information have been made to
conform to the current year presentation.
e. ACQUISITION OF BUSINESS
Year ended June 30, 2001
(i) Fibesa S.A.
In September 2000, the Company completed the acquisition of the 99.99%
equity interest in Fibesa S.A., ("FIBESA"), a related company engaged in real
estate brokerage activities for the Company's shopping centers, for total
consideration of US$ 10.0 million. The acquisition has been accounted for by the
purchase method of accounting, and accordingly, the purchase price has been
allocated to the assets acquired and the liabilities assumed based on the
estimated fair values at the date of acquisition. Goodwill of Ps. 18.9 million
represents the excess of the purchase price over the net identifiable tangible
and other intangible assets and is being amortized under the straight line
method over 10 years. The results of operations of FIBESA are included in the
accounts of the Company commencing as of July 1, 2000, the date of acquisition
for accounting purposes pursuant to the agreement.
Year ended June 30, 2000
(i) Alto Invest S.A.
On March 3, 2000, the Company had acquired a 61% equity interest in Alto
Invest S.A. ("Alto Invest") for de minimis consideration. Alto Invest was a
web-based provider of comprehensive investing tools, planning and financial
information and primarily generated its revenues from website advertising fees
and commissions charged to customers for on-line trading. Effective May 2001,
Alto Invest ceased operations and is actively pursuing to evaluate alternative
investment projects.
(ii) Tres Ce S.A.
On January 3, 2000, the Company acquired the remaining 20% equity
interest in Tres Ce S.A. for Ps. 4.9 million in cash.
F-92
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PREPARATION OF FINANCIAL STATEMENTS (CONTINUED)
e. ACQUISITION OF BUSINESS (CONTINUED)
(iii) Acquisition of Inversora del Puerto S.A. ("Inversora del Puerto")
On July 8, 1999, the Company acquired a 99.9% interest in Inversora del
Puerto, a wholly-owned subsidiary of IRSA, for de minimis consideration.
Inversora del Puerto had no significant activity prior to the acquisition by the
Company. Thereafter, the Company contributed Ps. 6.1 million to this company. On
the same date, Inversora del Puerto acquired a property located near Paseo
Alcorta shopping center for US$ 3.7 million, of which US$ 2.1 million was paid
in cash and the remaining balance was paid in July 2000.
(iv) Acquisition of Shopping Neuquen S.A. ("Shopping Neuquen")
On July 6, 1999, the Company had acquired a 94.6% interest in Shopping
Neuquen for US$ 4.2 million in cash. Shopping Neuquen's sole asset comprised of
a piece of land with preliminary governmental approval for construction of a
shopping center on the site. The Company had paid US$ 0.9 million on August 20,
1999, with the remaining US$ 3.3 million to be paid on the earlier of (i) the
opening of the shopping center or (ii) July 5, 2001.
During June 2001, the Company entered into negotiations with the
Municipality of Neuquen to reschedule the original timing of construction. Also,
the Company requested permission to sell a portion of the land to third parties.
Construction is rescheduled to commence on December 15, 2002 under the Company's
new proposed scheme. As of the date of the consolidated financial statements,
the proposal is being analyzed by governmental authorities. In the unlikely
event that the proposal is not accepted by the local governmental authorities,
the sale may be cancelled and Shopping Neuquen may not recover its original
investment. Although management anticipates a favorable resolution to the
Company's proposal, there can be no assurance as to the final outcome of the
negotiations.
f. FORMATION OF COMPANIES
Year ended June 30, 2000
(i) Altocity.Com S.A.
The Company's e-business operations are conducted by E-Commerce Latina
S.A., a holding company organized in Argentina in December 1999 ("E-Commerce
Latina" or the "holding company"). E-Commerce Latina is an Internet joint
venture between the Company and Telefonica de Argentina S.A. ("Telefonica"). In
December 1999, 50% interests in the holding company were issued to the Company
and Telefonica. Prior to the formation of the holding company, the Company had
formed Altocity.Com S.A. ("Altocity.Com"), a development stage company, for the
purpose of delivering e-commerce services that provide customers with the
information necessary to make personalized online buying decisions and gives
retailers the ability to reach a large customer base. At the time of the
formation of E-Commerce Latina, Altocity.Com had incurred only insignificant
preoperating costs.
In connection with the formation of the holding company, the Company and
Telefonica entered into an agreement on December 15, 1999 (the "Shareholders
Agreement"), under which Telefonica is required to contribute to the holding
company US$ 5.0 million in cash upon consummation of the Shareholders Agreement,
and US$ 5.0 million in cash on June 15, 2000 in return for its 50% ownership
position. The Company contributed intellectual property rights in exchange for
its ownership interest. The Company's non-cash capital contribution was recorded
at the Company's historical cost basis, which was zero. The Company and
Telefonica agreed to: (i) make capital contributions of up to US$ 10.0 million
based on its ownership interest and, (ii) make optional capital contributions to
be approved by E-Commerce Latina Board of Director's of up to US$ 12.0 million
to develop new lines of business, of which 75% to be contributed by Telefonica
and 25% by the Company. On April 30, 2001, the Company and Telefonica
contributed Ps. 19.6 million based on its respective ownership interests.
F-93
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PREPARATION OF FINANCIAL STATEMENTS (CONTINUED)
f. FORMATION OF COMPANIES (CONTINUED)
In January 2000, the holding company entered into a stock option
agreement with Consultores Internet Managers Ltd. ("CIM"), pursuant to which
options were granted to purchase class B shares of Altocity.Com, representing
15% of its common stock. CIM is a special-purpose Cayman Islands' corporation
created to act on behalf of Altocity.Com's management and is represented by an
independent attorney-in-fact. Pursuant to the terms of the agreement, options
were granted for a period up to eight years and at an exercise price to be
determined by the quotient of: (i) the original value of class B shares at the
time of the contribution to Altocity.Com by the holding company, plus interest
accrued at an annual fixed interest rate of 14% through the exercise date of the
option over, or (ii) the total number of class B shares owned by the holding
company at the exercise date of the option. CIM has a vested interest in 50% of
the underlying shares within 30 days after the grant date and the remaining 50%
will vest upon the third anniversary of the grant date. The option was granted
to CIM to be allocated by it among the management of Altocity.com as an
incentive compensation for their services. As of June 30, 2002, no individual
awards have been determined for participating employees under this option. Upon
exercise of the option, CIM's sole asset will be its 15% interest in
Altocity.com.
g. OTHER TRANSACTIONS
In June 2000, the Company transferred to its wholly-owned subsidiary
Shopping Alto Palermo S.A. ("SAPSA") the Alto Palermo shopping center property
and related tenant list.
h. USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting years. Estimates are used when accounting for the allowance
for doubtful accounts and mortgage receivable, depreciation, impairment of
long-lived assets, income taxes and contingencies. Actual results could differ
from those estimates.
4. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Company in the preparation of these consolidated financial statements.
a. REVENUE RECOGNITION
The Company primarily derives its revenues from leases and services
operations, the sale and development of properties, credit card operations and
to a lesser extent, from e-commerce activities. See Note 10 for details on the
Company's business segments.
o Leases and services
Leases with tenants are accounted for as operating leases. Tenants are
generally charged a rent, which consists of the higher of: (i) a monthly base
rent (the "Base Rent") and (ii) a specified percentage of the tenant's monthly
gross retail sales (the "Percentage Rent") (which generally ranges between 4%
and 8% of tenant's gross sales). Furthermore, pursuant to the rent escalation
clause in most leases, a tenant's Base Rent generally increases between 4% and
7% each year during the term of the lease. Minimum rental income is recognized
on a straight-line basis over the term of the lease and unpaid rents are
included in accounts receivable in the accompanying consolidated balance sheets.
Certain lease agreements contain provisions, which provide for rents
based on a percentage of sales or based on a percentage of sales volume above a
specified threshold. The Company determines the compliance with specific targets
and calculates the additional rent on a monthly basis as provided for in the
contracts. Thus, these contingent rents are not recognized until the required
thresholds are exceeded.
F-94
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
a. REVENUE RECOGNITION (CONTINUED)
o Leases and services (continued)
Generally, the Company's lease agreements vary from 36 to 120 months. Law
No. 24,808 provides that tenants may rescind commercial lease agreements after
the initial six months, upon not less than 60 days' written notice, subject to
penalties which vary from one to one and a half months rent if the tenant
rescinds during the first year of its lease, and one month of rent if the tenant
rescinds after the first year of its lease.
The Company also charges its tenants a monthly administration fee,
prorated among the tenants according to their leases, which varies from shopping
center to shopping center, relating to the administration and maintenance of the
common area and the administration of contributions made by tenants to finance
promotional efforts for the overall shopping centers' operations. Administration
fees are recognized monthly when earned.
In addition to rent, tenants are generally charged "admission rights", a
non-refundable admission fee that tenants may be required to pay upon entering
into a lease and upon lease renewal. Admission right is normally paid in one
lump sum or in a small number of monthly installments. Admission rights are
recognized using the straight-line method over the life of the respective lease
agreements. Furthermore, the lease agreements generally provide for the
reimbursement of real estate taxes, insurance, advertising and certain common
area maintenance costs. These additional rents and tenant reimbursements are
accounted for on the accrual basis.
As discussed in Note 3.e(i), in September 2000, the Company completed the
acquisition of the 99.99% equity interest of FIBESA, a related company. FIBESA
acts as the leasing agent for the Company bringing together the Company and
potential lessees for the retail space available in certain of the Company's
shopping centers. FIBESA's revenues are derived primarily from success fees
calculated as a percentage of the final rental income value for both the lessee
and the Company. Revenues related to success fees are recognized at the time
that the transaction is successfully concluded. A transaction is considered
successfully concluded when both parties have signed the related lease contract.
o Sales and development properties
The Company records revenue from the sale of properties when all of the
following criteria are met:
(i) the sale has been consummated;
(ii) the Company has determined that the buyer's initial and continuing
investments are adequate to demonstrate a commitment to pay for
the property;
(iii) the Company's receivable is not subject to future subordination;
and
(iv) the Company has transferred to the buyer the risk of ownership,
and does not have a continuing involvement in the property.
The Company uses the percentage-of-completion method of accounting with
respect to sales of development properties under construction effected under
fixed-priced contracts. Under this method, revenue is recognized based on the
ratio of costs incurred to total estimated costs applied to the total contract
price. The Company does not commence revenue and cost recognition until such
time as the decision to proceed with the project is made and construction
activities have begun.
The percentage-of-completion method of accounting requires management to
prepare budgeted costs (i.e.: the estimated costs of completion) in connection
with sales of properties / units. All changes to estimated costs of completion
are incorporated into revised estimates during the contract period.
o Credit card operations
Revenues derived from credit card transactions consist of commissions and
financing income. Commissions are recognized at the time the merchants'
transactions are processed, while financing income is recognized when earned.
F-95
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
a. REVENUE RECOGNITION (CONTINUED)
o E-commerce activities
The Company primarily conducts e-commerce activities through E-Commerce
Latina, a holding company organized in Argentina in December 1999 as an Internet
joint venture between the Company and Telefonica. E-Commerce Latina owns
Altocity.Com, a development stage company. Altocity.Com primarily derives its
revenues from monthly maintenance fees charged to suppliers, from sales of
products on its website and, to a lesser extent, from sales of advertising and
sponsorships. The Company accounts for its indirect investment in Altocity.Com
under the equity method of accounting.
For the years ended June 30, 2002, 2001 and 2000, net revenues from
Altocity.Com totaled Ps. 1.3 million, Ps. 2.0 million and Ps. 0.6 million, and
had a net loss of Ps. 15.1 million, Ps. 11.4 million and Ps. 2.0 million,
respectively.
In addition, the Company holds an interest in Alto Invest, a web-based
provider of comprehensive investing tools including planning and financial
information and a means to buy and sell financial assets. Alto Invest generated
insignificant revenues since its inception, primarily from advertising fees and
commissions charged to customers for online trading. Effective May 2001, Alto
Invest ceased all operations.
b. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less, to be cash equivalents.
c. INVESTMENTS
(i)Current
Current investments include time deposits which are valued at their cost
plus accrued interest and mutual funds which are carried at market value. Time
deposits have original maturities of less than three months. Mutual funds invest
in time deposits with original maturities of less than three months at purchase.
Unrealized gains and losses on time deposits and mutual funds are included in
financial results, net, in the consolidated statements of operations.
Current investments include tax credit certificates which are valued at
their technical value at the end of the year, as they were used to settle tax
obligations after the closing of the year for that amount.
Current investments also include a retained interest in transferred
credit card receivables pursuant to the securitization program of credit card
receivables of the Company (See Note 12 for details).
(ii) Non-current
Equity investments in unconsolidated affiliated companies, representing
between 20% and 50% of the capital stock in such companies, have been accounted
for under the equity method. During the year ended June 30, 2001, the Company
decreased its ownership percentage in Perez Cuesta from 25% to 18.9%. This
investment is still accounted for under the equity method of accounting, since
the Company is in a position to exercise significant influence over the
operating and financial policies of same.
Non-current investments also include a retained interest in transferred
credit card receivables pursuant to the securitization program of credit card
receivables of the Company (See Note 12 for details).
F-96
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d. INVENTORY
Inventory includes all direct contract costs such as land, materials and
construction fees associated with development properties. Contract costs and
capitalized interests are charged to the statement of operations as the related
revenue is recognized, using the percentage-of-completion method. Inventory
principally consists of the Torres de Abasto construction project, a residential
apartment complex located near the Abasto Shopping Center, and a piece of land
located near Paseo Alcorta Shopping Center. Torres de Abasto project has been
completed as of June 30, 2000. The Company anticipates the construction of an
office-building complex on the land located near Paseo Alcorta Shopping Center.
No interest cost was capitalized in this connection during the years
ended June 30, 2002 and 2001. Interest costs capitalized during the year ended
June 30, 2000 amounted to Ps. 5.9 million.
At June 30, 2002, the Company recognized an impairment loss generated by
the holding of non-current inventories amounting to Ps. 5.6 million.
Inventory is classified as current or non-current based on the estimated
date of sale and the time at which the related receivables are expected to be
collected.
e. FIXED ASSETS, NET
Properties purchased for rental purposes are classified as fixed assets.
Fixed assets are stated at cost, adjusted for inflation at the end of the year,
as defined in note 3.c., less accumulated depreciation, except for a parcel of
land acquired prior to June 30, 1986, which was originally recorded at its
appraised value as of such date. This appraisal increased the carrying value of
the land by Ps. 3.5 million, which was recorded against an appraisal revaluation
reserve account in the shareholders' equity. This appraisal revaluation reserve
will be amortized to income once the land is disposed of or its value becomes
impaired.
Depreciation expense has been determined using the straight-line method
over the estimated useful lives of the related assets as specified below:
Asset Estimated useful life (years)
-------------------------------- -------------------------------------
- Properties:
Shopping centers Between 19 and 31
Other 50
- Leasehold improvements Between 5 and 20
- Facilities Between 10 and 20
- Furniture and fixtures Between 8 and 10
- Vehicles 3
- Computer equipment Between 3 and 4
- Software Between 3 and 5
- Other 10
The Company capitalizes interest on real estate development projects.
During the years ended June 30, 2002 and 2001, there was no capitalization of
interest, as the Company did not develop any real estate project. Interest costs
capitalized during the year ended June 30, 2000 were Ps. 17.4 million.
The cost of maintenance and repairs is charged to expense as incurred.
The cost of significant renewals and improvements are added to the carrying
amount of the respective asset.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is reflected in the consolidated statement of operations.
At June 30, 2002 the Company recognized an impairment loss generated by
the holding of fixed assets amounting to Ps. 50.3 million.
F-97
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
f. SOFTWARE OBTAINED OR DEVELOPED FOR INTERNAL USE
The Company capitalizes certain costs associated with the development of
computer software for internal use. Costs capitalized during the years ended
June 30, 2002, 2001 and 2000 were Ps. 0.3 million, Ps. 0.5 million and Ps. 1.0
million, respectively. These costs are being amortized on a straight-line basis
between 3 and 5 years.
g. WEB-SITE DEVELOPMENT COSTS
The Company capitalizes certain costs incurred in the development of the
Company's websites. Such costs are amortized under the straight-line method over
a period of 2 years.
h. INTANGIBLE ASSETS, NET
(i) Deferred financing costs
Represent deferred expenses incurred in connection with the issuance of
Senior Notes and Notes. These expenses are stated at cost, adjusted for
inflation at the end of the year as described in note 3.c., less accumulated
amortization. Amortization is calculated using the straight-line method over the
term of the respective obligations (ranging from 4 to 5 years).
(ii) Expenses related to the securitization of receivables
Expenses related to the securitization of receivables represent expenses
related to the on-going securitization program of credit card receivables. These
expenses are amortized on a straight-line basis over a two-year period.
(iii) Preoperating expenses
Represent expenses incurred relating to pre-opening activities of certain
shopping centers and other expenses incurred in connection with e-business
project evaluations. These expenses are amortized on a straight-line basis over
a three-year period commencing upon the opening of the shopping center or the
launching of the project.
(iv) Advertising expenses
Advertising expenses relate to the Torres de Abasto project, the opening
of Abasto Shopping and promotion costs related to Paseo Alcorta. The expenses
incurred in relation to Torres de Abasto project are recognized in the statement
of operations as determined under the percentage-of-completion method. Other
advertising expenses are amortized under the straight-line method over a term of
3 years. Capitalized advertising expenses were Ps. 0.04 million during the year
ended June 30, 2000.
(v) Investment projects
Investment projects represent expenses primarily related to marketing
efforts incurred by the Company for the selling of merchandise through certain
means of communication. These costs are capitalized and amortized to income
under the straight-line method as from the start up date of the project. These
expenses are written off upon abandonment or disposal of project.
F-98
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
h. INTANGIBLE ASSETS, NET (CONTINUED)
(vi) Goodwill
Goodwill, representing the excess of cost over the fair value of
net identifiable assets acquired, is stated at cost adjusted for inflation at
the end of the year, as defined in note 3.c, and is amortized on a straight-line
basis over its estimated economic life, not exceeding 10 years. The Company
periodically evaluates the carrying value of goodwill if the facts and
circumstances, such as significant declines in sales, earnings or cash flows or
material adverse changes in the business climate, suggest that it may be
impaired. If any impairment is indicated as a result of such reviews, the
Company would measure it using techniques such as comparing the undiscounted
cash flows of the business to its book value including goodwill or by obtaining
appraisals of the related business. No impairment losses have been recognized in
any of the years presented herein.
(vii) Tenant list - Patio Bullrich
This item represents the acquired tenant list of the Patio Bullrich
shopping mall which is stated at cost adjusted for inflation at the end of the
year, as defined in note 3.c, and is amortized using the straight-line method
over a five-year period.
i. FOREIGN CURRENCY ASSETS AND LIABILITIES
Foreign currency transaction gains and losses are recorded within
financial results, net in the consolidated statements of operations.
j. INCOME TAX PROVISION
The Company and its subsidiaries calculate their income taxes on a
separate tax basis. The statutory income tax rate was 35% for all the years
presented. The Company does not recognize deferred taxes.
k. ASSET TAX PROVISION
The Company is subject to the Asset Tax Law ("Impuesto a la Ganancia
Minima Presunta"), which became effective for fiscal periods ending after
December 30, 1998. The asset tax is calculated on an individual entity basis at
the statutory tax rate of 1%, and is based upon the taxable assets of each
Argentinean entity as of the end of the year. Pursuant to this law, the Company
is required to pay the greater of the income tax or the asset tax. Any excess
of the asset tax over the income tax may be carried forward and recognized as a
payment on account of future income tax charges. Originally asset tax
carryforwards were available for utilization within a four-year period.
Pursuant to Law No. 25,360 effective December 2000, the utilization period has
been extended to ten years. Accordingly, the asset tax liability for the year
ended June 30, 2002 has been recognized as a non current asset since in the
opinion of management it is more likely than not that the Company will utilize
such asset against future income tax charges within the next ten years.
l. PROVISIONS FOR CONTINGENCIES AND ALLOWANCES
The Company provides for losses relating to accounts and mortgage
receivable. The allowance for losses is based on management's evaluation of
various factors, including the credit risk of customers, historical trends and
other information. While management uses the information available to make
evaluations, future adjustments to the allowance may be necessary if future
economic conditions differ substantially from the assumptions used in making the
evaluations. Management has considered all events and/or transactions that are
subject to reasonable and normal methods of estimations, and the consolidated
financial statements reflect that consideration.
F-99
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
l. PROVISIONS FOR CONTINGENCIES AND ALLOWANCES (CONTINUED)
The Company has certain contingent liabilities with respect to existing
or potential claims, lawsuits and other proceedings, including those involving
labor and other matters. The Company accrues liabilities when it is probable
that future costs will be incurred and such costs can be reasonably estimated.
Such accruals are based on developments to date, the Company's estimates of the
outcomes of these matters and the Company's lawyers' experience in contesting,
litigating and settling other matters. As the scope of the liabilities becomes
better defined, there will be changes in the estimates of future costs, which
could have a material effect on the Company's future results of operations and
financial condition or liquidity.
m. ADVERTISING EXPENSES
The Company generally expenses advertising and promotion costs as
incurred with the exception of advertising and promotion expenses incurred to
market real estate projects. See note 4.h. (iv) for details. Advertising and
promotion expenses were approximately Ps. 3.2 million, Ps. 5.6 million and Ps.
20.0 million for the years ended June 30, 2002, 2001 and 2000, respectively.
n. PENSION INFORMATION
The Company does not maintain any pension plans. Argentine laws provide
for pension benefits to be paid to retired employees from government pension
plans and/or private fund managed plans to which employees may elect to
contribute.
The Company does not sponsor any employee stock ownership plans.
o. IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of its long-lived
assets for impairment. The carrying value of a long-lived asset is considered
impaired by the Company when the expected cash flows, undiscounted and without
interest, from such asset is separately identifiable and less than its carrying
value. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair market value of the long-lived asset, as
mentioned in Notes 4.d and 4.e. Fair market value is determined primarily using
the anticipated cash flows discounted at a rate commensurate with the risk
involved or based on independent appraisals.
p. VACATION EXPENSES
Vacation expenses are fully accrued in the period the employee renders
services to earn such vacation.
q. HEDGING INSTRUMENTS
From time to time, the Company utilizes certain financial instruments to
manage its foreign currency and interest rate exposures. The Company does not
engage in trading or other speculative use of these financial instruments. Also,
the Company has not utilized financial instruments to hedge anticipated
transactions. For details on the Company's derivative instruments activity, see
Note 13.
- Interest rate swaps
Interest rate swaps are used to effectively hedge certain interest rate
exposures. Interest rate swap agreements are accounted for on an accrual basis,
with the net receivable or payable recognized as an adjustment to interest
expense. The related accrued receivable or payable is included as an adjustment
to interest payable. The fair value of the interest rate swap agreements is not
recognized in the accompanying consolidated financial statements.
F-100
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
q. HEDGING INSTRUMENTS (CONTINUED)
- Foreign currency forward-exchange contracts
The Company enters into foreign currency forward-exchange contracts with
maturities of three months or less. These forward contracts may be rolled over
to provide continuing coverage throughout the fiscal year. Consistent with the
Company's risk management policies, the Company uses foreign currency
forward-exchange contracts as a supplement to reduce its overall borrowing
costs. The fair value of the forward foreign exchange contracts is not
recognized in the accompanying consolidated financial statements.
5. DETAILS OF BALANCE SHEETS ACCOUNTS
a. CASH AND BANKS:
AS OF JUNE 30,
------------------------------------------------------
2002 2001
------------------------- -------------------------
Cash on hand.......................................... Ps. 6,208,598 Ps. 1,931,681
Bank accounts......................................... 6,632,976 11,514,194
------------------------- -------------------------
Ps. 12,841,574 Ps. 13,445,875
========================= =========================
b. INVESTMENTS:
AS OF JUNE 30,
------------------------------------------------------
2002 2001
------------------------- -------------------------
CURRENT
Time deposits....................................... Ps. 243,125 Ps. --
Mutual funds........................................ 126,238 5,434,225
Tax credit certificates............................. 1,436,408 --
Retained interest in transferred credit card
receivable (i).................................... 7,380,811 10,677,416
------------------------- -------------------------
Ps. 9,186,582 Ps. 16,111,641
========================= =========================
NON-CURRENT
Affiliated companies (ii)........................... Ps. 18,224,001 Ps. 22,909,409
Retained interest in transferred credit card
receivable (i).................................... 4,151,912 7,452,559
Government bonds.................................... -- 88,029
------------------------- -------------------------
Ps. 22,375,913 Ps. 30,449,997
========================= =========================
(i) As part of its domestic credit card securitization program, the
Company transfers credit card receivables to a Trust in exchange for
certificates representing undivided interests in such receivables. The Company
classified its retained interest in transferred credit card receivables into a
separate balance sheet account and presented the related charge-offs of
transferred credit card receivables as a reduction of credit revenues. The
retained interest consists of certificates held by the Company (See Note 12 for
details).
(ii) Represents the Company's share of affiliates' equity accounted for
under the equity method. As of June 30, 2002, the Company owned: (i) a 18.9%
interest in Perez Cuesta, and (ii) a 49% in Altocity.Com through a 50% interest
in E-Commerce Latina. Between December 2000 and June 2001, Perez Cuesta sold its
51% interest in the Bahia Blanca Plaza Shopping. As of June 30, 2002, retained
earnings (losses) of Perez Cuesta and E-Commerce Latina totaled Ps. 3.3 million
and Ps. (28.2) million, respectively. As of June 30, 2001, retained losses of
Perez Cuesta and E-Commerce Latina totaled Ps. 10.6 million and Ps. 13.3
million, respectively.
F-101
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DETAILS OF BALANCE SHEETS ACCOUNTS (CONTINUED)
c. ACCOUNTS RECEIVABLE, NET:
AS OF JUNE 30,
-------------------------------------------------------
2002 2001
------------------------- -------------------------
CURRENT
Leases and services receivable..................... Ps. 18,531,381 Ps. 22,344,302
Credit card receivable............................. 10,825,811 45,228,405
Checks to be deposited............................. 12,949,030 40,088,065
Debtors under legal proceedings.................... 20,772,542 27,752,713
Pass-through expenses receivable (i)............... 8,242,724 14,128,705
Mortgage receivable (ii)........................... 276,714 344,812
Other.............................................. -- 50,777
Less:
Allowance for doubtful accounts (Note 16.c.)....... (50,214,281) (48,697,561)
------------------------- -------------------------
Ps. 21,383,921 Ps. 101,240,218
========================= =========================
NON-CURRENT
Credit card receivable............................. Ps. 1,953,691 Ps. 2,131,577
Mortgage receivable (ii)........................... 1,392,055 3,561,682
Leases and services receivable..................... 1,371,959 3,133,293
Pass-through expenses receivable (i)............... -- 735,830
Less:
Allowance for doubtful accounts (Note 16.c.)....... (66,634) (62,976)
------------------------- -------------------------
Ps. 4,651,071 Ps. 9,499,406
========================= =========================
(i) Pass-through expenses receivable primarily represent maintenance and
other operating costs relating to the common area of shopping centers paid by
the Company on behalf of tenants.
(ii) Mortgage receivable consist of fixed-rate mortgages. At June 30,
2002, the remaining principal balance consists of mortgage receivable from
several borrowers. The amount due from the largest individual borrower was Ps.
92,735 at a contractual interest rate of 15%.
d. OTHER RECEIVABLES AND PREPAID EXPENSES, NET:
AS OF JUNE 30,
------------------------------------------------------
2002 2001
------------------------- -------------------------
CURRENT
Prepaid expenses..................................... Ps. 1,940,254 Ps. 866,600
Related parties (Note 7)............................. 1,008,793 683,655
Guarantee deposits (i)............................... 713,988 5,005,838
Income tax advances, net............................. 436,899 8,334,290
Prepaid gross sales tax.............................. 251,166 699,814
Other tax credits.................................... 121,283 386,175
Dividends receivable (Note 7)........................ 75,000 146,716
Prepaid services..................................... -- 2,571,373
Value Added Tax ("VAT") receivable................... -- 189,516
Other................................................ 456,113 3,182,265
------------------------- -------------------------
Ps. 5,003,496 Ps. 22,066,242
========================= =========================
F-102
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DETAILS OF BALANCE SHEETS ACCOUNTS (CONTINUED)
d. OTHER RECEIVABLES AND PREPAID EXPENSES, NET (CONTINUED):
AS OF JUNE 30,
------------------------------------------------------
2002 2001
------------------------- -------------------------
NON-CURRENT
Asset tax credits.................................... Ps. 21,026,018 Ps. 23,733,357
Guarantee deposits................................... 3,259,500 205,364
Mortgage receivable (ii)............................. 2,208,275 4,319,828
VAT receivable....................................... 570,580 1,090,783
Prepaid gross sales tax.............................. 384,324 951,496
Other................................................ 77,688 64,023
Less:
Allowance for doubtful mortgage receivable
(Note 16.c.) (ii).................................... (2,208,275) (1,778,374)
------------------------- -------------------------
Ps. 25,318,110 Ps. 28,586,477
========================= =========================
(i) Includes primarily Ps. 0.1 million related to a deposit required as
collateral for certain labor lawsuits of the Company.
(ii) Corresponds to a loan granted to an unaffiliated third party,
accruing interest at an annual fixed rate of 14%. This loan is collateralized by
a mortgage on certain properties. During fiscal year 2001, this debtor filed for
bankruptcy. As of June 30, 2002 the Company has recognized an allowance for the
entire balance based on the opinion of its legal counsel.
e. TRADE ACCOUNTS PAYABLE:
AS OF JUNE 30,
------------------------------------------------------
2002 2001
------------------------- -------------------------
CURRENT
Suppliers............................................ Ps. 6,637,243 Ps. 12,512,286
Credit card payable.................................. 7,461,633 14,690,113
Accruals............................................. 1,564,809 6,025,666
Imports payable...................................... 1,329,503 684,296
------------------------- -------------------------
Ps. 16,993,188 Ps. 33,912,361
========================= =========================
NON-CURRENT
Imports payable...................................... Ps. 6,117,088 Ps. 3,776,183
------------------------- -------------------------
Ps. 6,117,088 Ps. 3,776,183
========================= =========================
F-103
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DETAILS OF BALANCE SHEETS ACCOUNTS (CONTINUED)
f. CUSTOMER ADVANCES:
AS OF JUNE 30,
------------------------------------------------------
2002 2001
------------------------- -------------------------
CURRENT
Admission rights (i)................................ Ps. 6,024,396 Ps. 20,372,927
Lease advances (ii)................................. 2,248,520 9,510,424
Torres Abasto advances.............................. 577,431 1,479,688
Guarantee deposits.................................. 184,495 360,909
------------------------- -------------------------
Ps. 9,034,842 Ps. 31,723,948
========================= =========================
NON-CURRENT
Admission rights (i)................................ Ps. 14,900,388 Ps. 35,809,748
Lease advances (ii)................................. 10,084,662 22,004,852
Guarantee deposits.................................. 276,418 609,137
------------------------- -------------------------
Ps. 25,261,468 Ps. 58,423,737
========================= =========================
(i) Admission rights represent non-refundable fees received from tenants
upon entering into lease agreements with the Company. These amounts are deferred
and amortized to income under the straight-line basis over the respective terms
of the agreements. Also, the non-current balance includes an advance of Ps. 4.5
million from NAI in connection with the Rosario Project.
