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1 Links
2that generate
3 well-being
4 Annual Report 2003
5 Net Sales Cost-Bearing Liabilities
6 Millions of pesos as of December 31, 2003 Millions of pesos as of December 31, 2003
7
8
9
10
11 *source Economática *source Economática
12
13
14
15
16Financial Highlights
17Expressed in millions of pesos as of December 31, 2003
18
19Consolidated 2001 2002 2003 Changes 2003-2002
20 Sales 17,845 18,931 19,531 3.17%
21 Cost of sales 15,934 16,934 17,590 3.87%
22 Gross profit 1,911 1,997 1,942 -2.78%
23 Gross margin 10.71% 10.55% 9.94%
24 Operating expenses 1,213 1,267 1,204 -5.02%
25 Operating expense margin 6.80% 6.69% 6.16%
26 Operating profit 698 730 738 1.09%
27 Operating margin 3.91% 3.86% 3.78%
28 EBITDA (Earnings before interest, taxes, depreciation and amortization) 808 831 830 -0.19%
29 EBITDA margin 4.53% 4.39% 4.25%
30 Net profit 446 566 576 1.84%
31 Net margin 2.50% 2.99% 2.95%
32
33
34Consolidated 2001 2002 2003 Changes 2003-2002
35 Total assets 7,377 7,803 8,271 5.99%
36 Total debt 4,493 4,704 4,930 4.80%
37 Stockholders’ equity 2,884 3,099 3,341 7.79%
38
39
40
41
42 Sales Mix 2003
43 percentage
44 Grupo Casa Saba is one of the
45 Private
46 largest Mexican companies, Pharmaceutical
47 83.54%
48
49 with annual sales greater than
50
51
52 $19,000
53 ver me t
54 Pharmaceutical
55 . 3%
56
57 ealth eaut a
58 umer
59
60 million pesos Pu licati
61 3. % e eral
62 . %
63
64 ercha i e
65 a ther
66 .85%
67
68
69 *source Grupo Casa Saba
70 We distribute more than
71 Each day, more than
72
73 6,200
74 1. Ciudad Juárez
75
76
77 100,000 publications
78 2. Chihuahua
79
80 3. Coatzacoalcos
81
82 kilometers 4. Culiacán
83 as well as more than
84 are traveled while 5. Guadalajara
85 1,000 general merchandise
86 distributing more than 6. Hermosillo
87 and other products
88one million products throughout the country
89 7. La Laguna
90
91 8. León
92
93 9. Tijuana
94
95 10. Mérida
96
97 11. Monterrey
98
99 12. Morelia
100
101 13. Puebla
102
103 14. Reynosa
104
105 15. Tampico
106
107 16. Tuxtla
108
109 17. Veracruz
110
111
112
113 In the metropolitan area:
114
115 18. Drogueros
116
117 19. Taxqueña
118
119 20. Vallejo
120
121 21. Centennial1
122
123 22. Citem2
124
125 1
126 General Merchandise and Others
127
128 2
129 Publications
130
131
132
133
134 Our Company:
135 During 2003, Grupo Casa Saba’s effort was aimed at satisfying the particular expectations and needs of our
136 clients, suppliers, and commercial partners through our national distribution system as well as through the pro-
137 fessional work of the more than 5,200 collaborators that work at Grupo Casa Saba.We realize the importance and
138 the need of maintaining a culture of continuous improvement and efficiency in all of our processes. With that in
139 mind, each day we bring together our more than 110 years’ experience in the distribution of pharmaceutical
140 products with a proactive vision, thus creating bonds that bring well-being to the Mexican population.
141 Health and growth
142 the health industry in Mexico
143 The demand for health services and thus for medicine in Mexico, has kept an important growth led by
144the population dynamics as well as by different socio economic causes. Due to all this, the Mexican pharmaceutical
145 market has maintained a fast development, becoming more sophisticate and demanding and, in fact,
146 requiring higher levels of service and efficiency.
147
148
149
150
151 The Mexican population
152
153 is consuming more
154
155 medicine in order to improve
156
157 its quality of life and its
158
159 life expectancy
160
161
162
163 Total Population
164 The group of senior adults Mexican population
165 millions In Mexico, the demand
166 of over 65 years old reports an 114
167 112
168
169 annual growth rate higher than 110 for health services and
170 108
171
172 3.7% and could reach 4.6% in 106
173 for pharmaceutical products
174 104
175
176 2020 and 2030; which means 102
177 100
178 tends to grow in the medium
179 that in 15 years the initial size 98
180 96
181
182 of this population will duplicate. 94 and long terms
183 00 01 02 03 04 05 06 07 08 09 10
184
185
186
187 *source CONAPO *source CONAPO
188
189
190 With a population of around Life Expectancy
191 Urban Population Growth
192 Mexican population
193 1900-2000
194
195
196 population
197 (thousands)
198 104 more than 75 years
199
200 62 years
201
202 million, 50 years
203
204 at present Mexico is the eleventh 36 years
205
206 most populated country in the world
207 and it is foreseen that it will keep that
208 position for some decades to come
209 *source CONAPO *source CONAPO *source CONAPO
210 A population of over 104 million that, during Therefore, the national pharmaceutical
211
212the last several years, has showed a sustained industry has solid premises that lay the foun-
213
214increase in its life expectancy rate as well as a dations for sustained growth in the medium
215
216decrease in its infant death rate, tends to con- and long term. It is under these conditions
217
218sume more preventive and corrective medicine. –and because of its activity– that Grupo
219
220Everyday, this population demands more health Saba generates links within a productive
221
222services in order to broaden and improve the chain that creates well-being for the Mexican
223
224quality of life. population.
225
226
227
228
229 Grupo Casa Saba distributes
230 products to more than
231
232
233 22,000
234 points of sale including chains
235 of pharmacies and supermarkets,
236 independent pharmacies,
237 governmental institutions
238 as well as others
239
240
241 Through its
242 Grupo Casa Saba
243
244 has the biggest 22
245 product catalogue Distribution Centers
246 in the pharmaceutical Grupo Casa Saba has
247 the largest distribution
248 industry
249 infrastructure of its kind
250
251
252
253 We are the link that bonds
254 With more than
255
256
257 900 22,000 It is estimated that within
258
259
260
261 transport units,
262 clients
263 with more than
264 15 years
265 we distribute anywhere
266 in Mexico 600
267 suppliers
268 the population of adults over
269
270 65 years old will duplicate
271
272
273 *source CONAPO
274 Letter from the Chairman of the Board
275 Dear Shareholders:
276 Due to the evolution presented by the The remaining 6.85% of the Group’s
277 dynamic markets in which we operate, sales were generated by our Pharma-
278 2003 was, for Grupo Saba, a period of ceutical Government Division, our
279 important changes aimed at positioning Publications Division and our General
280 the Group in a more solid and competi- Merchandise and Others Division. In each
281 tive way. of these areas we carried out important
282 operational and client restructurings
283 With this in mind, innovative operational throughout the year. The before-men-
284 strategies were implemented in ware- tioned changes generated positive
285 houses and in sales divisions as well as in results, particularly during the last quar-
286 Our strategies the Group’s administrative and corporate ter, as was the case of our Publications
287 seek to maintain areas for the purpose of increasing the Division that, during the fourth quarter,
288 sustained growth operating profit levels and maintaining registered a sales increase of 11.64%.
289 in the medium and sustained sales growth.
290 The previously mentioned changes and
291 long terms
292 In our Private Pharmaceutical Products restructurings, as well as the highly com-
293 Division and our Health, Beauty and petitive environment that developed
294 Consumer Goods Division –which, during within the markets that our different divi-
295 2003, generated 93.15% of the Group’s sions operate in, resulted in a decrease in
296 sales– we implemented programs and con- our gross margin. However, the strate-
297 trols in order to raise our internal operative gies that were implemented which were
298 efficiency levels as well as the quality of intended to increase the efficiency of our
299 the services that we offer our clients. This warehouses and our operations in gener-
300 drove us to participate, in a competitive al, enabled us to reduce expenses. This,
301 manner, in the national private pharma- in effect, compensated for a significant
302 ceutical products market and made it pos- part the decrease in our consolidated
303 sible to increase annual sales by 5.61%. gross margin.
304
305
306
307
3083
309 Net Profit
310 Millions of pesos as of December 31, 2003
311As a result, the Group’s operating profit terms which benefits our shareholders,
312during 2003 increased 1.09% compared employees and the society in general.
313to 2002, while net income increased
3141.84% versus 2002. For Grupo Casa Saba, it is very important
315 to comply with both the Comisión
316Although 2003 brought great challenges Nacional Bancaria y de Valores and the
317for Grupo Casa Saba –which resulted in Bolsa Mexicana de Valores’ regulations as
318substantial operative changes and posi- well as with the regulations set out by
319tive financial results- we are confident the Securities and Exchange Commission *source Economática
320
321that the measures taken will allow us to and New York Stock Exchange in the
322operate in a competitive and profitable United States in order to continue being
323way in the medium and long terms. a transparent company that complies
324 Strategies started
325 with Corporate Governance policies.
326 during 2003 raised
327Given the Group’s more solid financial
328 the efficiency of
329structure and the annual cash flow that it We are sure that the efforts we have
330has generated, on August 25, 2003 we implemented will yield results over the
331 our operation allowing
332were able to pay out a cash dividend in next several years. Therefore, we will con- a reduction of expenses
333the amount of $0.37676 pesos per share. tinue heading down the path of transpar-
334 ent growth and social responsibility.
335This year marks our tenth anniversary
336trading on the Bolsa Mexicana de
337 Net Debt
338Valores and the New York Stock Millions of pesos as of December 31, 2003
339
340Exchange. This not only makes us very Isaac Saba Raffoul
341proud, but also strengthens our com- Chairman of the Board
342
343mitment to operating under strict stan-
344dards that enable us to maintain sus- Manuel Saba Ades
345tained growth in the medium and long CEO
346
347
348
349
350 *source Economática
351 Oriented to Pharmaceutical,
352 Health, Beauty and Consumer
353 Goods, Publications, General
354 Merchandise and Others,
355 we work with more than
356
357 600
358 suppliers offering a wide
359 range of products
360
361
362
363
364 Being close
365 to our
366 During 2003, and in benefit of the diverse 240 suppliers with whom we operate,
367 markets in which we operate but particu- we strive to increase the sales of each of
368 larly in the pharmaceutical products mar- the more than 9,000 of our products that
369 ket, Grupo Casa Saba directed its efforts we handle, which translates into the
370 towards strengthening the supply chain strengthening of the national pharma-
371 between its suppliers and clients, seeking ceutical sector. During 2003, within our
372 We maintain to increase sales as well as its informa- Publications Division and our General
373 our leadership tional and operative efficiency levels. Merchandise and Others Division, we
374 due to our distribution made efforts to improve and broaden our
375
376 technology, operating The strategies implemented by the Group relationship with our suppliers.
377 during the year generated results that
378 efficiency, wide range
379 allowed us to strengthen our good rela- Within this sector, Grupo Casa Saba has
380 of products, and full
381 tionships with our more than 600 suppli- developed state-of-the-art technology
382 coverage of our ers as well as to integrate efforts to pro- that enables us to offer our suppliers
383 sales points vide on time, high quality deliveries of the trustworthy and opportune information-
384 diverse range of products that we distrib- al services.
385 ute to the more than 22,000 clients with
386 whom we operate on a daily basis. At Grupo Casa Saba we will keep invest-
387 ing in technology and logistics in order to
388 In our pharmaceutical products distribu- offer our clients a better service while we
389 tion division and through the more than create more and better links throughout
390 all of the levels of the productive chain.
3915
392 We are committed
393
394 to fulfill the expectations
395
396 of our suppliers
397
398 and clients
399
400
401
402
403suppliers...
404 Sales of Pharmaceutical,
405 Health, Beauty
406 and Consumer Goods
407 Millions of pesos as of December 31, 2003
408
409
410
411
412 *source Grupo Casa Saba
413 We have an excellent
414 response capability
415 concerning time and stock
416quality due to our computing
417 systems, logistics systems
418 and 22 distribution centers
419
420
421
422
423 ... and to
424
425 Demographic Figures
426
427
428
429 Births
430
431 Deaths
432
433 Birthrate
434 Births per each thousand
435
436
437
438 Death rate
439 Deaths per each thousand
440
441 Fertility rate
442 Children per woman
443
444
445
446 *source Banamex
447 Our response capability
448 allows us to supply any
449 order in less than
450
451
452 12 hours
453
454our
455 customers’ needs...
456At Grupo Casa Saba we make daily efforts ucts which drives us to continually develop
457to satisfy the needs of our more than and implement innovative business strate-
45822,000 clients with a portfolio of more gies that will satisfy our clients’ growing
459than 16,000 products that includes: more and changing needs. In the Publications
460than 9,000 Pharmaceutical and Health, and General Merchandise and Others
461Beauty and Consumer Goods products; Divisions, we restructured our client base
462over 1,000 General Merchandise and as well as our product offering, both of For Grupo Casa Saba
463Other products; and more than 6,000 which we expect will yield positive results. it is very important
464Publications. to have a wide
465 The quality service that we offer our
466 range of products
467During 2003 we distributed more than 1.3 clients is based on our infrastructure,
468million products daily to a wide variety of which enables us to reach any point in
469 that allows us
470clients throughout Mexico. The Group’s Mexico in less than 12 hours; our tech- to cover our
471clients range includes large commercial nology platform; our logistics inventory clients’ needs
472supermarket and pharmacy chains as well management system and the value-
473as small commercial establishments added services that we provide.
474throughout the Mexican Republic.
475 We are committed to improving the
476In our main division –Private Pharma- services that we offer our clients day
477ceutical, we witnessed continuous growth after day, and we seek to strengthen our
478in the demand for pharmaceutical prod- long-term business links.
479
480
481
482 8
483 More than
484
485 400
486 million
487 pieces were distributed
488 during 2003
489
490
491
492
493...we bring well-being
494 closer to the
495 The fact that the general population has tain the health of all Mexicans throughout
496 access to the widest range of pharmaceuti- Mexico, including those places that no
497 cal, health, beauty and consumer products one else does; and second, by offering a
498 is in itself a key factor for its well-being. range of services that are profitable for its
499 shareholders and its more than 5,200
500 For Grupo Casa Saba it is not enough to employees.
501 We will continue accomplish the commercial and business
502 to invest in transport, objectives; it is fundamental to carry out We are also concerned about operating
503
504 technological and logistic social work, bringing our products closer in an ecological manner and in keeping
505 not only to the big cities or big clients, but the environment clean. With this in mind
506 equipment in order
507 also to all kinds of places and people. we renovate our transport equipment an
508 to improve the quality average of every 3.5 years and a large
509 of our response capability Therefore, in Grupo Casa Saba we are part of our units operate on natural gas.