(ii) Lease advances include current and non-current balances of Ps. 1.2
million and Ps. 9.0 million as of June 30, 2002, respectively, and US$ 1.2
million and US$ 9.7 million as of June 30, 2001, respectively, related to
advances received from Hoyts Cinemas ("Hoyts") for the construction of the movie
theater complexes at the Abasto and Alto Noa Shopping Centers. These advances
accrue interest at the six-month London Inter-Bank Offered Rate ("LIBOR") plus
2-2.25%. As of June 30, 2002 the six-month LIBOR was 1.95%. Based on the
agreement between the Company and Hoyts, the Company settles the advances by
offsetting them against lease expense owed by Hoyts for the space it rents.
g. SHORT-TERM AND LONG-TERM DEBT:
SHORT-TERM DEBT CONSISTS OF THE FOLLOWING:
AS OF JUNE 30,
------------------------------------------------------
2002 2001
------------------------- -------------------------
Uncollateralized loans plus accrued interest (i)..... Ps. 16,058,763 Ps. 66,255,650
Senior Notes plus accrued interest (ii).............. 17,738,306 30,829,911
Accrued interest on Notes (iii)...................... 1,578,483 4,490,880
Seller financing plus accrued interest (iv).......... 3,632,838 7,102,166
Mortgage loans (v)................................... 129,168 541,754
------------------------- -------------------------
Ps. 39,137,558 Ps. 109,220,361
========================= =========================
F-104
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DETAILS OF BALANCE SHEETS ACCOUNTS (CONTINUED)
g. SHORT-TERM AND LONG-TERM DEBT (CONTINUED):
LONG-TERM DEBT CONSISTS OF THE FOLLOWING:
AS OF JUNE 30,
------------------------------------------------------
2002 2001
------ ------------------ ------ ------------------
Senior Notes (ii).................................... Ps. 115,298,885 Ps. 205,401,000
Notes (iii).......................................... 51,440,000 130,948,028
Mortgage loans (v)................................... -- 235,522
Interest rate swap payable (vi)...................... 2,009,805 --
------------------------- -------------------------
Ps. 168,748,690 Ps. 336,584,550
========================= =========================
(i) Generally, the Company's short-term borrowings are in the form of
overdraft facilities and/or bank loans with an original maturity of less than
one year. The weighted average interest rates on short-term debt were 8% plus
CER and 9.71% as of June 30, 2002 and 2001, respectively. The Company generally
used the proceeds from these borrowings for working capital needs and other
general corporate purposes. The Company had unused lines of credit under the
short-term bank lines of Ps. 14.9 million at June 30, 2002, although it cannot
give any assurance that it will be able to effectively use such credit lines
given the current conditions of the Argentine economy.
(ii) On January 18, 2001, APSA together with its wholly owned subsidiary,
SAPSA, issued US$ 120.0 million of Senior Notes. The Senior Notes were issued in
three classes: US$ 40.0 million aggregate principal amount of Class A-2 Senior
Notes, due January 13, 2005, priced at 100%; US$ 5.0 million aggregate principal
amount of Class B-1 Senior Notes, due January 13, 2005, priced at 100%; and US$
75.0 million aggregate principal amount of Class B-2 Senior Notes, maturing at
various dates through January 13, 2005, priced at 100%. Interest on Class A-2,
Class B-1 and Class B-2 Senior Notes accrues at a Badlar rate (as defined below)
plus 395 basis points, 90-day Libor plus 475 basis points and Badlar rate plus
395 basis points, respectively ("30-day Badlar" represents a referenced average
interest rate payable by several private banks in Argentina to US
dollar-denominated time deposits of US$ 1 million or more, as adjusted in
accordance with a specified formula). Pursuant to Decree N(degree) 214, debts in
U.S. dollars or other foreign currencies in the Argentine financial system were
converted to pesos at the rate of exchange of Ps. 1 per US$ 1 or its equivalent
in another currency. As from February 3, 2002 the reference stabilization index
(CER) and interest rates ranging from 6% to 8% were applied to these debts (see
Note 2). The proceeds were used to repay certain outstanding collateralized
borrowings and other short-term debt of the Company. The Senior Notes are
collateralized by a pledge on the shares of SAPSA. The Senior Notes include
various restrictive covenants, which among other things require the Company to
maintain certain financial ratios. As of June 30, 2002, the Company was not in
compliance with certain of the financial covenants. On August 22, 2002, the
Company obtained a limited waiver from the holders of the Senior Notes with
respect to such covenant violations.
On February 8, 2002 the Company's principal shareholders, IRSA
Inversiones y Representaciones and Parque Arauco, subordinated the collection of
their receivables under the loan agreements entered with the Company to the
repayment of principal and interest on the Senior Notes and on short-term debt.
After the end of the year, the Company redeemed Class A2 Senior Notes for
a principal amount of Ps. 17.5 million, as mentioned in Note 14.
(iii) On April 7, 2000, the Company issued Ps. 85.0 million 14.875%
unsecured notes due April 7, 2005 (the "Notes"). Interest on the Notes are
payable semiannually on April 7 and October 7 of each year, commencing October
7, 2000. Proceeds from this issuance were used to repay certain outstanding
bridge financing obtained by the Company. The Notes include various restrictive
covenants, which among other things require the Company to maintain certain
financial ratios and net worth amounts. As of June 30, 2002, the Company was not
in compliance with certain of the financial covenants. No waiver has been
obtained with respect to this covenant violation, and as a result, the Company
is not able to incur additional indebtedness for so long as such covenant
violation is in existence.
During the year ended June 30, 2002, the Company redeemed an aggregate of
Ps. 15.5 million of the Notes at different prices below par plus accrued
interest.
F-105
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DETAILS OF BALANCE SHEETS ACCOUNTS (CONTINUED)
g. SHORT-TERM AND LONG-TERM DEBT (CONTINUED):
(iv) As of June 30, 2002 this balance included a principal amount of Ps.
3.3 million plus accrued interest of Ps. 0.3 million relating to the seller
financing obtained in the acquisition of Shopping Neuquen. Such seller financing
accrued interest at six-month LIBOR. As of June 30, 2002, the six-month LIBOR
was 1.95%.
(v) As of June 30, 2002 this balance included Ps 0.1 million related to a
loan collateralized by a mortgage on certain property of the Company, which book
value is Ps. 2.9 million as of such date.
(vi) Corresponds to the net amount of: 1) US$ 50.4 million for guarantees
granted to Morgan Guaranty Trust Company of New York, 2) a liability of US$ 69.1
million and 3) a right of Ps. 69.1 million arising from a Swap agreement
described in Note 13.(i).
h. SALARIES AND SOCIAL SECURITY PAYABLE:
AS OF JUNE 30,
------------------------------------------------------
2002 2001
------------------------- -------------------------
Social security payable.............................. Ps. 563,506 Ps. 1,404,449
Provision for vacation and bonuses................... 552,810 3,356,111
Salaries payable..................................... 252,669 1,047,702
Other ............................................... 53,650 315,227
------------------------- -------------------------
Ps. 1,422,635 Ps. 6,123,489
========================= =========================
i. TAXES PAYABLE:
AS OF JUNE 30,
------------------------------------------------------
CURRENT 2002 2001
------------------------- -------------------------
VAT payable......................................... Ps. 4,060,107 Ps. 2,907,752
Income tax provision................................ 3,436,985 245,165
Gross sales tax payable............................. 1,414,861 835,299
Gross sales tax withholdings........................ 223,328 394,969
Property tax provision.............................. 27,892 - -
Tax on corporate indebtedness (i)................... 65,968 76,913
Other tax withholdings.............................. 150,599 736,236
Other taxes......................................... 1,977,177 134,075
------------------------- -------------------------
Ps. 11,356,917 Ps. 5,330,409
========================= =========================
(i) Effective January 1, 1999 interest payable is subject to a 15% tax
levied on interest paid on debt and other financial costs incurred by the
Company. Pursuant to a new tax reform enacted December 12, 2000, this tax will
be gradually reduced as from January 1, 2001 and eliminated effective July 1,
2002.
j. OTHER LIABILITIES:
AS OF JUNE 30,
------------------------------------------------------
2002 2001
------------------------- -------------------------
CURRENT
Provision for contingencies (Note 16.c.) (i)......... Ps. 3,474,000 Ps. --
Accrual for directors fees, net...................... 1,121,784 1,318,827
Withholdings and guarantee deposits.................. 363,504 711,083
Dividends payable.................................... 337,678 660,566
Contributed leasehold improvements (ii).............. 188,858 188,858
Other................................................ 224,599 363,318
------------------------- -------------------------
Ps. 5,710,423 Ps. 3,242,652
========================= =========================
NON-CURRENT
Provision for contingencies (Note 16.c.) (i)......... 4,394,471 3,838,409
Contributed leasehold improvements (ii)............. 991,505 1,180,363
Withholdings and guarantee deposits.................. 47,668 93,248
------------------------- -------------------------
Ps. 5,433,644 Ps. 5,112,020
========================= =========================
F-106
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DETAILS OF BALANCE SHEETS ACCOUNTS (CONTINUED)
j. OTHER LIABILITIES (CONTINUED):
(i) This reserve relates to: (a) labor lawsuits filed against the
Company, (b) an assessment issued by the national fiscal authorities to the
Company relating to differences in the computation of estimated useful lives of
shopping centers, and (c) other sundry claims. In the opinion of management and
based on consultation with external legal counsel, the Company has established
provisions for amounts which are probable of adverse occurrence and which,
according to estimates developed by the Company's legal counsel, would meet all
related contingencies and corresponding fees relating to these claims.
(ii) Contributed leasehold improvements relate to installations
constructed by a tenant in the general area of the Abasto Shopping Center. The
Company has recorded the installations as fixed asset based on construction
costs incurred with a corresponding liability. Contributed leasehold
improvements are amortized to income over the term of lease. Such amortization,
net of the related depreciation of the leasehold improvement, was immaterial for
the years ended June 30, 2002 and 2001.
6. SHAREHOLDERS' CONTRIBUTION
a. COMMON STOCK
As of June 30, 2002, the Company had 700.0 million authorized and
outstanding shares of common stock, having a par value of Ps. 0.10 per share.
Holders of the common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. There was no share
activity during the year ended June 30, 2002.
COMMON STOCK
------------------------------------------------------------------------------
ADDITIONAL
SHARES ISSUED PAR VALUE PAID-IN-CAPITAL
----------------- ------------------------ ----------------------------
Shares issued for cash............... 4,000 Ps. 400 Ps. --
Shares issued for cash............... 16,000 1,600 --
Shares issued for cash............... 380,000 38,000 --
Additional paid in capital........... -- -- 5,699,438
Conversion into shares of inflation
Adjustment reserve................... 94,600,000 9,460,000 --
----------------- ------------------------ ----------------------------
BALANCES AS OF JUNE 30, 1996......... 95,000,000 Ps. 9,500,000 Ps. 5,699,438
================= ======================== ============================
Shares issued for cash............... 160,000,000 16,000,000 67,471,650
----------------- ------------------------ ----------------------------
BALANCES AS OF JUNE 30, 1997......... 255,000,000 Ps. 25,500,000 Ps. 73,171,088
================= ======================== ============================
Shares issued for cash............... 271,868,795 27,186,879 220,017,963
Shares issued for contribution of
Interest in Altos de Quilmes......... 108,131,205 10,813,121 87,508,414
----------------- ------------------------ ----------------------------
BALANCES AS OF JUNE 30, 1998 AND 1999 635,000,000 Ps. 63,500,000 Ps. 380,697,465
================= ======================== ============================
Shares issued for cash............... 65,000,000 6,500,000 84,554,789
----------------- ------------------------ ----------------------------
BALANCES AS OF JUNE 30, 2000, 2001
AND 2002........................... 700,000,000 Ps. 70,000,000 Ps. 465,252,254
================= ======================== ============================
APPROVED BY
-----------------------------------------------------
BODY DATE DATE OF REGISTRATION
------------------------------ ------------------- ---------------------
Extraordinary Shareholders' October 29, 1987 December 29, 1987
Meeting
Extraordinary Shareholders' October 26, 1988 December 29, 1988
Meeting
Extraordinary Shareholders' October 25, 1989 February 5, 1990
Meeting
Ordinary and Extraordinary November 24, 1994
Shareholders' Meeting
Ordinary and Extraordinary August 31, 1995 March 15, 1996
Shareholders' Meeting
Ordinary and Extraordinary October 29, 1996 May 15, 1998
Shareholders' Meeting
Ordinary and Extraordinary March 10, 1998 October 21, 1999
Shareholders' Meeting
Ordinary and Extraordinary March 10, 1998 October 21, 1999
Shareholders' Meeting
Ordinary and Extraordinary August 6, 1999 Pending
Shareholders' Meeting
b. INFLATION ADJUSTMENT OF COMMON STOCK
The Company's financial statements were prepared on the basis of general
price-level accounting, which reflects changes in the purchasing power of the
Argentine Peso in the historical financial statements. Accordingly, the annual
inflation adjustment related to common stock was appropriated to an inflation
adjustment reserve, which forms part of shareholders' equity. According to
Argentine rules and regulations, the balance of the inflation adjustment
reserves may be applied only towards the issuance of common stock to
shareholders of the Company.
F-107
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' CONTRIBUTION (CONTINUED)
c. IRREVOCABLE CONTRIBUTIONS
Irrevocable capital contributions represented capital contributions
received from existing shareholders from time to time to fund operations and
carried no obligations on the part of the Company to issue common shares or
repay such contributions.
d. RESTRICTIONS ON DISTRIBUTION OF PROFITS
In accordance with the Argentine Corporations Law and the Company's
by-laws, 5% of the net and realized profit for the year calculated in accordance
with Argentine GAAP plus (less) prior year adjustments must be appropriated by
resolution of shareholders to a legal reserve until such reserve equals 20% of
the Company's outstanding capital. This legal reserve may be used only to absorb
losses.
7. BALANCES AND TRANSACTIONS WITH RELATED PARTIES
The following is a summary of the balances and transactions with related
parties:
(EXPENSE) INCOME INCLUDED IN THE STATEMENTS OF
OPERATIONS
FOR THE YEARS ENDED JUNE 30,
----------------------------------------------------
DESCRIPTION OF
TRANSACTION /
COMPANY RELATION CAPTION 2002 2001 2000
------------------------------------------------------------------------------------------------------------
IRSA .............. Shareholder Other current
receivables and
prepaid expenses Ps. -- Ps. -- Ps. --
IRSA .............. Shareholder Current payable
with related parties -- -- --
IRSA .............. Shareholder Non current payable
with related
parties (*) -- -- --
Administrative
IRSA............... Shareholder expenses -- (246,692) (123,642)
IRSA............... Shareholder Accrued interest 21,143,614 -- (372,304)
Goldman Sachs and
Co............... Shareholder Current payable
with related parties -- -- --
Parque Arauco S.A. Shareholder Non current payable
with related
parties (*) -- -- --
Parque Arauco S.A. Shareholder Accrued interest (1,763,389) -- --
Perez Cuesta S.A.C.I. Equity investee Dividends receivable -- -- --
Inversora Bolivar S.A. Subsidiary of IRSA, shareholder Current payable
of the Company with related
parties -- -- --
Fibesa S.A......... Subsidiary of APSA, formerly a Commission and fees
sudsidiary of Consultores Asset for services
Management S.A (i) -- -- (2,867,946)
Inversora Bolivar S.A. Subsidiary of IRSA, shareholder Other current
of the Company receivables and
prepaid expenses -- -- --
Inversora Bolivar S.A. Subsidiary of IRSA, shareholder Accrued interest
of the Company -- (87,203) --
Dalor S.A. ........ Shareholder of Tarshop S.A., a Accrued interest
majority-owned subsidiary of
the Company (22,832) (44,496) (20,154)
Dalor S.A. ........ Shareholder of Tarshop S.A., a Current payable
majority-owned subsidiary of with related parties
the Company -- -- --
E-Commerce Latina S.A. Equity investee Other current
receivables and
prepaid expenses -- -- --
Altocity.Com S.A. . Subsidiary of E-Commerce Other current
Latina S.A., an equity investee receivables and
of the Company prepaid expenses -- -- --
Altocity.Com S.A. . Subsidiary of E-Commerce Latina Current payable
S.A., an equity investee of the with related parties
Company -- -- --
Altocity.Com S.A. . Subsidiary of E-Commerce Latina Leases
S.A., an equity investee of the
Company -- 338,053 216,160
Altocity.Com S.A. . Subsidiary of E-Commerce Latina Administrative
S.A., an equity investee of the expenses
Company -- (9,045) --
Raymond James S.A.. Shareholder of Alto Invest Other current
S.A., a majority-owned receivables and
subsidiary of the Company prepaid expenses -- -- --
Cresud S.A......... Shareholder of IRSA., Other current
shareholder of the Company receivables and
prepaid expenses -- -- --
Cresud S.A......... Shareholder of IRSA., Current payable
shareholder of the Company with related parties -- -- --
BALANCE RECEIVABLE (PAYABLE)
AS OF JUNE 30,
-------------------------------
COMPANY 2002 2001
------------------------------------
IRSA ..............
Ps. 646,166 Ps. 94,952
IRSA ..............
(414,662) (440,740)
IRSA ..............
(74,797,626) --
IRSA............... -- --
IRSA............... -- --
Goldman Sachs and
Co............... (6,512) (12,739)
Parque Arauco S.A.
(39,082,627) --
Parque Arauco S.A. -- --
Perez Cuesta S.A.C.I. 75,000 146,716
Inversora Bolivar S.A.
-- (87,203)
Fibesa S.A.........
-- --
Inversora Bolivar S.A.
28,265 --
Inversora Bolivar S.A.
-- --
Dalor S.A. ........
-- --
Dalor S.A. ........
(160,615) (314,195)
E-Commerce Latina S.A.
12,566 24,582
Altocity.Com S.A. .
311,671 546,527
Altocity.Com S.A. .
(5,595) (10,948)
Altocity.Com S.A. .
-- --
Altocity.Com S.A. .
-- --
Raymond James S.A..
-- 17,594
Cresud S.A.........
10,125 --
Cresud S.A.........
(46,468) --
(*) Amounts bear interest at market rates.
F-108
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. BALANCES AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
(i) In 1998, the Company entered into an agreement with the real estate
broker FIBESA, a controlled subsidiary of Consultores Asset Management S.A.
(hereinafter referred to as CAM). Pursuant to this agreement, FIBESA was granted
an exclusive right to act as the Company's leasing agent, with respect to
certain of the Company's operated shopping centers. FIBESA 's broker fees were
billed directly to the tenants and, therefore, the Company was not liable for
these costs. CAM is principally engaged in investment, investment advisory and
fund administration services. Eduardo S. Elsztain and M. Marcelo Mindlin are
President and Vice-President, respectively, and Chairman and Vice-Chairman,
respectively, of the Board of Directors of CAM and IRSA, as well as shareholders
of CAM and IRSA. In addition, Messrs. Elsztain and Mindlin are the Chairman and
First Vice-Chairman, respectively, of the Board of Directors of the Company. In
addition, certain executives, employees, shareholders and/or directors of CAM
and FIBESA are also executives, employees, shareholders and/or directors of IRSA
and the Company. As discussed in Note 3.e(i), in September 2000, the Company
completed the acquisition of FIBESA for total consideration of US$ 10.0 million.
Under the terms of the agreement, the acquisition has been retroactively
effective as of July 1, 2000. Therefore, the results of operations and related
payable and/or receivable balances have been included in the accompanying
consolidated financial statements of the Company as from that date. As such, no
related party transactions have been reported with FIBESA for the years ended
June 30, 2001 and 2002.
8. FINANCIAL RESULTS, NET
YEARS ENDED JUNE 30,
----------------------------------------------------------------
2002 2001 2000
------------------- ------------------- -------------------
GENERATED BY ASSETS:
Loss on exposure to inflation .................... Ps. (79,859,761) Ps. -- Ps. --
Impairment of long-lived assets .................. (55,860,977) -- --
Interest income .................................. 4,807,570 3,214,352 1,775,631
------------------- ------------------- -------------------
Ps. (130,913,168) Ps. 3,214,352 Ps. 1,775,631
=================== =================== ===================
GENERATED BY LIABILITIES:
Gain on exposure to inflation .................... Ps. 36,212,047 Ps. -- Ps. --
Interest income (expense) ........................ 88,646,942 (60,756,694) (44,821,777)
Tax on corporate indebtedness .................... (847,022) (2,966,665) (4,479,999)
Amortization of deferred financing costs ......... (3,665,289) (2,141,519) (834,509)
Interest income (expense) with related parties
(Note 7) ......................................... 19,380,225 (87,203) (372,304)
Exchange differences, net ........................ (46,501,262) (32,215) (9,883)
Other ............................................ (1,217,049) (360,167) (857,717)
------------------- ------------------- -------------------
Ps. 92,008,592 Ps. (66,344,463) Ps. (51,376,189)
------------------- ------------------- -------------------
FINANCIAL RESULTS, NET Ps. (38,904,576) Ps. (63,130,111) Ps. (49,600,558)
=================== =================== ===================
9. OTHER EXPENSES, NET
YEARS ENDED JUNE 30,
--------------------------------------------------------------------
2002 2001 2000
------------------- -------------------- --------------------
(Loss) gain on early redemption of debt (i) .. Ps. (352,290) Ps. 2,532,293 Ps. --
Recovery of provision for contingencies ...... 104,393 145,330 --
Provision for contingencies .................. (6,402,818) (177,249) (174,202)
Allowance for doubtful mortgage receivable ... (2,541,454) (1,778,374) --
Lawsuit fees ................................. -- -- (493,798)
(Loss) gain from the sale of fixed assets .... (10,628) 313,221 --
Write-off of abandoned investment projects ... (296,540) (372,946) (704,525)
Donations .................................... (88,773) (309,972) (88,070)
Other ........................................ (57,943) (625,209) 610,391
------------------- -------------------- --------------------
Ps. (9,646,053) Ps. (272,906) Ps. (850,204)
=================== ==================== ====================
F-109
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. OTHER EXPENSES, NET (CONTINUED)
(i) During the year ended June 30, 2002, the Company redeemed Notes for
Ps. 15.5 million, at different prices below par plus accrued interest. In
connection with the redemption, the Company recorded a gain of Ps. 0.3 million.
(Ps. 0.2 million, after tax). Such gain is net of a charge of Ps. 0.7 million
relating to the amortization of deferred financing costs associated with the
redeemed obligations.
During the year ended June 30, 2001, the Company redeemed a portion of
the Senior Notes and the Notes (US$ 2.5 million and Ps. 35.3 million,
respectively) at 100% and different prices below par plus accrued interest,
respectively. In connection with the redemption, the Company recorded a gain of
Ps. 3.5 million. (Ps. 2.2 million, after tax). Such gain is net of a charge of
Ps. 1.0 million relating to the amortization of deferred financing costs
associated with the redeemed obligations.
10. SEGMENT INFORMATION
GENERAL INFORMATION
The Company has determined that its reportable segments are those that
are based on the Company's method of internal reporting. Accordingly, the
Company has four reportable segments. These segments are Leases and services,
Sales and development properties, Credit card operations and E-commerce
activities.
A general description of each segment follows:
o Leases and services
This segment includes the operating results of the Company's shopping centers
principally comprised of lease and service revenues from tenants.
o Sales and development properties
This segment includes the operating results of the Company's construction and
ultimate sale of residential buildings business.
o Credit card operations
This segment manages the Company's portfolio of credit card accounts issued by
its majority-owned subsidiary, Tarshop.
o E-commerce activities
For the years ended June 30, 2001 and 2000, this segment includes developing
stage activities primarily consisting of the Company's on-line investment
initiatives related to Alto Invest S.A. Alto Invest was a web-based provider of
comprehensive investing tools, planning and financial information and primarily
generated its revenues from website advertising fees and commissions charged to
customers for on-line trading. Effective May 2001, Alto Invest ceased operations
and is actively pursuing to evaluate alternative investment projects. Although
results of e-commerce operations are separated for management internal reporting
purposes, all related revenues and associated costs are included in leases and
services line of the Company's consolidated statement of operations.
The Company's primary operations are located in Argentina. All revenues
and long-lived assets are attributable to the Company's country of domicile.
The Company measures its reportable segments based on net income.
Inter-segment transactions are accounted for at current market prices. The
Company evaluates performance of its segments and allocates resources to them
based on net income. The Company is not dependent on any single customer.
The accounting policies of the segments are the same as those described
in Note 4. The column titled eliminations includes the eliminations of
inter-segment activities.
F-110
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SEGMENT INFORMATION (CONTINUED)
As of and for the year ended June 30, 2002:
Sales and Total
Leases and development Credit card E-commerce reportable
services properties Operations activities segments
---------------- --------------- --------------- -------------- ------------------
Sales................ Ps. 126,081,378 Ps. 3,559,342 Ps. 40,794,169 Ps. -- Ps. 170,434,889
Costs................ (68,819,051) (4,803,722) (15,098,649) (289,400) (89,010,822)
GROSS PROFIT (LOSS) . 57,262,327 (1,244,380) 25,695,520 (289,400) 81,424,067
Selling expenses..... (32,513,751) (454,600) (18,719,117) -- (51,687,468)
Administrative
expenses............. (11,838,107) (3,518) (10,706,982) (40,605) (22,589,212)
Torres de Abasto unit
contracts' rescissions -- 53,746 -- -- 53,746
Net loss in credit
card trust........... -- -- (3,620,884) -- (3,620,884)
OPERATING INCOME
(EXPENSE)............ 12,910,469 (1,648,752) (7,351,463) (330,005) 3,580,249
Net income (loss) in
equity investments... 2,474,633 -- -- (7,159,032) (4,684,399)
Financial results, net (27,396,866) (5,248,734) (2,856,997) (339,866) (35,842,463)
- Interest income.... (119,377,865 (5,114,492) (2,856,997) (501,701) 127,851,055)
- Interest expense... 91,980,999 (134,242) -- 161,835 92,008,592
Other expense, net... (9,148,659) (5,694) (136,482) (355,218) (9,646,053)
LOSS BEFORE TAXES AND
MINORITY INTEREST.... (21,160,423) (6,903,180) (10,344,942) (8,184,121) (46,592,666)
Income tax........... (1,290,443) -- -- -- (1,290,443)
Minority interest.... 3,201,614 -- 2,025,871 252,704 5,480,189
NET LOSS............. (19,249,252) (6,903,180) (8,319,071) (7,931,417) (42,402,920)
Depreciation and
amortization......... 59,120,747 233,282 3,861,553 289,400 63,504,982
Additions of fixed
assets............... 2,712,007 -- 394,251 -- 3,106,258
Investment in equity
method investees
(see note 5.b.(ii)).. 12,748,636 -- -- 5,475,365 18,224,001
Operating assets..... 41,880,687 2,941,795 7,182,094 387,594 52,392,170
Non operating assets. 927,067,858 23,099,839 30,038,002 434,106 980,639,805
---------------- --------------- --------------- -------------- ------------------
Total Assets......... Ps. 968,948,545 Ps. 26,041,634 Ps. 37,220,096 Ps. 821,700 Ps. 1,033,031,975
---------------- --------------- --------------- -------------- ------------------
Total as of
and for the
year ended
Eliminations June 30, 2002
---------------- ------------------
Ps.
Sales................ (i) (606,992) Ps. 169,827,897
Costs................ (i)(i) 3,669,105 (85,341,717)
GROSS PROFIT (LOSS) . 3,062,113 84,486,180
Selling expenses..... -- (51,687,468)
Administrative
expenses............. -- (22,589,212)
Torres de Abasto unit
contracts' rescissions -- 53,746
Net loss in credit
card trust........... -- (3,620,884)
OPERATING INCOME
(EXPENSE)............ 3,062,113 6,642,362
Net income (loss) in
equity investments... -- (4,684,399)
Financial results, net (3,062,113) (38,904,576)
- Interest income.... (ii) (3,062,113) (130,913,168)
- Interest expense... -- 92,008,592
Other expense, net... -- (9,646,053)
LOSS BEFORE TAXES AND
MINORITY INTEREST.... -- (46,592,666)
Income tax........... -- (1,290,443)
Minority interest.... -- 5,480,189
NET LOSS............. -- (42,402,920)
Depreciation and
amortization......... -- 63,504,982
Additions of fixed
assets............... -- 3,106,258
Investment in equity
method investees
(see note 5.b.(ii)).. -- 18,224,001
Operating assets..... -- 52,392,170
Non operating assets. (iii) (13,512,388) 967,127,417
----------------- -----------------
Total Assets......... Ps. (13,512,388) Ps. 1,019,519,587
----------------- -----------------
(i) Represents inter-segment lease revenues and expenses.
(ii) Represents interest expense generated by inter-segment loan used to fund
the credit card activity.
(iii) Represents other inter-segment receivables eliminated in consolidation.
F-111
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SEGMENT INFORMATION (CONTINUED)
As of and for the year ended June 30, 2001:
Sales and
Leases and development Credit card E-commerce Total reportable
services properties Operations activities segments
------------------- ----------------- ----------------- ----------------- -------------------
Sales...................Ps. 175,865,277 Ps. 11,530,659 Ps. 41,945,091 Ps. 167,788 Ps. 229,508,815
Costs.................... (69,049,083) (12,566,463) (18,600,698) (1,548,757) (101,765,001)
GROSS PROFIT (LOSS)...... 106,816,194 (1,035,804) 23,344,393 (1,380,969) 127,743,814
Selling expenses......... (15,307,909) (790,747) (10,272,036) (1,211,031) (27,581,723)
Administrative expenses.. (18,583,368) (10,824) (11,696,294) (541,346) (30,831,832)
Torres de Abasto unit
contracts' rescissions .. -- (26,166) -- -- (26,166)
Net income in credit
card trust.............. -- -- 2,058,932 -- 2,058,932
OPERATING INCOME
(EXPENSE)............... 72,924,917 (1,863,541) 3,434,995 (3,133,346) 71,363,025
Net loss in equity
investments (i)......... (3,024,280) -- -- -- (3,024,280)
Financial results, net... (59,917,745) 520,664 -- (4,006) (59,401,087)
- Interest income........ 6,325,615 617,598 -- 163 6,943,376
- Interest expense....... (66,243,360) (96,934) -- (4,169) (66,344,463)
Other income (expense),
net...................... 107,333 (43,513) 144,696 (481,422) (272,906)
INCOME (LOSS) BEFORE
TAXES AND MINORITY
INTEREST................. 10,090,225 (1,386,390) 3,579,691 (3,618,774) 8,664,752
Income tax............... (2,356,802) -- -- -- (2,356,802)
Minority interest........ (984,780) -- (759,056) 898,484 (845,352)
NET INCOME (LOSS)........ 6,748,643 (1,386,390) 2,820,635 (2,720,290) 5,462,598
Depreciation and
amortization............ 62,955,019 313,638 2,870,340 1,271,376 67,410,373
Additions of fixed
assets................... 19,245,160 -- 1,669,914 151,664 21,066,738
Investment in equity
method investees
(see note 5.b.(ii))...... 10,275,011 -- -- 12,634,398 22,909,409
Operating assets......... 943,408,192 11,668,649 45,076,496 1,253,302 1,001,406,639
Non operating assets..... 211,210,904 28,540,436 30,577,914 13,178,177 283,507,431
------------------- ----------------- ----------------- ----------------- -------------------
TOTAL ASSETS............Ps. 1,154,619,096 Ps. 40,209,085 Ps. 75,654,410 Ps. 14,431,479 Ps. 1,284,914,070
------------------- ----------------- ----------------- ----------------- -------------------
Total as of and
for the year
ended
Eliminations June 30, 2001
---------------------- ------------------
Sales................... Ps. (ii) (893,795) Ps. 228,615,020
Costs................... (ii)(iii) 4,622,819 (97,142,182)
GROSS PROFIT (LOSS)..... 3,729,024 131,472,838
Selling expenses........ -- (27,581,723)
Administrative expenses. -- (30,831,832)
Torres de Abasto unit
contracts' rescissions . -- (26,166)
Net income in credit
card trust.............. -- 2,058,932
OPERATING INCOME
(EXPENSE)............... 3,729,024 75,092,049
Net loss in equity
investments (i)......... -- (3,024,280)
Financial results, net.. (3,729,024) (63,130,111)
- Interest income....... (iii) (3,729,024) 3,214,352
- Interest expense...... -- (66,344,463)
Other income (expense),
net..................... -- (272,906)
INCOME (LOSS) BEFORE
TAXES AND MINORITY
INTEREST................ -- 8,664,752
Income tax.............. -- (2,356,802)
Minority interest....... -- (845,352)
NET INCOME (LOSS)....... -- 5,462,598
Depreciation and
amortization............ -- 67,410,373
Additions of fixed
assets.................. -- 21,066,738
Investment in equity
method investees
(see note 5.b.(ii))..... -- 22,909,409
Operating assets........ -- 1,001,406,639
Non operating assets.... (iv) (27,090,428) 256,417,003
---------------------- ------------------
TOTAL ASSETS............ Ps. (27,090,428) Ps. 1,257,823,642
---------------------- ------------------
(i) The Company formed E-Commerce Latina in December, 1999. The issuance of
stock by E-Commerce Latina to Telefonica decreased the Company's
percentage of ownership in E-Commerce Latina and the value assigned to
the E-Commerce Latina's common stock issued under the transaction was
substantially more than the Company's carrying amount per share of
E-commerce stock, thus triggering a change in the Company's interest in
E-Commerce Latina. The change in the Company's interest resulted in the
recognition of a deferred gain since E-Commerce Latina is in the early
stage of development and the realizability of the gain is not assured.