510 aware of the double responsibility we This brings not only ecological but also
511 hold as a Group. First, by supplying prod- economical benefits to Mexico and to our
512 ucts on time and that care for and main- Group, thus creating bonds of well-being.
513
514
515
516
5179
518 We reach
519 places no one
520 else does
521
522
523
524
525people...
526
527 We are aware
528 of the importance
529 of working transparently,
530 with low risk and
531 social responsibility
532 We have been quoting
533 in the BMV and
534 the NYSE for
535
536
53710 years
538
539 ...at the
540
541 In August 2003
542 a dividend of
543
544 $100
545 million pesos
546 was paid
547 Closing Price
548 SAB* Bolsa Mexicana de Valores
549
550
551
552
553 *source Economática
554
555
556
557
558time we
559strengthen our growth.
560The Group’s performance during 2003 In order to comply with our commit-
561allowed us to reach total sales of ment to reward our shareholders with a
562$19,531.24 million pesos, an increase of portion of the generated profit, and
5633.17% with respect to 2002. Efforts given that this year we achieved a more
564implemented to improve our operations solid financial and operative level, dur- Our 10 years
565allowed us to achieve a net income of ing the month of August –and for the of trading
566$575.95 million pesos, an annual growth first time since the new administration in the Bolsa Mexicana
567of 1.84% compared to 2002. took over– a cash dividend of $100 mil-
568 de Valores and
569 lion pesos ($0.37676 pesos per share)
570In financial terms, we successfully reduced was paid out.
571 the New York Stock
572the Group’s total debt by 5.76%. This Exchange support
573placed Grupo Casa Saba in a more solid 2003 was our tenth year of trading on our commitment
574financial position that will allow us to the BMV and the NYSE. This makes us of generating value
575face the challenges within the different very proud and solidifies our commitment
576markets in which we operate, with better to continue generating value and
577results. strengthening our bonds with suppliers,
578 clients and shareholders within a frame-
579 work that is transparent, low risk and
580 socially responsible.
581
582
583
584 12
585 Board of Directors
586 Isaac Saba Raffoul Chairman of the Board
587 Manuel Saba Ades Vice Chairman
588 Moisés Saba Ades Vice Chairman
589 Alberto Saba Ades Vice Chairman
590 Gabriel Saba D’Jamus Board Member
591 Alejandro Sadurni Gómez Board Member
592 Raúl Fernández Diaque External Board Member
593 AgustÃn RodrÃguez Legorreta External Board Member
594 Iván Moguel Kuri External Board Member
595 Francisco Fuentes Ostos Secretary of the Board
596 Manuel Sáinz Meixueiro Statutory Examiner
597
598
599
600
601 Executive Officers
602 Manuel Saba Ades Chief Executive Officer
603 Gabriel Saba D’Jamus Deputy Chief Executive Officer
604 Alejandro Sadurni Gómez Director of Administration and Finance
605 Ricardo RÃos Cárdenas Director of Operations and Sales, Northern Zone
606 Oscar Gutiérrez Melgar Director of Operations and Sales, Southern Zone
607 Jesús Guerra de Luna Legal Affairs Director
608 Fernando Torres Suárez Purchasing Director
609 Jorge GarcÃa Barrios IT Director
610 Norberto Mouret Polo Human Resources Director
611
612
613
614
61513
616 Management’s discussion
617and analysis of operations results
618and financial position
619
620
621
622The following analysis should be read in con- decrease is result of the Group’s lower partic-
623junction with the letter to the shareholders ipation in contracts with PEMEX.
624written by the Chairman of the Board, the
625Consolidated Financial Statements and the • Health, Beauty and Consumer Goods repre-
626Notes that accompany this Annual Report. sented 9.61% of sales, a 2.5% increase versus
627The following is a comparative analysis of the previous year. This behavior is due to the
628the Fiscal year ended December 31, 2003 Group’s ability to maintain its market share dur-
629with that of 2002. ing the year, as well as the operative restructur-
630 ing that was implemented during the year.
631NET SALES
632The year’s net sales reached $19,531.24 mil- • General Merchandise and Others generated
633lions of pesos, increasing 3.17% compared 0.86% of the Group’s total sales, a decrease of
634to 2002. 14.42% , as a result of having fewer products
635 in its distribution catalogue as well as a de-
636Sales per Division: pressed demand for the products we market.
637• During 2003, Private Pharmaceuticals repre-
638sented 83.54% of total sales, an increase of • During the year, Publications represented
6395.82% versus 2002. The growth is the result of 3.27% of total sales, a decrease of 12.86%
640the commercial strategies implemented during versus the previous year. This negative com-
641the year as well as of the performance of the parative is result of the operative and client
642private pharmaceutical products market. restructuring that this division underwent
643 during 2003.
644• Government Pharmaceutical generated
6452.73% of the Group’s total sales, registering a COST OF SALES
64629.20% decrease compared to 2002. This The cost of sales for 2003 was $17,589.56 mil-
647 lions of pesos, 3.87% higher than that in
648 14
649 2002. As a result, the Group’s gross margin TAX PROVISIONS AND EMPLOYEE
650
651 went from 10.55% in 2002 to 9.94% in 2003, PROFIT SHARING
652
653 while gross income for the period decreased Total Tax provisions and employee profit shar-
654
655 2.78%. This result reflects both the Group’s ing for the year, was 150.01 million pesos,
656
657 current client structure as well as the higher 2.85% lower than in 2002. As a result, the
658
659 competitive environment in the different sec- Group’s tax rate went from 21.45% in 2002 to
660
661 tors in which we operate. 20.66% in 2003.
662
663
664 OPERATING EXPENSES NET INCOME
665
666 Operating expenses in 2003 accounted for In 2003, the Group’s net income reached
667
668 $1,203.75 million pesos, reflecting an annual $575.95 million pesos, an increase of 1.84%
669
670 decrease of 5.02% or $63.57 million pesos. compared to 2002. As a result , the net mar-
671
672 This important reduction in the Group’s con- gin for the period was 2.95%, 4 basis points
673
674 solidated expenses is due to the strategies lower than that registered in the previous year.
675
676 implemented by the management to increase
677 the productivity and efficiency in each of our COST-BEARING LIABILITIES AND CASH
678
679 operations. In accordance with our commitment to oper-
680 ate within a solid financial structure, the
681
682 OPERATING INCOME Group’s cost-bearing liabilities for this year
683
684 Operating income for 2003 reached $737.94 were $390.00 million, equivalent to a decrease
685
686 million pesos, an increase of 1.09% com- of 5.76% versus 2002. During the same peri-
687
688 pared to 2002. Given that the decrease in od, cash increased by 166.91% and debt
689
690 expenses partially compensated the reduction minus cash at year’s end decreased 37.40%, to
691
692 in the gross margin, the consolidated oper- $218.92 million pesos. It is important to note
693
694 ating margin was 3.78%, a contraction of the decrease in the Group’s debt less cash
695
696 eight basis points versus 2002. given the dividend payment of $100.0 million
697 that took place in August 2003.
698
699 INTEGRAL COST OF FINANCING
700 The integral cost of financing for the year was
701 $46.30 million pesos, an increase of 186.79%
702 with respect to 2002. This is the result of a
703 reduction in income earned from interest and
704 via the monetary position, neither of which
705 could be compensated for despite the 14.86% Alejandro Sadurni Gómez
706
707 decrease in interests paid. Director of Administration and Finance
708
709
710
711
71215
713 Audited
714Financial statements
715Grupo Casa Saba, S.A. de C.V. and Subsidiaries
716
717
718
719
720Content
721
722
723 Report of Statutory Auditor 16
724
725 Report of Independent Certified Public Accountants 17
726
727 Consolidated balance sheets 18
728
729 Consolidated statements of income 19
730
731 Consolidated statements of stockholders’ equity 20
732
733 Consolidated statements of changes in financial position 22
734
735 Notes to the consolidated financial statements 23
736 GRUPO CASA SABA, S.A. DE C.V. AND SUBSIDIARIES
737
738
739
740 report of
741 statutory auditor
742
743 To the Stockholders of Grupo Casa Saba, S. A. de C. V.:
744
745
746 In my capacity as statutory auditor and in performance of the provisions set forth in Article 166 of the General
747 Corporate Law and the bylaws of Grupo Casa Saba, S. A. de C. V., I hereby submit my opinion to you concerning
748 the accuracy, sufficiency, and reasonableness of the consolidated and individual financial information that the Board
749 of Directors has presented to you, with regard to the course of business of the Company for the year ended
750 December 31, 2003.
751
752
753
754 I have attended the stockholders’ meetings and board of directors’ meetings to which I have been called. I have
755 further obtained the information concerning the transactions, as well as documentation and records that I deemed
756 necessary to review from the directors and managers. My review has been conducted in accordance with auditing
757 standards generally accepted in Mexico.
758
759
760
761 In my opinion, the accounting criteria and information followed by the Company, considered by the managers to
762 prepare the consolidated and individual financial information they have presented to the stockholders at this
763 meeting, are appropriate, sufficient, and consistently applied with prior year. Therefore, that information accurately,
764 reasonably, and sufficiently reflects the financial position of Grupo Casa Saba, S. A. de C. V., and the consolidated
765 financial position with their subsidiaries as of December 31, 2003, and the consolidated and individual results of
766 their operations, stockholders’ equity and changes in their financial position for the year then ended, in conformity
767 with accounting principles generally accepted in Mexico.
768
769
770
771
772 Very truly yours,
773
774
775
776
777 Manuel Sainz Meixueiro, C.P.A.
778 Statutory Auditor
779
780
781 Mexico City, Mexico
782 February 18, 2004
783
784
785
786
78716
788 GRUPO CASA SABA, S.A. DE C.V. AND SUBSIDIARIES
789
790
791
792report of independent
793 certified public accountants
794
795To the Stockholders of Grupo Casa Saba, S.A. de C.V.:
796
797We have audited the accompanying consolidated balance sheets of GRUPO CASA SABA, S. A. DE C. V. AND
798SUBSIDIARIES (all incorporated in Mexico and collectively referred to as the "Group") as of December 31, 2002 and
7992003, and the related consolidated statements of income, stockholders' equity and changes in financial position for each
800of the years in the three-year period ended December 31, 2003, all stated in thousands of 2003 year-end constant
801Mexican pesos. These financial statements are the responsibility of the Group's management. Our responsibility is to
802express an opinion on these financial statements based on our audits.
803
804We conducted our audits in accordance with auditing standards generally accepted in the United States of America.
805Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
806statements are free of material misstatement, and prepared in conformity with accounting principles generally accepted
807in Mexico. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
808statements. An audit also includes assessing the accounting principles used and significant estimates made by
809management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
810reasonable basis for our opinion.
811
812In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
813position of Grupo Casa Saba, S.A. de C.V. and Subsidiaries as of December 31, 2002 and 2003, and the consolidated results
814of their operations, stockholders' equity and changes in their consolidated financial position for each of the years in the
815three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in Mexico.
816
817Also, in our opinion, the translation of the financial statements from Mexican peso amounts into U.S. dollar amounts
818has been made in conformity with the basis stated in Note 2). The translation of the financial statements amounts into
819U.S. dollars and the translation of the financial statements from Spanish into English have been made solely for the
820convenience of readers in the United States of America.
821
822Accounting practices used by the Group in preparing the accompanying consolidated financial statements conform to
823accounting principles generally accepted in Mexico, which differ in certain material respects with accounting principles
824generally accepted in the United States of America ("U.S. GAAP"). A description of these differences and a partial
825reconciliation of consolidated net income and stockholders’ equity for each of the years in the three-year period ended
826December 31, 2003 to U.S. GAAP, as permitted by Form 20-F of the Securities and Exchange Commission of the United
827States of America, are set forth in Notes 15) and 16). That Form allows waiving the requirement to quantify the
828differences in the U.S. GAAP reconciliation attributable to the adjustments recorded locally to comprehensively recognize
829the effect of price level changes for each line item of the financial statements.
830
831 SALLES, SAINZ – GRANT THORNTON, S.C.
832
833
834
835Mexico City, Mexico
836February 18, 2004 Jose Antonio Guzman Duran, C.P.A.
837
838
839
840 17
841 GRUPO CASA SABA, S.A. DE C.V. AND SUBSIDIARIES
842
843
844
845 consolidated
846 balance sheets
847 As of December 31, 2002 and 2003
848 (Amounts stated in thousands of 2003 year-end constant Mexican pesos (Ps.) and thousands of U.S. dollars ($))
849
850 Convenience
851 translation
852 2002 2003 2003
853 ASSETS
854 CURRENT
855 Cash and cash equivalents (Note 3.d) Ps. 64,099 Ps. 171,084 $ 15,221
856 Accounts receivable, net (Notes 3.f and 4) 3,364,000 3,748,837 333,526
857 Inventories, net (Notes 3.c and 5) 3,050,925 3,047,560 271,135
858 Prepaid expenses 14,264 15,735 1,400
859 Total current assets 6,493,288 6,983,216 621,282
860
861 PROPERTY AND EQUIPMENT, net (Notes 3.c and 6) 1,013,334 983,887 87,534
862
863 OTHER ASSETS, net 53,433 83,019 7,386
864
865 GOODWILL, net (Note 3.g) 243,427 220,720 19,637
866 Total assets Ps. 7,803,482 Ps. 8,270,842 $ 735,839
867
868
869
870
871 LIABILITIES
872 CURRENT
873 Current maturities of long-term debt (Note 8) Ps. 369,121 Ps. 390,000 $ 34,697
874 Trade accounts payable 3,695,968 3,572,412 317,830
875 Other payables and accrued liabilities 78,545 210,938 18,767
876 Employee profit sharing (Notes 3.j and 12.d) 3,580 1,434 128
877 TOTAL CURRENT LIABILITIES 4,147,214 4,174,784 371,422
878
879 LONG-TERM DEBT (Note 8) 44,706 - -
880 RESERVE FOR RETIREMENT PENSIONS AND SENIORITY
881 PREMIUM (Note 3.h) 19,279 51,665 4,596
882 DEFERRED INCOME TAX (Notes 3.j and 9) 492,771 703,444 62,584
883 TOTAL LIABILITIES 4,703,970 4,929,893 438,602
884
885 STOCKHOLDERS’ EQUITY
886 Capital stock (Note 11) 957,585 957,585 85,194
887 Premium on stock sold 741,243 741,243 65,947
888 Reserve for share repurchases (Note 11) 905,126 905,126 80,527
889 Retained earnings 2,031,299 2,505,006 222,865
890 Deficit on restatement (Note 3.c) (1,501,064) (1,733,334) (154,211)
891 Accrued deferred income tax effect (34,677) (34,677) (3,085)
892 TOTAL STOCKHOLDERS’ EQUITY 3,099,512 3,340,949 297,237
893
894 Total liabilities and stockholders’ equity Ps. 7,803,482 Ps. 8,270,842 $ 735,839
895
896
897
898
899 The accompanying notes are an integral part of these consolidated financial statements.
90018
901 GRUPO CASA SABA, S.A. DE C.V. AND SUBSIDIARIES
902
903
904
905 consolidated statements
906 of income
907For the years ended December 31, 2001, 2002 and 2003
908(Amounts stated in thousands of 2003 year-end constant Mexican pesos (Ps.) and thousands of U.S. dollars ($) )
909
910 Convenience
911 translation
912 2001 2002 2003 2003
913
914Net sales (Note 3.l) Ps. 17,844,708 Ps. 18,931,444 Ps. 19,531,240 $ 1,737,655
915Cost of sales 15,933,874 16,934,179 17,589,555 1,564,907
916 Gross profit 1,910,834 1,997,265 1,941,685 172,748
917
918OPERATING EXPENSES:
919 Selling 493,625 557,826 486,544 43,287
920 Administrative 719,673 709,496 717,206 63,808
921 1,213,298 1,267,322 1,203,750 107,095
922 Operating income 697,536 729,943 737,935 65,653
923
924COMPREHENSIVE COST OF FINANCING, NET:
925 Interest income (2,710) (7,974) (3,034) (270)
926 Interest expense 193,729 74,449 63,389 5,640
927 Exchange (gain) loss, net (Note 3.k) (958) (2,808) 178 16
928 Gain on monetary position (Note 3.c) (34,302) (47,524) (14,237) (1,267)
929 155,759 16,143 46,296 4,119
930Other income, net (33,249) (6,164) (34,315) (3,053)
931 Income before provisions 575,026 719,964 725,954 64,587
932
933PROVISIONS FOR:
934 Income tax (Notes 3.j, 12.a and 12 .e) 38,252 173,226 157,922 14,050
935 Income tax offset by prior year tax loss
936 carryforwards - (130,657) (129,262) (11,500)
937 Asset tax (Note 12.b) - 8,960 - -
938 Recovery of asset tax paid in prior
939 years (Note 12.b) - (42,210) - -
940 Deferred income tax (Notes 3.i and 9) 90,938 141,789 119,913 10,668
941
942 129,190 151,108 148,573 13,218
943 Employee profit sharing (Notes 3.j and 12.d) 126 3,297 1,434 128
944 129,316 154,405 150,007 13,346
945 Net income Ps. 445,710 Ps. 565,559 Ps. 575,947 $ 51,241
946
947
948 Net income per share (Note 3.l) Ps. 1.679 Ps. 2.131 Ps. 2.170 $ 0.193
949
950 Weighted average shares
951 outstanding (in thousands) 265,419 265,419 265,419
952
953
954
955
956The accompanying notes are an integral part of these consolidated financial statements.
957 19
958 GRUPO CASA SABA, S.A. DE C.V. AND SUBSIDIARIES
959
960
961
962 consolidated statements of
963 stockholders’ equity
964 For the years ended December 31, 2001, 2002 AND 2003
965 (Amounts stated in thousands of 2003 year-end constant Mexican pesos (Ps.) )
966
967
968 Capital stock
969 Premium on
970 Historical Restatement stock sold
971
972 Balances as of January 1, 2001 Ps. 167,903 Ps. 789,682 Ps. 741,243
973
974
975 Comprehensive income - - -
976
977
978 Balances as of December 31, 2001 167,903 789,682 741,243
979
980
981
982
983 Comprehensive income - - -
984
985
986 Balances as of December 31, 2002 167,903 789,682 741,243
987
988
989 Dividends paid - - -
990
991
992 Comprehensive income - - -
993
994
995 Balances as of December 31, 2003 Ps. 167,903 Ps. 789,682 Ps. 741,243
996
997
998
999
1000 The accompanying notes are an integral part of these consolidated financial statements.
100120
1002 Accrued
1003 Reserve for deferred
1004 share Retained Deficit on income tax
1005 repurchases earnings restatement effect Total
1006
1007Ps. 905,126 Ps. 1,020,031 Ps. (934,947) Ps. (34,677) Ps. 2,654,360
1008
1009
1010 - 445,710 (216,289) - 229,421
1011
1012
1013 905,126 1,465,741 (1,151,236) (34,677) 2,883,781
1014
1015
1016
1017
1018 - 565,559 (349,828) - 215,731
1019
1020
1021 905,126 2,031,300 (1,501,064) (34,677) 3,099,512
1022
1023
1024 - (102,240) - - (102,240)
1025
1026
1027 - 575,947 (232,270) - 343,677
1028
1029
1030Ps. 905,126 Ps. 2,505,006 Ps. (1,733,334) Ps. (34,677) Ps. 3,340,949
1031
1032
1033
1034
1035 21
1036 GRUPO CASA SABA, S.A. DE C.V. AND SUBSIDIARIES
1037
1038
1039
1040 consolidated statements of changes
1041 in financial position
1042 For the years ended December 31, 2001, 2002 AND 2003
1043 (Amounts stated in thousands of 2003 year-end constant Mexican pesos (Ps.) and thousands of U.S. dollars ($)
1044
1045 Convenience
1046 translation
1047 2001 2002 2003 2003
1048 OPERATING ACTIVITIES:
1049 Net income Ps. 445,710 Ps. 565,559 Ps. 575,947 $51,241
1050
1051 Add - Non cash items:
1052 Depreciation and amortization 110,052 101,456 91,875 8,174
1053 Allowance for doubtful accounts 33,283 96,721 80,628 7,173
1054 Loss on sale of property and equipment 12,545 6,121 8,006 712
1055 Provision for retirement pensions and
1056 seniority premium - 15,622 12,803 1,139
1057 Deferred income tax 90,938 141,789 119,913 10,668
1058 692,528 927,268 889,172 79,107
1059 CHANGES IN ASSETS AND LIABILITIES:
1060 (Increase) decrease in:
1061 Accounts receivable (455,288) (499,924) (465,465) (41,411)
1062 Inventories (565,355) (469,910) (228,905) (20,365)
1063 Prepaid expenses 2,211 (3,262) (1,471) (131)
1064 Trade accounts payable 118,464 270,084 (123,556) (10,993)
1065 Other payables and accrued liabilities 1,605 31,236 132,393 11,779
1066 Employee profit sharing (5,828) 3,343 (2,146) (191)
1067 (904,191) (668,433) (689,150) (61,312)
1068 Net cash (used in) provided by
1069 operating activities (211,663) 258,835 200,022 17,795
1070 INVESTING ACTIVITIES:
1071 Additions of property and equipment,
1072 net of retirements 9,810 39,159 43,975 3,912
1073 Decrease (increase) in other assets (5,405) 3,332 1,974 176
1074 Reserve for retirement pensions and
1075 seniority premium - (3,657) 11,781 1,048
1076 Net cash used in investing activities 4,405 38,834 57,730 5,136
1077 FINANCING ACTIVITIES:
1078 Dividends paid - - (102,240) (9,096)
1079 Bank loans, net of payments made 2,399 (296,333) (8,000) (712)
1080 Effect in change of bank loans due to the
1081 restatement (32,778) (40,483) (15,827) (1,408)
1082 Deferred income tax 79,158 81,709 90,760 8,075
1083 Net cash provided by (used in) financing
1084 activities 48,779 (255,107) (35,307) (3,141)
1085 Net (decrease) increase in cash and
1086 cash equivalents Ps. (167,289) Ps. (35,106) Ps. 106,985 $ 9,518
1087 Cash and cash equivalents
1088 at beginning of year 266,494 99,205 64,099 5,703
1089 Cash and cash equivalents
1090 at end of year Ps. 99,205 Ps. 64,099 Ps. 171,084 $ 15,221
1091 Supplementary information:
1092 Income tax and asset tax paid Ps. 41,525 Ps. 105,544 Ps. 161,734 $ 14,389
1093 Employee profit sharing paid Ps. 6,334 Ps. 124 Ps. 1,303 $ 116
1094 Interest paid Ps. 197,645 Ps. 63,097 Ps. 50,939 $ 4,532
1095
1096
1097
1098
1099 The accompanying notes are an integral part of these consolidated financial statements.
110022
1101 GRUPO CASA SABA, S.A. DE C.V. AND SUBSIDIARIES
1102
1103
1104
1105 notes to the consolidated
1106 financial statements
1107As of December 31, 2001, 2002 and 2003 (Monetary amounts stated in thousands of 2003 year-end constant Mexican
1108Pesos (Ps.) and thousands of U.S. dollars ($), except as indicated otherwise)
1109
1110
1111
11121. Description of business:
1113Grupo Casa Saba, S.A. de C.V. (the “Companyâ€), through its consolidated subsidiaries (collectively referred to as the “Groupâ€),
1114distributes pharmaceutical products, as well as health-and-beauty/other products, entertainment products (including magazines
1115and books), food/non-perishable products, and office/electronic products. The Group distributes these five product lines
1116through its distribution network to supermarket chains, pharmacies, both private and governmental, and retail customers
1117throughout Mexico. The Group does not maintain separate operating results for each of its five product lines, and as a result
1118it considers all of its operations and reports the results of all of its operations to management as a single business segment.
1119Revenue attributable to each of the five product lines is shown in Note 13).
1120The Company holds substantially all of the issued and outstanding capital stock of the following subsidiaries that are members
1121of the Group:
1122 Economic Interest
1123 (Direct or indirect)
1124 2002 2003
1125Casa Saba, S.A de C.V. (Casa Saba) 99.9% 99.9%
1126Drogueros, S.A. de C.V. (Drogueros) 99.9% 99.9%
1127Grupo Mexatar, S.A. de C.V. (Mexatar) 99.9% 99.9%
1128Centennial, S.A. de C.V. (Centennial) 99.9% 99.9%
1129Publicaciones Citem, S.A. de C.V (Citem) 99.9% 99.9%
1130Transportes Marproa, S.A. de C.V (Marproa) 99.9% 99.9%
1131Servicios Corporativos Saba, S.A. de C.V (Servicios Corporativos Saba) 99.9% 99.9%
1132Distribuidora Casa Saba, S.A. de C.V. (Distribuidora Saba) 99.9% 99.9%
1133Other companies (real estate and service companies) 99.9% 99.9%
1134
1135During 2002 and 2003, the Group´s management approved the following agreements to strengthen its corporate structure, as
1136well as to facilitate its consolidated operations. The Group’s management constantly reviews these strategies to adapt to any
1137economic changes that arise.
1138a) At the General Ordinary and Extraordinary Stockholders’ Meeting held on April 25, 2002, the stockholders approved the
1139amendment to the Company’s bylaws to adapt them to the most recent amendments enacted to Securities Market Law,
1140published in the Official Daily Gazette on June 1, 2001. Those amendments further strengthen the transparency of basic
1141information for the operation of the stock exchange and financial market, and appropriate governance in the business
1142corporate administration.
1143b) Effective July 2, 2002, through an unanimous resolution adopted by the stockholders, the subsidiaries Inmobiliaria Dejanira,
1144S.A. de C.V. and Uno a Uno, S.A. de C.V. changed their corporate name to Servicios Corporativos Drogueros, S.A. de C.V. and
1145Distribuidora Drogueros, S.A. de C.V., respectively. These consolidated subsidiaries render some specialized personnel services
1146mainly to Drogueros. These services consist of administrative, legal, accounting, tax, finance, treasury and electronic data
1147processing services.
1148c) Through an assignment of rights and obligations agreement dated June 30, 2003, Casa Saba, the main Company’s
1149subsidiary, sold certain collection rights to individuals and legal entities to the Company at a discount in the amount of Ps.
1150489,546 (Ps. 502,740 at fiscal year-end constant Mexican pesos). The selling price of the assignment agreed upon amounted
1151to Ps. 254,670 (Ps. 261,534 at fiscal year-end constant Mexican pesos). Accordingly, a gain is generated by the Company for
1152the collection rights acquired that is recognized in income as accrued.
1153Through an assignment of rights and obligations agreement dated December 30, 2003, Drogueros, a Company’s subsidiary,
1154sold certain collection rights to individuals and legal entities to the Company at a discount in the amount of Ps. 80,378. The
1155selling price of the assignment agreed upon amounted to Ps. 42,234. Accordingly, a gain is generated by the Company for the
1156collection rights acquired that is recognized in income as accrued.
1157These balances and/or transactions are eliminated in the accounting consolidation, in accordance with accounting principles
1158generally accepted in Mexico or “Mexican GAAPâ€. This provision is virtually identical to accounting principles generally accepted
1159in the United States of America or “U.S. GAAPâ€.
1160
1161
1162 23
1163 2. Basis of presentation:
1164 These financial statements are prepared based on the Mexican GAAP, which are described in Note 3). Certain accounting
1165 principles applied by the Group in accordance with Mexican GAAP differ from U.S. GAAP, as discussed in Note 15). A partial
1166 reconciliation of the reported net income and stockholders’ equity from Mexican GAAP to U.S. GAAP is included in Note 16).
1167 Convenience translation
1168 The accompanying consolidated financial statements have been translated from Spanish into English for the convenience of
1169 readers outside of Mexico. The consolidated financial statements are stated in Mexican pesos. U.S. dollar amounts shown in
1170 the accompanying financial statements were calculated based on the amounts in constant Mexican pesos as of December 31,
1171 2003. They have been included solely for the convenience of the reader and are translated from constant Mexican pesos, as a
1172 matter of arithmetic computation only by using the rate of Ps.11.24 (pesos) per U.S. dollar quoted by Banco de Mexico in the
1173 Official Daily Gazette as of December 31, 2003. The convenience translation should not be construed as a representation that
1174 the Mexican peso amounts have been, could have been, or could be translated into U.S. dollars in the future at this or any
1175 other exchange rate.
1176
1177 3. Significant accounting policies:
1178 a) Use of estimates
1179 Preparing the accompanying financial statements requires the Group’s management to make certain estimates and use certain
1180 assumptions to determine the valuation of some assets and liabilities, and disclose contingent assets and liabilities at the date
1181 of the financial statements, and the reported amount of revenues and expenses incurred during the periods. Actual results can
1182 differ from these estimates.
1183 b) Basis of consolidation
1184 The Group’s financial statements are presented on a consolidated basis under Mexican GAAP. The Group’s consolidated
1185 financial statements include the results of operation of the Company and those of all of its subsidiaries (controlled directly or
1186 indirectly, acquired, newly incorporated or disposed of) from the date on which they are acquired and/or incorporated up to
1187 the date when they are sold and/or at the year-end of the last year reported. The consolidated financial statements are prepared
1188 at the same date and for the same period. All significant intercompany balances and transactions are eliminated from the
1189 Group’s consolidated financial statements.
1190 c) Recognition of the impact of inflation on the financial information
1191 The Group restates its consolidated financial statements in terms of the purchasing power of the currency as of the fiscal year-
1192 end of the last period reported, thereby comprehensively recognizing the impact of inflation. Consequently, the amounts of
1193 the financial statements for the current year are comparable among themselves and with those of prior years. Accordingly, all
1194 prior year financial statement amounts presented herein differ from those originally reported.