This deferred gain is recognized in the non-current investments line item
of the consolidated balance sheet. This gain is being amortized to income
as the investee incurs operating losses. Therefore, no results from
E-Commerce Latina's operations are presented in this segment information
table.
(ii) Represents inter-segment lease revenues and expenses.
(iii) Represents interest expense generated by inter-segment loan used to fund
the credit card activity.
(iv) Represents other inter-segment receivables eliminated in consolidation.
F-112
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SEGMENT INFORMATION (CONTINUED)
As of and for the year ended June 30, 2000:
Sales and
Leases and development Credit card E-commerce Total reportable
services properties Operations activities segments
------------------- ----------------- ----------------- ----------------- -------------------
Sales...................Ps. 182,469,772 Ps. 9,892,965 Ps. 26,392,377 Ps. 110,744 Ps. 218,865,858
Costs.................... (69,360,273) (10,396,976) (13,104,601) (464,071) (93,325,921)
GROSS PROFIT (LOSS)...... 113,109,499 (504,011) 13,287,776 (353,327) 125,539,937
Selling expenses......... (36,418,174) (335,201) (6,539,880) (1,487,539) (44,780,794)
Administrative expenses.. (20,553,201) -- (6,712,591) (342,518) (27,608,310)
Torres de Abasto unit
contracts' rescissions .. -- (3,373,901) -- -- (3,373,901)
Net income in credit
card trust.............. -- -- 522,839 -- 522,839
OPERATING INCOME
(EXPENSE)............... 56,138,124 (4,213,113) 558,144 (2,183,384) 50,299,771
Net loss in equity
investments (i)......... (44,324) -- -- -- (44,324)
Financial results, net... (46,658,085) 387,596 -- 4,871 (46,265,618)
- Interest income........ 4,608,303 497,397 -- 4,871 5,110,571
- Interest expense....... (51,266,388) (109,801) -- -- (51,376,189)
Other (expense) income,
net (1,103,662) -- 253,458 -- (850,204)
INCOME (LOSS) BEFORE
TAXES AND MINORITY
INTEREST................. 8,332,053 (3,825,517) 811,602 (2,178,513) 3,139,625
Income tax............... (8,349,736) -- -- (8,349,736)
Minority interest........ (1,002,096) -- (212,115) 849,620 (364,591)
NET (LOSS) INCOME........ (1,019,779) (3,825,517) 599,487 (1,328,893) (5,574,702)
Depreciation and
amortization............ 57,701,558 -- 1,162,908 335,308 59,199,774
Additions of fixed
assets................... 54,315,067 -- 1,110,664 1,089,097 56,514,828
Investment in equity
method investees......... 13,299,292 -- -- 23,474 13,322,766
Operating assets......... 1,000,220,641 24,713,477 35,423,568 1,643,826 1,062,001,512
Non operating assets..... 178,413,973 12,293,670 17,410,865 3,099,591 211,218,099
------------------- ----------------- ----------------- ----------------- -------------------
TOTAL ASSETS............Ps. 1,178,634,614 Ps. 37,007,147 Ps. 52,834,433 Ps. 4,743,417 Ps. 1,273,219,611
------------------- ----------------- ----------------- ----------------- -------------------
Total as of and
for the year
ended
Eliminations June 30, 2000
---------------------- ------------------
Sales................... Ps. (ii) (1,035,350) Ps. 217,830,508
Costs................... (ii) (iii) 4,370,290 (88,955,631)
GROSS PROFIT (LOSS)..... 3,334,940 128,874,877
Selling expenses........ -- (44,780,794)
Administrative expenses. -- (27,608,310)
Torres de Abasto unit
contracts' rescissions . -- (3,373,901)
Net income in credit
card trust.............. -- 522,839
OPERATING INCOME
(EXPENSE)............... 3,334,940 53,634,711
Net loss in equity
investments (i)......... -- (44,324)
Financial results, net.. (3,334,940) (49,600,558)
- Interest income....... (iii) (3,334,940) 1,775,631
- Interest expense...... -- (51,376,189)
Other (expense) income,
net..................... -- (850,204)
INCOME (LOSS) BEFORE
TAXES AND MINORITY
INTEREST................ -- 3,139,625
Income tax.............. -- (8,349,736)
Minority interest....... -- (364,591)
NET (LOSS) INCOME....... -- (5,574,702)
Depreciation and
amortization............ -- 59,199,774
Additions of fixed
assets.................. -- 56,514,828
Investment in equity
method investees........ -- 13,322,766
Operating assets........ -- 1,062,001,512
Non operating assets.... (iv) (27,576,772) 183,641,327
---------------------- ------------------
TOTAL ASSETS............ Ps. (27,576,772) Ps.1,245,642,839
---------------------- ------------------
(i) The Company formed E-Commerce Latina in December, 1999. The issuance of
stock by E-Commerce Latina to Telefonica decreased the Company's
percentage of ownership in E-Commerce Latina and the value assigned to
the E-Commerce Latina's common stock issued under the transaction was
substantially more than the Company's carrying amount per share of
E-commerce stock, thus triggering a change in the Company's interest in
E-Commerce Latina. The change in the Company's interest resulted in the
recognition of a deferred gain since E-Commerce Latina is in the early
stage of development and the realizability of the gain is not assured.
This deferred gain is recognized in the non-current investments line item
of the consolidated balance sheet. This gain is being amortized to income
as the investee incurs operating losses. Therefore, no results from
E-Commerce Latina's operations are presented in this segment information
table.
(ii) Represents inter-segment lease revenues and expenses.
(iii) Represents interest expense generated by inter-segment loan used to fund
the credit card activity.
(iv) Represents other inter-segment receivables eliminated in consolidation.
F-113
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ADDITIONAL INFORMATION ON ASSETS AND LIABILITIES
The breakdown of main assets and liabilities as of June 30, 2002 is as
follows:
To mature in To mature between To mature between To mature between 10
3 months 4 and 6 months 7 and 9 months and 12 months
---------------------- ------------------------- ------------------------ -----------------------
ASSETS
Investments (1).............. Ps. 3,589,442 Ps. 200,000 Ps. 2,915,018 Ps. 200,000
Accounts receivable, net..... 8,351,253 3,249,196 2,240,159 1,219,356
Other receivables and prepaid
expenses..................... 1,831,693 500,285 311,227 785,858
---------------------- ------------------------- ------------------------ -----------------------
Ps. 13,772,388 Ps. 3,949,481 Ps. 5,466,404 Ps. 2,205,214
---------------------- ------------------------- ------------------------ -----------------------
LIABILITIES
Trade accounts payable........ Ps. 9,810,398 Ps. 256,589 Ps. 352,564 Ps. 256,589
Customer advances............ 3,133,046 1,786,054 1,606,373 2,509,369
Short-term and long-term debt 13,133,587 2,882,904 15,587,437 3,665,130
Related parties.............. -- -- -- --
Other liabilities (2)........ 12,034,218 3,971,018 1,137,204 1,024,285
---------------------- ------------------------- ------------------------ -----------------------
Ps. 38,111,249 Ps. 8,896,565 Ps. 18,683,578 Ps. 7,455,373
---------------------- ------------------------- ------------------------ -----------------------
Accruing interest at a fixed rate Accruing interest at a variable rate
------------------------------------------------ ------------------------------------------------
Current Non-Current Current Non-Current
---------------------- ------------------------- ------------------------ ----------------------
ASSETS
Investments (1).............. Ps. 243,125 Ps. -- Ps. 1,562,646 Ps. --
Accounts receivable, net..... 276,714 1,392,055 -- --
Other receivables and prepaid
expenses..................... 434,000 -- -- --
---------------------- ------------------------- ------------------------ -----------------------
Ps. 953,839 Ps. 1,392,055 Ps. 1,562,646 Ps. --
---------------------- ------------------------- ------------------------ -----------------------
LIABILITIES
Trade accounts payable....... Ps. 1,329,503 Ps. 6,117,088 Ps. -- Ps. --
Customer advances............ -- 16,218,499 1,220,000 9,042,969
Short-term and long-term debt 35,504,720 168,748,690 --
3,632,838
Related parties.............. -- 113,880,253 -- --
Other liabilities (2)........ -- -- -- --
---------------------- ------------------------- ------------------------ -----------------------
Ps. 36,834,223 Ps. 304,964,530 Ps. 4,852,838 Ps. 9,042,969
---------------------- ------------------------- ------------------------ -----------------------
To mature in
greater than
1 year Past due No fixed term Total
-------------------- ------------------- -------------------- ----------------------
ASSETS
Investments (1).............. Ps. 4,151,912 Ps. -- Ps. 2,282,122 Ps. 13,338,494
Accounts receivable, net..... 4,651,071 6,323,957 -- 26,034,992
Other receivables and prepaid
expenses..................... 24,465,110 304,831 2,122,602 30,321,606
-------------------- ------------------- -------------------- ----------------------
Ps. 33,268,093 Ps. 6,628,788 Ps. 4,404,724 Ps. 69,695,092
-------------------- ------------------- -------------------- ----------------------
LIABILITIES
Trade accounts payable........ Ps. 6,117,088 Ps. 6,317,048 Ps. -- Ps. 23,110,276
Customer advances............ 25,261,468 -- -- 34,296,310
Short-term and long-term debt 168,748,690 -- 3,868,500 207,886,248
Related parties.............. -- -- 114,514,105 114,514,105
Other liabilities (2)........ 3,906,216 -- 1,850,678 23,923,619
-------------------- ------------------- -------------------- ----------------------
Ps. 204,033,462 Ps. 6,317,048 Ps. 120,233,283 Ps. 403,730,558
-------------------- ------------------- -------------------- ----------------------
Not accruing interest
-------------------------------------------
Current Non-Current Total
-------------------- ------------------- --------------------
ASSETS
Investments (1).............. Ps. 7,380,811 Ps. 4,151,912 Ps. 13,338,494
Accounts receivable, net..... 21,107,207 3,259,016 26,034,992
Other receivables and prepaid
expenses..................... 4,569,496 25,318,110 30,321,606
-------------------- ------------------- --------------------
Ps. 33,057,514 Ps. 32,729,038 Ps. 69,695,092
-------------------- ------------------- --------------------
LIABILITIES
Trade accounts payable....... Ps. 15,663,685 Ps. -- Ps. 23,110,276
Customer advances............ 7,814,842 -- 34,296,310
Short-term and long-term debt -- -- 207,886,248
Related parties.............. 633,852 -- 114,514,105
Other liabilities (2)........ 18,489,975 5,433,644 23,923,619
-------------------- ------------------- --------------------
Ps. 42,602,354 Ps. 5,433,644 Ps. 403,730,558
-------------------- ------------------- --------------------
(1) Represents time deposits, mutual funds, tax credit certificates and
retained interest in transferred credit card receivables.
(2) Represents salaries and social security payable, taxes payable and other
liabilities.
12. TARSHOP CREDIT CARD RECEIVABLES SECURITIZATION
The Company has ongoing revolving period securitization programs through
which Tarshop, a majority-owned subsidiary of the Company, transfers a portion
of its customer credit card receivable balances to a master trust (the "Trust")
that issues certificates to public and private investors. To the extent the
certificates are sold to third parties, the receivables transferred qualify as
sales for financial statement purposes and are removed from the Company's
balance sheet. The remaining receivables in the Trust which have not been sold
to third parties are reflected on the Company's balance sheet as a retained
interest in transferred credit card receivables. Under these programs, the
Company acts as the servicer on the accounts and receives a fee for its
services.
Under the securitization programs, the Trust may issue two types of
certificates representing undivided interests in the Trust - Titulos de Deuda
Fiduciaria ("TDF") and Certificados de Participacion ("CP"), which represent
debt, and equity certificates, respectively. Interest and principal services are
paid periodically to the TDF holders throughout the life of the security. CPs
are subordinated securities which entitle the CP holders to share pro rata in
the cash flows of the securitized credit card receivables, after principal and
interest on the TDFs and other fees and expenses have been paid. During the
revolving period no payments are made to TDF and CP holders. Principal
collections of the underlying financial assets are used by the Trust to acquire
additional credit card receivables throughout the revolving period. Once the
revolving period ends, a period of liquidation occurs during which: (i) no
further assets are purchased and (ii) all cash collections are used to fulfill
the TDF service requirements and (iii) the remaining proceeds are used to
fulfill the CPs service requirements.
The Company entered into two-year revolving-period securitization
programs, through which Tarshop sold an aggregate amount of Ps. 83.1 million of
its customer credit card receivable balances to Trusts for Ps. 67.3 million in
net cash proceeds. Under the securitization programs, the Trusts issued Ps. 12.4
million nominal value subordinated CPs, Ps. 23.8 million 12% fixed-rate interest
TDFs and Ps. 20.0 million 18% fixed-rate interest TDFs, and Ps. 6.9 million
variable rate interest TDFs. Tarshop acquired all the CPs at an amount equal to
their nominal value while the TDFs were sold to other investors through a public
offering in Argentina. Bank commissions incurred in this connection totaled Ps.
5.7 million. As a credit protection for investors, Tarshop has established cash
reserves for losses amounting to Ps. 0.3 million.
F-114
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. DERIVATIVE INSTRUMENTS
The Company utilizes various hedge instruments, primarily interest rate
swaps and foreign currency forward-exchange contracts, to manage its interest
rate exposure associated with its peso-denominated fixed-rate debt. The counter
parties to these instruments generally are major financial institutions. The
Company does not hold or issue derivative instruments for trading purposes. In
entering into these contracts, the Company has assumed the risk that might arise
from the possible inability of counter parties to meet the terms of their
contracts. The Company does not expect any losses as a result of counterpart
defaults.
At June 30, 2002 and 2001, the Company had the following derivative
activity:
(i) INTEREST RATE SWAP
In order to minimize its financing costs and to manage interest rate
exposure, during fiscal year 2000 the Company entered into an interest rate swap
agreement to effectively convert a portion of its peso-denominated fixed-rate
debt to peso-denominated floating rate debt. As of June 30, 2001, the Company
had an interest rate swap agreement outstanding with an aggregate notional
amount of Ps. 85.0 million with maturities through March 2005. This swap
agreement initially allowed the Company to reduce the net cost of its debt.
However, subsequent to June 30, 2001, the Company modified the swap agreement
due to an increase in interest rates as a result of the economic situation.
Under the terms of the revised agreement, the Company converted its
peso-denominated fixed rate debt to U.S. dollar-denominated floating rate debt
for a notional amount of US$ 69.1 million with maturities through March 2005. As
collateral for the agreement, the Company was required to make a deposit of US$
50.0 million with the counterparty. Any differential to be paid or received
under this agreement is accrued and is recognized as an adjustment to interest
expense in the statement of operations. The related accrued receivable or
payable is included as an adjustment to interest payable. The fair value of the
swap agreement is not recognized in the consolidated financial statements.
During the years ended June 30, 2002, 2001 and 2000, the Company recognized net
losses of Ps. 100.6 million, 6.4 million and Ps. nil, respectively.
The Company's risk related to the swap agreement is represented by the
cost of replacing such agreement at prevailing market rates. Such cost would
increase in the event of a continued devaluation of the Argentine Peso.
(ii) FOREIGN CURRENCY FORWARD-EXCHANGE CONTRACTS
In the past, consistent with the Company's risk management policies, the
Company used foreign currency forward-exchange contracts as a supplement to
reduce its overall borrowing costs. The fair value of the forward foreign
exchange contracts was not recognized in the accompanying consolidated financial
statements. At June 30, 2001, the Company had outstanding foreign currency
forward contracts with financials institutions to sell an aggregate net amount
of US$ 80.0 million with a final maturity through September 15, 2001. For the
years ended June 30, 2002, 2001 and 2000, the Company recognized (losses) gains
of Ps. (1.4) million, Ps. 4.8 million and Ps. 1.4 million relating to these
contracts, respectively. At June 30, 2002, the Company does not hold any foreign
currency forward-exchange contract outstanding.
14. SUBSEQUENT EVENTS
ISSUE OF UNSECURED CONVERTIBLE NOTES
On August 20, 2002 the Company issued US$ 50 million of unsecured
convertible Notes (the "Convertible Notes") in exchange for cash and the
settlement of certain liabilities. Proceeds from the issuance of Convertible
Notes were used to repaid short-term bank loans for Ps. 24.3 million and for the
redemption of the Senior Notes for a principal amount of Ps. 47.0 million. The
Convertible Notes matures on July 19, 2006, accrues interest (payable
semiannually) at a fixed annual rate of 10% and are convertible at the option of
the holder into common shares of Ps. 0.10 par value per share at a conversion
rate of 30.8642 per unite.
In case of all the bondholders convert the Notes, our capital would
extend from 70.0 million shares to 224.4 million shares.
The issuance of the Convertible Notes was approved by the shareholders on
December 4, 2001 and by the National Securities Commission on March 15, 2002,
and authorized for listing on the Buenos Aires Stock Exchange on July 8, 2002.
F-115
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP
The Company's consolidated financial statements are prepared in
accordance with Argentine GAAP, which differ in certain significant respects
from US GAAP. Such differences involve methods of measuring the amounts shown in
the consolidated financial statements, as well as additional disclosures
required by US GAAP and Regulation S-X of the Securities and Exchange Commission
(SEC).
I. Difference in measurement methods
The following reconciliation to US GAAP does not include the reversal of
the adjustments to the financial statements for the effects of inflation
required under Argentine Technical Resolution No. 6, with the modification
established in the Argentine Technical Resolution No. 19, because the
application of this Resolution represents a comprehensive measure of the effects
of price level changes in the Argentine economy.
The principal differences, other than inflation accounting, between
Argentine GAAP and US GAAP are described below, together with an explanation,
where appropriate, of the method used in the determination of the necessary
adjustments.
YEARS ENDED JUNE 30,
------------------------------------------------------------------------------
2002 2001 2000
--------------------- ---------------------- -----------------------
RECONCILIATION OF NET (LOSS) INCOME:
Net (loss) income as reported under
Argentine GAAP............................ Ps. (42,402,920) Ps. 5,462,598 Ps. (5,574,702)
US GAAP ADJUSTMENTS:
Revenue recognition from sales of
development properties (Note 15.I.a))..... 196,469 (107,487) 679,118
Preoperating and advertising expenses
-Original value (Note 15.I.c))........ (361,788) (1,696,221) (4,034,739)
-Amortization (Note 15.I.c)).......... 1,787,131 7,137,227 5,228,625
Web site development costs (Note 15.I.d)). -- 697,683 (697,683)
Software obtained for internal use (Note
15.I.e)).................................. 159,583 (164,221) (275,578)
Differences in basis relating to purchase
accounting (Note 15.I.f))
-Amortization (Note 15.I.g))........... (2,211,288) (500,165) (577,304)
Non-current investments in unconsolidated
affiliated companies (Note 15.I.h))...... (2,735,999) 1,016,635 (1,367,767)
Accounting for changes in interest in
unconsolidated affiliated companies (Note
15.I.i)).................................. (264,779) (8,421,752) (995,393)
Accounting for changes in interest in
consolidated affiliated companies (Note
15.I.j)).................................. -- (65,030) --
Securitization accounting (Note 15.I.l)). (893,847) (4,307,224) (190,000)
Available-for-sale securities (Note 15.I.m)) (5,356) (23,752) --
Deferred charges (Note 15.I.n))........... (55,494) (134,289) --
Amortization of fees related to the Senior
Notes (Note 15.I.o))...................... (915,926) (421,131) --
Accounting for derivatives and hedging
activities (Note 15.I.q))................. (42,246,588) (10,079,056) --
Minority interest (Note 15.I.r))......... 1,665,049 1,103,833 (507,910)
Income tax (Note 15.I.p))................ (55,695,356) (2,156,130) 18,565,668
--------------------- ---------------------- -----------------------
Net (loss) income under US GAAP........... Ps. (143,981,109) Ps. (12,658,482) Ps. 10,252,335
===================== ====================== =======================
Basic and diluted EPS under US GAAP:
(Loss) income before accounting changes... Ps. (0.2057) Ps. (0.0184) Ps. 0.0152
Accounting changes - gain................. Ps. -- Ps. 0.0003 Ps. --
--------------------- ---------------------- -----------------------
Net (loss) income......................... Ps. (0.2057) Ps. (0.0181) Ps. 0.0152
===================== ====================== =======================
Weighted average number of shares outstanding Ps. 700,000,000 Ps. 700,000,000 Ps. 673,708,791
===================== ====================== =======================
F-116
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
YEARS ENDED JUNE 30,
-----------------------------------------------
2002 2001
--------------------- --------------------
RECONCILIATION OF SHAREHOLDERS' EQUITY:
Total shareholders' equity under Argentine GAAP................ Ps. 601,207,186 Ps. 643,610,106
US GAAP ADJUSTMENTS:
Revenue recognition from sales of development properties (Note
15.I.a))....................................................... -- (196,469)
Appraisal revaluation of fixed assets (Note 15.I.b))........... (3,517,461) (3,517,461)
Preoperating and advertising expenses
-Original value (Note 15.I.c)).............................. (24,903,369) (24,541,581)
-Accumulated amortization (Note 15.I.c)).................... 21,853,535 20,066,404
Software obtained for internal use (Note 15.I.e)).............. (280,216) (439,799)
Differences in basis relating to purchase accounting
-Original value (Note 15.I.f))............................. 11,256,080 11,256,080
-Accumulated amortization (Note 15.I.g)).................... (4,212,623) (2,001,335)
Non-current investments in unconsolidated affiliated companies
(Note 15.I.h))................................................. (3,819,808) (1,064,791)
Accounting for changes in interest in unconsolidated affiliated
companies (Note 15.I.i))....................................... -- 264,779
Securitization accounting (Note 15.I.l))....................... (5,391,069) (723,282)
Deferred charges (Note 15.I.n))............................... (189,783) (134,289)
Amortization of fees related to the Senior Notes (Note 15.I.o)) (1,337,057) (421,131)
Accounting for derivatives and hedging activities (Note 15.I.q)) (52,325,644) (10,079,056)
Minority interest (Note 15.I.r))............................... 2,628,369 474,331
Deferred income tax (Note 15.I.p))............................ (69,086,870) (14,710,518)
--------------------- --------------------
Shareholders' equity under US GAAP............................. Ps. 471,881,27 0 Ps. 617,841,988
====================== ====================
Description of changes in shareholders' equity under US GAAP: YEARS ENDED JUNE 30,
----------------------------------------------
2002 2001
--------------------- --------------------
Shareholders' equity as of the beginning of the year........... Ps. 617,841,988 Ps. 628,505,728
Other comprehensive income (loss).............................. (1,979,609) 1,994,742
Net loss under US GAAP......................................... (143,981,109) (12,658,482)
--------------------- --------------------
Shareholders' equity as of the end of the year................. Ps. 471,881,270 Ps. 617,841,988
====================== ====================
a) REVENUE RECOGNITION ISSUES
- REVENUE FROM SALES OF DEVELOPMENT PROPERTIES
Under Argentine GAAP, the Company recognizes revenue from sales of
development properties under fixed-priced construction contracts following the
percentage-of-completion method.
Under US GAAP, the Company applies Statement of Financial Accounting
Standards ("SFAS") No. 66 "Accounting for Sales of Real Estate", which requires
revenue to be measured under the percentage-of-completion method if the Company
meets certain criteria. If the criteria are not met, either the installment
method or the deposit method is used. Under the installment method cash receipts
are apportioned between cost recovered and profit, while under the deposit
method, no revenue is recognized and cash receipts are recorded as customer
advances. The Company determined that revenue recognition under the installment
method is appropriate for certain sales contracts.
Following is a description of revenues from sales of development
properties, their associated costs and related loss on Torres de Abasto unit
contracts' rescissions under US GAAP for the years ended June 30, 2002, 2001 and
2000, respectively.
AS OF JUNE 30,
------------------------------------------------------------------
2002 2001 2000
----------------- -------------------- -----------------
Sales.......................................... Ps. 4,348,407 Ps. 11,100,713 Ps. 9,537,034
Costs.......................................... (5,393,129) (12,244,003) (10,130,029)
Torres de Abasto unit contracts' rescissions... Ps. 53,746 Ps. (26,166) Ps. (2,605,801)
F-117
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
a) REVENUE RECOGNITION ISSUES (CONTINUED)
- OTHER REVENUE RECOGNITION ISSUES
As discussed in Note 4.a., certain of the Company's lease contracts
provide for the payment of additional rent based on a percentage of the tenant's
revenues. The Company determines the compliance with specific targets and
calculates the additional rent on a monthly basis as provided for in the
contracts. Thus, the Company does not have the inherent estimation process of a
lessor that determines additional rent less frequently. Under Argentine GAAP,
these contingent rents are not recognized until the required thresholds are
exceeded. Under US GAAP, the Company considers that Emerging Issues Task Force
98-9 "Accounting for Contingent Rent" ("EITF 98-9") is not applicable and that
its accounting policy is consistent with the provisions of Staff Accounting
Bulleting 101 ("SAB 101") "Revenue Recognition". As such, no difference exists
between revenue recognized under Argentine GAAP and US GAAP.
As discussed in Note 4.a., certain of the Company's lease contracts
provide for schedule rent increases. Under US GAAP, the Company evaluated the
guidance of FTB 85-3 and FTB 88-1 in accounting for its operating leases with
scheduled rent increases. Under this guidance, rental income from leases with
scheduled rent increases is to be recognized on a straight-line basis over the
lease term. The Company determined that such guidance was not applicable for the
Company's lease operations. In reaching its conclusion, the Company has
considered (i) that all of the Company's lease contracts are cancelable as
permitted under Argentine Law 24,808 ("Rentals Law") provided that the lease has
been in effect for at least six months and an insignificant penalty is paid by
the tenant; and (ii) the level of past due lease accounts receivable and current
delinquency rates.
b) APPRAISAL REVALUATION OF FIXED ASSETS
As discussed in Note 4.e., under Argentine GAAP, the Company recognized a
parcel of land acquired prior to June 30, 1986 at its appraised value as of such
date. This appraisal increased the carrying value of the land by Ps. 3.5
million, which was recorded against an appraisal revaluation reserve account in
the shareholders' equity. Under Argentine GAAP, this appraisal revaluation
reserve will be amortized to income once the land is disposed of or its value
becomes impaired. Under US GAAP, this parcel of land was recorded at original
cost and therefore, this reserve has been reversed.
c) PREOPERATING AND ADVERTISING EXPENSES
Under Argentine GAAP, the Company capitalizes certain costs related to
pre opening activities of the Company's shopping centers as well as other costs
related to the evaluation of certain e-commerce projects. These costs are being
amortized under the straight-line basis over 3 years. Under US GAAP, these costs
are expensed as incurred.
Also, under Argentine GAAP, the Company capitalizes certain advertising
and promotion costs related to certain shopping centers, which are being
amortized under the straight-line basis over 3 years. Under US GAAP, all of
these costs are expensed as incurred.
d) WEB SITE DEVELOPMENT COSTS
Under Argentine GAAP, the Company capitalizes certain costs incurred in
connection with the development of the Company's web sites. Such costs are
amortized under the straight-line method over a period of 2 years.
Under US GAAP, the Company adopted EITF No. 00-02, "Accounting for Web
Site Development Costs" for the fiscal year ended June 30, 2000. As such, during
fiscal year 2000 the Company expensed Ps. 0.7 million of certain costs incurred
during the planning stage as well as costs related to training, administration
and other maintenance activities. Under Argentine GAAP, the Company expensed
such costs during fiscal year 2001 primarily as a result of the discontinuance
of Alto Invest's operations. Under US GAAP, the Company reversed such adjustment
during fiscal year 2001, as these costs were expensed as incurred in fiscal year
2000.
F-118
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
e) SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
Under Argentine GAAP, the Company capitalizes certain costs incurred in
the development of software for internal use. Under US GAAP, the Company applies
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" effective July 1, 1999. As such, the
Company (i) expensed Ps. 0.2 million, Ps. 0.4 million and Ps. 0.3 million of
capitalized software costs for the years ended June 30, 2002, 2001 and 2000,
respectively, and (ii) reversed amortization expense charges recognized under
Argentine GAAP of Ps. 0.3 million, Ps. 0.3 million and Ps. nil for the years
ended June 30, 2002, 2001 and 2000, respectively.
f) DIFFERENCES IN BASIS RELATING TO PURCHASE ACCOUNTING
Under Argentine GAAP and US GAAP, the Company applies the purchase method
of accounting to its acquisitions. Accordingly, the fair market value of the
assets and liabilities acquired was estimated and the excess of the purchase
price over the fair value is considered goodwill. The US GAAP adjustment for
"Difference in basis relating to purchase accounting" reflects the application
of US GAAP adjustments, such as accounting for deferred income taxes, when
estimating the fair value of such assets and liabilities.
g) AMORTIZATION EXPENSE
The differences in the carrying amount of goodwill between Argentine GAAP
and US GAAP as described in Note 15.I.f. give rise to differences in
amortization expenses.
h) NON-CURRENT INVESTMENTS IN UNCONSOLIDATED AFFILIATED COMPANIES
The Company has assessed the impact of US GAAP adjustments for its equity
investees. As a consequence of this assessment, the Company recognized a net
(loss) gain of Ps. (2.7) million, Ps. 1.0 million and Ps. (1.4) million for the
years ended June 30, 2002, 2001 and 2000, respectively. These adjustments relate
principally to (i) the recognition of preoperating and organization costs as
expenses, (ii) the accounting of web site development costs, (iii) the
depreciation of fixed assets, (iv) the recognition of deferred income taxes, and
(v) the accounting for available-for-sale securities.
i) ACCOUNTING FOR CHANGES IN INTEREST IN UNCONSOLIDATED AFFILIATED
COMPANIES
As discussed in Note 3.f.(i), the Company formed E-Commerce Latina in
December 1999. The issuance of stock by E-Commerce Latina to Telefonica
decreased the Company's percentage of ownership in E-Commerce Latina and the
value assigned to the E-Commerce Latina's common stock issued under the
transaction was substantially more than the Company's carrying amount per share
of E-Commerce Latina stock, thus triggering a change in the Company's interest
in E-Commerce Latina. Under Argentine GAAP, the change in the Company's interest
resulted in the recognition of a deferred gain of Ps. 9.8 million since
E-Commerce Latina is in the early stage of development and the realizability of
the gain is not assured. This gain was being amortized to income as the investee
incurred operating losses. Under US GAAP, in accordance with Staff Accounting
Bulletin ("SAB") Topic 5H, as amended by SAB 84, the Company reflected the
change of interest in E-Commerce Latina as a credit to additional
paid-in-capital, and as a result, the amortized portion of deferred gain under
Argentine GAAP was reversed.
In March 2001, the Company's ownership interest in Perez Cuesta decreased
from 25% to 18.9% as a result of an issuance of stock by Perez Cuesta not
subscribed by the Company. Under Argentine GAAP, the change in the Company's
interest resulted in the recognition of a gain of Ps. 0.3 million since the
value assigned to the Perez Cuesta's common stock issued under the transaction
was substantially more than the carrying amount per share of Perez Cuesta stock.
Under US GAAP, the Company applies SAB Topic 5H that permits the income
statement treatment. Accordingly, under US GAAP, the Company recognized a gain
of Ps. 0.4 million. The difference of Ps. 0.1 million reflects the effect of US
GAAP adjustments as of the date of change.
F-119
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
j) ACCOUNTING FOR CHANGES IN INTEREST IN CONSOLIDATED AFFILIATED
COMPANIES
In September 2000, the Company's interest in Alto Invest increased from
61% to 76% as a result of an issuance of stock by Alto Invest. Under Argentine
GAAP, the change in the Company's interest resulted in the recognition of a loss
of Ps. 0.4 million since the value assigned to the Alto Invest's common stock
issued under the transaction was substantially more than the carrying amount per
share of Alto Invest stock. Under US GAAP, this transaction was accounted for as
a purchase of additional shares and, accordingly, the difference was considered
goodwill. As discussed in Note 4, Alto Invest ceased its operations in May 2001.
Therefore, under US GAAP, the Company wrote-down Ps. 0.5 million related to the
goodwill previously recognized. The difference respect the amount recognized
under Argentine GAAP relates to the effect of US GAAP adjustments at the date of
change.
k) STOCK OPTION AGREEMENT WITH CONSULTORES INTERNET MANAGERS LTD.
E-Commerce Latina entered into a stock option agreement with CIM,
pursuant to which options were granted, to purchase class B shares of
Altocity.Com, representing 15% of its common stock. CIM is a special-purpose
Cayman Islands' corporation created to act on behalf of the Company's management
and is represented by an independent attorney-in-fact. Pursuant to the terms of
the agreement, options were granted for a period up to eight years and at an
exercise price to be determined by the quotient of (i) the original value of
class B shares at the time of the contribution to Altocity.Com by the holding
company, plus interest accrued at an annual fixed interest rate of 14% through
the exercise date of the option over (ii) the total number of class B shares
owned by the holding company at the exercise date of the option. CIM has a
vested interest in 50% of the underlying shares within 30 days after the grant
date and the remaining 50% will vest upon the third anniversary of the grant
date. The option was granted to CIM to be allocated by it among the management
of Altocity.com as an incentive compensation for their services. As of June 30,
2002, no individual awards have been determined for participating employees
under this option. Upon exercise of the option, CIM's sole asset will be its 15%
interest in Altocity.Com.
Under US GAAP, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" in accounting for both stock option agreements. This
Statement gave the Company the option of either (i) continuing to account for
stock-based employee compensation plans in accordance with the guidelines
established by Accounting Principles Board ("APB") No. 25, "Accounting for Stock
Issued to Employees" and related interpretations while providing the disclosures
required under SFAS No. 123, or (ii) adopting SFAS No. 123 accounting for all
employee and non-employee stock compensation arrangements. The Company opted to
continue to account for its stock-based awards using the intrinsic value method
in accordance with APB No. 25.
Under US GAAP, in accordance with AIN-APB 25 "Accounting for Stock Issued
to Employees - an accounting interpretation of APB Opinion No 25", the economic
substance of a plan established by the principal stockholders is substantially
the same for the Company and the employee, whether the plan is adopted by the
Company or the principal stockholder. Consequently, the Company should account
for this type of plan when one is established or financed by the principal
stockholder unless (i) the relationship between the stockholder and the
company's employee is one which would normally result in generosity, (ii) the
stockholder has an obligation to the employee which is completely unrelated to
the latter's employment or (iii) the Company clearly does not benefit from the
transaction. The rationale established in this Interpretation has been adopted
by the SEC to apply to other situations in which a principal stockholder
undertakes transactions for the benefit of the company. SAB 79 (SAB Topic 5T)
requires any transaction undertaken by a company's principal stockholder for the
benefit of the company to be accounted for according to its substance and not
its form.
The Company has determined that the stock options were granted, in
substance, to compensate the management of Altocity.Com. In addition, as the
exercise price is not known at date of grant, this option agreement is
considered to be a "variable" plan. To date, no individual awards have been
determined for participating employees under the option plan. At June 30, 2002,
as the exercise price exceeds the fair market value of Altocity.Com's shares, no
compensation expense has been recognized.
F-120
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
l) SECURITIZATION ACCOUNTING
As discussed in Note 12, the Company entered into two-year
revolving-period securitization programs through which Tarshop, a majority-owned
subsidiary of the Company, sold a portion of its customer credit card receivable
balances to Trusts that issue certificates to public and private investors.
Under Argentine GAAP, to the extent the certificates are sold to third parties,
the related transferred balances qualify as sales for financial statement
purposes and as such the receivables are removed from the Company's consolidated
balance sheet. The remaining receivables in the Trusts, which have not been sold
to third parties, are reflected on the Company's balance sheet as retained
interests in transferred credit card receivables. These retained interests are
treated in a manner similar to an investment and accounted for under the equity
method.
Certain expenses associated with the securitization of credit card
receivables are capitalized and amortized over the term of the agreements.
Pursuant to the contractual agreements, the Company remains the servicer on the
accounts and receives a fee for the services performed. Income from servicing
activities is recognized as services are performed.
Under US GAAP, the Company adopted Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS No. 140"). SFAS No. 140 was issued in
September 2000 and replaces, in its entirety, SFAS No. 125. The Company was
required to adopt the provisions of SFAS No. 140 prospectively to transactions
beginning after March 31, 2001. Although SFAS No. 140 has changed many of the
rules regarding securitizations under SFAS No. 125, it continues to require an
entity to recognize the financial and servicing assets it controls and the
liabilities it has incurred and to derecognize financial assets when control has
been surrendered. The proceeds of securitized financial assets are allocated to
the assets sold, the servicing asset or liability and retained interest, based
on their relative estimated fair values at the transfer date in determining the
gain on the securitization transaction. SFAS No. 140 and SFAS No. 125 also
require an entity to recognize a servicing asset or servicing liability each
time it undertakes an obligation to service financial assets that have been
securitized and amortize it over the period of estimated net servicing income or
loss. The Company has not recognized any servicing asset or liability since the
estimated fair value of the servicing right was zero. In determining the
estimated fair value, the Company considered the fees received as compensation
just adequate to compensate the Company for its servicing responsibilities (i.e.
the fees received as compensation for the services rendered are similar to those
that would be paid to a substitute servicer, should one be required, according
to estimated market values).
The retained interests in securitized credit card receivables are treated
as a debt security classified as available-for-sale in accordance with Statement
of Financial Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for
Certain Investments in Debt and Equity Securities", and are carried at fair
value. At the time of securitization, the retained interest is initially
recorded at the basis allocated in accordance with SFAS No. 140. This original
cost basis is periodically adjusted to fair value, which is based on the
discounted anticipated future cash flows on a "cash out" basis. The cash out
method projects cash collections to be received only after all amounts owed to
investors have been paid. Adjustments to fair value (net of related deferred
income taxes) are recorded as a component of other comprehensive income.
The following summarizes the Company's securitization activity:
YEAR ENDED JUNE 30,
-------------------------------------------------------------------
2002 2001 2000
--------------------- ---------------------- ----------------------
Proceeds from securitizations Ps. 96,219,348 Ps. 55,589,795 Ps. 23,278,780
Servicing fees received 108,513 256,900 28,973
The following summarizes the changes in the balance of the Company's
retained interest for the years ended June 30, 2002 and 2001:
F-121
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
l) SECURITIZATION ACCOUNTING (CONTINUED)
ESTIMATED UNREALIZED
COST GAIN (LOSS) FAIR VALUE
-------------------- --------------------- --------------------
Balance at June 30, 2000 Ps. 4,702,908 Ps. - Ps. 4,702,908
Retained interest in portfolios sold 9,223,064 - 9,223,064
Change in unrealized gain - 3,773,940 3,773,940
-------------------- --------------------- --------------------
Balance at June 30, 2001 Ps. 13,925,972 Ps. 3,773,940 Ps. 17,699,912
Retained interest in portfolios sold - - -
Change in unrealized gain (loss) - (10,965,313) (10,965,313)
-------------------- --------------------- --------------------
Balance at June 30, 2002 Ps. 13,925,972 Ps. (7,191,373) Ps. 6,734,599
==================== ===================== ====================
As of June 30, 2002, and 2001 the gross net unrealized (loss) gain has
been offset by a deferred tax benefit (expense) of Ps. 2.5 million and Ps. (1.3)
million, respectively.
The key economic assumptions used in measuring the fair value of retained
interests at the time of and subsequent to a securitization are the estimated
cash flows and the discount rate. The estimated cash flows have been discounted
at 70%. The following represents the sensitivity of the current fair value of
retained interest in securitizations at June 30, 2002 to changes to key
assumptions:
IMPACT ON FAIR VALUE OF
-----------------------------------------------
5% ADVERSE CHANGE 10% ADVERSE CHANGE
----------------------- -----------------------
Discount rate 70% Ps. 147,244 Ps. 288,074
The above sensitivities are hypothetical and should be used with caution.
As the amounts indicate, changes in fair value based on variations in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also, in
this table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption. In reality, changes in one factor may result in changes in another,
which might magnify or counteract the sensitivities.
The Company's managed credit card receivables consists of retained
interest in credit card receivable securitizations and investor's share of
securitizations sold to unrelated parties without recourse. The Company records
its retained interest in credit card receivable securitizations on the balance
sheet.
m) AVAILABLE-FOR-SALE SECURITIES
Under Argentine GAAP, investments in mutual funds are carried at market
value, with unrealized gains and losses recorded in income. Under US GAAP,
pursuant to SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities", these investments in mutual funds are classified as
available-for-sale investments, and accordingly unrealized gains and losses are
excluded from income and reported as a separate component of shareholders'
equity.
n) DEFERRED CHARGES
Under Argentine GAAP, the Company capitalizes certain costs, which are
being amortized on a straight-line method over 3 years. Under US GAAP, such
costs are expensed as incurred.
F-122
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
o) AMORTIZATION OF FEES RELATED TO THE SENIOR NOTES
Under Argentine GAAP, fees and expenses relating to the Senior Notes are
being amortized on a straight-line method over the term of the agreement. Under
US GAAP, such costs are being amortized over the same period using the effective
interest method of amortization.
p) DEFERRED INCOME TAX
Under Argentine GAAP, income taxes are recognized on the basis of amounts
currently due in accordance with Argentine tax regulations. Temporary
differences between the financial reporting and income tax bases of accounting
are therefore not considered in recognizing income taxes. Under US GAAP, the
Company applies the principles of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes", which requires a comprehensive
liability method of accounting for income taxes. Under the comprehensive
liability method, deferred income taxes are recognized for the tax consequences
of temporary differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities.
Deferred tax assets are also recognized for tax loss carryforwards. If it
is more likely than not that some portion or all of a deferred tax asset will
not be realized, a valuation allowance is recognized. Under SFAS No. 109, the
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the date of the change.
The Company has provided a valuation allowance for a portion of its net
deferred tax assets, as the future realization of the tax benefit is not
considered by management to be more-likely-than-not. The Company will continue
to monitor the need for the valuation allowance that has been provided.
At June 30, 2002, the Company and its subsidiaries had approximately Ps.
135.6 million of tax loss carryforwards. These carryforwards are available to
offset future taxable income and expire at various dates beginning in 2003 and
ending in 2008.
The components of the net deferred income tax liability under US GAAP as
of June 30 consist of the following:
2002
----------------------------------------------------------------------
SFAS 109 APPLIED TO SFAS 109 APPLIED
ARGENTINE GAAP TO US GAAP
BALANCES ADJUSTMENTS SFAS 109
---------------------- ------------------ ----------------------
DEFERRED TAX ASSETS:
Tax loss carryforward................. Ps. 47,451,373 Ps. -- Ps. 47,451,373
Allowance for doubtful accounts....... 2,628,997 -- 2,628,997
Provisions............................ 2,228,965 -- 2,228,965
Other................................. 45,297 -- 45,297
Accounting for derivatives and hedging -- 18,313,975 18,313,975
Credit card securitization............ -- 1,886,874 1,886,874
---------------------- ------------------ ----------------------
Total gross deferred tax assets....... 52,354,632 20,200,849 72,555,481
---------------------- ------------------ ----------------------
Valuation allowance................... (1,558,194) -- (1,558,194)
---------------------- ------------------ ----------------------
Total net deferred tax assets......... Ps. 50,796,438 Ps. 20,200,849 Ps. 70,997,287
---------------------- ------------------ ----------------------
DEFERRED TAX LIABILITIES:
Fixed assets.......................... (134,002,415) 98,076 (133,904,339)
Inventory............................. (3,141,353) -- (3,141,353)
Intangible assets..................... (4,351,757) 1,601,836 (2,749,921)
Others................................ (288,544) -- (288,544)
---------------------- ------------------ ----------------------
Total gross deferred tax liabilities.. Ps. (141,784,069) Ps. 1,699,912 Ps. (140,084,157)
---------------------- ------------------ ----------------------
NET DEFERRED INCOME TAX ASSET (LIABILITY) Ps. (90,987,631) Ps. 21,900,761 Ps. (69,086,870)
====================== ================== ======================
2001
----------------------------------------------------------------------
SFAS 109 APPLIED TO
ARGENTINE GAAP SFAS 109 APPLIED TO
BALANCES US GAAP ADJUSTMENTS SFAS 109
--------------------- --------------------- --------------------
DEFERRED TAX ASSETS:
Tax loss carryforward................. Ps. 5,773,503 Ps. -- Ps. 5,773,503
Allowance for doubtful accounts....... 260,247 -- 260,247
Provisions............................ 279,757 -- 279,757
Other................................. -- -- --
Accounting for derivatives and hedging -- 3,527,670 3,527,670
Credit card securitization............ -- 150,510 150,510
--------------------- --------------------- --------------------
Total gross deferred tax assets....... 6,313,507 3,678,180 9,991,687
--------------------- --------------------- --------------------
Valuation allowance................... (2,339,729) -- (2,339,729)
--------------------- --------------------- --------------------
Total net deferred tax assets......... Ps. 3,973,778 Ps. 3,678,180 Ps. 7,651,958
--------------------- --------------------- --------------------
DEFERRED TAX LIABILITIES:
Fixed assets.......................... (18,220,043) 153,929 (18,066,114)
Inventory............................. (217,240) 68,764 (148,476)
Intangible assets..................... (5,446,783) 1,863,347 (3,583,436)
Others................................ (564,450) -- (564,450)
--------------------- --------------------- --------------------
Total gross deferred tax liabilities.. Ps. (24,448,516) Ps. 2,086,040 Ps. (22,362,476)
--------------------- --------------------- --------------------
NET DEFERRED INCOME TAX ASSET (LIABILITY) Ps. (20,474,738) Ps. 5,764,220 Ps. (14,710,518)
===================== ===================== ====================
F-123
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
p) DEFERRED INCOME TAX (CONTINUED)
As of June 30, 2002 and 2001, Ps. 24,718,792 and Ps. 7,254,808,
respectively are classified as current assets, and Ps. 93,805,662 and Ps.
21,965,326, respectively, are classified as non-current liabilities.
Income tax expense (benefit) for the years ended June 30 consists of the
following:
2002 2001 2000
------------------ ------------------ ------------------
Current income tax expense............Ps. 1,290,443 Ps. 2,356,802 Ps. 8,349,736
Deferred income tax expense (benefit). 55,695,356 2,156,130 (18,565,668)
------------------ ------------------ ------------------
Income tax expense (benefit)..........Ps. 56,985,799 Ps. 4,512,932 Ps. (10,215,932)
================== ================== ==================
The provision for income taxes computed in accordance with US GAAP
differs from that computed at the statutory rate prevailing as of each year end,
as follows:
YEARS ENDED JUNE 30,
--------------------------------------------------------------------
2002 2001 2000
--------------------- ------------------- --------------------
Income tax (benefit) expense at
statutory tax rate on pretax (loss)
income in accordance with US GAAP...... (32,949,192) (2,941,411) Ps. 318,117
Non-deductible expenses................ 6,677,688 4,446,705 (11,937,225)
Net loss in related companies.......... 2,597,139 2,799,659 785,696
Change in valuation allowance.......... 317,090 1,146,652 711,008
Inflation adjustment................... 79,999,550 -- --
Others, net............................ 343,524 (938,673) (93,528)
--------------------- ------------------- --------------------
Income tax expense (benefit)........... Ps. 56,985,799 Ps. 4,512,932 Ps. (10,215,932)
===================== =================== ====================
q) ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
As discussed in Note 13, the Company enters into interest rate swaps and
foreign currency forward contracts to further manage its exposure to interest
rate variations related to its borrowings and to lower its overall borrowing
costs.
At June 30, 2002 and 2001, the Company had the following derivative
activity:
(i) Interest rate swaps
During fiscal year 2000, the Company entered into an interest rate swap
agreement to effectively convert a portion of its peso-denominated fixed-rate
debt to peso-denominated floating rate debt. As of June 30, 2001, the Company
had an interest rate swap agreement outstanding with an aggregate notional
amount of Ps. 85.0 million with maturities through March 2005. This swap
agreement initially allowed the Company to reduce the net cost of its debt.
However, subsequent to June 30, 2001, the Company modified the swap agreement
due to an increase in interest rates as a result of the economic situation.
Under the terms of the revised agreement, the Company converted its
peso-denominated fixed rate debt to U.S. dollar-denominated floating rate debt
for a notional amount of US$ 69.1 million with maturities through March 2005. As
collateral for the agreement, the Company was required to make a deposit with
the counterpart, totaling US$ 50.4 million at June 30, 2002.
Under Argentine GAAP, any differential to be paid or received is accrued
and is recognized as an adjustment to interest expense in the statement of
operations. The related accrued receivable or payable is included as an
adjustment to interest payable. The fair value of the swap agreement is not
recognized in the financial statements.
F-124
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
q) ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED)
(i) Interest rate swaps (continued)
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.
SFAS No. 133 was subsequently amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133, and is now effective for fiscal years beginning after
June 15, 2000, but may be implemented as of the beginning of any fiscal quarter
after issuance. Retroactive application is not permitted. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997. Changes in accounting methods will be required
for derivative instruments utilized by the Company to hedge foreign currency
exchange rate and interest rate risks. Such derivatives include foreign currency
forward contracts and interest rate swaps. In June 2000, the FASB issued
Statement 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities", which addresses a limited number of implementation issues
arising from SFAS 133.
Under US GAAP, the Company adopted Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133), and its corresponding amendments under SFAS No. 138, on July 1,
2000.
Under US GAAP, the swap is required to be recorded on the balance sheet
at fair value. The interest rate swap was originally designated as a hedge of
the change in fair value of the fixed-rate debt related to fluctuations in
interest rates, and accordingly, differences between the changes in the fair
value of the swap and the hedged fixed-rate debt, representing hedge
ineffectiveness, were recognized in earnings. Subsequent to June 30, 2001, due
to the modifications of the swap agreement, the swap does not longer qualify for
hedge accounting, and accordingly, changes in fair value of the swap agreement
are recognized in earnings in the current period.
In accordance with the transition provisions of FAS 133, the Company
recorded a net-of-tax cumulative-effect-type adjustment of Ps. 0.2 million
(loss) in earnings during the year ended June 30, 2001 to recognize at fair
value the swap designated as a fair value hedge and the difference (attributable
to the hedged risks) between the carrying value and the fair value of related
hedged debt.
(ii) Foreign currency forward contracts
Consistent with the Company's risk management policies, the Company uses
foreign currency forward-exchange contracts as a supplement to reduce its
overall borrowing costs. At June 30, 2001, the Company had outstanding foreign
currency forward contracts with financials institutions to sell an aggregate net
amount of US$ 80.0 million with a final maturity through September 15, 2001. At
June 30, 2002, the Company does not hold any foreign currency forward-exchange
contract outstanding.
Under Argentine GAAP, the fair value of the forward foreign exchange
contracts is not recognized in the financial statements. Under US GAAP, these
forward contracts do not qualify for hedge accounting treatment under FAS 133.
However, these derivatives, although not designated in a hedging relationship,
are required to be recorded on the balance sheet at fair value. Changes in fair
values of these derivative instruments not designated as hedging instruments are
recognized in earnings in the current period. In accordance with the transition
provisions of FAS 133, the Company recorded a net-of-tax cumulative-effect-type
adjustment of Ps. 0.4 million (gain) in earnings during the year ended June 30,
2001.
F-125
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
q) ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED)
(iii) Additional disclosure requirements
The Company's policy requires that contracts used as hedges must be
effective at reducing the risk associated with the exposure being hedged and
must be designated as a hedge at the inception of the contract. Hedging
effectiveness is assessed periodically. Any contract that is either not
designated as a hedge, or is so designated but is ineffective, is marked to
market and recognized in earnings immediately. The Company will discontinue
hedge accounting prospectively if it is determined that the derivative is no
longer effective in offsetting changes in the fair value or cash flows of a
hedged item; when the derivative expires or is sold, terminated, or exercised;
when the derivative is dedesignated as a hedge instrument, because it is
probable that the forecasted transaction will not occur; or management
determines that designation of the derivative as a hedge instrument is no longer
appropriate.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. In this documentation, the
Company specifically identifies the asset, liability, firm commitment, or
forecasted transaction that has been designated as a hedged item and states how
the hedging instrument is expected to hedge the risks related to the hedged
item. The Company formally measures effectiveness of its hedging relationships
both at the hedge inception and on an ongoing basis in accordance with its risk
management policy.
When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will continue to be
carried on the balance sheet at its fair value, and gains and losses that were
accumulated in OCI will be recognized immediately in earnings. When the hedged
forecasted transaction is no longer probable, but is reasonably possible, the
accumulated gain or loss remains in OCI and will be recognized when the
transaction affects earnings; however, prospective hedge accounting for this
transaction is terminated. In all other situations in which hedge accounting is
discontinued, the derivative will be carried at its fair value on the balance
sheet, with changes in its fair value recognized in current-period earnings.
r) MINORITY INTEREST
This adjustment represents the effect on minority interest of the
foregoing reconciling items.
II. Additional disclosure requirements
a) SEGMENT INFORMATION
Under Argentine GAAP, when an entity has different activities, it is
recommended practice (but not compulsory) to disclose the revenues and expenses
for each activity in the financial statements or as supplementary information.
Furthermore, the Company believes that the presentation of segment information
facilitates a clearer understanding of the Company's performance by readers.
Argentine GAAP does not prescribe any guidance in presenting segment
information. Accordingly, the Company has chosen to follow the guidance set
forth in SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information" in determining the number and nature of reportable operating
segments presented in the primary financial statements (See Note 10 for details)
b) DISCLOSURE OF MATURITIES OF LONG-TERM DEBT
Scheduled maturities of the long-term debt for the next years, as of June
30, 2002, are as follows:
2003.......................................... Ps. 23,078,795
2004.......................................... 15,618,750
2005.......................................... 153,129,940
-------------------------
Ps. 191,827,485
=========================
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ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
c) DISCLOSURE OF OPERATING LEASE INFORMATION
The Company enters into cancelable commercial leases with its tenants for
terms ranging from three to ten years, with most leases having terms of no more
than five years. Tenants are generally charged a rent which consists of the
higher of (i) the base rent and (ii) the percentage rent (which generally ranges
between 4% and 8% of the tenants sales). Furthermore, pursuant to the rent
escalation clause in most leases, a tenant's base rent generally increases
between 4% and 7% each year during the term of the lease.
Included in lease revenues for the years ended June 30, 2002, 2001 and
2000 were contingent rentals of Ps. 5.3 million, Ps. 7.5 million and Ps. 9.0
million, respectively.
d) DISCLOSURE OF RELATED PARTIES TRANSACTIONS
The following disclosures of transactions with related parties are
required under US GAAP:
Donations: In November 1997, the Company's Board of Directors agreed to
enter into an agreement with Fundacion IRSA, a charitable, no-for profit
corporation of which Eduardo S. Elsztain is a Director and his wife is the
President, whereby the Company granted to Fundacion IRSA, the right to use 3,800
square meters of constructed area in Abasto for no charge for a period of 30
years. This area is used for a children's museum called Museo de los Ninos -
Abasto, which is an interactive learning center for both children and adults.
The Company expects that the children's museum will attract additional customers
to Abasto. The museum opened in April 1999.
Advisory services: On October 29, 1996, at the general and extraordinary
shareholder's meeting of the Company, the shareholders authorized the Board of
Directors to enter into an agreement with a consultant relating to the provision
of construction management services, specifically related to the construction of
Abasto and Torres de Abasto. Such decision was based on the need to have
advisory with high specialization in the analysis and execution of those types
of developments, since Alto Palermo does not have its own personnel with such
expertise. The Company subsequently agreed to receive such services from IRSA
and Parque Arauco, jointly in relation to the construction of Abasto and from
IRSA alone, regarding the construction of Torres de Abasto. Pursuant to the
agreement between the parties, the fee for the provision of these services is 5%
of all direct expenses incurred in the construction of the said properties. In
terms of Abasto, this fee is split 65% as to IRSA and 35% as to Parque Arauco.
On May 1, 2000, the Company entered into an agreement with IRSA for the
sale or lease of the remaining units of Torres de Abasto project for a monthly
fixed fee of Ps. 2,500 plus an additional fee of: (i) one percent of total
selling price; or (ii) two percent of the total lease contract.
Since the commercialization of the units is completed, the agreement
between both companies has expired.
Corporate services: In order to reduce administrative expenses and to
achieve a more efficient allocation of corporate resources, the Company and IRSA
provide themselves and Cresud S.A.C.I.F. y A. corporate services in the areas of
institutional relations, finance and human resources.
Legal services: During the years ended June 30, 2002, 2001 and 2000, the
law firm Zang, Bergel & Vines provided the Company legal services amounting to
Ps. 1.2 million, Ps. 2.0 million and Ps. 1.6 million, respectively. Saul Zang,
director of the Company, and Ernesto M. Vines and Juan M. Quintana, alternate
directors of the Company, are partners of the law firm.
e) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Under Argentine GAAP, there are no specific rules regarding disclosure of
fair value of financial instruments.
F-127
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
e) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Under US GAAP, SFAS No. 105 requires reporting entities to disclose
certain information about financial instruments with off-balance sheet risk of
accounting loss. SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments", requires disclosure of fair value information about financial
instruments whether or not recognized in the balance sheet, for which it is
practicable to estimate fair value. Financial instruments include such items as
to cash and cash equivalents and accounts receivable and other instruments. SFAS
No. 107 excludes from its disclosure requirements lease contracts and various
significant assets and liabilities that are not considered to be financial
instruments. SFAS No. 119 requires reporting entities to disclose certain
information for derivative financial instruments. SFAS No. 133, which is
effective July 1, 2000, supersedes SFAS No. 105 and SFAS No. 119 and amends SFAS
No. 107 to include in SFAS No. 107 the disclosure requirements of credit risk
concentrations from SFAS No. 105. See Note 15.II.f) for details of concentration
of credit risk.
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and the relevant market
information. Where available, quoted market prices are used. In other cases,
fair values are based on estimates using other valuation techniques, such as
discounting estimated future cash flows using a rate commensurate with the risks
involved or other acceptable methods. These techniques involve uncertainties and
are significantly affected by the assumptions used and the judgments made
regarding risk characteristics of various financial instruments, prepayments,
discount rates, estimates of future cash flows, future expected loss experience,
and other factors. Changes in assumptions could significantly affect these
estimates. Derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in an immediate
sale of the instrument. Also, because of differences in methodologies and
assumptions used to estimate fair value, the Company's fair values should not be
compared to those of other companies.
Under the Statement, fair value estimates are based on existing
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Accordingly, the aggregate fair value amount presented
does not represent the underlying value of the Company. For certain assets and
liabilities, the information required under the Statement is supplemental with
additional information relevant to an understanding of the fair value.
The methods and assumptions used to estimate the fair values of each
class of financial instruments as of June 30, 2002 and 2001 are as follows:
Cash and cash equivalents
The Company considers all highly liquid investments with original
maturities of three months or less, consisting of time deposits and mutual
funds, to be cash and cash equivalents. The carrying amount reported in the
balance sheet approximates fair value.
Mortgages and leases receivable, net
The estimated fair value of mortgage notes receivable collateralized by
real property is based on discounting the future cash flows at a year-end risk
adjusted lending rate that the Company would utilize for loans of similar risk
and duration. It is not practicable to estimate the fair value of leases
receivable because of the inability to estimate it without incurring excessive
costs.
Accounts and notes receivable, net
Carrying amounts are considered to approximate fair value. All amounts
that are assumed to be uncollectible within a reasonable time are written off
and/or reserved.
F-128
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
e) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Retained interest in transferred credit card receivables
Fair value is estimated by discounting anticipated future cash flows
using a discount rate based on specific factors. The anticipated future cash
flows are projected on a "cash out" basis to reflect the restriction of cash
flows until the investors have been fully paid. As of June 30, 2002 and 2001,
the fair value of retained interests in transferred credit card receivables
amounted to Ps. 6.7 million and Ps. 17.7 million, respectively.
Accounts and notes payable
The carrying amount of accounts and notes payable reported in the balance
sheet approximates its fair value.
Short-term debt
The carrying amount of short-term debt reported in the balance sheet
approximates fair value due to its short-term nature.
Long-Term debt
As of June 30, 2002 and 2001 the carrying amount of long-term debt
reported in the balance sheet approximates its fair value.
Other receivables and Other liabilities
The carrying amount of other receivables and other liabilities reported
in the balance sheet approximates fair value due to their short-term nature.
Forward foreign currency exchange contracts
The fair value of the forward foreign currency exchange contracts is
based on the estimated amount at which they could be settled based on forward
market exchange rates. As of June 30, 2001, the fair value of foreign exchange
forward contracts totaled Ps. 1.1 million.
Interest rate swap agreement
The fair value of the interest rate swap agreement was determined based
on the present value of the estimated future net cash flows using implied rates
in the applicable yield curve as of the valuation date. At June 30, 2002 and
2001, outstanding interest rate swaps had estimated fair values, which were
unfavorable by approximately Ps. 245.9 million and Ps. 26.0 million,
respectively. The accompanying consolidated balance sheets do not reflect those
values.
f) CREDIT RISK
The Company is exposed to a significant concentration of credit risk,
relating to its cash and current investments. The Company places its cash and
current investments in high quality financial institutions that are located in
Argentina and United States. The Company's policy is to limit the exposure with
any one institution.
As of June 30, 2002 and 2001, approximately Ps. 7.0 million and Ps. 16.9
million included in the cash balances were held with 17 institutions and 15
institutions, respectively. The Company has not experienced any significant
losses in such accounts.
F-129
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
f) CREDIT RISK (CONTINUED)
Credit card receivables arise primarily under open-end revolving credit
accounts used to finance purchases of goods and services offered by the
Company's shopping centers. These accounts have various billing and payment
structures, including varying minimum payment levels and finance charge rates.
Credit card receivables are shown net of an allowance for uncollectible
accounts. The Company provides an allowance for uncollectible accounts based on
impaired accounts, historical charge-off patterns and management judgement.
As of June 30, 2002 the Company has sold credit card receivables of Ps.
121.7 million through securitization transactions, for which the Company's
credit risk exposure is contractually limited to the subordinated CPs held by
the Company representing Ps. 9.6 million (equity value) and a Ps. 0.3 million
escrow reserves for losses.
g) BALANCE SHEET CLASSIFICATION DIFFERENCES
Under Argentine GAAP, assets and liabilities are classified in the
current or non-current, principally depending on the expected settlement dates.
Under US GAAP, real estate enterprises generally do not present a classified
balance sheet.
As discussed in Note 5.g., at June 30, 2002, the Company has not complied
with certain restrictive covenants set forth in the Senior Notes Agreement. On
August 22, 2002, the Company obtained a limited waiver from the holders of the
Senior Notes with respect to such covenant violations. As a result, under
Argentine GAAP, the Company has classified the amounts as long-term obligations
in the accompanying consolidated balance sheet. Under US GAAP, Statement of
Financial Accounting Standards ("SFAS") No.78 "Classification of Obligations
That Are Callable by the Creditor" clarifies how obligations that are callable
by the creditor should be presented by the debtor in a classified balance sheet.
Specifically, it addresses whether an obligation should be classified as a
current liability if the debtor is in violation of a provision of a long-term
debt agreement at the balance-sheet date and (a) the violation makes the
obligation callable at the balance-sheet date or (b) the violation, if not cured
within a specified grace period, will make the obligation callable within one
year from the balance-sheet date. Pursuant to this guidance and given that the
Company has not obtained a permanent waiver and there is no assurance that an
acceleration will not take place within a one year period, for US GAAP purposes
the entire outstanding balance would have been classified as a
current-liability.
h) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1999, FASB issued SFAS No. 136, "Transfers of Assets to a
Not-for-Profit Organization or Charitable Trust That Raises or Holds
Contributions for Other". This Statement establishes standards for transactions
in which an entity -the donor- makes a contribution by transferring assets to a
not-for-profit organization or charitable trust -the recipient organization-
that accepts the assets from the donor and agrees to use those assets on behalf
of or transfer those assets, the return on investment of those assets, or both
to another entity -the beneficiary- that is specified by the donor. It also
establishes standards for transactions that take place in a similar manner but
are not contributions because the transfers are revocable, repayable, or
reciprocal. The Company adopted SFAS No. 136 effective July 1, 2000. Its
adoption did not have a material effect on the company's results of operations
and financial condition.