1195 The impact of inflation on the financial information is recognized under Bulletin B-10, “Recognition of the Impact of Inflation
1196 on the Financial Informationâ€, as amended (“Bulletin B-10â€) issued by Mexican Institute of Public Accountants or “MIPA†by
1197 applying the following procedures:
1198 i) The amounts of the accompanying consolidated financial statements and their notes are presented for comparative purposes
1199 in Mexican pesos of purchasing power as of December 31, 2003, by applying the inflation factor derived from the National
1200 Consumer Price Index (the “NCPIâ€).
1201 ii) Revenues and expenses related to monetary items are restated from the month in which they occur up to fiscal year-end, by
1202 applying the NCPI factor. Expenses related to nonmonetary items such as cost of sales and depreciation are restated as of the
1203 date on which inventories are sold, and/or at the time when property and equipment are depreciated based on the restated
1204 value of those assets, and from that date up to fiscal year-end, based on the applicable NCPI factor.
1205 iii) The gain or loss on monetary position represents the impact of inflation on the purchasing power on monetary items. The
1206 gain or loss on monetary position is determined by applying the NCPI factor to the consolidated average net monetary position
1207 at beginning of each month, which amount is subsequently restated at fiscal year-end by applying the relevant NCPI factor. The
1208 gain or loss on monetary position is included in the statement of income in the line item “Comprehensive cost of financingâ€.
1209 iv) Inventories are initially recorded at acquisition cost. They are subsequently restated to their replacement cost. Restated
1210 inventory values do not exceed their net realizable values.
1211 v) Property and equipment are initially recorded at acquisition cost. Those fixed assets along with their depreciation are restated
1212 based on “adjustments due to changes in the general price level method†by applying the relative accrued NCPI factor to the
1213 value of those assets determined by an appraisal performed by independent experts as of December 31, 1996 (except for
1214 Drogueros, as discussed in Note 6)), as well as to the original cost of acquisitions made subsequent to that date.
1215 Depreciation is calculated on the restated value of fixed assets, by using the straight-line method based on the remaining
1216 economic useful lives thereof.
1217
1218
1219
1220
122124
1222 vi) Goodwill is restated based on the relative NCPI factor.
1223
1224vii) Stockholders’ equity is restated based on the NCPI factor by considering the age of contributions and that of earnings or
1225losses generated. The restatement of stockholders’ equity represents the amount necessary to maintain shareholders’
1226investment in terms of the purchasing power of the currency at fiscal year-end of the last year reported.
1227viii) The deficit on restatement represents the accumulated monetary effect at the date on which the financial statements were
1228restated for the first time, plus (less) the deficit (surplus) generated by the valuation of nonmonetary assets, based on the
1229replacement cost above or below inflation by considering the NCPI factor. Effective 1997, that deficit or surplus is mainly
1230generated by restating inventories to their replacement cost above or below the NCPI factor, as well as its applicable deferred
1231income tax effect. The resulting deficit or surplus is included in the statement of stockholders’ equity as a component of
1232comprehensive income of the year.
1233d) Cash and cash equivalents
1234Cash consists basically of non-interest bearing bank deposits. Cash equivalents are comprised mainly of short-term investments
1235(highly liquid investments that have a ninety day term of maturity or less when acquired) in banking institutions, payable on
1236demand at variable interest rates. Investments are valued at market value (cost plus accrued interest).
1237e) Financial instruments
1238All financial assets and financial liabilities derived from any type of financial instrument are recognized in the balance sheet at
1239fair value, except for investments in held-to-maturity securities. The valuation effect is recognized in income of the year.
1240Investments in held-to-maturity securities are valued at acquisition cost. Revenues and costs generated by financial instruments
1241are recognized in the statement of income when accrued.
1242In accordance with Bulletin C-2, “Financial Instruments†issued by the MIPA, the Group’s financial instruments are comprised
1243mainly of cash and cash equivalents, accounts receivable and payable not related to its commercial activities, bank loans, and
1244long-term debt. As of December 31, 2002, and 2003, the carrying value of financial instruments shown in the balance sheet
1245approximates their fair value, due to their short-term nature. Long-term debt bears variable interest at available market rates
1246for debt with similar terms and maturities.
1247f) Allowance for doubtful accounts
1248The allowance for doubtful accounts represents the Group’s estimate of the probable loss inherent in all receivables by
1249considering: (i) the general historical trend of payment performance of customers, and (ii) factors surrounding the specific
1250customer’s credit risk.
1251g) Goodwill
1252Effective January 2003, the new Bulletin C-8, “Intangible Assets†issued by the MIPA sets forth that intangible assets acquired
1253through a business combination are accounted for at the fair value of the purchase date and reported separately, unless their
1254cost cannot be reasonably determined. In that case, they should be accounted for as goodwill.
1255The Group’s goodwill arises from acquiring shares of capital stock of subsidiary companies at a price exceeding the fair value
1256of the net assets acquired. The goodwill balance is continually assessed to establish whether factors such as the occurrence of
1257significant adverse events, changes in the environment in which the business operates and expectations of operating income,
1258provide elements of judgment indicating that the carrying value of goodwill may not be recovered. In that case, an impairment
1259loss is recorded in the period when such a determination is made, resulting from the excess of the carrying value of goodwill
1260over the fair value determined under a discounted cash flow. For 2003, the Group recorded an operating expense for goodwill
1261impairment in the amount of Ps. 28,709.
1262Up to 2002 year-end, goodwill was amortized over the term during which the Group’s management estimated that the
1263additional benefits of such an investment would be generated, without exceeding twenty years. The unamortized portion was
1264continually reviewed, thereby decreasing the remaining amortization term whether economic and circumstantial factors
1265surrounding the Group indicated impairment in the carrying value of goodwill. As of December 2002, amortization expensed
1266amounted to Ps. 22,068 (Ps. 22,946 at fiscal year-end constant Mexican pesos).
1267h) Labor obligations
1268i) Members of the Group that have personnel recognize the labor obligations for retirement pensions and seniority premiums
1269derived from defined benefit plans for all their employees in accordance with the Federal Labor Law, as well as the schemes
1270that have been established for each plan. Seniority premiums are granted for a voluntary separation of personnel, after
1271completing fifteen years of service, and calculated based on the number of years worked. Retirement pensions are granted to
1272all personnel having completed at least ten years of service and have reached sixty-five years of age. Members of the Group
1273are required to pay certain severance benefits to employees that are dismissed without proper cause. These payments for non-
1274substitute indemnification of retirement pensions are expensed when paid.
1275Projected benefit obligations, unamortized items, and the net periodic cost applicable to retirement pensions and seniority
1276premiums are determined by using the “projected unit credit methodâ€, in conformity with Bulletin D-3, “Labor obligationsâ€
1277issued by the MIPA. This method is virtually identical to the method under U.S. GAAP.
1278
1279
1280
1281 25
1282 Members of the Group with employees have created a fund placed in an irrevocable trust in a financial institution to meet the
1283 labor obligations referred to above. During 2001, 2002, and 2003, contributions to the fund based on actuarial computations
1284 amounted to Ps. 8,000, Ps. 4,279 and Ps. 10,000 (Ps. 8,734, Ps. 4,449 and Ps. 10,000 at fiscal year-end constant Mexican
1285 pesos, respectively). As of December 31, 2001, 2002, and 2003, fund assets consisted primarily of investments in equity
1286 securities, as well as investments in fixed income securities issued by Mexican companies that are traded on the Mexican Stock
1287 Market.
1288 ii) The relevant information of the study performed by independent actuaries, with regard to the retirement pension and
1289 seniority premiums of the Members of the Group that have employees, is summarized below. The rates referred with regard
1290 to actuarial assumptions are stated in real terms (nominal rates at market discounted for inflation).
1291 December 31,
1292 2002 2003
1293 Labor liability
1294 Vested benefit obligation Ps. 80,420 Ps. 109,494
1295 Non-vested benefit obligation 13,630 20,379
1296
1297 Accumulated benefit obligation 94,050 129,873
1298 Additional benefit related to future compensation increases 38,526 10,042
1299
1300 Projected benefit obligation 132,576 139,915
1301 Fair value of plan assets (41,924) (48,063)
1302
1303 Unfunded projected benefit obligation 90,652 91,852
1304 Unrecognized net transition obligation (44,933) (41,922)
1305 Negative amendments 15,007 16,092
1306 Unrecognized net loss (41,447) (45,721)
1307
1308 Unfunded accrued pension cost and seniority premiums to be recognized
1309 under U.S. GAAP and Mexican GAAP Ps. 19,279 Ps. 20,301
1310
1311 Current Obligation - 51,665
1312
1313 Additional obligation - Ps. 31,364
1314 Components of the net periodic cost
1315 Service cost Ps. 5,356 Ps. 4,386
1316 Interest on projected benefit obligation 7,144 7,604
1317 Expected return on plan assets (4,021) (3,654)
1318 Amortization of unrecognized obligations 3,238 3,288
1319 Amortization of amendments (803) (911)
1320 Amortization of losses 1,838 1,480
1321 SFAS 88 Cost 2,028 -
1322 Other 842 610
1323 Net periodic cost under U.S. GAAP and Mexican GAAP Ps. 15,622 Ps. 12,803
1324
1325 Assumptions
1326 Discount rate 6% 6%
1327 Salary increase rate 2% 2%
1328 Return on plan assets 8% 8%
1329
1330
1331 i) Comprehensive income
1332 Comprehensive income consists of the consolidated net income for the period, plus (less) other results (i.e. deficit on
1333 restatement and/or the deferred income tax effect), for the same period reflected in the stockholders’ equity pursuant to specific
1334 regulatory provisions. Consequently, stockholders’ equity discloses the components of comprehensive income, which does not
1335 include capital contributions or reductions.
1336 j) Income tax and employee profit sharing
1337 i) The Group records the provision for both income tax and employee profit sharing based on the amount payable determined
1338 based on taxable income applicable to both items.
1339 ii) The deferred income tax effect is determined by applying the “comprehensive asset and liability method†in accordance with
1340 Bulletin D-4, “Accounting for Income Tax, Asset Tax and Employee Profit Sharingâ€, and Circular 54, “Bulletin D-4
1341 Interpretationsâ€, issued by MIPA. Pursuant to this method, the deferred income tax liability is recorded for all temporary
1342 differences. On the other hand, the deferred income tax asset is only recorded under certain circumstances. The deferred
1343 income tax liability and/or asset is classified as a non-current item. The deferred income tax liability and/or asset is determined
1344
1345
1346
134726
1348 by applying the income tax rate to the temporary differences between the accounting and tax values of assets and liabilities as
1349of the date of the relevant financial statements, as well as the amount of the tax loss carryforwards. In the event of any change
1350of the income tax rate, effective subsequent to the fiscal year-end, the income tax rate that will be effect at the time it is
1351estimated that temporary differences are realized will be applied. Asset tax paid in the year and in prior years that is recoverable
1352may be recognized as a deferred income tax asset, under certain circumstances.
1353The Group has carried out a valuation allowance to determine the amount of the deferred income tax asset that will be
1354recorded, in the event that it is more likely that a certain portion or the entire deferred income tax asset may not be realized.
1355Any reduction in the deferred income tax asset amount is recorded in the income statement and/or the stockholders’ equity,
1356by considering the nature of the temporary item. There is no valuation allowance recorded as of December 31, 2001, 2002
1357and 2003.
1358The deferred employee profit sharing effect is only recorded when it is reasonably presumed that the temporary differences
1359that gave rise thereto are going to result in a future asset or liability, and there is no evidence that such a situation is going to
1360change. At 2001, 2002 and 2003 fiscal year-end, the consolidated subsidiaries of the Group that have personnel had no
1361temporary items of that nature.
1362iii) The Group prepares its income tax return and asset tax return on a consolidated basis. The Group’s consolidated subsidiaries
1363meet the characteristics set forth in the Income Tax Law for “controlled companiesâ€. The Group recognizes the impact of the
1364eliminations that should be recorded for book and tax consolidation purposes. Consequently, the Group’s consolidated financial
1365statements reflect the amount of the provision for income tax of the Company and each of its consolidated subsidiaries, adjusted
1366for the impact of consolidation.
1367k) Foreign currency denominated transactions
1368Foreign currency denominated transactions are recorded at the current exchange rate at the date on which they are entered
1369into or paid. Foreign currency denominated monetary items are translated to Mexican pesos by using the exchange rate
1370published by the Central Bank of Mexico at month-end. Exchange fluctuations derived from these monetary items are recorded
1371in the income statement in the line item “Comprehensive cost of financingâ€.
1372l) Earnings per share
1373Earnings per share are determined based on the weighted average common shares outstanding during the years and earnings
1374for common shareholders, in conformity with Bulletin B-14, “Earnings per share†issued by the MIPA.
1375m) Revenue recognition
1376Revenues are recognized in the period in which risks and benefits are transferred to purchasers, which generally coincides with:
1377(i) persuasive evidence that an arrangement exists, (ii) delivery has occurred to the satisfaction of customers’s orders, (iii) the
1378seller’s price to the buyer is fixed or determined, and (iv) collectively is reasonable assured.
1379
13804. Accounts receivable:
1381 2002 2003
1382Trade receivables Ps. 3,403,305 Ps. 3,706,324
1383Allowance for doubtful accounts (183,957) (257,131)
1384 3,219,348 3,449,193
1385Other receivables 77,572 54,370
1386Related parties - 3,514
1387Value added tax recoverable 28,663 32,081
1388Income tax recoverable 38,417 198,655
1389Asset tax recoverable - 11,024
1390 Ps. 3,364,000 Ps. 3,748,837
1391
1392
13935. Inventories:
1394 2002 2003
1395Pharmaceutical products Ps. 2,033,372 Ps. 2,151,611
1396Beauty care products 464,318 284,211
1397Books and magazines 264,402 294,029
1398Electric appliances 4,996 3,712
1399Groceries 46,561 59,133
1400Other 13,432 11,881
1401 2,827,081 2,804,577
1402Estimate for slow-moving magazines inventory (26,811) (7,017)
1403 2,800,270 2,797,560
1404Merchandise-in-transit 250,655 250,000
1405 Ps. 3,050,925 Ps. 3,047,560
1406
1407Merchandise-in-transit applies mainly to pharmaceutical products. The title has been transferred to the Group.