In June 2001, SFAS No. 141, "Business Combinations," was issued. This
statement eliminates pooling of interests accounting and requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. The Company adopted this standard on July 1, 2001 and the
adoption of this standard did not have a significant effect on the Company's
financial statements.
F-130
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
h) RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets," was
issued establishing accounting and reporting standards that address how goodwill
and intangible assets should be accounted for within the financial statements.
The statement requires companies to not amortize goodwill and intangible assets
with infinite lives, but to test such assets for impairment on a regular basis
(at least annually). An intangible asset that has a finite life should be
amortized over its useful life and evaluated for impairment on a regular basis
in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." (SFAS No. 121). The Company
is required to adopt the provisions of SFAS No. 142 effective for fiscal 2003.
SFAS No. 141 will require upon adoption of SFAS No. 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in SFAS No. 141 for recognition apart
from goodwill. Upon adoption of SFAS 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of SFAS No. 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period. The Company currently has unamortized goodwill remaining
from certain purchase business acquisitions in the amount of Ps. 27.9 million,
which will be subject to the transition provisions of SFAS 141 and 142.
Amortization expense related to goodwill was Ps. 4.3 million, Ps. 4.3 million
and Ps. 2.3 million for the years ended June 30, 2002, 2001 and 2000,
respectively. The Company is currently analyzing the impact SFAS 141 and 142
will have on the consolidated financial statements.
In August, 2001, FASB issued Statement of Financial Accounting Standards
("SFAS") No. 143, "Accounting for Asset Retirement Obligations," which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 requires an enterprise to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of tangible long-lived assets. The
Company is required to adopt the provisions of SFAS No. 143 for fiscal year
beginning on July 1, 2002. The Company does not anticipate that SFAS No. 143
will significantly impact the Company's consolidated financial statements.
On October 3, 2001, FASB issued SFAS No. 144. "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", it retains many
of the fundamental provisions of that Statement. The Statement is effective for
fiscal years beginning after December 15, 2001. The Company does not anticipate
that the initial adoption of SFAS No. 144 will have a significant impact on the
Company's financial statements.
On May 1, 2002, the FASB issued SFAS No. 145 "Rescission of SFAS Nos.
4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections as of April
2002" (SFAS No. 145), which, among other things, eliminates the exception of
applying APB Opinion No. 30 (APB 30) to all gains and losses related to
extinguishments of debt (other than extinguishments of debt to satisfy
sinking-fund requirements). As a result, gains and losses from extinguishment of
debt should be classified as extraordinary items only if they meet the criteria
set forth in APB 30. These provisions are effective for fiscal years beginning
after May 15, 2002, with early application encouraged. Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods that does not meet the criteria in APB 30 for classification as an
extraordinary item should be reclassified. The Company adopted this standard on
April 1, 2002. As such, gains and losses on extinguisment of debt recorded in
prior periods are no longer reported as extraordinary items. See Note 15.II.p).
F-131
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
i) RISKS AND UNCERTAINTIES
The Company's operations are subject to risks and uncertainties with
respect to:
Risks associated with Argentine operations. All Company's operations and
properties are located in Argentina. As a result, the Company financial
condition and results of operations depend to a significant extent on
macroeconomic and political conditions prevailing in Argentina. The Argentine
economy has experienced a persistent recession since 1988, and in recent months
the recession has deepened into an unprecedented political and economic crisis
which has disrupted Argentina's financial system and effectively paralyzed the
economy.
Shopping center operating risks: The development, administration and
profitability of shopping centers are impacted by various factors including: the
accessibility and the attractiveness of the area where the shopping center is
located, the intrinsic attractiveness of the shopping center, the flow of people
and the level of sales of each shopping center rental unit within the Company's
shopping centers, the amount of rent collected from each shopping center rental
unit and the fluctuations in occupancy levels in the shopping centers. In the
event that there is an increase in operational costs, caused by inflation or
other factors, it could have a material adverse effect on the Company if its
tenants are unable to pay their higher rent obligations due to the increase in
expenses.
All of the Company's lease agreements with tenants were denominated in
U.S. dollars. As a result of the economic measures announced by the government
in early 2002, the Company's lease agreements were converted into pesos at a
rate of Ps. 1.0 per U.S. dollar, and are subject to an adjusting index (CER) as
from February 3, 2002 that will be retroactively collected beginning August
2002. If services prices are higher or lower than amounts paid at due dates, the
Company or tenants can request a price readjustment. If the parties do not reach
an agreement, lawsuits, or other legal action may be initiated. The increase in
the adjusting index may affect the risk of default on the Company's leases with
tenants, as any of the Company's tenants may not be able to increase its
revenues due to the economic recession.
Since May 28, 1997, Law No. 24,808 provides that tenants may rescind
commercial lease agreements after the initial six months upon not less than
sixty days written notice, subject to penalties of only one-and-a-half months
rent if the tenant rescinds during the first year of the lease, and one-month
rent if the tenant rescinds after the first year of the lease. The exercise of
such rescission rights could materially and adversely affect the Company.
Real estate market operating risks: The Company's property is currently
and will continue to be subject to risks incident to the ownership and operation
of commercial real estate and residential development properties. The Company's
lease sales from its real estate operations may be adversely affected by (i)
local or national economic conditions in the areas in which the properties are
located; (ii) oversupply of retail space or a reduction in demand for retail
space; (iii) increased competition form other real estate operators; (iv)
changes in the ability of the Company or the tenants to provide for adequate
maintenance and/or insurance; (v) increases in operating expenses; and/or (vi)
adverse changes in the regional or national economy. Other risks include the
inability to collect rent due to bankruptcy or insolvency of tenants or
otherwise, the need to periodically renovate, repair and release space and the
costs thereof and the ability of a tenant to provide adequate maintenance and
insurance. In addition, the failure to sell the property constructed (Torres de
Abasto), or to be constructed (Coto Residential Project and the Rosario
Project), could have a material adverse effect on the Company.
An economic downturn in the areas in which the shopping centers are
located might adversely affect the Company's sales (through bankruptcy of
tenants and reduction in the shopping center sales due to lower variable
income). Increases in operating costs due to inflation and other factors may
result in some tenants being unable or unwilling to pay rent or expense
increases. In addition, the Company has several tenants occupying space in more
than one shopping center and, as a result, if any of such tenants should
experience financial difficulties and cease paying rent, the Company's operating
results could be adversely affected. Furthermore, as leases on properties
expire, the Company may be unable to find new tenants or tenants may enter into
new leases on terms that are less favorable to the Company. The failure to lease
such properties could have a material adverse effect on the Company.
F-132
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
i) RISKS AND UNCERTAINTIES (CONTINUED)
Credit card operating risks: Credit card operations are subject to
federal legislation and regulation. From time to time, such legislation, as well
as competitive conditions, may affect, among other things, credit card finance
charges. While the Company cannot predict the effect of future competitive
conditions and legislation or the measures the Company might take in response
thereto, a significant reduction in the finance charges imposed by Tarshop would
have an adverse effect on the Company. In addition, changes in general Argentine
economic conditions, including, but not limited to, higher interest rates and
increases in delinquencies, charge-offs and personal bankruptcies could have an
adverse effect on the Company.
E-commerce risks: The Company also offers its services over the Internet,
and competes in the market for Internet services and products, which is
characterized by intense competition and rapid technological changes. The
Company's internet ventures have a limited operating history, have never
generated profits, and their prospects are subject to the risks, expenses, and
uncertainties frequently encountered by companies in new and rapidly evolving
markets for internet products and services. These risks include the failure to
develop and extend the Company's online service brands, the rejection of the
Company's services by Web consumers, vendors and/or advertisers, the inability
of the Company to maintain and increase the levels of traffic on its online
services, as well as other risks and uncertainties. In the event that the
Company does not successfully implement its business plan, certain assets may
not be recoverable.
j) CAPITALIZED INTEREST
Under both Argentine and US GAAP, during the year ended June 30, 2000 the
Company capitalized interest on funds borrowed to finance construction amounting
to Ps. 4.3 million. No interest costs were capitalized for the years ended June
30, 2002 and 2001.
k) STATEMENTS OF CASH FLOWS
The Company has elected to present the statements of cash flows in the
primary financial statements using the guidance set forth in SFAS No. 95
"Statement of Cash Flows" but using Argentine GAAP numbers. As further described
in Note 4.b., the Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. As a result, no
differences exist between cash flows reported in the primary financial
statements and cash flows that would be reported in a statement of cash flows
prepared using US GAAP numbers. However, as discussed further below, certain
differences do exist between cash flows from operating, investing and financing
activities reported in the primary financial statements and cash flows from
operating, investing and financing activities that would be reported in a
statement of cash flows prepared using US GAAP numbers.
Under US GAAP, the total amounts of cash and cash equivalents at the end
of the years shown in the statements of cash flows are required to be the same
amounts as similarly titled line items shown in the consolidated balance sheets,
as of those dates. The following table reconciles the balances included as cash
and banks in the consolidated balance sheets to the total amounts of cash and
cash equivalents at the end of the years shown in the statements of cash flows:
AS OF JUNE 30,
-----------------------------------------------------------------------------
2002 2001 2000
-------------------- -------------------------- ------------------------
Cash and banks ......................... Ps. 12,841,574 Ps. 13,445,875 Ps. 6,713,980
Cash equivalents:
Time deposits...................... 243,125 -- 3,930,385
Mutual funds....................... 126,238 5,434,225 2,831,850
Other.............................. 1,436,408 -- --
-------------------- -------------------------- ------------------------
Total cash and cash equivalents......... Ps. 14,647,345 Ps. 18,880,100 Ps. 13,476,215
==================== ========================== ========================
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
k) STATEMENTS OF CASH FLOWS (CONTINUED)
Under Argentine GAAP, all costs incurred in the development of software
for internal use were reported as cash flow from investing activities. Under US
GAAP, certain of these costs were not capitalized and accordingly would be
F-133
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
classified as cash flows from operating activities. In addition, under Argentine
GAAP nor the effect of exchange rate changes on cash and cash equivalents,
neither the effects of inflation were disclosed by presenting additional cash
flow statement categories as required by US GAAP. The following table presents
the cash flows from operating, investing and financing activities and the
effects of inflation accounting and exchange rate changes on cash and cash
equivalents that would be reported in the statement of cash flows, which
contemplate classification differences under US GAAP:
FOR THE YEARS ENDED JUNE 30,
----------------------------------------------------------------------------
2002 2001 2000
-------------------- ----------------------- -------------------
Net cash provided by operating activities..... Ps. 59,775,402 Ps. 27,897,594 Ps. 85,386,731
Net cash used in investing activities......... (3,120,106) (48,205,584) (47,830,195)
Net cash (used in) provided by financing
activities.................................... (48,824,788) 25,711,875 (63,269,674)
Effect of exchange rate changes on cash
and cash equivalents.......................... (47,222) -- --
Effects of inflation accounting............... Ps. (12,016,041) Ps. -- Ps. --
l) EARNINGS PER SHARE
Under Argentine GAAP, the Company is not required to present earnings per
share information. Under US GAAP, basic and diluted net (loss) income per share
are presented in conformity with SFAS No. 128 "Earnings per Share" and SEC Staff
Accounting Bulletin No. 98 ("SAB No. 98") for all years presented.
Basic net (loss) income per share is computed by dividing the net (loss)
income available to common shareholders for the period by the weighted average
shares of common stock outstanding during the period. Diluted net (loss) income
per share is computed by dividing the net (loss) income for the period by the
weighted average number of common and dilutive potential common shares then
outstanding during the period. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 98, ordinary shares and convertible
preferred shares issued or granted for nominal consideration prior to the
anticipated effective date of an initial public offering must be included in the
calculation of basic and diluted net loss per share as if they had been
outstanding for all periods presented. To date, the Company has not had any
issuance or grants for nominal consideration.
Since the Company has no dilutive potential common stock outstanding,
there are no dilutive earnings per share amounts as described in SFAS No. 128.
As discussed in Note 15.II.h), under US GAAP gains and losses on
extinguishment of debt recorded in prior periods are no longer reported as
extraordinary items. Thus, the Company reflected the impact of such
reclassification in the presentation of earnings per share.
F-134
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
l) EARNINGS PER SHARE (CONTINUED)
The following tables set forth the computation of basic and diluted net
(loss) income per share under US GAAP for the periods indicated:
YEAR ENDED JUNE 30,
----------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Numerator:
(Loss) income before accounting changes.............Ps. (143,981,109) Ps. (12,885,403) Ps. 10,252,335
Accounting changes.................................. -- 226,921 --
------------------ ------------------ ------------------
Net (loss) income available to common shareholders..Ps..(143,981,109) Ps. (12,658,482) Ps. 10,252,335
================== ================== ==================
Denominator:
Basic and diluted weighted average shares
outstanding......................................... 700,000,000 700,000,000 673,708,791
Basic and diluted earnings per share under US GAAP:
(Loss) income before accounting changes.............Ps. (0.2057) Ps. (0.0184) Ps. 0.0152
Accounting changes.................................. -- 0.0003 --
------------------ ------------------ ------------------
Basic and diluted net (loss) income per common
share...............................................Ps. (0.2057) Ps. (0.0181) Ps. 0.0152
================== ================== ==================
The following tables set forth the proforma effects of the retroactive
application of a change in accounting principle on earnings per share:
YEAR ENDED JUNE 30,
---------------------------------------------
2002 2001 2000
-------------- ------------- --------------
Basic and diluted net (loss) income per share under US GAAP .. Ps. (0.2057) Ps. (0.0184) Ps. 0.0156
m) SEVERANCE INDEMNITIES
Under Argentine law and labor agreements, the Company is required to make
minimum severance payments to its dismissed employees without cause and
employees leaving its employment in certain other circumstances. Under Argentine
GAAP, severance payments are expensed as incurred. Under US GAAP, the Company
follows the guidelines established by SFAS No. 112, "Employers' Accounting for
Post-employment Benefits", and SFAS No. 43, "Accounting for Compensated
Absences", which requires the accrual of severance costs if they relate to
services already rendered, are related to rights that accumulate or vest, are
probable of payment and are reasonably estimable. While the Company expects to
make severance payments in the future, it is impossible to estimate the number
of employees that will be dismissed without proper cause in the future, if any,
and accordingly the Company has not recorded such liability.
N) PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following selected unaudited pro forma information is being provided
to present a summary of the consolidated results of the Company as if the
acquisitions described in Note 3.e had occurred as of the beginning of the
periods presented, giving effect to purchase accounting adjustments. The pro
forma data is for information purposes only and may not necessarily reflect the
results of operations of the Company had the acquired business operated as part
of the Company for the periods presented.
YEAR ENDED JUNE 30,
-----------------------------------------
2001 2000
------------------- --------------------
Leases and services revenue ........................... Ps. 175,139,270 Ps. 190,546,216
Net income (loss)...................................... 5,462,598 (2,835,103)
Basic and diluted net income (loss), per common share.. 0.0078 (0.0042)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
o) CONSOLIDATION UNDER US GAAP
As discussed in Note 12, the Company has ongoing revolving period
securitization programs through which it transfers a portion of its customer
credit card receivable balances to master trusts that issue certificates to
public and private investors. Under Argentine GAAP, to the extent that
certificates are sold to third parties, the receivables transferred qualify as
sales for financial statement purposes and are removed from the Company's
balance sheet. The remaining
F-135
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
receivables in the trust, which have not been sold to third parties, are
reflected on the Company's balance sheet as a retained interest in transferred
credit card receivables. These retained interests are treated in a manner
similar to an investment and accounted for under the equity method.
Under US GAAP, certain of the special purpose entity structures in
securitization programs would have been consolidated in accordance with Emerging
Issues Task Force Issue ("EITF") No. 96-20, "Impact of SFAS No. 125 on
Consolidation of Special Purpose Entities" considering the criteria established
by this standard for precluding consolidation are not met. Presented below is
the consolidated condensed information of the Company at June 30, 2002 giving
effect to the abovementioned consolidation:
AS OF JUNE 30, 2002
--------------------------------------------------------------
COMPANY SPE ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------
Current assets.............. 49,586,054 12,464,571 -- 62,050,625
Non-current assets.......... 969,933,533 662,994 (1,913,960) 968,682,567
--------------------------------------------------------------
TOTAL ASSETS................ 1,019,519,587 13,127,565 (1,913,960) 1,030,733,192
Current liabilities......... 84,289,415 4,579,965 -- 88,869,380
Non-current liabilities..... 319,441,143 6,633,640 -- 326,074,783
--------------------------------------------------------------
TOTAL LIABILITIES........... 403,730,558 11,213,605 -- 414,944,163
MINORITY INTEREST........... 14,581,843 -- -- 14,581,843
SHAREHOLDERS' EQUITY........ 601,207,186 1,913,960 (1,913,960) 601,207,186
F-136
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
p) STATEMENT OF INCOME CLASSIFICATION DIFFERENCES
OPERATING INCOME
Under US GAAP, certain expense items included in the Argentine GAAP
financial statements of the Company within "Other expense, net" would be
included in the determination of operating income. In addition, under Argentine
GAAP, the recovery of certain allowances and provisions has been included within
"Other expense, net". Under US GAAP, such items would have been classified as a
reversal to the amounts in the line items, which were originally recorded.
Operating income under US GAAP would have been Ps. 1.1 million, Ps. 70.8 million
and Ps. 52.2 million for the years ended June 30, 2002, 2001 and 2000,
respectively.
EARLY EXTINGUISHMENT OF DEBT
As discussed in Note 15.II.h), the Company adopted SFAS No. 145 on April
1, 2002. As such, under US GAAP, gains and losses on extinguishment of debt
recorded in prior periods are no longer reported as extraordinary items.
q) EQUITY INVESTMENTS
The investments in Perez Cuesta and E-Commerce Latina are accounted for
using the equity method, wherein the investment is recorded at the amount of the
underlying equity in the net assets of the investments and adjusted to recognize
the Company's share of the undistributed earnings or losses.
The Company's share of the loss of these affiliates was Ps. 4.8 million,
Ps. 3.3 million and Ps. 0.04 million during the years ended June 30, 2002, 2001
and 2000, respectively, and its investment in these companies totaled Ps. 18.2
million at June 30, 2002 and Ps. 22.9 million at June 30, 2001.
Summarized financial information of these affiliates (on a 100% basis) is
as follows:
PEREZ CUESTA
AS OF JUNE 30,
----------------------------------------
2002 2001
------------------- -------------------
Current assets........................................... Ps. 6,665,454 Ps. 14,470,853
Non-current assets....................................... 87,123,173 91,273,152
------------------- -------------------
Total assets............................................. 93,788,627 105,744,005
------------------- -------------------
Current liabilities...................................... 20,590,885 22,208,527
Non-current liabilities ................................. 41,816,893 66,103,140
------------------- -------------------
Total liabilities........................................ 62,407,778 88,311,667
------------------- -------------------
Shareholders' equity .................................... Ps. 31,380,849 Ps. 17,432,338
=================== ===================
FOR THE YEAR ENDED JUNE 30,
----------------------------------------
2002 2001
------------------- -------------------
Net sales................................................ Ps. 9,234,283 Ps. 13,321,822
Operating (loss) income.................................. (543,757) 3,685,438
Net income (loss)........................................ Ps. 13,948,544 Ps. (13,501,810)
F-137
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
q) EQUITY INVESTMENTS (CONTINUED)
E-COMMERCE LATINA
AS OF JUNE 30,
----------------------------------------
2002 2001
------------------- -------------------
Current assets........................................... Ps. 7,574,861 Ps. 6,141,801
Non-current assets....................................... 4,279,820 22,464,105
------------------- -------------------
Total assets............................................. 11,854,681 28,605,906
------------------- -------------------
Current liabilities...................................... 1,474,648 2,982,499
Non-current liabilities ................................. -- 93,606
------------------- -------------------
Total liabilities........................................ 1,474,648 3,076,105
------------------- -------------------
Minority interest........................................ (570,694) (268,545)
=================== ===================
Shareholders' equity .................................... Ps. 10,950,727 Ps. 25,798,346
=================== ===================
FOR THE YEAR ENDED JUNE 30,
----------------------------------------
2002 2001
------------------- -------------------
Net sales................................................ Ps. 1,343,757 Ps. 2,037,930
Operating loss........................................... (6,114,137) (13,305,218)
Net loss................................................. Ps. (14,847,621) Ps. (11,358,343)
r) INVESTMENTS IN DEBT AND EQUITY SECURITIES
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", the Company has classified its investments in
mutual funds as available for sale securities. The following are additional
disclosure requirements in accordance with SFAS No. 115:
Available-for-sale securities
The amortized cost, gross unrealized holding gains or losses and fair
value of the available-for-sale securities by major security type at June 30,
2002 and 2001 were as follows:
2002 2001
------------------------------------------ ----------------------------------------
UNREALIZED UNREALIZED
INSTRUMENT COST GAIN MARKET VALUE COST GAIN MARKET VALUE
------------------------- ----------- ------------- ---------------- ----------- ------------- --------------
Mutual funds......... 97,130 29,108 126,238 5,410,473 23,752 5,434,225
Proceeds from sales of investment securities available-for-sale during
the years ended June 30, 2002 and 2001 were Ps. 26.2 million and Ps. 130.3
million, respectively. Gross gains of Ps. 0.1 million and Ps. 0.2 million for
the years ended June 30, 2002 and 2001, respectively, were realized on those
sales.
s) COMPREHENSIVE LOSS
On July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes guidelines for the reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Accumulated other comprehensive income is presented below, net of
income tax benefit/expense:
F-138
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
S) COMPREHENSIVE LOSS (CONTINUED)
YEAR ENDED JUNE 30,
------------------------------------------------------------
2002 2001 2000
------------------- ------------------- -------------------
Net (loss) income under US GAAP................... Ps. (143,981,109) Ps. (12,658,482) Ps. 10,252,335
Other comprehensive income:
Net change in unrealized holding gain on
available-for-sale securities of consolidated
subsidiaries (net of minority interest and income
taxes of Ps. 2,161 and Ps. 8,312, respectively,
for 2001; and Ps. 1,624 and Ps. 1,875,
respectively, for 2002)........................... 1,857 13,279 --
Net change in unrealized holding gain on
available-for-sale securities of equity
investments (net of income taxes of Ps. nil)...... (19,018) 19,018 --
Net change in unrealized holding gain on retained
interest in transferred credit card receivables
(net of income taxes of Ps. 1,320,879 and
minority interest of Ps. 490,613)................. (1,962,448) 1,962,448 --
------------------- ------------------- -------------------
Comprehensive (loss) income....................... Ps. (145,960,718) Ps. (10,663,737) Ps. 10,252,335
=================== =================== ===================
AS OF JUNE 30,
------------------------------------------------------------
2002 2001 2000
------------------- ------------------- -------------------
Accumulated other comprehensive income........... Ps. 15,136 Ps. 1,994,745 Ps. --
=================== =================== ===================
F-139
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
t) INVESTMENTS IN REAL ESTATE AND ACCUMULATED DEPRECIATION
The following is a summary of the Company's investments in real
estate as of June 30, 2002 prepared in accordance with SEC S-X 12-28.
Buildings and Total buildings
Description Encumbrances Land improvement Improvements and improvements
------------------------ --------------- ---------------- ------------------ ---------------- -------------------
Shopping centers:
- Abasto............... Ps. 8,678,568 Ps. 214,031,278 Ps. 45,649 Ps. 214,076,927
- Alto Palermo......... 7,736,734 352,812,073 - - 352,812,073
- Alto Avellaneda...... 15,438,960 118,640,083 5,327 118,645,410
- Paseo Alcorta........ 7,124,940 85,250,494 309,341 85,559,835
- Alto Noa............. 317,480 25,033,389 13,620 25,047,009
- Patio Bullrich....... 7,492,045 133,723,256 2,577 133,725,833
- Buenos Aires Design.. -- 37,584,722 101,535 37,686,257
Caballito.............. 7,850,559 14,220,328 -- 14,220,328
Rosario Project........ 36,872,496 11,414,578 1,590,082 13,004,660
Neuquen................ Mortgage 2,948,850 4,632,767 -- 4,632,767
Other.................. 1,024,395 9,626,504 -- 9,626,504
---------------- ------------------ ---------------- -------------------
Total.................. Ps. 95,485,027 Ps. 1,006,969,472 Ps. 2,068,131 Ps. 1,009,037,603
================ ================== ================ ===================
Life on which
depreciation
in latest
statements of
Accumulated Date of operations is
Description Total depreciation construction Date acquired computed
------------------------ ------------------- ------------------ ------------------------------------- ----------------
Shopping centers:
- Abasto............... Ps. 222,755,495 Ps. 29,265,534 November, 1998 n/a 31
- Alto Palermo......... 360,548,807 124,096,924 October, 1990 November, 1997 26
and March, 1998
- Alto Avellaneda...... 134,084,370 45,820,724 October, 1995 November and
December, 1997 19
- Paseo Alcorta........ 92,684,775 24,834,583 June, 1992 June, 1997 22
- Alto Noa............. 25,364,489 5,706,162 September, 1994 March, 1995, 23
September,
1996 and
January, 2000
- Patio Bullrich....... 141,217,878 21,700,812 September, 1988 October, 1998 23
- Buenos Aires Design.. 37,686,257 15,999,522 Between November, 1997 20
November and
December, 1993
Caballito.............. 22,070,887 -- Under construction October, 1998 n/a
Rosario Project........ 49,877,156 -- Under construction August, 1998 n/a
Neuquen................ 7,581,617 -- Under construction September, 1999 n/a
Other.................. 10,650,899 475,449 n/a n/a n/a
------------------- ------------------
Total.................. Ps. 1,104,522,630 Ps. 267,899,710
=================== ==================
F-140
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
t) INVESTMENTS IN REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
Years ended June 30,
---------------------------------------------------------
2002 2001
-------------------------- --------------------------
Balance, beginning of the years..... Ps. 1,152,728,610 Ps. 1,148,819,295
Additions during the years:
Acquisitions................... -- 2,678,213
Improvements................... 2,068,131 12,722,089
Transfers from work-in-progress
leasehold improvements......... -- 4,842,528
-------------------------- --------------------------
1,154,796,741 1,169,062,125
-------------------------- --------------------------
Deductions during the years:
Transfers to inventory......... -- (15,630,762)
Cost of real estate sold....... -- (406,252)
Transfers to other receivables
and prepaid expenses........... -- (296,501)
(1)
Impairment..................... (50,274,111) --
-------------------------- --------------------------
(50,274,111) (16,333,515)
-------------------------- --------------------------
Balance, end of the years........... Ps. 1,104,522,630 Ps. 1,152,728,610
========================== ==========================
(1) Includes Ps. 22,820,505 related to Alto Avellaneda, Ps. 12,771,077
related to Alto Noa, Ps. 10,453,947 related to Caballito, Ps. 3,244,901 related
to Neuquen and 983,681 related to other properties.
F-141
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
u) MORTGAGE RECEIVABLE ON REAL ESTATE
The following is a summary of the Company's mortgage receivable on real
estate as of June 30, 2002 prepared in accordance with SEC S-X 12-29.
Col. B. Col. C. Col. D. Col. E. Col. F.
-------------------------- ----------- ---------------------- ----------------- ---------------- ---------------------
Interest Final maturity Periodic Face amount of
Description Rate date payment term Prior liens mortgages
-------------------------- ----------- ---------------------- ----------------- ---------------- ---------------------
Customer A 14% June 2014 Monthly None 127,676
Customer B 15% August 2014 Monthly None 88,800
Customer C 16% December 2006 Monthly None 84,750
Customer D 16% December 2014 Monthly None 79,960
Customer E 14% May 2014 Monthly None 77,163
Customer F 12% September 2009 Monthly None 76,000
Customer G 16% October 2009 Monthly None 74,214
Customer H 12% April 2015 Monthly None 72,801
Customer I 14% June 2014 Monthly None 70,165
Customer J 14% June 2014 Monthly None 70,000
Customer K 16% June 2014 Monthly None 69,300
Customer L 15% December 2009 Monthly None 65,910
Customer M 14% June 2009 Monthly None 60,000
Customer N 14% June 2014 Monthly None 57,802
Customer O 16% February 2010 Monthly None 57,539
Customer P 12% April 2015 Monthly None 53,173
Mortgage Receivables 14-16% July 2003-May 2009 Monthly None 130,800
under Ps. 30,000
Mortgages Receivables 12-17% June 2002-June 2014 Monthly None 375,632
Ps. 30,000-Ps. 49,999
Mortgages Receivables 9-15% June 2005-June 2014 Monthly None 387,662
Ps. 50,000-Ps. 69,999
---------------------
Ps. 2,079,347
=====================
Col. G. Col. H.
-------------------------- --------------------- ------------------
Principal amount
of receivables
subject to
delinquent
Carrying amount of principal
Description mortgages or interest
-------------------------- --------------------- ------------------
Customer A 59,959 None
Customer B 92,735 None
Customer C 79,246 None
Customer D 86,070 None
Customer E 75,962 None
Customer F 63,813 None
Customer G 66,123 None
Customer H 50,409 None
Customer I 73,480 None
Customer J 84,444 None
Customer K 67,092 None
Customer L 84,217 None
Customer M 58,793 None
Customer N 53,998 None
Customer O 59,120 None
Customer P 69,257 None
Mortgage Receivables 63,787 None
under Ps. 30,000
Mortgages Receivables 291,476 None
Ps. 30,000-Ps. 49,999
Mortgages Receivables 188,788 None
Ps. 50,000-Ps. 69,999
---------------------
Ps. 1,668,769
=====================
F-142
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
u) MORTGAGE RECEIVABLE ON REAL ESTATE (CONTINUED)
The summary of activity in mortgage receivable is as follows:
YEARS ENDED JUNE 30,
-----------------------------------------------------
2002 2001
----------------------- -----------------------
Balance, beginning of the years............ Ps. 3,906,494 Ps. 3,927,596
Additions during the years:
New mortgage receivable................. -- 1,715,850
Deductions during the years:
Collections of principal................ (2,237,725)(1) (1,736,952)
----------------------- -----------------------
Balance, end of years...................... Ps. 1,668,769 Ps. 3,906,494
======================= =======================
(1) Includes exposure to inflation of Ps. 1,909,513.
16. OTHER FINANCIAL STATEMENT INFORMATION
The following tables present additional consolidated financial statement
disclosures required under Argentine GAAP:
a. Fixed assets, net
b. Intangible assets, net
c. Allowances and provisions
d. Cost of sales and development properties, leases and services and
credit card operations
e. Foreign currency assets and liabilities
f. Other expenses
F-143
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
16. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
A. FIXED ASSETS, NET
Original value
-------------------------------------------------------------------------------------------------------
Value as of
beginning of Value as of end of
Principal account years Additions Deductions Transfers years
--------------------------- -------------------- -------------------- --------------- ---------------------- -------------------
Properties:
----------
Shopping Centers:
-Abasto..................... Ps. 222,709,846 Ps. 45,649 Ps. -- Ps. -- Ps. 222,755,495
-Alto Palermo .............. 360,548,807 -- -- -- 360,548,807
-Alto Avellaneda............ 156,899,548 5,327 -- -- 156,904,875
-Paseo Alcorta.............. 92,370,086 145,561 -- -- 92,515,647
-Alto NOA .................. 38,121,946 13,620 -- -- 38,135,566
-Buenos Aires Design........ 37,553,570 44,353 -- -- 37,597,923
-Patio Bullrich............. 141,013,370 -- -- -- 141,013,370
-Neuquen.................... 9,185,204 -- -- -- 9,185,204
Rosario plots of land....... 36,575,995 -- -- -- 36,575,995
Caballito plots of land..... 7,850,559 -- -- -- 7,850,559
Other....................... 11,634,580 -- -- -- 11,634,580
Leasehold improvements...... 9,961,743 160,317 (293,281) -- 9,828,779
Facilities.................. 9,285,776 3,525 -- -- 9,289,301
Furniture and fixtures...... 9,840,063 19,872 (56,012) -- 9,803,923
Vehicles.................... 111,543 -- -- -- 111,543
Computer equipment.......... 11,417,123 210,756 (35,753) -- 11,592,126
Software.................... 3,031,112 317,838 -- (3) 420,333 3,769,283
Work-in-progress:
-Rosario.................... 11,711,079 1,590,082 -- -- 13,301,161
-Caballito ................. 24,674,275 -- -- -- 24,674,275
-Neuquen.................... 1,641,314 -- -- -- 1,641,314
-Buenos Aires Design ....... 31,152 57,182 -- -- 88,334
-Leasehold improvements .... 872,060 325,819 -- -- 1,197,879
-Patio Bullrich............. 201,931 2,577 -- -- 204,508
-Paseo Alcorta.............. 5,348 163,780 -- -- 169,128
Other....................... 1,399 -- -- -- 1,399
------------------- -------------------- --------------- ---------------------- -------------------
Total as of June 30, 2002... Ps. 1,197,249,429 Ps. 3,106,258 Ps. (385,046) Ps. 420,333 Ps. 1,200,390,974
=================== ==================== =============== ====================== ===================
Total as of June 30, 2001... Ps. 1,192,516,206 Ps. (5) 21,066,738 Ps. (406,252) Ps.(4) (15,927,263) Ps. 1,197,249,429
=================== ==================== =============== ====================== ===================
Depreciation
----------------------------------------------------------------------------------------------
Current year
-----------------------------------------------
Accumulated as of Increases (decreases) and Accumulated as of end of
Principal account beginning of years transfers Amount (1) years
--------------------------- ------------------- -------------------------- ------------------- ------------------------
Properties:
----------
Shopping Centers: Ps. 22,486,929 Ps. -- Ps. 6,778,605 Ps. 29,265,534
-Abasto..................... 107,904,123 -- 16,192,801 124,096,924
-Alto Palermo .............. 37,842,081 -- 7,978,643 45,820,724
-Alto Avellaneda............ 21,263,988 -- 3,570,595 24,834,583
-Paseo Alcorta.............. 3,890,436 -- 1,815,726 5,706,162
-Alto NOA .................. 14,006,210 -- 1,993,312 15,999,522
-Buenos Aires Design........ 15,892,866 -- 5,807,946 21,700,812
-Patio Bullrich............. -- -- -- --
-Neuquen.................... -- -- -- --
Rosario plots of land....... -- -- -- --
Caballito plots of land..... 146,965 -- 328,484 475,449
Other....................... 4,252,521 (124,796) 1,042,530 5,170,255
Leasehold improvements...... 6,594,739 -- 923,036 7,517,775
Facilities.................. 6,788,613 (56,012) 1,046,849 7,779,450
Furniture and fixtures...... 98,010 -- 13,533 111,543
Vehicles.................... 7,452,310 (35,753) 1,440,026 8,856,583
Computer equipment.......... 1,143,863 (3) 79,621 825,171 2,048,655
Software....................
Work-in-progress:
-Rosario.................... -- -- -- --
-Caballito ................. -- -- -- --
-Neuquen.................... -- -- -- --
-Buenos Aires Design ....... -- -- -- --
-Leasehold improvements .... -- -- -- --
-Patio Bullrich............. -- -- -- --
-Paseo Alcorta.............. -- -- -- --
Other....................... 1,399 -- -- 1,399
------------------- -------------------------- ------------------- ------------------------
Total as of June 30, 2002... Ps. 249,765,053 Ps. (136,940) Ps. (2) 49,757,257 Ps. 299,385,370
=================== ========================== =================== ========================
Total as of June 30, 2001... Ps. 199,839,208 Ps. (6) (2,017) Ps. 49,927,862 Ps. 249,765,053
=================== ========================== =================== ========================
Net carrying value as of June 30,
----------------- ------------------------------------
Principal account Impairment 2002 2001
--------------------------- ------------------ ----------------- -----------------
Properties:
----------
Shopping Centers:
-Abasto..................... Ps. -- Ps. 193,489,961 Ps. 200,222,917
-Alto Palermo .............. -- 236,451,883 252,644,684
-Alto Avellaneda............ (22,820,505) 88,263,646 119,057,467
-Paseo Alcorta.............. -- 67,681,064 71,106,098
-Alto NOA .................. (12,771,077) 19,658,327 34,231,510
-Buenos Aires Design........ -- 21,598,401 23,547,360
-Patio Bullrich............. -- 119,312,558 125,120,504
-Neuquen.................... (3,244,901) 5,940,303 9,185,204
Rosario plots of land....... -- 36,575,995 36,575,995
Caballito plots of land..... -- 7,850,559 7,850,559
Other....................... (983,681) 10,175,450 11,487,615
Leasehold improvements...... -- 4,658,524 5,709,222
Facilities.................. -- 1,771,526 2,691,037
Furniture and fixtures...... -- 2,024,473 3,051,450
Vehicles.................... -- -- 13,533
Computer equipment.......... -- 2,735,543 3,964,813
Software.................... -- 1,720,628 1,887,249
Work-in-progress:
-Rosario.................... -- 13,301,161 11,711,079
-Caballito ................. (10,453,947) 14,220,328 24,674,275
-Neuquen.................... -- 1,641,314 1,641,314
-Buenos Aires Design ....... -- 88,334 31,152
-Leasehold improvements .... -- 1,197,879 872,060
-Patio Bullrich............. -- 204,508 201,931
-Paseo Alcorta.............. -- 169,128 5,348
Other....................... -- -- --
----------------- ----------------- -----------------
Total as of June 30, 2002... Ps. (50,274,111) Ps. 850,731,493 Ps. --
================= ================= =================
Total as of June 30, 2001... Ps. -- Ps. -- Ps. 947,484,376
================= ================= =================
(1) The allocation of annual depreciation charges in the statements of
operations is included in "Other expenses" (Note 16.f.).
(2) Includes Ps. 216,348 in "Other expense, net" (Note 9).
(3) Reclassified from intangible assets.
(4) Includes Ps. 296,501 reclassified to other receivables and prepaid expenses
and Ps. 15,630,762 reclassified to inventory.
(5) Includes Ps. 544,254 related to acquisitions.
(6) Includes Ps. 74,017 related to acquisitions.
F-144
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
16. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
B. INTANGIBLE ASSETS, NET
Original value
---------------------------------------------------------------------------------------------
Value as of beginning Value as of end
Principal account of years Additions Deductions Transfers of years
----------------------------------- ---------------------- ------------------ ------------- ------------------ ---------------
Trademarks.......................... Ps. 491,893 Ps. 18,558 Ps. -- Ps. -- Ps. 510,451
Deferred financing costs............ 19,088,755 55,463 -- -- 19,144,218
Expenses related to securitization
of receivables...................... 1,764,979 4,072,475 -- -- 5,837,454
Preoperating expenses............... 44,341,348 361,787 -- -- 44,703,135
Advertising expenses:
- Torres Abasto.................... 3,708,767 -- -- -- 3,708,767
- Abasto........................... 1,369,340 -- -- -- 1,369,340
- Paseo Alcorta.................... 854,961 -- -- -- 854,961
Investment projects:
- Paseo Alcorta.................... 704,525 -- -- -- 704,525
- Price line....................... 372,946 -- -- -- 372,946
- Multiespacio..................... 80,192 -- -- -- 80,192
- Sales by TV...................... 121,232 -- -- -- 121,232
Goodwill:
- Old Alto Palermo S.A............. 21,917,268 -- -- -- 21,917,268
- Tarshop S.A...................... 560,416 -- -- -- 560,416
- Inversha S.A..................... 1,007,912 -- -- -- 1,007,912
- Pentigras S.A.................... 587,529 -- -- -- 587,529
- Fibesa S.A....................... 18,881,395 -- -- -- 18,881,395
Tenant List-Patio Bullrich ......... 4,188,580 -- -- -- 4,188,580
Deferred charges ................... 142,188 98,940 -- -- 241,128
Other .............................. 332,268 88,065 -- (420,333) --
--------------------- ------------------ ------------- ------------------ ---------------
Total as of June 30, 2002........... Ps. 120,516,494 Ps. 4,695,288 Ps. -- Ps. (3) (420,333) Ps. 124,791,449
===================== ================== ============= ================== ===============
Total as of June 30, 2001........... Ps. 93,089,331 Ps. (5) 27,504,000 Ps. (76,837) Ps. -- Ps. 120,516,494
===================== ================== ============= ================== ===============
Amortization
-----------------------------------------------------------------------------------
Current year
------------------------------------------
Accumulated as of Increases (decreases) Amount Accumulated as of
Principal account beginning of years and transfers (1) end of years
--------------------------------------- ------------------- --------------------- ------------------- -----------------
Trademarks.............................. Ps. 99,860 Ps. -- Ps. 54,238 Ps. 154,098
Deferred financing costs................ 5,400,356 -- 4,315,341 9,715,697
Expenses related to securitization
of receivables.......................... 991,870 -- 2,154,975 3,146,845
Preoperating expenses................... 40,060,475 -- 1,592,827 41,653,302
Advertising expenses:
- Torres Abasto........................ 3,427,272 -- 233,282 3,660,554
- Abasto............................... 1,255,229 -- 114,111 1,369,340
- Paseo Alcorta........................ 854,961 -- -- 854,961
Investment projects:
- Paseo Alcorta........................ 704,525 -- -- 704,525
- Price line........................... 372,946 -- -- 372,946
- Multiespacio......................... -- -- 80,192 80,192
- Sales by TV.......................... 121,232 -- -- 121,232
Goodwill:
- Old Alto Palermo S.A................. 8,218,974 -- 2,191,727 10,410,701
- Tarshop S.A.......................... 174,062 -- 58,000 232,062
- Inversha S.A......................... 291,511 -- 96,051 387,562
- Pentigras S.A........................ 181,181 -- 61,536 242,717
- Fibesa S.A........................... 1,888,140 -- 1,888,140 3,776,280
Tenant List-Patio Bullrich ............. 2,303,713 -- 837,715 3,141,428
Deferred charges ....................... 7,899 -- 43,446 51,345
Other .................................. 53,477 (79,621) 26,144 --
------------------ --------------------- ------------------- -----------------
Total as of June 30, 2002............... Ps. 66,407,683 Ps. (3) (79,621) Ps. (2) 13,747,725 Ps. 80,075,787
================== ===================== =================== =================
Total as of June 30, 2001............... Ps. 48,925,172 Ps. -- Ps. (4) 17,482,511 Ps. 66,407,683
================== ===================== =================== =================
Net carrying value as of June 30,
--------------------------------------
Principal account 2002 2001
--------------------------------------------------- ----------------- ------------------
Trademarks......................................... Ps. 356,353 Ps. 392,033
Deferred financing costs........................... 9,428,521 13,688,399
Expenses related to securitization
of receivables..................................... 2,690,609 773,109
Preoperating expenses.............................. 3,049,833 4,280,873
Advertising expenses:
- Torres Abasto................................... 48,213 281,495
- Abasto.......................................... -- 114,111
- Paseo Alcorta................................... -- --
Investment projects:
- Paseo Alcorta................................... -- --
- Price line...................................... -- --
- Multiespacio.................................... -- 80,192
- Sales by TV..................................... -- --
Goodwill:
- Old Alto Palermo S.A............................ 11,506,567 13,698,294
- Tarshop S.A..................................... 328,354 386,354
- Inversha S.A.................................... 620,350 716,401
- Pentigras S.A................................... 344,812 406,348
- Fibesa S.A...................................... 15,105,115 16,993,255
Tenant List-Patio Bullrich ........................ 1,047,152 1,884,867
Deferred charges .................................. 189,783 134,289
Other ............................................. -- 278,791
----------------- ------------------
Total as of June 30, 2002.......................... Ps. 44,715,662 Ps. --
================= ==================
Total as of June 30, 2001.......................... Ps. -- Ps. 54,108,811
================= ==================
(1) The allocation of annual amortization charges in the statements of
operations is included in "Other expenses" (Note 16.f.).
(2) Includes Ps. 3,665,289 allocated in "Financial results, net" (Note 8),
Ps. 730,244 in "Other expense, net" (Note 9) and Ps. 2,154,975 in "Net
(loss) income in credit card trust".
(3) Reclassified to fixed assets.
(4) Includes Ps. 2,141,519 allocated in "Financial results, net" (Note 8),
Ps. 1,402,218 in "Other expense, net" (Note 9), Ps. 2,227,425 in "Net loss
in equity investments" and Ps. 909,665 in "Net (loss) income in credit card
trust".
(5) Includes Ps. 1,271 related to acquisitions.
F-145
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
16. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
C. ALLOWANCES AND PROVISIONS
BALANCES AS OF
BEGINNING OF
ITEM YEARS ADDITIONS DEDUCTIONS
--------------------------------------------- ---------------- ---------------- --------------------
DEDUCTED FROM CURRENT ASSETS:
Allowance for doubtful accounts.............. Ps. 48,697,561 Ps. 47,046,857 Ps. (1) (45,530,137)
---------------- ---------------- --------------------
Total as of June 30, 2002.................... Ps. 48,697,561 Ps. 47,046,857 Ps. (45,530,137)
================ ================ ====================
Total as of June 30, 2001.................... Ps. 34,829,985 Ps.(3)18,221,199 Ps. (4,353,623)
================ ================ ====================
Total as of June 30, 2000.................... Ps. 16,958,595 Ps. 19,688,732 Ps. (6) (1,817,342)
================ ================ ====================
DEDUCTED FROM NON-CURRENT ASSETS:
Allowance for doubtful accounts.............. Ps. 62,976 Ps. 3,658 Ps. --
Allowance for doubtful mortgage receivable... 1,778,374 2,541,454 (2,111,553)
Impairment of inventory...................... -- 5,586,866 --
Impairment of fixed assets................... Ps. -- Ps. 50,274,111 Ps. --
---------------- ---------------- --------------------
Total as of June 30, 2002.................... Ps. 1,841,350 Ps. 58,406,089 Ps. (2,111,553)
================ ================ ====================
Total as of June 30, 2001.................... Ps. 12,784 Ps. 1,828,566 Ps. --
================ ================ ====================
Total as of June 30, 2000.................... Ps. -- Ps. 12,784 Ps. --
================ ================ ====================
INCLUDED IN CURRENT LIABILITIES:
Provision for contingencies.................. Ps. -- Ps. 3,474,000 Ps. --
---------------- ---------------- --------------------
Total as of June 30, 2002.................... Ps. -- Ps. 3,474,000 Ps. --
================ ================ ====================
Total as of June 30, 2001.................... Ps. -- Ps. -- Ps. --
================ ================ ====================
Total as of June 30, 2000.................... Ps. 134,729 Ps. -- Ps. (5) (134,729)
================ ================ ====================
INCLUDED IN NON-CURRENT LIABILITIES:
Provision for contingencies.................. Ps. 3,838,409 Ps. 2,928,818 Ps. (2) (2,372,756)
---------------- ---------------- --------------------
Total as of June 30, 2002.................... Ps. 3,838,409 Ps. 2,928,818 Ps. (2,372,756)
================ ================ ====================
Total as of June 30, 2001.................... Ps. 4,309,172 Ps. 177,249 Ps. (4) (648,012)
================ ================ ====================
Total as of June 30, 2000.................... Ps. 4,000,241 Ps.(5) 308,931 Ps. --
================ ================ ====================
CARRYING VALUE AS OF JUNE 30,
-----------------------------------------------------
ITEM 2002 2001 2000
--------------------------------------------- ---------------- ---------------- ----------------
DEDUCTED FROM CURRENT ASSETS:
Allowance for doubtful accounts.............. Ps. 50,214,281 Ps. 48,697,561 Ps. 34,829,985
---------------- ---------------- ----------------
Total as of June 30, 2002.................... Ps. 50,214,281 Ps. -- Ps. --
================ ================ ================
Total as of June 30, 2001.................... Ps. -- Ps. 48,697,561 Ps. --
================ ================ ================
Total as of June 30, 2000.................... Ps. -- Ps. -- Ps. 34,829,985
================ ================ ================
DEDUCTED FROM NON-CURRENT ASSETS:
Allowance for doubtful accounts.............. Ps. 66,634 Ps. 62,976 Ps. 12,784
Allowance for doubtful mortgage receivable... 2,208,275 1,778,374 --
Impairment of inventory...................... 5,586,866 -- --
Impairment of fixed assets................... Ps. 50,274,111 Ps. -- Ps. --
---------------- ---------------- ----------------
Total as of June 30, 2002.................... Ps. 58,135,886 Ps. -- Ps. --
================ ================ ================
Total as of June 30, 2001.................... Ps. -- Ps. 1,841,350 Ps. --
================ ================ ================
Total as of June 30, 2000.................... Ps. -- Ps. -- Ps. 12,784
================ ================ ================
INCLUDED IN CURRENT LIABILITIES:
Provision for contingencies.................. Ps. 3,474,000 Ps. -- Ps. --
---------------- ---------------- ----------------
Total as of June 30, 2002.................... Ps. 3,474,000 Ps. -- Ps. --
================ ================ ================
Total as of June 30, 2001.................... Ps. -- Ps. -- Ps. --
================ ================ ================
Total as of June 30, 2000.................... Ps. -- Ps. -- Ps. --
================ ================ ================
INCLUDED IN NON-CURRENT LIABILITIES:
Provision for contingencies.................. Ps. 4,394,471 Ps. 3,838,409 Ps. 4,309,172
---------------- ---------------- ----------------
Total as of June 30, 2002.................... Ps. 4,394,471 Ps. -- Ps. --
================ ================ ================
Total as of June 30, 2001.................... Ps. -- Ps. 3,838,409 Ps. --
================ ================ ================
Total as of June 30, 2000.................... Ps. -- Ps. -- Ps. 4,309,172
================ ================ ================
(1) Includes recovery of allowance for doubtful accounts of Ps. 78,356 and
exposure to inflation of Ps. 45,451,781.
(2) Includes recovery of provision for contingencies of Ps. 104,393 and
exposure to inflation of Ps. 1,929,833.
(3) Includes Ps. 320,412 related to acquisitions.
(4) Includes recovery of provision for contingencies of Ps. 145,330.
(5) Includes Ps. 134, 729 reclassified to non current.
(6) Includes recovery of allowance for doubtful accounts of Ps. 92,863.
F-146
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
16. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
D. COST OF SALES AND DEVELOPMENT PROPERTIES, LEASES AND SERVICES AND
CREDIT CARD
YEARS ENDED JUNE 30,
-------------------------------------------------------------------
2002 2001 2000
-------------------- ---------------------- ------------------
I. COST OF SALES AND DEVELOPMENT PROPERTIES
Inventory as of the beginning of the years ............. Ps. 34,830,599 Ps. 31,056,878 Ps. 61,523,116
Plus:
Purchases of the years ................................. 384,290 -- 3,642,401
Expenses (Note 16.f.) .................................. 350,007 1,317,221 1,666,479
Reclassified from fixed assets ......................... -- 15,630,762 --
Less:
Impairment of inventory ................................ (5,586,866) -- --
Rescissions of sales contracts ......................... -- (59,680) (4,478,158)
Properties delivered ................................... (1,862,543) (548,119) (20,899,984)
Stock as of the end of the years ....................... (23,311,765) (34,830,599) (31,056,878)
-------------------- --------------------- ------------------
COST OF SALES AND DEVELOPMENT PROPERTIES ......... 4,803,722 12,566,463 10,396,976
==================== ===================== ==================
II. COST OF LEASES AND SERVICES
Expenses (Note 16.f.) .................................. 69,108,451 70,597,841 69,824,343
-------------------- --------------------- ------------------
COST OF LEASES AND SERVICES ....................... 69,108,451 70,597,841 69,824,343
==================== ===================== ==================
III. COST OF CREDIT CARD OPERATIONS
Expenses (Note 16.f.) .................................. 11,429,544 13,977,878 8,734,312
-------------------- --------------------- ------------------
COST OF CREDIT CARD OPERATIONS .................... 11,429,544 13,977,878 8,734,312
==================== ===================== ==================
TOTAL COST ........................................ Ps. 85,341,717 Ps. 97,142,182 Ps. 88,955,631
==================== ===================== ==================
F-147
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
16. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
E. FOREIGN CURRENCY ASSETS AND LIABILITIES
Total as of June 30,
----------------------------------
Amount of Current
foreign exchange
Captions Currency currency rate 2002 2001
---------------------------------------------- ------------- -------------- ---------------- ----------------
ASSETS
CURRENT ASSETS
Cash and banks................... US$ 1,203,746 3.70 Ps. 4,453,860 Ps. 266,084
Investments...................... US$ 11,250 3.70 41,625 819,640
Accounts receivable, net......... US$ -- -- 27,260,680
Other receivables and prepaid
expenses......................... US$ 17,000 3.70 62,900 4,680,482
-------------- ---------------- ----------------
TOTAL CURRENT ASSETS............. 1,231,996 Ps. 4,558,385 Ps. 33,026,886
-------------- ---------------- ----------------
NON-CURRENT ASSETS
Accounts receivable, net......... US$ 740,000 3.70 Ps. 2,738,000 Ps. 6,525,570
Other receivables and prepaid
expenses, net.................... US$ 45,000 3.70 166,500 2,639,227
-------------- ---------------- ----------------
TOTAL NON-CURRENT ASSETS......... 785,000 Ps. 2,904,500 Ps. 9,164,797
-------------- ---------------- ----------------
TOTAL ASSETS AS OF JUNE 30, 2002. 2,016,996 Ps. 7,462,885 Ps. --
============== ================ ================
TOTAL ASSETS AS OF JUNE 30, 2001 -- Ps. -- Ps. 42,191,683
============== ================ ================
LIABILITIES
CURRENT LIABILITIES
Trade accounts payable........... US$ 349,869 3.80 Ps. 1,329,503 Ps. 684,296
Customer advances................ US$ -- -- 31,113,682
Short-term debt.................. US$ 1,040,153 3.80 3,952,581 96,751,530
Related parties.................. US$ -- -- 551,629
-------------- ---------------- ----------------
TOTAL CURRENT LIABILITIES........ 1,390,022 Ps. 5,282,084 Ps. 129,101,137
-------------- ---------------- ----------------
NON CURRENT LIABILITIES
Trade accounts payable........... US$ 1,609,760 3.80 Ps. 6,117,088 Ps. 3,776,183
Customer advances................ US$ -- -- 58,423,737
Long-term debt................... US$ 18,719,686 3.80 71,134,807 205,636,522
Related parties.................. US$ 14,550,073 3.80 55,290,277 --
-------------- ---------------- ----------------
TOTAL NON-CURRENT LIABILITIES.... 34,879,519 Ps. 132,542,172 Ps. 267,836,442
============== ================ ================
TOTAL LIABILITIES AS OF JUNE 30,
2002............................. 36,269,541 Ps. 137,824,256 Ps. --
============== ================ ================
TOTAL LIABILITIES AS OF JUNE 30,
2001............................. -- Ps. -- Ps. 396,937,579
============== ================ ================
F-148
ALTO PALERMO S.A. (APSA)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
16. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
F. OTHER EXPENSES
Expenses
-------------------------------------------------------------------------------
Cost of
Cost of Cost of sales and
leases and credit card development
Items services operations Properties Administrative Selling
------------------------------------- -------------- --------------- -------------- --------------- ---------------
Depreciation and amortization....... Ps. 54,468,569 Ps. 1,068,875 Ps. -- Ps. 853,289 Ps. 347,393
Allowance for doubtful accounts..... -- -- -- -- 46,972,159
Salaries and bonuses................ -- 4,797,876 -- 7,042,947 677,007
Condominium expenses................ 10,542,245 -- -- -- --
Taxes, rates, contributions and
services............................ 483,395 2,290,674 3,083 2,874,640 --
Fees and payments for services...... -- 534,859 -- 4,461,998 17,535
Parking............................. 3,185,420 -- -- -- --
Advertising......................... -- -- -- -- 3,180,510
Fees for directors.................. -- -- -- 1,934,618 --
Commissions......................... -- 1,911,142 -- -- --
Rental ............................. 312,096 144,193 -- 1,217,837 --
Insurance........................... -- 184,062 -- 626,684 --
Stationery.......................... -- 218,960 -- 575,076 --
Maintenance and repairs............. 10,733 148,418 260,074 318,973 --
Social security contributions....... -- -- -- 593,681 136,110
Personnel .......................... -- 127,119 -- 431,084 --
Bank charges........................ -- -- -- 371,551 --
Control authorities expenses........ -- -- -- 170,304 --
Freight and transportation.......... -- -- -- 129,915 --
Computer services................... 105,993 -- -- -- --
Other............................... -- 3,366 86,850 986,615 356,754
-------------- -------------- ------------- -------------- ---------------
Total as of June 30, 2002........... Ps. 69,108,451 Ps. 11,429,544 Ps. 350,007 Ps. 22,589,212 Ps. 51,687,468
============== ============== ============= ============== ===============
Total as of June 30, 2001........... Ps. 70,597,841 Ps. 13,977,878 Ps. 1,317,221 Ps. 30,831,832 Ps. 27,581,723
============== ============== ============= ============== ===============
Total as of June 30, 2000........... Ps. 69,824,343 Ps. 8,734,312 Ps. 1,666,479 Ps. 27,608,310 Ps. 44,780,794
============== ============== ============= ============== ===============
Total as of Total as of Total as of
June 30, June 30, June 30,
Items 2002 2001 2000
------------------------------------- --------------- --------------- ---------------
Depreciation and amortization....... Ps. 56,738,126 Ps. 60,729,546 Ps. 57,479,889
Allowance for doubtful accounts..... 46,972,159 17,950,979 19,608,653
Salaries and bonuses................ 12,517,830 21,426,875 17,458,850
Condominium expenses................ 10,542,245 -- --
Taxes, rates, contributions and
services............................ 5,651,792 10,116,952 9,693,276
Fees and payments for services...... 5,014,392 6,430,485 5,793,322
Parking............................. 3,185,420 4,999,818 4,323,736
Advertising......................... 3,180,510 5,645,730 20,049,172
Fees for directors.................. 1,934,618 1,969,586 1,820,403
Commissions......................... 1,911,142 2,607,867 2,485,190
Rental ............................. 1,674,126 3,034,105 2,995,122
Insurance........................... 810,746 886,945 959,258
Stationery.......................... 794,036 1,005,680 1,293,162
Maintenance and repairs............. 738,198 1,357,151 2,097,445
Social security contributions....... 729,791 1,783,835 1,623,519
Personnel .......................... 558,203 867,360 1,068,465
Bank charges........................ 371,551 549,448 538,640
Control authorities expenses........ 170,304 167,617 182,263
Freight and transportation.......... 129,915 178,233 202,404
Computer services................... 105,993 585,393 396,025
Other............................... 1,433,585 2,012,890 2,545,444
--------------- --------------- ---------------
Total as of June 30, 2002........... Ps. 155,164,682 Ps. -- Ps. --
=============== =============== ===============
Total as of June 30, 2001........... Ps. -- Ps. 144,306,495 Ps. --
=============== =============== ===============
Total as of June 30, 2000........... Ps. -- Ps. -- Ps. 152,614,238
=============== =============== ===============
F-149
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management and Shareholders of
Brazil Realty S.A. Empreendimentos e Participacoes
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in financial position and of
changes in shareholders' equity present fairly, in all material respects, the
financial position of Brazil Realty S.A. Empreendimentos e Participacoes and its
subsidiaries at June 30, 2001 and the results of their operations and their
changes in financial condition for the year then ended, expressed in Brazilian
reais, in conformity with accounting principles prescribed by Brazilian
Corporate Law. 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 audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
Accounting principles prescribed by Brazilian Corporate Law 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 consolidated net income expressed in Brazilian reais for the
year ended June 30, 2001 and the determination of consolidated shareholders'
equity also expressed in Brazilian reais at June 30, 2001 to the extent
summarized in Note 18 to the consolidated financial statements.
The financial statements previously presented as at and for the twelve months
ended June 30, 2000 were prepared on the basis of generally accepted accounting
principles in Brazil. The accompanying financial statements have been prepared
on the basis of accounting principles prescribed by Brazilian Corporate Law, and
reconciled to accounting principles generally accepted in the United States of
America (Notes 2 and 18).
Sao Paulo, Brazil,
August 10, 2001
PricewaterhouseCoopers Auditores Independentes
Sao Paulo, Brazil
F-150
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management and Shareholders of
Brazil Realty S.A. Empreendimentos e Participacoes:
(1) We have audited the consolidated balance sheet of BRAZIL REALTY S.A.
EMPREENDIMENTOS E PARTICIPACOES (a Brazilian corporation) and subsidiaries as of
June 30, 2000 and the related statements of income, changes in shareholders'
equity, and changes in financial position for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements.
(2) We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting amounts and disclosures
in the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
(3) In our opinion, the financial statements referred to in paragraph (1)
present fairly, in all material respects, the consolidated financial position of
Brazil Realty S.A. Empreendimentos e Participacoes and subsidiaries as of June
30, 2000, and the results of their operations, and the changes in their
financial position for the year then ended, in accordance with accounting
principles prescribed by Brazilian corporate law.
(4) Accounting practices used by the Company in preparing the accompanying
financial statements conform with accounting principles prescribed by Brazilian
corporate law but do not conform with accounting principles generally accepted
in the United States of America. A description of these differences and a
reconciliation of consolidated net income and shareholders' equity to U.S.
generally accepted accounting principles are set forth in Note 18. As mentioned
in Note 2, the Company is reissuing its financial statements as of and for the
year ended June 30, 2000 due to the change of its reporting currency from reais
of constant purchasing power as of the latest balance sheet date to nominal
reais, in order to maintain consistency in the presentation of the financial
statements.
Arthur Andersen
Sao Paulo, Brazil,
January 19, 2001
(except to the matters discussed in Notes 2 and 18, for which
the date is August 10, 2001)
F-151
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--JUNE 30, 2001 AND 2000
(In thousands of Brazilian reais)
A S S E T S
JUNE 30,
------------------------
2001 2000
---------- ----------
CURRENT ASSETS:
Cash, cash equivalents and financial investments 97,738 59,308
Accounts receivable 78,845 68,115
---------- ----------
Allowance for doubtful accounts (557) (1,037)
Inventory - properties 68,073 52,278
Recoverable income taxes 12,991 11,141
Project costs 2,864 4,526
Other assets 192 4,769
---------- ----------
Total current assets 260,146 199,100
---------- ----------
NONCURRENT ASSETS:
Accounts receivable 88,513 109,300
Deferred income tax 3,139 2,660
Other assets 3 12
---------- ----------
Total non-current assets 91,655 111,972
---------- ----------
PERMANENT ASSETS:
Investments 36,400 31,145
Property and equipment, net 81,662 88,840
Deferred expenses 1,374 796
---------- ----------
Total permanent assets 119,436 120,781
---------- ----------
Total assets 471,237 431,853
========== ==========
The accompanying notes are an integral
part of these consolidated financial statements
F-152
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--JUNE 30, 2001 AND 2000
(In thousands of Brazilian reais)
LIABILITIES AND SHAREHOLDERS' EQUITY
JUNE 30,
-----------------------
2001 2000
--------- ----------
CURRENT LIABILITIES:
Estimated costs to complete construction projects in process 42,273 44,493
Accounts payable for properties acquisition, current portion 13,646 10,243
Suppliers 12,132 54
Bank debt and financing 9,803 13,496
Interest payable 2,084 1,660
Income tax and social contribution payable - 363
Taxes payable, other than income tax 1,917 897
Other accounts payable 2,278 5,956
--------- ----------
Total current liabilities 84,133 77,162
--------- ----------
NONCURRENT LIABILITIES:
Fixed rate notes 46,416 36,245
Financing 3,299 6,074
Deferred profit on sales of properties, net 40,875 54,554
Estimated costs to complete construction projects in process 19,182 26,127
Provision for contingencies 9,791 -
Accounts payable for properties acquisition 6,014 7,422
Deferred income tax 1,640 4,745
--------- ----------
Total non-current liabilities 127,217 135,167
--------- ----------
Deferred revenue 645 847
--------- ----------
MINORITY INTEREST 11,495 7,638
--------- ----------
SHAREHOLDERS' EQUITY:
Paid-in capital 158,466 123,546
Advance for future capital increase - 7,129
Treasury shares (6,470) (6,470)
Profit reserve 69,415 61,995
Legal reserve 7,180 4,697
Retained earnings 19,156 20,142
--------- ----------
Total shareholders' equity 247,747 211,039
--------- ----------
Total liabilities and shareholders' equity 471,237 431,853
========= ==========
The accompanying notes are an integral
part of these consolidated financial statements
F-153
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED JUNE 30, 2001 AND 2000
(In thousands of Brazilian reais)
TWELVE MONTHS ENDED JUNE 30,
----------------------------
2001 2000
----------- ----------
REVENUE:
Sale of properties 133,529 145,811
Resale of properties 22,782 4,872
Rental properties 17,937 14,143
Other 99 88
Services 2,817 974
Taxes on revenue (8,741) (1,605)
----------- ----------
NET REVENUE 168,423 164,283
COST OF SALES AND SERVICES:
Cost of properties sold (70,937) (81,060)
Cost of resale of properties (11,576) (3,314)
Cost of rental properties (2,697) (2,107)
---------- ----------
GROSS PROFIT 83,213 77,802
---------- ----------
OPERATING (EXPENSES) INCOME:
General and administrative expenses (12,145) (11,281)
Marketing and selling expenses (22,017) (14,248)
Losses from investments (1,747) (2,884)
Financial income and expenses, net (10,555) 2,320
Other operating income and expenses, net 67 811
---------- ----------
INCOME BEFORE INCOME TAX AND MINORITY INTEREST 36,816 52,520
INCOME TAX (1,496) (1,600)
---------- ----------
NET INCOME BEFORE MINORITY INTEREST 35,320 50,920
MINORITY INTEREST (6,403) (4,619)
REVERSAL OF INTEREST ON OWN CAPITAL (Note 3.1) 19,750 -
---------- ----------
NET INCOME 48,667 46,301
========== ==========
EARNINGS PER SHARE OUTSTANDING AT END OF THE PERIOD (R$) 0.61 0.64
========== ==========
The accompanying notes are an integral
part of these consolidated financial statements.