1408
1409
1410 27
1411 6. Property and equipment:
1412 2002 2003
1413 Total Original cost Restatement Total
1414 Building Ps. 771,590 Ps. 242,322 Ps. 528,343 Ps. 770,665
1415 Machinery and equipment 85,511 38,074 47,582 85,656
1416 Transportation equipment 238,353 143,052 87,453 230,505
1417 Office equipment 131,818 43,231 88,605 131,836
1418 Computer equipment 251,150 138,770 131,591 270,361
1419 1,478,422 605,449 883,574 1,489,023
1420 Less-accumulated depreciation (734,973) (292,998) (482,014) (775,012)
1421 743,449 312,451 401,560 714,011
1422 Land 269,885 51,079 218,797 269,876
1423 Ps. 1,013,334 Ps. 363,530 Ps. 620,357 Ps. 983,887
1424
1425
1426 Property and equipment of the subsidiary Drogueros, whose net restated value as of December 31, 2002 and 2003 is included
1427 in the foregoing summary, amounts to Ps. 111,840 (Ps. 116,287 at fiscal year-end constant Mexican pesos) and Ps. 111,653,
1428 respectively. The restatement for that property and equipment was determined by applying the NCPI factor to the original cost
1429 of the property and equipment of Drogueros from their respective dates of acquisition.
1430 The average annual depreciation rates for 2002 and 2003 were as follows:
1431 Buildings and improvements 2.10%
1432 Machinery and equipment 6.09%
1433 Transportation equipment 10.15%
1434 Furniture and fixtures 6.50%
1435 Computer equipment 11.15%
1436
1437
1438
1439 7. Related party balances and transactions:
1440 As of December 31, 2002 and 2003, the receivable balance from and (payable) balance to related parties was as follows:
1441 2002 2003
1442 Aeroxtra, S.A. de C.V. Ps. - Ps. 3,514
1443 Xtra Inmuebles, S.A. de C.V. (200) -
1444 Pastas Molisaba, S.A. de C.V. (317) -
1445 Ps. (517) Ps. 3,514
1446
1447 As of December 31, 2002, the payable balance to Xtra Inmuebles, S.A. de C.V. and Pastas Molisaba, S.A. de C.V. applied to
1448 real property leased and miscellaneous articles purchased. Moreover, the leases expensed amounted to Ps. 4,092 (Ps. 4,255 at
1449 fiscal year-end constant Mexican pesos). At 2002 year-end, the payable balance was included in line item “Other payables and
1450 accrued liabilitiesâ€.
1451 At 2003 year-end, the receivable balance from Aeroxtra, S.A. de C.V. is derived from financing granted to that related party
1452 that bore interest in the amount of Ps. 535 in the year. The balance was included in line item “Accounts receivable, netâ€. In
1453 addition, flight services and leases of real property paid to Aeroxtra, S.A. de C.V. and Xtra Inmuebles, S.A. de C.V. were
1454 expensed in the amounts of Ps. 10,388 and Ps. 4,501, respectively, in the year.
1455 During 2002 and 2003, the Group had no other related party agreements, except for the balances and transactions referred
1456 to above. The Group’s management estimates that all related party transactions were agreed upon on an arm’s length basis.
1457
1458 8. Bank loans and long-term debt:
1459 a) On December 31, 2003, Casa Saba obtained an unsecured loan from Scotiabank Inverlat, S.A. (“Scotiabankâ€) in the amount
1460 of Ps. 390,000, which bore interest at a 7.29% annual market rate. The proceeds from this loan were used for the working
1461 capital. The loan was paid in full on its due date, January 7, 2004.
1462 b) Through a “mortgage backed clean credit opening contract†with Scotiabank dated June 29, 2001, Casa Saba obtained a
1463 loan in the amount of Ps. 645,000 (Ps. 724,811 at fiscal year-end constant Mexican pesos). The proceeds from this loan were
1464 used to prepay all of the Casa Saba’s outstanding restructured indebtedness derived from a “mortgage backed clean credit
1465 opening contract†with Banco Nacional de Mexico, S.A. dated December 5, 2000.
1466 Indebtedness outstanding under the Scotiabank loan would be payable in fifty-four monthly installments from July 18, 2001
1467 through December 31, 2005. This loan bore interest at a variable rate equal to the Equilibrium Interbank Interest Rate published
1468 by the Central Bank of Mexico in effect from time to time, plus 1.75%. As of December 31, 2002, the aggregate amount of
1469 the indebtedness outstanding amounted to Ps. 198,000 (Ps. 205,874 at fiscal year-end constant Mexican pesos).
1470
1471
1472
147328
1474 On September 18, 2003, Casa Saba prepaid the indebtedness outstanding referred to above in full. Prepayments on principal
1475in whole or in part were permitted. Consequently, prepayments did not generate any penalty payable by Casa Saba.
1476Accordingly, the terms and conditions of the loan obtained from Scotiabank on June 29, 2001 are no longer applicable at 2003
1477year-end.
1478c) On December 16, 2002, Casa Saba obtained an unsecured loan from Scotiabank in the amount of Ps. 200,000 (Ps. 207,953
1479at fiscal year-end constant Mexican pesos). This loan bore interest at a 9.3% annual market rate. The proceeds from this loan
1480were used for the working capital of Casa Saba. This loan was paid in full on its due date, February 14, 2003.
1481d) As of December 31, 2002 and 2003, short and long-term bank debt was as follows:
1482 Weighted average
1483 Balance at dinterest rate at
1484 Type of loan fiscal year-en fiscal year-end
1485 2002
1486Secured loan – short-term Mexican pesos Ps. 161,165 9.97%
1487Unsecured loan – short-term Mexican pesos 207,956 9.97%
1488Secured loan – long-term Mexican pesos 44,706 9.97%
1489 Ps. 413,827
1490 2003
1491Unsecured loan – short-term Mexican pesos Ps. 390,000 7.29%
1492
1493
1494Applicable interest rates are adjusted monthly, in accordance with market rates, hence, the carrying value of the bank debt
1495approximates its market value as of December 31, 2002 and 2003.
1496
14979. Deferred income tax:
1498As of December 31, 2002 and 2003, the deferred income tax liability effect determined in accordance with Bulletin D-4 issued
1499by MIPA was as follows:
1500 2002 2003
1501Excess of book over tax value of assets and Liabilities, net Ps. 2,569,493 Ps. 2,800,507
1502Tax loss carryforwards (969,336) (479,462)
1503 1,600,157 2,321,045
1504Deferred income tax liability 560,055 765,945
1505Less-
1506Asset tax recoverable (67,284) (62,501)
1507Deferred income tax liability effect Ps. 492,771 Ps. 703,444
1508
1509As of December 31, 2001, 2002 and 2003, the excess of book over tax value of assets and liabilities refers mainly to the line
1510items of inventories, property and equipment, and certain prepaid expenses. At those year-ends, the provision for deferred
1511income tax applied to the income statement amounted to Ps. 90,938, Ps. 141,789 and Ps. 119,913 at fiscal year-end constant
1512Mexican pesos, respectively.
1513Under Mexican GAAP the effect of the restatement of non-monetary assets is recorded in stockholders’ equity. Accordingly, the
1514deferred taxes related to such assets would be reflected directly in equity. This provision is virtually identical to U.S. GAAP.
1515The Group recognizes the deferred income tax asset derived from tax loss carryforwards, whose benefit expires in varying
1516amounts between 2008 and 2011. Their realization depends on generating sufficient taxable income prior to the expiration of
1517those tax loss carryforwards. Although realization of tax loss carryforwards is not assured, Management estimates a high
1518likelihood that the deferred income tax asset will be realized taking into account the Group’s business plan. The deferred income
1519tax asset may be reduced in the short-term if the estimated taxable income decreases in future periods.
1520As of December 31, 2001, 2002 and 2003, the Members of the Group with employees did not have a deferred employee profit
1521sharing effect, insofar as there were no temporary items that would have generated a future liability or asset, as discussed in
1522Note 3j).
1523
152410. Consolidated foreign currency position:
1525As of December 31, 2002 and 2003, assets and liabilities denominated in U.S. dollars were as follows:
1526 2002 2003
1527Current assets $ 3,617 $ 3,776
1528Current liabilities 104 1,381
1529Net $ 3,513 $ 2,395
1530Net (at fiscal year-end constant Mexican pesos) Ps. 37,669 Ps. 26,827
1531
1532
1533
1534
1535 29
1536 As of December 31, 2002 and 2003, the Group valued its U.S. dollars denominated assets and liabilities at the fiscal year-end
1537 exchange rate of Ps. 10.31 (pesos), and Ps. 11.24 (pesos) per dollar, respectively, published by the Central Bank of Mexico in
1538 the Official Daily Gazette.
1539 As of February 18, 2004, issue date of the accompanying financial statements, the consolidated net U.S. dollar position was
1540 similar to that of December 31, 2003 and the exchange rate was Ps. 10.93 (pesos) per dollar.
1541
1542 11. Stockholders’ equity:
1543 Capital structure
1544 As of December 31, 2002 and 2003, paid-in capital stock was as follows:
1545 Number Par value
1546 2002 2003
1547 Fixed capital shares without retirement rights 265,149,080 Ps. 167,730 Ps. 167,730
1548 Variable capital shares 270,280 173 173
1549
1550 265,419,360 Ps. 167,903 Ps. 167,903
1551
1552 At fiscal year-end constant Mexican pesos Ps. 957,585 Ps. 957,585
1553
1554
1555 As of December 31, 2002 and 2003, capital stock comprised of 265,419,360 fully paid and non-assessed Ordinary Shares, with
1556 no par value. Variable capital shares may not exceed ten times the amount of fixed minimum capital stock.
1557 Repurchase and resale of own shares
1558 At the General Ordinary and Extraordinary Stockholders’ Meeting held on April 22, 2003, the stockholders resolved that
1559 maximum amount geared toward the Company’s own share repurchases should be equivalent to 15% of the Company’s
1560 stockholders’ equity as of December 31, 2002, without exceeding retained earnings at that date. The amount of the reserve
1561 for own share repurchases was appropriated from retained earnings. During 2002 and 2003, the shareholders did not approve
1562 a specific number of shares and peso amount for repurchase or resale of its own shares.
1563 As of December 31, 2002 and 2003, the number of shares available for resale was 14,729,720 valued in the amount of Ps.
1564 100,446 (Ps. 146,678 at fiscal year-end constant Mexican pesos). Those shares cannot be represented at the stockholders’
1565 meeting, as long as the shares belong to the Company.
1566 Legal reserve
1567 Net income generated by the Company is subject to the legal provision that requires appropriating 5% of the Company’s
1568 income to a legal reserve until that reserve equals 20% of the Company’s capital stock. Equity in earnings of subsidiaries is not
1569 considered for this purpose. Amounts from this reserve may not be distributed to the Company’s stockholders, except as stock
1570 dividends. As of December 31, 2002 and 2003, the Company’s legal reserve amounted to Ps. 54,819 at fiscal year-end constant
1571 Mexican pesos, which is included in the balance sheet under the caption “Retained earningsâ€.
1572 Distribution of earnings and capital reductions
1573 Any dividends distributed to stockholders must be paid out of the consolidated “Net taxable income account†(“CUFINâ€). Any
1574 dividends paid out in excess of CUFIN are subject to a 49.2% in 2004 (51.5% in 2003) tax rate payable by the Company, except
1575 as discussed in the following paragraph “Dividends among companies of the Groupâ€. The resulting income tax may be offset
1576 against income tax due in the same year and the subsequent two years. The balance of CUFIN is determined in accordance
1577 with currently enacted tax legislation.
1578 On April 22, 2003, dividends were declared at the Company’s Stockholders’ Meeting in the amount of Ps. 100,000 (Ps. 102,240
1579 at fiscal year-end constant Mexican pesos), paid out of retained earnings. Dividends paid did not exceed the consolidated CUFIN
1580 balance at that date; therefore, no taxable income was generated for income tax.
1581 The excess of capital reimbursement per share paid to stockholders over the balance of the consolidated “Restated contributed
1582 capital per share account†should be treated as a distributed dividend. The excess will be assessable in accordance with the
1583 specific procedure provided for in the Income Tax Law. The resulting income tax may be offset as referred to above. Restated
1584 contributed capital per share account is determined in accordance with currently enacted tax legislation.
1585 In addition, effective 2002, the 7.7% income tax withholding rate applicable to dividends paid to individuals or foreign residents
1586 was eliminated.
1587 Dividends among companies of the Group
1588 Dividends distributed among consolidating companies that are not paid out of the CUFIN will be subject to income tax at the
1589 time when the shares of the controlled subsidiary distributing them are sold, either in whole or in part, when the equity stake
1590 is reduced in the controlled subsidiary or when the Group is dissolved or no longer consolidates. During 2002 and 2003, no
1591 corporate changes of that nature occurred.
1592
1593
1594
159530
1596 At stockholders’ meetings held on March 5 and August 29, 2003, the stockholders of Casa Saba declared the payment of
1597dividends to the Company in the amounts of Ps. 314,000 and Ps. 56,500, respectively (Ps. 322,237 in March and Ps. 57,765 in
1598August, at fiscal year-end constant Mexican pesos). Those payments were made out of the CUFIN account of Casa Saba.
1599In addition, in August 2003, dividends distributed among the other Group’s consolidated subsidiaries amounted to Ps. 63,200 (Ps.
160064,616 at fiscal year-end constant Mexican pesos). All payments were made out of the CUFIN of each of the subsidiaries that
1601declared the dividend.
1602
160312. Tax system:
1604a) Consolidated income tax due
1605i) In accordance with the enacted tax provisions, the income tax rate will be reduced gradually. Therefore, a 34% tax rate is
1606applied in fiscal 2003, 33% in fiscal 2004, and finally 32% in fiscal 2005. Consequently, effective 2002 certain tax provisions
1607were eliminated, including: (i) the existing option to defer 5% of income tax payable by the companies, and (ii) the
1608determination of the denominated “Reinvested net taxable income account†(“CUFINERâ€). As of December 31, 2002, the
1609Group had no deferred income tax payment. In addition, at that fiscal year-end, there was no CUFINER balance either.
1610The Group determines its income and assets taxes on a consolidated basis. Either consolidated taxable income or a consolidated
1611tax loss is determined in accordance with the “consolidative equity†of the taxable income or tax loss generated in the year by
1612the Company and that of its consolidated subsidiaries. “Consolidative equityâ€, as provided for in the Income Tax Law, represents
161360% of the equity stake that the Company holds in all of its consolidated subsidiaries. Effective 2002, consolidative equity
1614applicable to the Company, in its capacity as a “holding companyâ€, is 60% instead of 100% of the consolidative equity that
1615used to be incorporated up to 2001. The remaining 40% of that taxable income or tax loss is reported separately by the
1616Company and by each of its consolidated subsidiaries. The Company and each of its consolidated subsidiaries record their
1617applicable income and asset taxes, insofar as each of the companies must separately file the income and asset tax return of the
1618year, in accordance with Tax Legislation.
1619Taxes are computed in Mexican pesos as of the date on which the transactions occurred. In accordance with Bulletin B-10, they
1620are restated to fiscal year-end Mexican pesos by applying the NCPI factor.