F-154
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE TWELVE MONTHS ENDED JUNE 30, 2001 AND 2000
(In thousands of Brazilian reais)
Advance for
Paid-in Future capital Treasury Legal Profit Retained
Capital increase Shares Reserve Reserve earnings Total
------- -------- ------ ------- ------- -------- -----
BALANCES AS OF JUNE 30, 1999 123,546 - (6,470) 2,621 32,419 15,350 167,466
Advance for future capital increase made
through capitalization of dividend payable - 7,129 - - - - 7,129
Net income - - - - - 46,301 46,301
Allocation of net income for the year ended
December 31, 1999 as approved by the
shareholders meeting held on April 25, 2000:
Legal reserve - - - 2,076 - (2,076) -
Dividends - - - - - (9,857) (9,857)
Profit Reserve - - - - 29,576 (29,576) -
--------- -------- --------- ------- ---------- --------- ---------
BALANCES AS OF JUNE 30, 2000 123,546 7,129 (6,470) 4,697 61,995 20,142 211,039
Capital contributions in cash received
as part of the subscription of paid-in capital for
a total of R$ 18,132 approved by the Board of
Directors on June 28, 2000 11,003 - - - - - 11,003
Capitalization of advance for future capital
increase as approved by the shareholders
meeting held on July 28, 2000 7,129 (7,129) - - - - -
Capital increase through capitalization of
interest on own capital payable ot R$ 19,750,
net of income tax withheld from shareholders
of R$ 2,962 approved on December 21, 2000 16,788 - - - - - 16,788
Net income - - - - - 48,667 48,667
Allocation of income for the year ended December 31,
2000 as approved by the shareholders meeting held
on February 20, 2001:
Legal reserve - - - 2,483 - (2,483) -
Profit reserve 7,420 (7,420) -
Dividends - - - - - (20,000) (20,000)
Interest on own capital (19,750) (19,750)
--------- -------- --------- ------- ---------- --------- ---------
BALANCES AS OF JUNE 30, 2001 158,466 - (6,470) 7,180 69,415 19,156 247,747
========= ======== ========= ======= ========== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-155
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE TWELVE MONTHS ENDED JUNE 30, 2001 AND 2000
(In thousands of Brazilian reais)
TWELVE MONTHS ENDED JUNE 30,
--------------------------------
2001 2000
------------ ----------------
SOURCES OF FUNDS
FROM OPERATIONS
NET INCOME 48,667 46,301
Depreciation and amortization 2,259 2,830
Deferred income tax (3,584) -
Exchange loss on non-current liabilities 10,171 155
Residual value of fixed assets disposed off 2,974 494
Provision for contingencies 9,791 -
Minority interest 6,403 4,619
---------- --------------
ADJUSTED NET INCOME 76,681 54,399
FROM SHAREHOLDERS
Increase in share capital 27,791 -
Advance for future capital increase - 7,129
---------- --------------
TOTAL SOURCES OF FUNDS - SHAREHOLDERS 27,791 7,129
FROM THIRD PARTIES
Bank financing - 5,919
Increase in deferred income tax - 2,085
Transfer from non current to current assets 773 22,406
Decrease in non current accounts receivable and other assets 20,796 14,406
---------- --------------
TOTAL SOURCES OF FUNDS - THIRD PARTIES 21,569 44,816
TOTAL SOURCES OF FUNDS 126,041 106,344
USES OF FUNDS
Increases in Investments 2,230 4,674
Increases in fixed assets 1,782 5,594
Increase in intangible assets 649 1,047
Decrease in deferred profit on sale of properties, net and
deferred revenue 13,881 7,926
Decrease in estimated costs to complete construction in process 6,945 18,029
Long-term debt transferred to short-term 2,775 155
Decrease in long term accounts payable 1,408 2,478
Dividends on consolidated subsidiaries and affiliates paid to minority interests 2,546 1,946
Dividends 20,000 9,857
Interest in own capital 19,750 -
---------- --------------
TOTAL USES OF FUNDS 71,966 51,706
---------- --------------
INCREASE IN WORKING CAPITAL 54,075 54,638
WORKING CAPITAL AT THE BEGINNING OF THE PERIOD 121,938 67,300
---------- --------------
WORKING CAPITAL AT THE END OF THE PERIOD 176,013 121,938
========== ==============
The accompanying notes are an integral
part of these consolidated financial statements.
F-156
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
1. OPERATIONS
Brazil Realty S.A. Empreendimentos e Participacoes S.A. ("Brazil Realty") and
its subsidiaries ("the Company") are engaged primarily in the acquisition,
development, marketing and sale of residential and commercial properties. In
this context, these companies also conduct sales of vacant land, rental of
properties, and management and advisory services on real estate projects, and
have investments in the equity of affiliated real-estate companies and in
real-estate investment funds.
2. FINANCIAL STATEMENT PRESENTATION
(a) BASIS OF PRESENTATION AND REPORTING PERIOD
----------------------------------------------
The financial statements have been prepared specifically for purposes of
permitting the shareholder IRSA Inversiones y Representaciones S.A., to comply
with its reporting requirements with the Securities and Exchange Commission
("SEC") of the United States of America. The financial statements have been
prepared in accordance with the accounting principles established by the
Brazilian Corporate Law.
While the fiscal year-end of the Company is December 31 of each year, the
balance sheet as of June 30, 2001 and 2000 and the statements of income, of
changes in financial position and of changes in shareholders' equity for the
twelve months ended June 30, 2001 and 2000 have been prepared for the
special-purpose indicated above.
Until December 31, 1995, publicly traded companies in Brazil were required to
prepare their financial statements according to two sets of accounting
principles: (a) Brazilian Corporate Law, which was and remains in full force and
is valid for all legal purposes, including the basis for calculating income
taxes and mandatory minimum dividends; and (b) generally accepted accounting
principles in Brazil (Brazilian GAAP), which require the application of the
constant currency method of accounting to reflect the effect of inflation in the
preparation of supplementary financial statements, in accordance with the
standards recommended by the Comissao de Valores Mobiliarios (CVM), the
Brazilian securities commission. The accounting principles under Brazilian
Corporate Law and Brazilian GAAP differ in the method of recognizing the effects
of inflation in the financial statements.
F-157
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
(b) BRAZILIAN CORPORATE LAW
----------------------------
Under Brazilian Corporate Law, until December 31, 1995 a simplified method was
used to recognize the effects of inflation, which consisted of indexing
permanent assets (investments, property and equipment, and intangible assets)
and shareholders' equity accounts using indices set forth by the Federal
Government of Brazil, based on the variation of the Unidade Fiscal de Referencia
(UFIR). The net effect of the indexation was charged or credited in the
statement of income under a single account. Brazilian Corporate Law, however,
did not recognize the effect of inflation in certain balance sheet accounts,
such as inventories and customer advances; this method also did not require the
indexation of information from the preceding years when presenting comparative
financial information. In the highly inflationary environment prevailing in
Brazil until July 1,1994, the financial statements prepared in accordance with
accounting principles set forth in Brazilian Corporate Law did not allow for a
consistent comparison of financial information between two different periods.
Under Brazilian Corporate Law and the CVM rules, the application of the method
to account for the effects of inflation described above was prohibited beginning
January 1, 1996 and, therefore, the financial statements prepared in accordance
with Brazilian Corporate Law do not include the recognition of the effects of
inflation since then.
(c) CONSTANT CURRENCY METHOD (BRAZILIAN GAAP)
--------------------------------------------
Under the constant currency method required by Brazilian GAAP, all amounts
presented in reais, both in the financial statements and notes thereto, are
stated in constant purchasing power currency on the date of the latest balance
sheet presented, pursuant to the CVM rules for publicly traded companies.
Brazilian GAAP requires application of the constant currency method also after
December 31, 1995. The constant currency method requires the recognition of the
following effects of inflation in the financial statements:
o Adjustment of the opening balances, non-monetary asset additions and
related depreciation or cost of non-monetary assets sold by applying a
general inflation index, recognizing the gain by means of a credit to
income.
o Adjustment of shareholders' equity opening balances and movements for
the period by applying a general inflation index, recognizing the loss
by means of a charge to income.
o Allocation of inflationary gains and losses of non-monetary items to
the corresponding income and expenses. Gains and losses for which the
corresponding income and expenses were not identified are allocated to
a specific account under "Other operating income and expenses, net".
F-158
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
(d) CHANGES IN THE PRESENTATION OF THE FINANCIAL STATEMENTS
------------------------------------------------------------
These financial statements were prepared in accordance with the accounting
principles set forth by Brazilian Corporate law (Law 6.404/76 and Law
10.303/2001 as amended) and rules and instructions issued by the CVM, which
include the indexation of permanent assets and shareholders' equity solely until
December 31, 1995. Through the twelve months ended June 30, 2000, the financial
statements of the Company presented in documents filed with the SEC were
submitted pursuant to Brazilian GAAP, requiring full application of the constant
currency method after December 31, 1995. In common with other Brazilian
companies whose financial statements are presented in documents filed with the
SEC, the Company has been granted the option to present its primary financial
statements on the basis of accounting principles established under Brazilian
Corporate Law beginning with the twelve months ended June 30, 2001.
This accommodation arose from a position paper prepared by the International
Task Force of the American Institute of Certified Public Accountants (AICPA).
The SEC staff informally indicated that it would not object to such
presentation. To harmonize the presentation format of financial statements to be
used by shareholders in the United States with those used in the Brazilian
market, management has prepared the Company's financial statements pursuant to
the principles set forth in Brazilian Corporate Law. All periods are presented
in accordance with Brazilian Corporate Law as the change in the reporting
currency from reais of constant purchasing power as of the latest balance sheet
date to nominal reais requires a restatement of all periods submitted in order
to maintain consistency in the presentation of the financial statements.
(e) SUMMARIZED FINANCIAL STATEMENTS FOR THE PRECEDING YEAR IN CURRENCY OF
CONSTANT PURCHASING POWER
The previously filed financial statements for the preceding twelve-month period
were prepared in accordance with Brazilian GAAP, stated in constant currency of
June 30, 2000, and are summarized below:
Condensed Consolidated Balance sheet - June 30, 2000 (in R$ of constant
purchasing power as of June 30, 2000)
Current assets 205,533
Non-current assets 111,972
Permanent assets 154,250
---------
Total assets 471,755
=========
Current liabilities 77,180
Non-current liabilities 134,266
Minority interest 7,764
Shareholders' equity 252,545
---------
Total liabilities and shareholders' equity 471,755
=========
F-159
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
Condensed Consolidated Statement of income - Twelve-month period ended June 30,
2000 (in R$ of constant purchasing power as of June 30, 2000)
Net revenue 165,240
Gross profit 80,559
Income before income tax and minority interest 51,659
Net income 44,021
(f) RECONCILIATION BETWEEN SHAREHOLDERS' EQUITY AND NET INCOME DETERMINED UNDER
BRAZILIAN CORPORATE LAW AND BRAZILIAN GAAP
The reconciliation, as of and for the twelve-month period ended June 30, 2000,
between shareholders' equity and net income under Brazilian Corporate Law, used
for these financial statements, and under Brazilian GAAP, used for the documents
filed with the SEC until the year ended June 30, 2000, is presented below:
SHAREHOLDER'S NET INCOME FOR THE
EQUITY AS OF JUNE 30, TWELVE MONTHS
2000 ENDED JUNE 30, 2000
Balances determined under Brazilian Corporate
Law as currently presented in these financial
statements 211,039 46,301
Effects of inflation on:
Inventories - Properties 5,662 5,239
Investments 6,334 -
Property and equipment and deferred expenses 27,133 15,904
Project costs 2,519 2,282
Shareholders' equity - (22,599)
Other (18) -
Minority interests (124) (3,106)
----------------- ---------------
Balances determined under Brazilian GAAP as previously
presented 252,545 44,021
================= ===============
3. SIGNIFICANT ACCOUNTING POLICIES
The main accounting policies adopted in the preparation of the consolidated
financial statements, summarized below, are consistent with those used in the
preceding year, except for the changes in the basis of presentation of the
financial statements described in Note 2 above.
F-160
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
(a) Indexed and Foreign-Currency Denominated Assets and Liabilities--Assets
and liabilities denominated in foreign currencies or subject to indexation
by contract are carried at historical amounts subsequently updated through
the balance-sheet date according to the contractual terms and based on the
year-end value of the respective currency or index.
(b) Cash, Cash Equivalents and Financial Investments--In accordance with
Brazilian Corporate Law this caption includes cash and cash equivalents and
other financial investments consisting mainly of government marketable
securities and quotas in mutual funds. Cash and cash equivalents consists
of cash, highly liquid investment funds, certificates of deposit and other
financial instruments with original maturity of 90 days or less, stated at
cost plus interest accrued through the balance sheet date. Government
marketable securities and investments in quotas of mutual funds are
recorded at its amortized cost plus accrued financial charges or, if lower,
its fair market value at the balance sheet date. Losses on marketable
securities to reduce their carrying values to fair values are recognized in
the statement of income.
(c) Allowance for Doubtful Accounts--The allowance is determined by management
based on specific analyses of the performance of the receivables, in light
of the contractual guarantees (usually, pledge of subject property) and for
an amount considered to cover estimated probable losses on the realization
of receivables.
(d) Inventories - Properties--Are stated at historical cost (acquisition cost
and/or direct development and construction costs) and comprise the portion
of allocated land, incurred selling expenses and construction costs of the
units available for sale.
(e) Investments--Investments consists mainly of land held which is expected to
be used to form investment funds and is stated at historical acquisition
cost.
(f) Property and Equipment--Recorded at historical cost, inflation-indexed,
when appropriate, up to December 31, 1995. Depreciation is provided for
under the straight-line method according to the annual depreciation rates
based on the estimated useful lives of the assets as indicated in Note 9 .
(g) Deferred Expenses--Consist substantially of expenses for issuance of Fixed
Rate Note (Note 12.a) which are recorded at historical cost and expensed
straight-line over the term of the notes.
(h) Income Taxes--Income tax and social contribution (a federally mandated tax
based on income) are accrued on taxable income at the applicable tax rates
(Note 13).
Deferred taxes on income are recognized under the liability method on temporary
differences between the tax basis and reporting basis of assets and liabilities
and on tax loss carryforwards. Some of the subsidiaries compute and pay income
tax and social contribution based on a simplified method allowed for entities
that do not attain established revenue thresholds. Under such simplified method,
income tax and social contribution are computed and paid based on levels of
revenue and not on taxable income. No deferred taxes have been recognized in
such subsidiaries.
F-161
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
(i) Revenue and Cost Recognition - Sale and resale of properties--Revenues
and costs of real estate projects are recognized under the
percentage-of-completion method, based on specific control records per
project and monitoring reports by technical areas. As soon as residential
or commercial units are negotiated, the full contractual price is
recognized in "Accounts receivable" with a counterentry in "Deferred Profit
on Sale of Properties". Total attributed cost of the unit under sale
contracts (allocated land cost plus selling expenses and incurred and
budgeted construction costs) is charged to "Deferred Profit on Sale of
Properties" against "Inventories" (for the portion of allocated land,
incurred selling expenses and incurred construction costs) and "Estimated
costs to complete construction projects in progress" (for the portion of
budgeted construction costs). "Deferred profit on the sale of properties"
consisting of both deferred revenue and costs as described above are
recognized in income based on the percentage-of-completion. The effects of
revisions to total attributed costs are allocated between income (for the
portion of revenue already recognized) and deferred profit.
(j) Revenue and Cost Recognition - Rental properties--Revenue on rental
properties consist of rent which is recognized in income when due from the
customer. Entry fees charged on certain shopping center and commercial
lease contracts were recorded as income upon signing the related contracts
up to the year ended June 30, 2000. As from July 1, 2000 such fees are
recognized in income straight-line over the contract period.
(k) Earnings per Share--Is calculated based on the number of shares outstanding
at the balance sheet date , excluding treasury shares.
(l) Interest on own capital--As from January 1, 1996, Brazilian corporations
are permitted to distribute and consider as dividends a tax-deductible
notional interest charge on shareholders' equity . Such amount is
recognized as an expense within "Financial income and expenses, net" with
credit in liabilities . Simultaneously the same amount is reversed as
income in "Reversal of interest in own capital" charging retained earnings.
(m) Use of estimates--The preparation of financial statements in accordance
with accounting principles under Brazilian corporate law requires
management to use estimates and assumptions concerning the amounts of
recorded assets and liabilities and the disclosures of contingent assets
and liabilities at the balance sheet date, as well as the estimation of
revenues and expenses for the period. The actual results may differ from
those estimates.
4. CONSOLIDATION POLICIES AND PROCEDURES
The consolidated financial statements include the accounts of Brazil Realty and
all of its subsidiaries in which Brazil Realty directly owns more than 50% of
the voting shares, as listed below. Associated companies in which Brazil Realty
owns less than 50% of voting shares, but the control of which is shared which
others, under a specific instruction from CVM, are consolidated on a
proportional basis according to the percentage of total share capital owned. All
significant intercompany accounts and transactions, as well as unrealized income
in intercompany transactions are eliminated upon consolidation. The minority
interests of consolidated subsidiaries in income and shareholders' equity are
stated in specific accounts.
F-162
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
The consolidated subsidiaries, and the associated entities consolidated
proportionally, are as follows:
PERCENTAGE OWNED
AS OF JUNE 30.
-----------------
2001 2000
-----------------
CONSOLIDATED SUBSIDIARIES
Brazil Realty Servicos e Investimentos Ltd.
(Bahamas) 99.99 99.99
Brazil Realty Administracao e Locacao Ltda. 99.99 99.99
BRC Servicos Ltda. 99.99 99.99
Millennium de Investimentos Imobiliarios Ltda. 99.99 99.99
Tal de Investimentos Imobiliarios Ltda. 75.00 75.00
Cybra de Investimentos Imobiliarios Ltda. 75.00 75.00
Tal de Empreendimentos Imobiliarios Ltda. 75.00 75.00
Capital Realty de Investimento Imobiliario Ltda. 99.99 -
ABC Realty de Investimento Imobiliario Ltda. 95.00 90.00
AFFILIATES PROPORTIONALLY CONSOLIDATED
Fifity de Investimentos Imobiliarios Ltda. 50.00 50.00
Country de Investimentos Imobiliarios Ltda. 50.00 50.00
Forest Hill de Investimento Imobiliario Ltda. 25.00 25.00
Cyset de Investimento Imobiliario Ltda. 36.99 36.99
BRX Adm. De Shopping Centers S/C ltda.. 49.99 49.99
BRH Adm. De Investimento Imobiliario Ltda. 50.00 -
ABC II de Investimentos Imobiliarios Ltda. 34.00 -
Fundo de Investimento Imobiliario Centro Textil
Internacional 43.50 43.50
Fundo de Investimento Imobiliario ABC Plaza Shopping 20.40 20.40
Fundo Brasilio Machado de Investimento Imobiliario 50.00 50.00
Fundo JK de Investimento Imobiliario 34.00 34.00
Fundo Tal de Investimento Imobiliario 0.003 0.003
F-163
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
5. CASH, CASH EQUIVALENTS AND FINANCIAL INVESTMENTS
2001 2000
-------------------
Bank deposits and petty cash 1,603 1,138
Fixed income funds 39,263 13,811
Marketable government securities:
Brazilian External Debt (C Bond and Brazil 2040) 56,251 43,847
Brazilian National Treasury Notes - NTN 595 486
Russian External Debt 26 26
------ ------
97,738 59,308
====== ======
Fixed income funds are mutual funds administered by banks, the purpose of which
is to invest mostly in interbank deposits and bank certificates of deposit. The
Company's deposits in these funds may be withdrawn at any time. As of June 30,
2001 and 2000 fixed income funds include R$ 3,868 and R$ 2,141, respectively, of
quotas available for sale in "Fundo Financial Center de Investmento Imobiliario"
in which the Company owns as of June 30, 2001 and 2000, 9.7% and 16.2% of total
quotaholders equity, respectively.
The investment in Brazilian federal government debt securities (C-Bonds and
Brazil 2040) was made through a subsidiary outside Brazil and bears semi-annual
interest of 4% (C-Bonds) and 5% (Brazil 2040) at June 30, 2001 of face value.
Such bonds may be sold at any time.
F-164
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
6. ACCOUNTS RECEIVABLE
Accounts receivable result mainly from sales of residential and commercial
properties (monetarily restated through the balance sheet date according to
contractual indexes), from rental of office space in commercial buildings and
areas in shopping centers, and resale of properties, as follows:
2001 2000
-----------------------
Current:
Sales of development properties (a) 71,377 64,220
Rental 2,303 1,834
Resale of properties 4,192 913
Other 973 1,148
Allowance for doubtful accounts (557) (1,037)
------- -------
Total current 78,288 67,078
------- -------
Noncurrent:
Sales of development properties (a) 88,513 109,300
------- -------
Total noncurrent 88,513 109,300
------- -------
Total 166,801 176,378
======= =======
(a) Accounts receivable from sales of development properties under fixed price
contracts are contractually adjusted based upon the INCC (a index based on
prices of civil construction), as specified in the contracts up to delivery
of the property. Thereafter are adjusted based on the IGP-M (a general
price index).
7. INVENTORY - PROPERTIES
This caption includes the cost of land acquired for future development projects,
and the portion of actual costs accumulated in the construction of projects,
excluding units already under sales contracts, as follows:
2001 2000
Projects under construction (land portion and
accumulated construction costs of unsold units) 52,815 20,426
Land held for future incorporation 15,258 31,852
------ ------
Total 68,073 52,278
====== = =====
F-165
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
8. INVESTMENTS
2001 2000
-----------------
Faria Lima (a) 33,848 28,115
Goodwill (b) 2,552 3,030
------- -------
Total 36,400 31,145
======= =======
(a) Composed of acquired properties located on Av. Faria Lima in Sao Paulo, SP,
Brazil , which management expects to be used for contribution to future
real estate investment funds.
(b) Goodwill on the acquisition of quotas in "Fundo de Investimento Imobiliario
ABC Plaza Shopping" and "Fundo Brasilio Machado de Investimento
Imobiliario"
9. PROPERTY AND EQUIPMENT, NET
Annual
depreciation
Rate - % 2001 2000
--------------------
Land - 19,753 20,945
Buildings 1.27 - 2.05 69,337 65,814
Machinery and equipment 10 3,633 3,621
Furniture and fixtures 10 251 225
Telephone lines - 196 196
Computers 10 405 341
Construction in progress - 364 8,393
Other - 332 317
------- ------
Sub-Total 94,271 99,852
------- ------
Accumulated depreciation (12,609) (11,012)
------- ------
Total 81,662 88,840
====== ======
The estimate of the remaining useful lives of the buildings was reviewed by an
independent appraiser in 1997.
F-166
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
10. ESTIMATED COSTS TO COMPLETE CONSTRUCTION PROJECTS IN PROCESS
This caption represents the provision of future costs to be incurred in the
completion of real estate projects under construction, for units under contracts
for sale. The amount reflects the latest estimate of total construction costs of
such units less amounts already incurred. The amount initially recorded, at the
time of entering into contracts for sale of units, against Deferred profits on
sale of properties, and reduced, against Inventory, by the attribution to such
units of actual costs incurred which were originally charged to Inventories. The
balance is regularly reviewed for changes in cost estimates which are recognized
against deferred profits or income (Cost of properties sold), as appropriate.
11. DEFERRED PROFITS ON SALE OF PROPERTIES
Deferred profits consist of revenues and costs to be recognized in income over
future periods under the percentage-of-completion method, as follows:
2001 2000
-------------------
Revenues to be recognized from units in
construction under sales contracts 101,028 134,206
Land, construction costs and selling
expenses of units in construction
under sales contracts (60,153) (79,652)
------- -------
Net 40,875 54,554
======= =======
F-167
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
12. BANK DEBT, FINANCING AND FIXED RATE NOTES
2001 2000
----------------------
Current:
Bank debt 5,594 8,873
Financing 4,209 4,623
Sub-total Bank debt and Financing ------ ------
9,803 13,496
------ ------
Interest on fixed rate notes 2,060 1,619
Interest in financing 24 41
------ ------
Sub-total Interest payable 2,084 1,660
Sub-total current 11,887 15,156
------ ------
Non-current:
Fixed rate notes (US$20,145 due
in 2005) 46,416 36,245
Financing 3,299 6,074
------ ------
Sub-total non-current 49,715 42,319
------ ------
Total 61,602 57,475
====== ======
Local currency 7,532 10,738
Foreign currency 54,070 46,737
------ ------
61,602 57,475
====== ======
a. BANK DEBT
Represented principally by indebtedness, collateralized by the Company, entered
into by the subsidiary Brazil Realty Servicos e Investimentos Ltd. in 1998. The
interest rate for this debt is LIBOR plus 0.5% to 1% p.a.
F-168
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
b. FINANCING
Represented by transactions entered into to finance Classique Klabin I and II,
The Universe and The Excellence projects. The contracted rates are 10% and 12.5%
per annum, plus Referential Rate (TR, which had a variation of 1.7% and 2.8%,
respectively, in the twelve months ended June 30, 2001 and 2000), with monthly
payment of interest and principal maturing in July, November and December 2002,
for the financing related to the The Universe, Clasique Klabin I and II, and The
Excellence, respectively. Mortgage on the related properties and receivables
from such developments have been offered as collateral.
c. FIXED RATE NOTES
In July 1997 the Company obtained US$ 75,000,000 by issuing fixed rate notes in
the international markets to finance real estate ventures. The notes matures in
2005, with semiannual interest payments of 10.05% per annum. The notes may be
redeemed at the option of the Company or of the noteholders in July 2002. This
issue has certain covenants concerning: indebtedness, warrants, asset transfers,
leaseback transactions, transactions with affiliates, mergers and other.
During 1998 and during the first semester of 1999 the Company repurchased and
canceled US$ 54,855,000 of such debt.
d. MATURITY OF BANK DEBTS, FINANCINGS AND FIXED RATE NOTES
MATURITY (*) 2001
----------
Through June 31, 2002 12,215
Through June 31, 2003 2,971
Through June 31, 2004 -
Thereafter 46,416
TOTAL 61,602
======
(*) Considers that no option for early payment of fixed rate notes is exercised.
F-169
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
13. INCOME TAXES
Brazilian entities are subject to corporate income tax, computed currently at
25% of taxable income for the calendar year, and social contribution on profits,
computed at 9% (12% during the period from April 1999 through January 2000).
Taxable income reflects income before income tax as per corporate-law books
adjusted by certain nondeductible and nontaxable items. Income taxes are
assessed individually for each legal entity. Certain companies with yearly
revenues up to a certain threshold (R$ 240,000 currently) can elect the
so-called estimated profit regime for income tax and social contribution
purposes. In this case, corporate income tax and social contribution is computed
at the regular rate referred to above, but taxable income is arbitrarily
presumed to be 8% of gross revenues. Brazil Realty is subject to corporate
income tax under the regular taxable income computation. However, certain of its
subsidiaries and affiliates have been able to elect the presumed profit regime.
Tax loss carryforwards can be used to offset taxable income and do not expire,
but offsetting is limited to 30% of taxable income each year. However based on
an injunction obtained on March 18, 1998, amounts payable are being offset by
Brazil Realty against all of the taxable income in the year.
As of June 30, 2001, the accumulated tax losses amounted to R$ 8,145 and the
negative social contribution basis to R$ 9,541, both available for offset
against future taxable profits.
The main permanent difference adjustments to determine the effective tax rates
for the twelve months ended June 30, 2001 and 2000 are the following: (a) profit
generated by subsidiaries which pay income tax on a presumed basis; that is,
there are actual profits in excess of presumed profits; (b) recognition of tax
loss carryforward during the twelve months ended June 30, 2001; and (c) profit
generated by the subsidiary located in Iha da Madeira, a tax haven.
F-170
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
The components of the deferred income tax assets and liabilities are comprised
of the following as of June 30, 2001 and 2000:
2001 2000
----------- -----------
Deferred tax assets:
Taxes losses carryforward 2,895 865
Allowance for doubtful accounts - 620
Taxable income (cash received)
higher than accounting basis
(revenue recognized)for
deferred profit 244 1,175
----- ------
Total gross deferred tax assets 3,139 2,660
----- ------
Deferred tax liabilities:
Taxable income (cash received)
lesser than accounting basis
(revenue recognized)for
deferred profit (1,640) (4,745)
----- ------
Total gross deferred tax liabilities (1,640) (4,745)
----- ------
Total net deferred income tax asset
(liability) 1,499 (2,085)
===== ======
Income tax returns in Brazil are open to review and assessment by the income tax
authorities during a period of 5 years from the year the returns are filed. Such
reviews might generate assessments, which would include unpaid taxes, penalties
and interest.
14. CONTINGENCIES
Provisions for contingencies are determined based on a periodical analysis by
management, supported by external legal consultants. No provisions are made for
lawsuits and claims for which a loss is considered to be either reasonably
possible, but not probable, or remote.
F-171
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
The Company has been challenging in court the constitutionality of the law
applicable to the payment of Cofins (social contribution on gross revenues) on
sales of property. The Company's argument is that the law specifies that this
tax is due on merchandise sold, and that "property is not merchandise". The
Company had not provided for on its financial statements prepared under the
Brazilian Corporate Law method for the period ended June 30, 2000 the contingent
loss related to the dispute on Cofins tax on property sales. During the period
ended June 30, 2001, management and outside legal counsel re-assessed the
likelihood of losses on such dispute based on the outcome of similar cases, and
concluded that it was more probable than not that the Company would have a
negative outcome. Accordingly, the subject contingency was provided for on the
financial statements for the period ended June 30, 2001. The amount of the
contingent liability recorded is R$ 7,791 as of June 30, 2001.
The Company has also recorded during the twelve months ended June 30, 2001 a
provision amounting to R$ 2,000 as of June 30, 2001 for the penalties arising
from offsetting tax credits for income tax and social contribution purposes
without observing the limit of 30% of taxable income per year as further
explained in Note 13.
The Company is involved in other processes related to the incidence or expansion
of the taxable bases for PIS, COFINS and Social Contribution. Management, based
on the opinion of its legal advisors, who indicate that a favorable outcome is
probable, has not set up a provision for possible payments of the these taxes
which amounted to R$ 5,735 at June 30, 2001.