1621ii) One of the Group’s consolidated subsidiaries (Transportes Marproa, S.A. de C.V., which assets and revenues are not material
1622to the Group’s consolidated operations), is authorized to pay its annual income and asset taxes separately from the Group under
1623a special tax regime known as the “Simplified regimeâ€. Under this special regime, the subsidiary pays its annual income tax,
1624based only on cash-in and cash-out with regard to all of its transactions carried out during the year.
1625iii) In March 1999, the Group filed an appeal for constitutional relief against the amendments enacted to the tax consolidation
1626regime, which became effective in 1999. The main amendment sets forth that the Group should determine consolidative equity
1627of the 60% discussed in paragraph i) above. Notwithstanding that in March 2002, a ruling in favor of the Group was handed
1628down by the Federal Tax Court against that amendment, the Group has determined its consolidated taxable income or
1629consolidated tax loss, as the case may be, based on the consolidative equity since 1999.
1630iv) Income tax due is determined by taking into account the impact of inflation on depreciation of restated fixed assets, the
1631deduction and/or accumulation of the annual inflationary adjustment on monetary items, as well as the deduction of inventory
1632purchases instead of the book cost of sales.
1633At 2002 and 2003 fiscal year-end, the income tax provision was as follows:
1634 2001 2002 2003
1635Income tax due Ps. 38,252 Ps. 173,226 Ps. 157,922
1636Income tax offset by prior year tax loss carryforwards - (130,657) (129,262)
1637Deffered income tax 90,938 141,789 119,913
1638 129,190 184,358 148,573
1639Asset tax, net of recovery - (33,250) -
1640 Ps. 129,190 Ps. 151,108 Ps. 148,573
1641
1642Taxable income generated in 2001, 2002 and 2003 differs from book income, due to the annual inflationary adjustment on
1643monetary items, excess of book over tax depreciation, deduction of inventory purchases in excess of the book cost of sales, and
1644the effect of prior year tax loss carryforwards.
1645At 2002 and 2003 fiscal year-end, consolidated taxable income in the amount of Ps. 373,299 and Ps. 380,182 at fiscal year-
1646end constant Mexican pesos was incurred, respectively. At those years, the applicable income tax was fully offset by prior year
1647tax loss carryforwards, as provided for in the Income Tax Law provisions, in the amounts of Ps. 130,657 and Ps. 129,262,
1648respectively. The foregoing effect is shown in the income statement.
1649
1650
1651
1652
1653 31
1654 b) Consolidated asset tax due
1655 i) Consolidated asset tax due is determined by applying a 1.8% annual tax rate to the average restated value of the assets, less
1656 the average face value of certain debts (“Group’s asset positionâ€). Effective 2003, the Group’s asset position is determined
1657 based on the “consolidative equity†(discussed in paragraph a) above) of the assets and debts of the Company and that of its
1658 consolidated subsidiaries, in accordance with a specific criterion issued by the Ministry of Finance and Public Credit. Up to fiscal
1659 2002, the Group’s asset position was determined based on the average restated value of assets, less the average face value of
1660 certain debts of the Company, plus the asset position of its subsidiaries. The asset position of the subsidiaries was determined
1661 based on the equity stake held by the Company in its consolidated subsidiaries. Pursuant to this tax change, the Group
1662 estimates that it will reduce asset tax due in the short-term.
1663 Asset tax is only paid on the amount in which it exceeds income tax of the year. Income tax paid during the year may be credited
1664 against asset tax due in the same year. As provided for in currently enacted Tax Legislation, asset tax paid in excess of income
1665 tax due in the same period may be recovered over a ten year term, under certain circumstances. On the other hand, income
1666 tax paid in excess of asset tax due may be credited for the immediately foregoing three years, under certain circumstances. As
1667 of December 31, 2002 and 2003, the consolidated asset tax due amounted to Ps. 47,160 (Ps. 49,035 at fiscal year-end constant
1668 Mexican pesos) and Ps. 28,703, respectively.
1669 ii) On February 15, May 31, and June 30, 2000, the Federal Tax Court handed down a favorable ruling to the Company, Casa
1670 Saba, and Drogueros, respectively, in order for asset tax to be determined by subtracting the average face value of debts
1671 contracted with the financial system or its intermediaries from the average restated value of assets. As a result, during 2002,
1672 the Company obtained the refund of asset tax paid in excess for prior years in the amount of Ps. 40,596 (Ps. 42,210 at fiscal
1673 year-end constant Mexican pesos). This amount is shown in the income statement.
1674 c) Tax loss carryforwards and asset tax recoverable
1675 i) Tax loss carryforwards can be offset against taxable income that may be generated in the future over a ten year term. Tax
1676 loss carryforwards can be restated based on the NCPI factor from the date incurred up to the sixth month of the year in which
1677 they can be offset against taxable income. On the other hand, asset tax recoverable can be restated from the date on which
1678 the recoverable balance is generated up to the date when that balance is recovered.
1679 As of December 31, 2003, the restated amount of tax loss carryforwards and asset tax recoverable were as follows:
1680 Year Tax loss Asset tax Year of
1681 Incurred carryforward recoverable expiration
1682 1995 Ps. - Ps. 3,843 2005
1683 1996 - 14,404 2006
1684 1998 299,772 - 2008
1685 2000 181,103 - 2010
1686 2001 184,943 2,259 2011
1687 2002 - 8,315 2012
1688 2003 - 28,703 2013
1689 Ps. 665,818 Ps. 57,524
1690
1691
1692 ii) In addition, at 2003 fiscal year-end, the Company, in its capacity as a “Holding Companyâ€, has individual tax loss
1693 carryforwards derived from the sale of stock (whose return is not considered interest as provided for in the Income Tax Law) in
1694 the amount of Ps. 352,997 (Ps. 387,959 at fiscal year-end constant Mexican pesos). That amount can be applied only in the
1695 Holding Company.
1696 Tax loss carryforwards of the subsidiaries expire individually in a ten year term, effective the date on which the tax losses are
1697 incurred. The effect of these restated tax loss carryforwards should be reversed in the tax consolidation in the year that the
1698 subsidiary loses its carryforward right.
1699 Prior to the authorization to consolidate for tax purposes, some consolidated subsidiaries of the Group incurred tax losses and
1700 had asset tax recoverable. As of December 31, 2003, the restated balance of those items amounted to Ps. 2,603 and Ps. 8,181
1701 at fiscal year-end Mexican pesos, respectively, with different expiration dates that did not go beyond fiscal 2007.
1702 d) Employee profit sharing
1703 The Federal Labor Law provides that the Group’s consolidated subsidiaries that have personnel are obligated to pay profit
1704 sharing to their employees. The amount of this profit sharing is calculated by applying a 10% annual rate to taxable income
1705 determined for each subsidiary, as provided for in the Income Tax Law. As of December 31, 2001, 2002 and 2003, no deferred
1706 effect was recorded in accordance with Mexican GAAP, as discussed in Note 9).
1707 e) Provisions for income tax
1708 In accordance with Mexican GAAP, the following items represent the principal differences between Mexican income tax
1709 computed at the statutory tax rate and the Group's provisions for income tax in each year:
1710
1711
1712
1713
171432
1715 Year ended December, 31
1716 2001 2002 2003
1717Statutory income tax rate 35% 35% 34%
1718Permanent differences:
1719 Comprehensive financing expense vs. annual
1720 inflationary adjustment 6 - 3
1721 Non-deductible items 6 (12) (10)
1722 Other (including inflation effects) (172) 74 40
1723
1724Temporary differences:
1725 Depreciation 1 13 4
1726 Book cost of sales vs. purchases, labor and overhead (91) 39 16
1727 Application of tax loss carryforwards (11) 25 45
1728 Tax loss of the year 226 (174) (132)
1729 0% 0% 0%
1730
1731In 2002 and 2003, the Group had generated consolidated taxable income. Consequently, income tax payable in the amount
1732of Ps. 125,660 (Ps. 130,657 at fiscal year-end constant Mexican pesos) and Ps. 129,262 was fully offset by prior year
1733consolidated tax loss carryforwards. In addition, in 2002, the Group obtained a refund of the asset tax from the Ministry of
1734Finance and Public Credit, in the amount of Ps. 40,596 (Ps. 42,210 at fiscal year-end constant Mexican pesos), as referred to in
1735paragraph b) above.
1736
173713. Segment information:
1738Although the Group distributes five product lines, it considers all of its operations, and reports the results of all of its operations
1739to management as a single business segment, as discussed in Note 1).
1740Revenue attributable to each of the five product lines for the years ended December 31, 2001, 2002 and 2003, were as follows:
1741 Millions of Mexican pesos
1742 2001 2002 2003
1743Pharmaceutical products Ps. 15,053 Ps. 16,173 Ps. 16,849
1744Health and beauty aids/other products 1,763 1,830 1,876
1745Entertainment products 800 732 638
1746Food/non-perishable products 166 160 148
1747Office/electronic products 63 36 20
1748 Total Ps. 17,845 Ps. 18,931 Ps. 19,531
1749
1750
175114. New Mexican accounting pronouncements:
1752(i) In December 2001, the MIPA issued the revised Bulletin C-9, “Liability, provisions, contingent assets and liabilities, and
1753commitments†(“Bulletin C-9â€). This Bulletin supersedes former Bulletin C-9, “Liabilities†and Bulletin C-12, “Contingencies
1754and Commitmentsâ€. Bulletin C-9 sets forth the precise rules for valuation, presentation and disclosure of liabilities and
1755provisions, as well as for valuation and disclosure of contingent assets and liabilities, and for disclosure of commitments.
1756Bulletin C-9 requires the use of present value techniques to carry out the valuation of certain provisions, when the effect is
1757material, the accounting for the settlement of liabilities derived from obligations issued, either the early settlement of liabilities
1758is realized or the obligations are substituted for a new issue, the accounting for the convertible debt in shares, and the disclosure
1759of committed amounts when it represents significant additions of fixed assets. Application of the provisions of Bulletin C-9 is
1760mandatory, effective January 1, 2003. The Group considers this provision did not have a material effect on its income statement
1761or financial position.
1762(ii) In January 2002, the MIPA issued revised Bulletin C-8, “Intangible Assets†(“Bulletin C-8â€). This Bulletin supersedes Bulletin
1763C-8, “Intangiblesâ€. The new Bulletin defines intangible assets as costs incurred and rights or privileges acquired with the
1764intention to generate a specific future economic benefit. Bulletin C-8 sets forth: (i) that development costs should be capitalized
1765as intangible assets considering that costs incurred should be properly identified, that there are expected future benefits, and
1766that the Group has control over such a benefits; (ii) that pre-operating costs should be expensed as a period cost. Pre-operating
1767cost previously recognized under former Bulletin C-8 will continue to be amortized over its useful life; (iii) that intangible assets
1768acquired in a business combination be accounted for at fair value at the date of the purchase and be separately reported, unless
1769their cost cannot be reasonably determined, in which case they should be reported as goodwill. Intangible assets with finite
1770useful life should be amortized over its useful life. Also if there is no market for these assets, they should be reduced to the
1771amount of goodwill or to zero. These assets including goodwill are also subject to periodic impairment evaluations.
1772Amortization of goodwill should be reported in operating expenses. Application of the provisions of Bulletin C-8 is mandatory,
1773effective January 1, 2003.
1774
1775
1776
1777 33
1778 As a result of the application of the provisions of Bulletin C-8, the Group completed a transitional fair value based impairment
1779 test on its goodwill as of January 1, 2003. Based on the results of this test, the fair value of the goodwill was equivalent to the
1780 recorded value at that date; therefore, no adjustment was made to the carrying value of the goodwill. Other provisions of the
1781 Bulletin C-8 had not effect in the Group’s financial position.
1782 (iii) In March 2003, the MIPA issued Bulletin C-15, “Impairment of long-lived assets and their related disposal†(“Bulletin C-
1783 15â€). This Bulletin sets forth new rules for the computation and recognition of impairment losses of such assets and their
1784 reversal. The Bulletin presents examples of indications of possible impairment in the value of long-lived assets or tangible assets
1785 in use, including goodwill. To calculate impairment loss requires determination of the recovery value, that is defined as the
1786 higher of the net selling price of a cash generating unit and its value in use. Value in use represents the net present value of
1787 future cash flows, using an appropriate discount rate. Losses on property and equipment to be disposed of are determined in
1788 a similar manner, except that fair market values are reduced for the cost to dispose. The provisions issued prior to this Bulletin
1789 use future net cash flows referred to purchasing power of the evaluation date; therefore, does not require discounting of such
1790 flows. Application of the provisions of Bulletin C-15 is mandatory, effective January 1, 2004, although early adoption is
1791 recommended. The Group is ongoing to quantifying the effect of the adoption of this new Bulletin. The Group does not believe
1792 this provision will have a material effect on its income statement or financial position.
1793 (iv) In April 2003, the MIPA issued Bulletin B-5, “Financial information by segment†(“Bulletin B-5â€). This Bulletin supersedes
1794 the provisions issued by the International Accounting Standard No. 14, “Financial information by segment†(“IAS No. 14â€),
1795 which was applied suppletory based on the provisions set forth by Bulletin A-8, “Suppletory application of International
1796 Accounting Standardsâ€, regarding the disclosure of financial information by segment. The provisions of this new Bulletin are
1797 substantially similar to those of the IAS No. 14; however, they incorporate a managerial approach as a basis to define segment
1798 information required to be disclosed, and used by management in its decision-making. Application of the provisions of Bulletin
1799 B-5 is mandatory, effective its issue date. These provisions do not change segment information previously presented by the
1800 Group.
1801 (v) In May 2003, the MIPA issued Bulletin C-12, “Financial instruments with liability and equity characteristics or characteristics
1802 of both†(“Bulletin C-12â€). This new Bulletin incorporates the parts referred to in other bulletins issued by the MIPA regarding
1803 the issuance of debt, capital or compound financial instruments. Bulletin C-12 sets forth the basic differences between liabilities
1804 and equity, as well as the rules to classify and value the opening recognition of liability and equity components of compound
1805 financial instruments. Subsequent recognition and valuation of liability and equity components of compound financial
1806 instruments is subject to the provisions set forth in the specific bulletins issued by the MIPA. Application of the provisions of
1807 Bulletin C-12 is mandatory, effective January 1, 2004, although early adoption is recommended. Although the Group currently
1808 has no financial instruments with these characteristics, this does not mean that the Group may not issue them in the future.
1809 (vi) In December 2003, the MIPA issued the new Bulletin D-3, “Labor obligationsâ€, which incorporates rules for valuation,
1810 presentation, and disclosure of remunerations at retirement for other post-retirement benefits. Those remunerations apply to
1811 benefits, which are expected to be granted to retired employees having completed a retirement age, or as of that age, in
1812 addition to the pension plan. At this year-end, the Group’s subsidiaries with employees had not created remunerations plans
1813 of this nature. This provision had no effect on the financial position of the Group.
1814 In addition, the new Bulletin includes the concept of “Remunerations at the end of the employer/employee relationshipâ€,
1815 granted to employees when they complete their employer/employee relationship prior to reaching retirement age.
1816 Remunerations granted to employees due to causes other than restructuring, are valued by using the “projected unit credit
1817 methodâ€. In the meantime, remunerations due to restructuring causes, should continue to follow the guidelines of Bulletin C-
1818 9, “Liability, provisions, contingent assets and liabilities, and commitmentsâ€, discussed in the foregoing paragraph i).
1819 (vii) On November 24, 2001, the “MIPA†issued the revised Bulletin C-9, “Liability, Provisions, Contingent Assets and Liabilities
1820 and Commitments†(“Bulletin C-9â€). This Bulletin supersedes former Bulletin C-9, “Liabilities†and Bulletin C-12,
1821 “Contingencies and Commitmentsâ€. New Bulletin C-9 sets forth a methodology for valuation, presentation and disclosure of
1822 liabilities and provisions, as well as for valuation and disclosure of contingent assets and liabilities, and for disclosure of
1823 commitments. This Bulletin requires that: (a) all contingent assets that have a practical true realization must be accounted for
1824 and disclosed in the financial statements; (b) contingent assets that have a probable realization cannot be accounted for in the
1825 financial statements, but must be disclosed; and (c) contingent assets that do not have a probable realization and cannot be
1826 accounted for in the financial statements are not required to be disclosed.
1827 Bulletin C-9 requires disclosure of committed amounts when it represents significant additions of fixed assets. In addition, New
1828 Bulletin C-9 establishes new standards for the use of present value techniques to measure liabilities, and the accounting for the
1829 early settlement of liabilities and convertible debt. Application of the provisions of Bulletin C-9 is mandatory, effective January 1,
1830 2003, although early adoption is recommended. The Group does not believe this provision will have a material effect on its income
1831 statement or financial position.
1832 (ii) On December 6, 2001, MIPA issued revised Bulletin C-8, “Intangible Assets†(“Bulletin C-8â€). This New Bulletin supersedes
1833 Bulletin C-8, “Intangiblesâ€. New Bulletin defines intangible assets as costs incurred and rights or privileges acquired with
1834
1835
1836
183734
1838 intention to generate a specific future economic benefit. Bulletin C-8 sets forth: (i) that development costs should be capitalized
1839as intangible assets considering that costs incurred should be properly identified, that there are expected future benefits, and
1840that the company has control over such a benefits; (ii) that pre-operating costs should be expensed as a period cost.
1841Preoperating cost previously recognized under former Bulletin C-8 will continue t o be amortized, subject to periodic
1842impairment evaluations; (iii) that intangible assets acquired in a business combination be accounted for at fair value at the date
1843of the purchase and be separately reported, unless their cost cannot be reasonably determined, in which case they should be
1844reported as goodwill. Intangible assets with finite useful life should be amortized over its useful life. Also if there is no market
1845for these assets, they should be reduced to the amount of goodwill or to zero. These assets are also subject to periodic
1846impairment evaluations. Amortization of goodwill should be reported in operating expenses. Application of the provisions of
1847Bulletin C-8 is mandatory, effective January 1, 2003, although early adoption is recommended. The Group does not believe this
1848provision will have a material effect on its income statement or financial position.
1849iii) In April 2003, the IMCP issued Bulletin B-5 “Financial information by segments†(“Bulletin B-5â€), which supersedes the
1850provisions of International Accounting Standard No. 14. “Financial information by segments†(“IAS No. 14â€), which was
1851applied suppletorily based on the provisions of Bulletin A-8 “Suppletory application of International Accounting Standardsâ€,
1852with respect to the disclosure of financial information by segments. The provisions of Bulletin B-5 are substantially similar to
1853those of IAS No. 14. however, the new Bulletin incorporates a management approach as a basis to define segment information
1854required to be disclosed, and used by management in its decision-making. Application of this Bulletin is mandatory, effective
1855its issue date. These provisions do not change segment information, previously presented by the Group.
1856iv) In May 2003, the IMCP issued Bulletin C-12 “Financial instruments with liability and capital characteristics, or characteristics of
1857both†(“Bulletin C-12â€). This new Bulletin incorporates the parts referred to in other bulletin issued by the IMCP with respect to
1858the issue of debt, capital, or combined financial instruments. Bulletin C-12 sets forth the basic differences between liabilities and
1859capital, as well as the rules to classify and value the opening recognition of liability and capital components of combined financial
1860instruments. Subsequent recognition and valuation of liability and capital components of combined financial instruments is subject
1861to the provisions set forth in the specific bulletins issued by the IMCP. The provisions of the Bulletin are mandatory, effective January
18621, 2004. Although the Group currently has no financial instruments with these characteristics, this does not mean that the Group
1863may not issue them in the future.
1864
186515. Differences between Mexican and U.S. GAAP:
1866The Group’s consolidated financial statements are prepared based on Mexican GAAP, which differ in certain material respects
1867from U.S. GAAP. A partial reconciliation of the reported net income and stockholders’ equity to U.S. GAAP is presented in Note
186816) below. This partial reconciliation to U.S. GAAP does not include the reversal of the restatement of the financial statements
1869to recognize the impact of inflation, as required under Mexican GAAP, Bulletin B-10, as amended. The application of Bulletin
1870B-10 represents a comprehensive measure of the impact of price-level changes in the inflationary Mexican economy and, as
1871such, is considered a more meaningful presentation than historical cost-based financial reporting for both Mexican and U.S.
1872accounting purposes.
1873Other than inflation accounting, the principal differences between Mexican GAAP and U.S. GAAP that affect the consolidated
1874financial statements are described below along with an explanation, where appropriate, of the method used to determine the
1875adjustment between Mexican and U.S. GAAP.
1876a) Statements of Cash Flows
1877Under Mexican GAAP, the Group prepares the consolidated statements of changes in financial position in accordance with
1878Bulletin B-12, “Statement of Changes in Financial Positionâ€. Bulletin B-12 specifies the appropriate presentation of this
1879statement when the financial statements have been restated to constant Mexican pesos in accordance with the Third
1880Amendment to Bulletin B-10. Bulletin B-12 identifies the generation and application of resources representing differences
1881between beginning and ending balance sheets in constant Mexican pesos, excluding the effect of the heading “Deficit on
1882restatementâ€. The Bulletin also requires treating monetary gains and losses and unrealized gains and losses on foreign currency
1883transactions as cash items in the determination of net cash provided by operating activities. Consequently, the changes included
1884in this financial statement constitute cash flow activity stated in constant Mexican pesos. Under Mexican GAAP, the changes in
1885current and long-term debt related to restatement to constant Mexican pesos are presented in the consolidated statements of
1886changes in financial position as a resource used in financing activities, and the gain or loss on monetary position is presented
1887as a component of operating activities.
1888Under Statement of Financial Accounting Standard No. 95, “Statement of Cash Flows†(“SFAS 95â€), a statement of cash flows
1889is required, which presents only cash movement and excludes non-cash items. SFAS 95 does not provide guidance on inflation-
1890adjusted statements of changes in financial position. If the gain on monetary position were treated as a component of financing
1891activities, resources (used in) provided by operating activities would be Ps. (245,965), Ps. 211,311, and Ps.185,785 and net cash
1892provided by (used in) financing activities would be Ps. 83,081, Ps. (207,583) and Ps. (21,070) in 2001, 2002 and 2003,
1893respectively
1894
1895
1896
1897
1898 35
1899 b) Deferred income tax and employee profit sharing
1900 i) The Group adopted SFAS No. 109, “Accounting for income taxes†(“SFAS 109â€) for U.S. GAAP reconciliation purposes. SFAS
1901 109 determines the deferred income tax effect by using the “comprehensive asset and liability methodâ€. This method is virtually
1902 identical to Mexican GAAP. SFAS 109 requires reducing deferred income tax asset by a valuation allowance if it is more likely
1903 than not that some portion or all of the deferred income tax asset will not be realized. As described in Note 12b), Mexican Tax
1904 Law requires paying a 1.8% annual tax rate on the Group’s net assets which may be used to offset future income tax
1905 obligations. Under SFAS 109, such an amounts are treated as a deferred income tax benefit and reduced by a valuation
1906 allowance, if required. These provisions are virtually identical to Mexican GAAP.
1907 For U.S. GAAP purposes, all of the changes in the required deferred income tax effect during the year are allocated entirely in
1908 the income statement, except for the deferred income tax effect derived from temporary differences attributed to changes in
1909 other stockholders’ equity accounts. In that event, such an effect is applied directly to the specific stockholders’ equity account
1910 that generate such a changes.This provision is virtually identical to Mexican GAAP.
1911 In addition, under U.S. GAAP the deferred income tax effect should be classified as current and non-current, based on the
1912 classification of the asset and liability items that give rise to it. As of December 31, 2002 and 2003, the deferred income tax
1913 effect under Mexican and U.S. GAAP was classified as follows:
1914 CONSTANT MEXICAN PESOS
1915 MEXICAN GAAP U.S. GAAP
1916 2002 2003 2002 2003
1917 Current Ps. - Ps. - Ps. 652,488 Ps. 855,748
1918 Noncurrent 492,771 703,444 (159,717) (152,304)
1919 Ps. 492,771 Ps. 703,444 Ps. 492,771 Ps 703,444
1920
1921 ii) The Group’s consolidated subsidiaries that have personnel are obligated to pay profit sharing to their employees, which is
1922 calculated by applying a 10% annual rate to taxable income determined for each subsidiary in accordance with the Income Tax
1923 Law, as explained in Note 12d) above. By virtue thereof, employee profit sharing is subject to the future consequences of
1924 temporary differences in the same manner as income tax.
1925 Under Mexican GAAP no deferred employee profit sharing was recorded in 2001, 2002, and 2003 insofar as the Group’s
1926 consolidated subsidiaries did not have temporary differences that had generated future liabilities or benefits, as explained in Note
1927 9). For U.S. GAAP purposes, a deferred profit sharing expense and liability have been calculated. Therefore, in 2001, and 2002,
1928 the deferred effect not recorded under Mexican GAAP amounted to Ps. 24,714, and Ps. (48,843), respectively. For fiscal 2003, no
1929 deferred employee profit sharing was generated for U.S. GAAP purposes. Accordingly, a reconciling item for the deferred effect
1930 not recorded under Mexican GAAP is included in the reconciliation of Mexican to U.S. GAAP. In addition, employee profit sharing
1931 is classified as an operating expense for U.S. GAAP purposes. The components of the U.S. GAAP employee profit sharing liability
1932 as of December 31, 2001, and 2002 were as follows:
1933 DEFERRED EMPLOYEE PROFIT SHARING
1934 CONSTANT MEXICAN PESOS
1935 2001 2002 2003
1936 Current -
1937 Inventories Ps. 50,893 Ps. 59,516 Ps. 283,294
1938 Non-deductible reserves (4,625) (5,314) (95,795)
1939 46,268 54,202 187,499
1940 Non-current-
1941 Property and equipment 3,722 2,850 373
1942 Prepaid expenses and
1943 Prepaid pension cost 1,685 1,565 (44)
1944 Other (43,395) - (187,828)
1945 (37,988) 4,415 (187,499)
1946 Ps. 8,280 Ps. 58,617 Ps. -
1947
1948 iii) Goodwill
1949 Goodwill is restated based on NCPI factor as discussed in Note 3c). Under Mexican GAAP and U.S. GAAP, prior to January 1,
1950 2003, and January 1, 2002, respectively, goodwill was amortized on a straight-line basis over 20 years.
1951 In June 2001, the Financial Accounting Standards Board approved the issuance of SFAS 142, “Goodwill and Other Intangible
1952 Assetsâ€, which established new accounting and reporting requirements for goodwill and other intangible assets. The new
1953 standard requires that all intangible assets acquired that are obtained through contractual or legal right, or are capable of being
1954 separately sold, transferred, licensed, rented or exchanged must be recognized as an asset apart from goodwill. As a result of
1955 the statement, under US GAAP, goodwill and intangibles with indefinite lives are no longer amortized, but are subject to an
1956 annual assessment for impairment by applying a fair value based test. Effective 2003, this provision is virtually identical to
1957 Mexican GAAP.
1958
1959
196036
1961 16. Reconciliation of Mexican to U.S. GAAP:
1962Net income and stockholder’s equity adjusted to take into account the significant differences between Mexican GAAP and U.S.
1963GAAP, except for the comprehensive effect of price-level changes as required by Mexican GAAP, were as follows:
1964 Thousands of Mexican pesos (Ps.) and thousands of U.S. dollars ($), except per share
1965Net income- Year Convenience
1966 translation
1967 2001 2002 2003 2003
1968Net income under Mexican GAAP Ps. 445,710 Ps. 565,559 Ps. 575,947 $ 51,241
1969
1970U.S. GAAP adjustments- Deferred
1971 employee profit sharing 25,697 (50,785) 56,375 5,016
1972Amortization of goodwill - 22,946 - -
1973Impact of inflation accoun- ting on
1974 U.S. GAAP ad- justments 1,493 448 2,242 199
1975 27,190 (27,391) 58,617 5,215
1976
1977Net income under U.S. GAAP Ps. 472,900 Ps. 538,168 Ps. 634,564 $ 56,456
1978
1979Weighted average common shares
1980 outstanding (thousands) 265,419 265,419 265,419
1981
1982Basic and diluted earnings per share
1983 under U.S. GAAP Ps 1.78 Ps 2.03 Ps. 2.39
1984
1985Because Mexican GAAP requires using a comprehensive method for recognizing the impact of inflation and the financial
1986statements are prepared on this basis, the applicable impact of inflation on U.S. adjustments was calculated and included in
1987the heading “impact of inflation accounting on U.S. GAAP adjustmentsâ€.