15. SHAREHOLDERS' EQUITY
a. CAPITAL
On June 30, 2001, the Company's capital consisted of R$ 158,466 (R$ 123,546 as
of June 30, 2000) divided into 82,502,800 (June 30, 2000 - 75.250.000 shares)
book entry registered shares, without par value, of which 38,500,000 (June 30,
2000 - 35,000,000 shares) are common voting shares and 44,002,800 (June 30, 2000
- 40,250,000 shares) are preferred nonvoting shares. The Board of Directors is
authorized to increase capital, without requiring a vote by the shareholders or
a change in by-laws, up to the limit of 140,000,000 shares.
On June 18, 2000 a subscription of capital was approved by the Board of
Directors for a total of R$ 18,132, of which R$ 7,129 were dividens payable
capitalized and R$ 11,003 were paid up during July and August 2000. As a result
of such subscription capital contributions were received and 3,500,000 common
shares and 3,752,800 preferred shares were issued. On December 21, 2000 a
capital increase of R$ 16,788, without issue of shares, was approved through
capitalization of interest on own capital payable.
Preferred shares are non voting but have priority in the payment of dividends
and capital reimbursement, and have the right to receive dividends 10% higher
than common shares.
b. TREASURY SHARES
As of June 30, 2001 and 2000 the Company had 2,722,000 preferred treasury
shares, the majority of which were acquired in 1998.
F-172
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
c. LEGAL RESERVE AND PROFIT RESERVE
c.1. LEGAL
Annually, the Company is required to transfer 5% of net income from its
statutory financial statements (whose year-end is December 31 of each year) to a
legal reserve, as required by corporate law, until the reserve equals 20% of
paid-in capital.
This reserve can be used to increase the capital or absorb losses, but cannot be
distributed as dividends. Accumulated losses, if any, can be recorded against
the legal reserve account.
c.2. PROFIT RESERVE
Recognized based on budgets of the Company as set forth in bylaws to finance
additional purchases of fixed assets and working capital and expansion
activities, composed of up to 100% of the remaining net income after legal and
statutory reserves and dividend payments, and it cannot exceed capital stock.
d. DIVIDENDS
The Company's bylaws provide for the distribution of annual mandatory minimum
dividends of 25% of the adjusted net income as determined on the statutory
financial statements (whose year end is December 31 of each year) calculated
based on provisions set forth in article 202 of Law No. 6.404/76 (Corporate
law), as amended. The determination of dividends payable related to the fiscal
year ended December 31, 2000 is as follows, which was approved by the
shareholders in the meeting held in February 20, 2001 and dividends were paid
during the first semester of 2001:
Corporate law
-----------------
Net income for the year ended December 31, 2000 49,654
Allocation to legal reserve - 5% of net income (2,483)
------
Basis of computation of minimum dividend 47,171
Percentage of minimum dividends as set forth in
bylaws 25%
Minimum dividend as set forth in bylaws 11,793
Dividends declared in excess of minimum dividends 8,207
-------
Total dividends approved for the fiscal year ended
December 31, 2000 20,000
F-173
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
16. TRANSACTION WITH RELATED PARTIES
The Company uses other affiliates related to the Cyrela group, a group
controlled by one of the shareholders of the Company, to perform certain of its
activities, and the amounts of its disbursements to such affiliates for the
twelve months ended June 30, 2001 and 2000 were approximately R$ 17,929 and R$
8,076. Such services included rent collection, accounts payable, financial
process, legal advise, engineering and purchases services, human resources
administration and data processing services as well as management of
construction and provision of labor force for construction.
17. FINANCIAL INSTRUMENTS
The Company takes part in transactions involving financial instruments, all
recognized in the balance sheet, designed to meets its needs, as well as to
reduce exposure to market, currency and interest rate risks. Management of these
risks is effected by defining strategies, establishing control systems, and
determining position limits.
Financial investments are recorded in accordance with its contractual terms
which reflect usual market conditions as of June 30, 2001 and 2000.
Conditions and terms of loans and financings are presented in Note 12. The
estimated market values of the financial instruments, both assets and
liabilities, as of June 30, 2001 and 2000, do not differ substantially from
those reflected in the financial statements.
Investments in subsidiaries are not listed on stock exchanges and therefore
sufficient assumptions to estimate a market value are not available.
18. SUMMARY OF THE PRINCIPAL DIFFERENCES BETWEEN BRAZILIAN CORPORATE LAW AND
U.S. GAAP
Through the twelve months ended June 30, 2000, the financial statements of the
Company presented in documents filed with the SEC were submitted pursuant to
Brazilian GAAP, requiring full application of the constant currency method after
December 31, 1995. In common with other Brazilian companies whose financial
statements are presented in documents filed with the SEC, the Company has been
granted the option to present its primary financial statements on the basis of
accounting principles established under Brazilian Corporate Law beginning with
the twelve months ended June 30, 2001.
To harmonize the presentation format of financial statements to be used by
shareholders in the United States with those used in the Brazilian market,
management has prepared the Company's financial statements pursuant to the
principles set forth in Brazilian Corporate Law. All periods are presented in
accordance with Brazilian Corporate Law as the change in the reporting currency
from reais of constant purchasing power as of the latest balance sheet date to
nominal reais requires a restatement of all periods submitted in order to
maintain consistency in the presentation of the financial statements.
F-174
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
The Company's consolidated financial statements are prepared in accordance with
Brazilian Corporate Law, which differs in certain respects from U.S. GAAP. Such
differences involve methods of measuring the amounts shown in the consolidated
financial statements, as well as additional disclosures required by U.S. GAAP.
Note 3 summarizes the accounting policies adopted by the Company on these
financial statements prepared following the accounting principles established by
Brazilian Corporate Law.
The reconciliation of shareholders' equity as of June 30, 2001 and 2000 and net
income for the twelve months then ended between Brazilian Corporate Law and U.S.
GAAP are set forth below. Certain additional disclosures which are required
under U.S. GAAP have not been included considering that the reconciliation to US
GAAP is being presented under item 17 of Form 20-F of the SEC rules.
Twelve months ended June 30,
------------------------------
2001 2000
-------------- -------------
(Restated into
nominal reais)
CONSOLIDATED NET INCOME UNDER BRAZILIAN CORPORATE LAW 48,667 46,301
Add (deduct) the effect of U.S. GAAP adjustments:
(a) Effect of indexation for the years ended December 31, 1996
and 1997 (148) (128)
(b) Interest on receivables and payables (5,736) 5,440
(c) Sale of real estate and participations in real estate 1,046 2,613
investment funds with guarantee of minimum yield
(d) Revenue from entry fees on rental activities 1,938 1,939
(e) Capitalized interest costs net of amortization and
recognition in cost of properties sold of interest
cost capitalized (397) 1,037
(f) Stock based compensation 5 (761)
(g) Valuation at fair value of available for sale securities - -
(h) Provision for contingencies 4,450 (4,450)
(i) Deferred income tax on adjustments above (2,134) (838)
(j) Minority interests on adjustments above 523 (778)
------ ------
NET INCOME IN ACCORDANCE WITH U.S. GAAP 48,214 50,375
------ ------
Weighted average common and preferred shares outstanding
(in thousand of shares):
Common shares 38,356 35,000
Preferred shares 41,127 37,528
F-175
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
Earnings per share in accordance with U.S. GAAP - Basic:
Common shares 0.58 0.66
Preferred shares 0.63 0.73
Earnings per share in accordance with U.S. GAAP - Diluted:
Common shares 0.58 0.66
Preferred shares 0.63 0.73
June 30,
-------------------------------
2001 2000
------------ ---------------
(Restated into
nominal reais)
CONSOLIDATED SHAREHOLDERS' EQUITY UNDER BRAZILIAN CORPORATE LAW 247,747 211,039
Add (deduct) the effect of U.S. GAAP adjustments:
(a) Effect of indexation for the years ended December 31, 1996
and 1997 4,738 4,886
(b) Interest on receivables and payables (12,120) (6,384)
(c) Sale of real estate and of participations in real estate
investment trusts with guarantee of minimum yield - (1,046)
(d) Revenue from entry fees on rental activities (567) (2,505)
(e) Capitalized interest costs net of amortization and
recognition in cost of properties sold of interest cost
capitalized 640 1,037
(f) Stock based compensation - -
(g) Valuation at fair value of available for sale securities 53 -
(h) Provision for contingencies - (4,450)
(i) Deferred income tax (265) 1,869
(j) Minority interests on adjustments above 1,087 564
------- -------
CONSOLIDATED SHAREHOLDERS' EQUITY UNDER U.S.GAAP 241,313 205,010
------- -------
DESCRIPTION OF CHANGES IN ESTIMATED SHAREHOLDERS' EQUITY UNDER U.S. GAAP:
Shareholders' equity under U.S. GAAP at the beginning of the
twelve months period 205,010 157,363
Advance for future capital increase - 7,129
Capital contributions in cash 11,003 -
Capitalization of interest on own capital 16,788 -
Provision for interest on own capital payable (19,750) -
Dividends distributed (20,000) (9,857)
Unrealized gains on available for sale securities 53 -
Stock based compensation (5) -
Net income for the twelve month period under U.S. GAAP 48,214 50,375
------- -------
Shareholders' equity under U.S. GAAP at the end of the twelve
months period 241,313 205,010
======= =======
F-176
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
18.1. NARRATIVE DESCRIPTION OF THE DIFFERENCES IN DETERMINATION OF NET INCOME
AND SHAREHOLDERS' EQUITY BETWEEN THE CORPORATE LAW METHOD AND U.S. GAAP
Accounting policies which differ significantly between the Brazilian Corporate
Law Method and U.S. GAAP are described below.
a. EFFECT OF INDEXATION FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
Until December 31, 1995, publicly-traded companies in Brazil were required to
prepare financial statements under two methods: (i) the Brazilian Corporate Law
Method, valid for tax and statutory purposes, and (ii) the Constant Currency
Method (Brazilian GAAP), a method for preparing price-level adjusted financial
statements. See Note 2 for a detailed discussion of these two methods.
The primary difference between the Brazilian Corporate Law Method and Brazilian
GAAP relates to the accounting for the effects of inflation. The Brazilian
Corporate Law Method discontinued inflation accounting effective January 1,
1996. Prior to that date, financial statements prepared under the Brazilian
Corporate Law Method included inflationary indexation of fixed assets,
investments, deferred charges and shareholders' equity, which were reported in
the statement of operations as a single line item. Brazilian GAAP utilizes a
constant currency methodology similar to US Accounting Principles Board
Statement No. 3 ("APS 3"), except that Brazilian GAAP continues to apply
inflationary accounting in periods of low inflation. Under US GAAP, management
determined that the Brazilian economy ceased to be highly inflationary effective
January 1, 1998.
In the Company's reconciliation to US GAAP, an adjustment for inflationary
accounting has been included in relation to the period from January 1, 1996 to
December 31, 1997, a period in which inflationary accounting was prohibited by
the Brazilian Corporate Law Method but still required by APS 3 under US GAAP.
In determining amounts under US GAAP, the effects of inflation for the years
ended December 31, 1996 and 1997 were determined using the Indice Geral de
Precos do Mercado- IGP-M index. For periods prior to 1996, the Company used the
same index as in the Brazilian Corporate Law Method financial statements (UFIR).
b. INTEREST ON RECEIVABLES AND PAYABLES
Under US GAAP, long-term receivables and payables bearing no interest or
substantially less than market interest rates arising from non monetary
transactions are required to be discounted to their present value using a market
interest rate. The imputed interest is treated as a reduction of the related
receivable or payable and is recognized as interest over the remaining term
until maturity. The offset is treated as a reduction of the transaction giving
rise to the receivable or payable, e.g., revenue, in the case of a receivable,
or cost of acquired asset or service received, in the case of a payable.
Under Brazilian Corporate Law, interest is recognized solely in accordance with
the terms of the underlying contract or agreement.
F-177
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
c. SALE OF REAL ESTATE AND PARTICIPATION IN REAL ESTATE INVESTMENT FUNDS WITH
GUARANTEE OF MINIMUM YIELD
The Company has sold both real estate and participation in real estate
investment funds with a guaranteed minimum yield to the buyers for a limited
period of time following the sale.
Under Brazilian Corporate Law, profit from the sales of participation in real
estate investment funds is recorded directly in income in the year of the sale,
and expenses related to the minimum yield are recognized over the guarantee
period.
Under US GAAP, such sales are accounted for under the deposit method in
accordance with Statement of Financial Accounting Standards ("SFAS") No.66,
"Accounting for Sales of Real Estate" until operations of the property cover all
operating expenses, debt service and payments under the sale contract. As from
this moment, profit should be recognized as services or products under the sales
contract are provided.
d. REVENUE FROM ENTRY FEES ON RENTAL ACTIVITIES
Commercial and shopping center leases are considered to be nonresidential
leases. It is a general practice to charge a certain amount as an entry fee at
the beginning of certain commercial and shopping center lease contracts.
Under Brazilian Corporate Law, revenues from entry fees up to June 30, 2000 were
recognized in income upon the signing of the lease contract. For lease contracts
signed after July 1, 2000, revenue under Brazilian Corporate Law is recognized
straight line over the contract period.
Under US GAAP, revenues from entry fees are recorded in income over the term of
the lease contract.
e. CAPITALIZED INTEREST COSTS
Under Brazilian Corporate Law, as from January 1, 1996, interest is
capitalizable for assets that require a period of time to be ready for their
intended use, such as self-constructed assets and real estate development
projects. The amount capitalized is determined by applying the effective
interest rate of specific borrowings entered into for the purpose of financing
such constructions to the average expenditures during the period and is limited
to the amount of interest incurred. The Company has not capitalized interest
under Brazilian Corporate Law since their borrowings do not meet the specificity
criteria indicated above.
Under US GAAP, in accordance with the provisions of SFAS No. 34 "Capitalization
of Interest Cost", interest incurred on borrowings is capitalized to the extent
that borrowings do not exceed construction-in-progress irrespective of the
purpose of the borrowing. Under US GAAP, capitalized interest is added to the
individual assets and is amortized over their useful lives. The credit is a
reduction of interest expense. The amount of interest capitalized excludes the
monetary gains and losses associated with the borrowings and the foreign
exchange gains and losses on foreign currency borrowings.
f. STOCK-BASED COMPENSATION
The Company has granted options to acquire shares of Company stock to certain
members of its Board of Directors.
F-178
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
Under Brazilian Corporate Law, there is no accounting recognition unless and
until such options are exercised.
Under US GAAP, stock options are accounted for in accordance with the
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation" and
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees.". The Company has opted to recognized stock-based compensation
following APB No. 25. In accordance with APB No. 25 when options granted are
forfeited compensation expense should be decreased in the period of forfeiture.
g. VALUATION AT FAIR VALUE OF AVAILABLE FOR SALE SECURITIES
Under Brazilian Corporate Law, investments in marketable debt and equity
securities are recorded at its amortized cost plus accrued financial charges or,
if lower, its fair market value at the balance sheet date. Losses on marketable
securities to reduce its carrying value to its fair value are recognized in the
statement of income. If the fair market value of marketable debt and equity
securities exceed its amortized cost no gain is recognized until the security is
realized.
Under U.S. GAAP, in accordance with SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities", investments in equity securities
that have readily determinable fair values and all investments in debt
securities should be classified as trading securities, available-for-sale
securities and held-to-maturity securities.
Debt securities that the enterprise has the positive intent and ability to hold
to maturity are classified as held-to-maturity securities and are reported at
amortized cost. Debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses included
in earnings, and debt and equity securities not classified as either held to
maturity or trading securities are classified as available for sale securities
and reported at fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of shareholders' equity, net of
tax effects.
As of June 30, 2000 all marketable securities held by the Company were
classified as trading. However, no adjustment between Brazilian Corporate Law
and US GAAP is being presented since the fair value of such securities
approximated their carrying amount. As of June 30, 2001 all marketable
securities other than the investment in a real estate investment fund were
classified as trading and no adjustment between Brazilian Corporate Law and US
GAAP is presented for such securities for the same reason described above.
Investment in quotas of a real estate investment fund as of June 30, 2001 was
classified as available-for-sale and the difference between fair value and cost
is recognized directly in a separate component of shareholders' equity for US
GAAP purposes.
F-179
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
h. PROVISION FOR CONTINGENCIES
This adjustment does not reflect exactly a difference between Brazilian and US
accounting practices for the period ended June 30, 2000. As the local financial
statements had already been released by the time the likelihood of losses on the
case of Cofins tax on property sales became clear (Note 14), this adjustment was
considered only for purposes of the reconciliation to US GAAP.
i. DEFERRED INCOME TAX
Under both Brazilian Corporate Law and US GAAP, deferred income taxes are
recognized under the liability method. Under Brazilian Corporate Law tax
liabilities are recognized based on the amount expected to be paid. A net
deferred tax asset is recognized if it can be shown that there is reasonable
certainty that the asset will be recovered against tax payable on future
profits. Under US GAAP, a net deferred tax asset related to temporary
differences or tax carry-forwards is recognized only if it is more likely than
not that the asset will be realized. The Company has determined the net deferred
tax adjustment necessary to comply with US GAAP by applying the statutory tax
rate to the other US GAAP taxable adjustments reflected in the reconciliation
herein presented.
18.2 RECONCILIATION OF PREVIOUSLY SUBMITTED AND CURRENT SHAREHOLDERS' EQUITY AND
NET INCOME FOR THE TWELVE MONTH PERIOD ENDED JUNE 30, 2000 UNDER U.S. GAAP
The reconciliation of net income andshareholders' equity to US GAAP submitted in
the preceding years, stated in constant reais of purchasing power of June 30,
2000 and in these financial statements, stated in nominal reais are presented in
the table below:
Shareholders'
equity Net income
-------------- -------------
AMOUNTS CURRENTLY PRESENTED (IN NOMINAL REAIS) 205,010 50,375
(a) Effects of indexation on assets and liabilities
and the corresponding depreciation and cost of
goods sold for the period January 1, 1998 to June 30,
2000, a period in which Brazil was not considered a
hyper-inflationary economy under US GAAP 36,620 (2,152)
(b) Difference in the value of adjustments between the
amounts in nominal reais and in constant reais of
purchasing power of June 30, 2000 (1,584) 6,405
(c) Deferred tax effect 2,075 (4,000)
------------- --------------
Amounts as previously submitted (in constant reais of
purchasing power of June 30, 2000) 242,121 50,628
============= ==============
F-180
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
18.3. ADDITIONAL DISCLOSURE REQUIREMENTS
a. FINANCIAL STATEMENT DISCLOSURES
Brazilian Corporate Law requires, in general, less information than is required
to be disclosed in the notes to the financial statements in U.S. GAAP. These
financial statements include only those additional disclosures necessary to
comply with Item 17 of Form 20-F and not all disclosures that would be required
to comply with U.S. GAAP.
b. PROPORTIONAL CONSOLIDATION
Under U.S. GAAP, consolidation is generally required for investments greater
than 50% of the outstanding voting stock, except when control is likely to be
temporary or not held by the majority owner. Minority interest should be
recorded for the pro rata share of the subsidiaries' equity and net income not
owned by the parent company. Proportional consolidation is prohibited except in
certain specific circumstances.
This is a presentational difference only and does not affect the net income or
shareholders' equity as determined under U.S. GAAP.
Under Brazilian Corporate Law, at each year end, consolidated financial
statement must be prepared by any publicly held company which has investments in
subsidiaries, including jointly-controlled subsidiaries.
A company is considered a subsidiary when its investor, directly or indirectly,
has rights which ensure permanently: (a) decision making in the corporate acts,
and (b) power to elect or remove most of the managers. A wholly-owned subsidiary
is also a subsidiary, which has the investor as the single shareholder.
For jointly controlled subsidiaries, the consolidated financial statements of
the investees are consolidated , in proportion to their interest in the
subsidiaries' stock.
The summarized balance sheet and income statement information as of June 30,
2001 and 2000 of jointly controlled subsidiaries accounted for under the
proportional consolidation method in the Company's Brazilian Corporate Law
financial statements is presented below:
2001 2000
------------- ------------
Current assets 27,744 22,452
Non-current assets 59,726 49,344
------------- ------------
Total assets 87,470 71,796
============= ============
Current liabilities 17,392 12,401
Non-current liabilities 13,835 4,598
Shareholders' equity 56,243 54,797
Total liabilities and s
shareholders' equity 87,470 71,796
Revenue 17,530 7,369
Gross profit 8,895 4,664
Net income 5,617 3,123
F-181
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
c. EARNINGS PER SHARE
Under Brazilian Corporate Law, net income per share is calculated on the number
of shares outstanding at the balance sheet date.
Under US GAAP, since the preferred and common shareholders have different voting
and liquidation rights, basic and diluted earnings per share have been
calculated using the "two-class" method, pursuant to SFAS No. 128, "Earnings per
share". The "two-class" method is an earnings allocation formula that determines
earnings per share for preferred and common stock according to the dividends to
be paid as required by the Company's by-laws and participation rights in
undistributed earnings. Basic earnings per common share is computed by
allocating net income available to all shareholders to common and preferred
shareholders based on the weighted-average number of common and preferred shares
outstanding during the period considering, for preferred shares, the 10%
preference.
Diluted earnings per share is computed by allocating net income available to all
shareholders to common and preferred shareholders based on the weighted-average
number of common and preferred share equivalents outstanding during the period
considering, for preferred shares, the 10% preference. The weighted average
number of common and preferred share equivalents outstanding during the period
is determined by adding shares issuable under the Company's stock option plan to
the weighted-average number of common and preferred share equivalents
outstanding during the period. During the twelve months ended June 30, 2001 and
2000 the effect of the stock option plan was antidilutive.
Twelve months ended June 30,
2001 2000
Weighted average number of preferred shares
outstanding (in thousand of shares) 41,127 37,528
Additional 10% right for preferred shares (in thousand of Shares) 4,113 3,753
--------- -------
Adjusted weighted average number of preferred shares
Outstanding (in thousand of shares) for
Earnings per share calculation (A) 45,240 41,281
--------- -------
Weighted average number of common shares
Outstanding (in thousand of shares) (B) 38,356 35,000
Total weighted average number of shares
outstanding (in thousand of shares) (C) 83,596 76,281
========= =======
Net income (D) 48,214 50,375
Basic and diluted earnings per common share in R$
(E) = (D)* [(B)/(C)]/(B) 0.58 0.66
Basic and diluted earnings per preferred share in R$
(E)+10% 0.63 0.73
F-182
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
d. STATEMENT OF CASH FLOWS
Brazilian Corporate Law requires the inclusion of a statement of changes in
financial position, which describes sources and applications of funds in terms
of working capital. U.S. GAAP requires the presentation of a statement of cash
flows describing the Company's cash flows from operating, investing and
financing activities. The statement of cash flow is included below.
Cash and cash equivalents in the statement of cash flows presented below
consists of cash and due from banks as well as mutual funds which consists of
short-term highly liquid investments. Cash and cash equivalents in the statement
of cash flows is reconciled to the amount of "Cash, cash equivalents and
financial investments" presented in the balance sheet as follows:
2001 2000
------------ --------------
CASH AND CASH EQUIVALENTS IN
THE STATEMENT OF CASH FLOWS
Bank deposits and petty cash 1,603 1,138
Money market funds 35,395 11,670
36,998 12,808
AMOUNTS INCLUDED UNDER CASH,
CASH EQUIVALENTS AND FINANCIAL
INVESTMENTS IN THE BALANCE SHEET
THAT DO NOT MEET THE DEFINITION
OF CASH AND CASH EQUIVALENTS FOR
THE PURPOSE OF THE STATEMENT OF
CASH FLOWS
Fixed income funds 3,868 2,141
Marketable government securities:
Brazilian External Debt (C Bond
and Brazil 2040) 56,251 43,847
Brazilian National Treasury
Notes - NTN 595 486
Russian External Debt 26 26
------ -------
TOTAL CASH, CASH EQUIVALENTS AND
FINANCIAL INVESTMENTS AS PRESENTED
IN THE BALANCE SHEET
97,738 59,308
====== ======
F-183
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
TWELVE MONTHS
ENDED JUNE 30,
2001 2000
CASH FLOW FROM OPERATING ACTIVITIES
Net income for the twelve month period 48,667 46,301
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 2,259 2,830
Deferred income tax (3,584) -
Minority interest 6,403 4,619
Exchange loss on long-term debt 10,171 155
Net gain on sale of fixed assets (2,720) -
Changes in components of working capital:
(Increase) decrease in current assets:
Accounts receivable (11,210) 284
Inventories - properties (15,022) (20,678)
Recoverable income taxes (1,850) (971)
Other assets 6,239 (5,518)
Increase (decrease) in current liabilities:
Estimated costs to complete construction projects
in process (2,220) (4,047)
Accounts payable for properties acquisition 3,403 1,198
Interest payable 424 (335)
Taxes payable 657 622
Suppliers and other accounts payable 8,400 3,100
Decrease in non current accounts receivable and
other non current assets 20,796 14,406
Increase (decrease) in long term liabilities:
Estimated cost to complete construction projects
in process (6,945) (18,029)
Accounts payable for properties acquisition (1,408) (2,478)
Deferred profit on sales of properties, net (13,679) (8,773)
Provision for contingencies 9,791 -
Others (202) 847
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 58,370 13,533
F-184
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
2001 2000
CASH FLOW USED IN INVESTING ACTIVITIES
Change in trading securities, net (12,513) (25,791)
Purchase of available for sale securities (1,727) (2,141)
Acquisition of property and equipment (1,782) (5,594)
Proceeds from sale of property, plant and equipment 5,694 8,370
Acquisition of investments (2,230) (4,674)
Proceeds from investments - 494
Increase in intangible assets, net (649) (1,047)
-------- --------
NET CASH FLOW USED IN INVESTING ACTIVITIES (13,207) (30,383)
CASH FLOW FROM (USED IN) FINANCING ACTIVITES
Net changes in short term debt (2,095) 3,638
Repayment of long-term debt (6,380) -
Borrowing of long term debt 2,007 5,919
Dividends and interest on own capital paid (20,000) (9,857)
Dividends on consolidated subsidiaries and
affiliates paid to minority interests (2,546) (1,946)
Capital contributions in cash 11,003 7,129
Income tax wit held on interest on own capital (2,962) -
-------- --------
NET CASH FROM (USED IN) FINANCING ACTIVITIES (20,973) 4,883
-------- --------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 24,190 (11,967)
Cash and cash equivalents
At the beginning of the year 12,808 24,775
-------- --------
At the end of the year 36,998 12,808
======== ========
Supplemental cash flow disclosure
Cash paid for interest 5,343 7,716
Cash paid for taxes on income 9,042 3,904
F-185
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
e. INVESTMENTS IN REAL ESTATE AND ACCUMULATED DEPRECIATION
The following is a summary of the Company's investments in real estate recorded
under Property and Equipment as of June 30, 2001 prepared in accordance with SEC
S-X 12-28:
Life on which
depreciation in
latest statement of
Date of income is
Buildings and Accumulated End of Date computed
Description (1) Land Improvements Total Depreciation Construction Acquired (in years)
--------------- ------ -------------- --------- --------------- ---------------- ------------ -------------------
Nova Sao Paulo (3) 3,638 12,922 16,560 (4,010) - October 1995 40
Microlite (3) 3,726 9,112 12,838 (1,030) - October 1996 32
Centro
Empresarial (3) 792 2,976 3,768 (183) - October 1997 65
Brasilinvest (3) - 8,791 8,791 (835) - March 1998 25
ABC Plaza
Shopping (4) 2,223 9,394 11,617 (613) June 1997 June 1997 48
Centro Textil
Industrial (4/5) 4,522 15,594 20,116 (1,826) June 1996 June 1996 47
ARMCO (Av.
Industrial) (4) 4,177 4,426 8,603 (146) May 1997 May 1997 -
Brasilio
Machado (3) 675 6,486 7,161 (378) June 1997 June 1997 48
------ ------ ------ -----
Total 19,753 69,701 89,454 (9,021)
====== ====== ====== =====
(1) The Company has no mortgage loans or other encumbrances on these buildings.
All buildings are located in the state of Sao Paulo, Brazil
(2) Under construction
(3) Office space
(4) Shopping center
(5) Trade and convention center
F-186
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
Description of changes in investments in real estate:
June 30,
--------------------------
2001 2000
----------- -------------
Balance at the beginning of the twelve month period
87,650 105,409
Additions during the year:
Acquisitions 1,411 5,349
Deductions during the year:
Sales (2,720) -
Transfer to current assets (773) (21,489)
Transfer to investments (3,616) -
Depreciation (1,519) (1,619)
----------- -------------
Balance at the end of the twelve month period 80,433 87,650
=========== =============
F-187
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
h. MORTGAGE LOANS ON REAL ESTATE
Principal
Amount of
loans subject
Final Period Carrying to delinquent
Interest maturity payment Prior Face amount Amount of Principal or
Description Rate date term Liens of mortgages Mortgages Interest
----------------- ------------- -------------- ------------ ---------- -------------- -------------- -------------
Mortgage loans
Universe TR plus 12.5% July 2002 Monthly None 5,088 2,017 None
Mortgage loans
Excellence TR plus 12.5% December 2002 Monthly None 6,840 3,548 None
Mortgage loans
Classique Klabin TR plus 10% November 2002 Monthly None 5,800 1,967 None
------ -----
17,728 7,532
====== =====
TR - Referencial rate
F-188
BRAZIL REALTY S.A. EMPREENDIMENTOS E PARTICIPACOES
--------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AS OF JUNE 30, 2001 AND 2000 AND FOR THE TWELVE MONTHS THEN ENDED
-----------------------------------------------------------------
(In thousands of Brazilian reais,
---------------------------------
except when otherwise indicated)
--------------------------------
Description of changes in mortgage loans:
June 30,
-------------------------
2001 2000
----------- ------------
Balance at the beginning of the twelve
month period 10,738 -
Additions during the year:
Borrowings obtained 2,007 11,828
Accrued Interest 1,167 992
------ ------
13,912 12,820
Deductions during the year:
Repayments (6,380) (2,082)
------ ------
6,380 2,082
------- ------
Balance at the end of the twelve month
period 7,532 10,738
====== ======
F-189
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.
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
By: /s/ M. Marcelo Mindlin
-------------------------
M. Marcelo Mindlin
Executive Vice President
Date: December 9, 2002
CERTIFICATION
I, Eduardo S. Elsztain, certify that:
1. I have reviewed this annual report on Form 20-F of IRSA Inversiones y
Representaciones Sociedad Anonima;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
/s/ Eduardo S. Elsztain
------------------------
By: Eduardo S. Elsztain
Chief Executive Officer
December 9, 2002
This certification accompanies the Report pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and shall not, except as to the extent required by
the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities and Exchange Act of 1934, as amended.
CERTIFICATION
I, M. Marcelo Mindlin, certify that:
1. I have reviewed this annual report on Form 20-F of IRSA Inversiones y
Representaciones Sociedad Anonima;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
/s/ M. Marcelo Mindlin
------------------------
By: M. Marcelo Mindlin
Chief Financial Officer
December 9, 2002
This certification accompanies the Report pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and shall not, except as to the extent required by
the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities and Exchange Act of 1934, as amended.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS
-------------------------------------------------------------------------------
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
-----------------------------------------------------------------
In connection with the Annual Report on Form 20-F of IRSA Inversiones y
Representaciones Sociedad Anonima (the "Company") for the year ended June 30,
2002 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), Eduardo S. Elsztain, as Chief Executive Officer of the Company,
hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his
knowledge;
(1) The Report fully complies with the requirements of Section 13 (a) or
15 (d) of the Securities and Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Eduardo S. Elsztain
---------------------------
By: Eduardo S. Elsztain
Chief Executive Officer
December 9, 2002
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except as to the extent required by
the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities and Exchange Act of 1934, as amended.
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS
-------------------------------------------------------------------------------
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
-----------------------------------------------------------------
In connection with the Annual Report on Form 20-F of IRSA Inversiones y
Representaciones Sociedad Anonima (the "Company") for the year ended June 30,
2002 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), M. Marcelo Mindlin, as Chief Financial Officer of the Company,
hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his
knowledge;
(1) The Report fully complies with the requirements of Section 13 (a) or
15 (d) of the Securities and Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ M. Marcelo Mindlin
---------------------------
By: M. Marcelo Mindlin
Chief Financial Officer
December 9, 2002
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except as to the extent required by
the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities and Exchange Act of 1934, as amended.