1988
1989Stockholders’ equity- Convenience
1990 translation
1991 2001 2002 2003 2003
1992Stockholders’ equity under
1993 Mexican GAAP Ps 2,883,781 Ps 3,099,512 Ps. 3,340,949 $ 297,237
1994U.S. GAAP adjustments-
1995Reversal of the opening impact of
1996 deferred items recorded under
1997 Mexican GAAP 34,677 - - -
1998Deferred employee profit Sharing (8,280) (58,617) -
1999Amortization of goodwill - 22,946 22,946 2,041
2000 26,397 (35,671) 22,946 2,041
2001Stockholders’ equity under U.S. GAAP Ps 2,910,178 Ps 3,063,841 Ps. 3,363,895 $ 299,278
2002
2003
2004Changes in stockholders’ equity
2005 under U.S. GAAP
2006 Convenience
2007 translation
2008 2001 2002 2003 2003
2009Stockholders’ equity under
2010U.S. GAAP as of beginning of the year Ps 2,653,567 Ps 2,910,178 Ps 3,063,841 $ 272,583
2011Comprehensive income under
2012 U.S. GAAP 256,611 188,340 402,294 35,791
2013Reversal of the deferred income tax - (34,677)
2014Dividends paid - - (102,240) (9,096)
2015Approximate majority of stockholders’
2016 equity under U.S. GAAP as of the
2017 end of the year Ps 2,910,178 Ps 3,063,841 Ps 3,363,895 $ 299,278
2018
2019Comprehensive income under
2020U.S. GAAP Convenience
2021 translation
2022 2001 2002 2003 2003
2023Net income under U.S. GAAP Ps. 472,900 Ps. 538,168 Ps. 634,564 $56,456
2024Deficit on holding non-monetary assets (216,289) (349,828) (232,270) (20,665)
2025Comprehensive income
2026 under U.S. GAAP Ps. 256,611 Ps. 188,340 Ps. 402,294 $35,791
2027
2028
2029
2030 37
2031 17. Supplementary U.S. GAAP disclosures:
2032 a) Financial instruments with off-balance-sheet risk
2033 Under the provisions of SFAS No. 105, “Disclosure of information about financial instruments with off-balance-sheet risk and
2034 financial instruments with concentrations of credit riskâ€, the Group’s accounts receivable, which represent receivables from
2035 numerous customers including a large retailers, and the Group’s cash balances do not represent any significant concentration
2036 of risk to the Group.
2037 b) Impairment of long-lived assets
2038 Under U.S. GAAP, an impairment occurs when the total amount of the estimated future cash flow that may be reasonably
2039 expected to be obtained through the use of the asset during its remaining economic useful live, reduced by the operating costs
2040 and expenses associated with such cash flows, is less than the net book value of the asset. The impairment of a long-lived asset
2041 that must be charged to the income statement is that amount by which the net book value exceeds its recovery value. If the
2042 adjustment is in order, it is determined by the difference between “fair value†and net book value. SFAS No. 121, “Accounting
2043 for the impairment of long-lived assets and for long lived assets to be disposed ofâ€, defines “fair value†as the amount at which
2044 the asset could be bought or sold in a current transaction between willing parties. The write-down for impairment is not
2045 allowed to be reversed. In addition, U.S. GAAP requires valuing fixed assets and some intangibles held for sale at the lower
2046 between net book value or their realization value. The Group does not believe existing changes in circumstances indicate that
2047 the net book value of an asset may not be fully recoverable. In addition, the Group does not have any intangible and/or fixed
2048 assets held for sale.
2049 In August 2001, SFAS 144, “Accounting for the impairment or disposal of long-lived assets†was issued. This SFAS supersedes
2050 SFAS No. 121, and provide a single accounting model for long-lived assets to be disposed of. Although many of the
2051 fundamental recognition and measurement provisions of SFAS No. 121 are retained, the new rules significantly change the
2052 criteria that would have to be met to classify an asset as held-for-sale. The new rules also supersede the provisions of APB
2053 Opinion No. 30, “Reporting the results of operations-reporting, the effects of disposal of a segment of a business, and
2054 extraordinary, unusual and infrequently occurring events and transactionsâ€, with regard to reporting the effects of a disposal
2055 of a segment of business. Those rules further require showing expected future operating losses from discontinued operations
2056 in discontinued operations in the period in which the losses are incurred (rather than as of the measurement date presently
2057 required by APB No. 30). SFAS 144 was adopted by the Group on January 1, 2002 and did not have a significant impact on
2058 the results of operations or financial position.
2059 c) Cuantitative and qualitative disclosures on market risk
2060 The Group is subject to market risks due to interest rate fluctuations that prevail in the domestic economy. Those fluctuations
2061 further impact the short and long-term debt generated by loans obtained from Mexican banks for financing its operations. The
2062 Group has managed its interest rate risks.
2063 d) Fair value of financial instruments
2064 The carrying amounts for cash and cash equivalents, accounts receivable, accounts payable, receivables due from and payable
2065 to related parties, and accrued liabilities approximate their fair value due to their short-term nature.
2066 Long-term debt bears interest at value rates and, consequently, carrying value approximates the fair value.
2067 e) Derivative instruments and hedging activities
2068 The provisions of SFAS No. 133, “Accounting for derivative instruments and hedging activitiesâ€, as amended, (“SFAS 133â€),
2069 requires recording all derivative instruments as either assets or liabilities on the balance sheet at their fair value. Changes in the
2070 fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether
2071 or not a derivative is designated as part of a hedge transaction, and the type of hedge transaction, if applicable. SFAS 133 as
2072 amended became effective on January 1, 2001. Although, the Group does not currently have derivative instruments or engage
2073 in any hedging activities, there can be no assurance that the Group will not do so in the future. Also, Bulletin C-2, “Financial
2074 instruments†issued by MIPA, which is similar to SFAS No. 133, became effective in 2001.
2075 f) Comprehensive income
2076 SFAS No. 130, “Reporting comprehensive incomeâ€, requires reporting all items required to be recognized under accounting
2077 standards as components of comprehensive income in a financial statement displayed with the same prominence as other
2078 financial statements. The adoption of SFAS No. 130 does not impact net income or shareholders’ equity. The Group presents
2079 Comprehensive income under U.S.GAAP for 2001, 2002, and 2003 in Note 16) hereinabove.
2080 g) Segment Information
2081 The Group adopted SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Informationâ€. SFAS 131
2082 establishes standards for the way that public enterprises must determine and report information or operating segments in its
2083 annual and interim reports. Although the Group distributes five product lines, it considers all of their operations, and reports
2084 the results of all of its operations to management as a single business segment. Accordingly, the Group does not maintain
2085 separate operating results for each of its five product lines. Revenue attributable to each of the five product lines for the years
2086 ended December 31, 2001, 2002 and 2003, is mentioned in Note 13) hereinabove.
2087
2088
2089
209038
2091 h) Business combinations
2092In June 2001, SFAS 141, “Business combination†superseded SFAS 38, “Accounting for pre-acquisition contingencies of
2093purchased enterprises†and the APB Opinion 16, “Business combinationâ€. SFAS 141 prohibits using of the “pooling of interest
2094method†and requires using the “purchase method†of accounting for business combinations. SFAS 141 is effective July 1,
20952001. Although the Group has not currently carried out business combinations, there can be no assurance that the Group will
2096not do so in the future.
2097i) Goodwill and other intangible assets
2098In June 2001, SFAS 142, “Goodwill and other intangible assets†superseded APB Opinion 17, “Intangible assetsâ€. Under the
2099new rules, goodwill and intangible assets deemed to have indefinite lives are not longer be amortized over their remaining
2100economic useful lives. Instead they will be subject to annual impairment tests in accordance with SFAS 142. Other intangible
2101assets will continue to be amortized over their remaining economic useful lives.
2102The Company applied the provisions of SFAS 142 beginning on January 1, 2002. The Company has completed a transitional
2103fair value based impairment test on its goodwill as of January 1, 2002. Based on the results of this test, the fair value of the
2104goodwill is equivalent to or greater than the recorded value as of January 1, 2002, therefore, no adjustment has been made
2105to the carrying value of the goodwill in the Company’s financial statements.
2106As of December 31, 2002, the Company has total consolidated goodwill, net of accumulated amortization of Ps 234,117.
2107The following table adjusts earnings and earnings per share for the adoption of SFAS 142, in fiscal 2001:
2108 Year Ended
2109 December 31,
2110 2001
2111Reported net earnings (US GAAP) Ps. 472,900
2112Add:
2113 Goodwill amortization, net of tax 27,849
2114 Adjusted net earnings Ps. 500,749
2115 Basic and diluted earnings per share:
2116 Reported net earnings Ps. 1.89
2117Add:
2118 Goodwill amortization, net of tax Ps. 0.10
2119 Adjusted net earnings Ps. 1.99
2120
2121
2122i) Recently Issued Accounting Standards
2123In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
2124143, “Accounting for Asset Retirement Obligationsâ€. This Statement addresses financial accounting and reporting for
2125obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143
2126requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a
2127legal obligation associated with the retirement of a tangible long-lived asset. SFAS 143 also requires the enterprise to record
2128the contra to the initial obligation as an increase to the carrying amount of the related long-lived asset (i.e., the associated asset
2129retirement costs) and to depreciate that cost over the remaining useful life of the asset. The liability is adjusted at the end of
2130each period to reflect the passage of time (i.e., accretion expense) and changes in the estimated future cash flows underlying
2131the initial fair value measurement. Enterprises are required to adopt SFAS 143 for fiscal years beginning after June 15, 2002.
2132Management does not anticipate a significant impact on its financial position or its results of operations, or cash flows.
2133In April 2002, the FASB issued SFAS 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
2134No. 13, and Technical Correctionsâ€. SFAS 145 eliminates extraordinary accounting treatment for reporting gain or loss on debt
2135extinguishment, and amends other existing authoritative pronouncements to make various technical corrections, clarify
2136meanings, or describe their applicability under changed conditions. The provisions of SFAS 145 related to the rescission of FASB
2137Statement No. 4 are applicable in fiscal years beginning after May 15, 2002, the provisions related to FASB Statement No. 13
2138are effective for transactions occurring after May 15, 2002, and all other provisions are effective for financial statements issued
2139on or after May 15, 2002; however, early application is encouraged. Debt extinguishments reported as extraordinary items prior
2140to scheduled or early adoption of SFAS 145 would be reclassified in most cases following adoption. Management does not
2141expect the adoption of SFAS 145 to have a material effect on the Company’s financial position, results of operations, or cash
2142flows.
2143In June 2002, the FASB issued Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities. (“SFAS
2144146â€). SFAS 146 applies to costs associated with an exit activity (including restructuring) or with adisposal of long-lived assets.
2145Those activities can include eliminating or reducing product lines, terminating employees and contracts and relocating plant
2146facilities or personnel. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with
2147earlier adoption encouraged. The Company does not believe the adoption of this standard will have a material impact on its
2148financial position, results of operations, or cash flows.
2149
2150
2151
2152 39
2153 In December 2002, the FASB issued Statement No. 148, “Accounting for Stock-Based Compensation-Transition and
2154 Disclosureâ€, (“SFAS 148â€) an amendment of FASB Statement No. 123. SFAS 148 amends FASB Statement No. 123,
2155 “Accounting for Stock-Based Compensationâ€, to provide alternative methods of transition for an entity that voluntarily changes
2156 to the fair value based method of accounting for stock-based employee compensation and to require prominent disclosures
2157 about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee
2158 compensation. SFAS 148 also mends APB Opinion No. 28, “Interim Financial Reporting,†to require disclosures about those
2159 effects in interim financial information. The Company currently accounts for its stock-based compensation awards to employees
2160 and directors under the accounting prescribed by Accounting Principles Board Opinion No. 25 and provides the disclosures
2161 required by SFAS No. 123. The Company does not believe the adoption of this standard will have a material impact on its
2162 financial position, results of operations, or cash flows.
2163 In November 2002, the FASB issued Interpretation 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for
2164 Guarantees, Including Indirect Guarantees of Indebtedness of Othersâ€. For a guarantee subject to FASB Interpretation 45, a
2165 guarantor is required to: measure and recognize the fair value of the guarantee at inception (for many guarantees, fair value
2166 will be determined using a present value method); and provide new disclosures regarding the nature of any guarantees, the
2167 maximum potential amount of future guarantee payments, the current carrying amount of the guarantee liability, and the
2168 nature of any recourse provisions or assets held as collateral that could be liquidated and allow the guarantor to recover all or
2169 a portion of its payments in the event guarantee payments are required.
2170 The disclosure requirements of this Interpretation are effective for financial statements for fiscal years ending after December
2171 15, 2002 and did not have a material effect on the Company’s financial statements. The initial recognition and measurement
2172 provisions are effective prospectively for guarantees issued or modified on or after January 1, 2003, which should not have a
2173 material effect on the Company’s financial statements.
2174 On January 31, 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities†(“FIN 46â€). FIN
2175 46 clarifies existing accounting for whether variable interest entities should be consolidated in financial statements based upon
2176 the investees ability to finance its activities without additional financial support and whether investors possess characteristics of
2177 a controlling financial interest. FIN 46 applies to years or interim periods beginning after June 15, 2003 with certain disclosure
2178 provisions required for financial statements issued after January 31, 2003. Management is currently evaluating the applicability
2179 of FIN 46 to its leases with related parties discussed in Note 7), but does not anticipate a material impact on financial position
2180 or results of operations.
2181 On April 30, 2003 the FASB issued Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging
2182 Activities.†The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments
2183 embedded in other contracts, and for hedging activities under Statement 133. The amendments set forth in Statement 149
2184 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular,
2185 this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a
2186 derivative as discussed in Statement 133. In addition, it clarifies when a derivative contains a financing component that warrants
2187 special reporting in the statement of cash flows. This Statement is effective for contracts entered into or modified after June
2188 30, 2003.
2189 In May 15, 2003 the FASB issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of
2190 both Liabilities and Equityâ€. The Statement improves the accounting for certain financial instruments that, under previous
2191 guidance, issuers could account for as equity. The new Statement requires that those instruments be classified as liabilities in
2192 statements of financial position. In addition to its requirements for the classification and measurement of financial instruments
2193 in its scope, Statement 150 also requires disclosures about alternative ways of settling the instruments and the capital structure
2194 of entities, all of whose shares are mandatorily redeemable. Most of the guidance in Statement 150 is effective for all financial
2195 instruments entered into or modified after May 31, 2003. Management does not anticipate a material impact on the Company.
2196
2197
2198
2199
220040
2201 Investor Relations
2202
2203 Corporate
2204
2205 Jorge Sánchez L.
2206 Tel. (52) (55) 5284 6672
2207 jsanchez@casasaba.com
2208
2209 IR Communications
2210
2211 Ernestina Nevarez
2212 Tel. (52) (55) 5644 1247
2213 enevarez@irandpr.com
2214
2215
2216
2217
2218 casasaba.com
2219
2220 Standard & Poor’s
2221 Long term mxA+/Positive
2222 Short term mxA-1
2223
2224
2225
2226
2227Legal Protection Notice:
2228This annual report contains information about the future relating to Grupo Casa Saba S.A. de C.V. and its subsidiaries based on assumptions by
2229Management. Such information, as well as statements about future events and expectations are subject to risks and uncertainties, as well as factors that
2230could cause the results, performance, or achievements of the Group to be completely different at any time. Such factors include changes in general eco-
2231nomic conditions, government and business policies on the national level, as well as changes in interest and inflation rates, volatility of exchange rates,
2232prices of products, the energy situation, and others. Because of these risks and factors, the real results could vary materially with respect to the esti-
2233mates described in this document, because of which Grupo Casa Saba accepts no responsibility for the variations nor for information deriving from offi-
2234cial sources.
2235 Grupo Casa Saba
2236Paseo de la Reforma #215
2237 Lomas de Chapultepec
2238 México, D.F. 11000
2239 Tel. (52) (55) 5284 6600
2240