UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _________________
Commission file number 1-14946
CEMEX, S.A. de C.V.
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(Exact name of the registrant as specified in its charter)
CEMEX MEXICO, S.A. de C.V.
EMPRESAS TOLTECA DE MEXICO, S.A. de C.V.
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(Exact names of co-registrants and guarantors as specified
in their respective charters)
CEMEX CORPORATION
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(Translation of registrant's name into English)
CEMEX MEXICO CORPORATION
EMPRESAS TOLTECA DE MEXICO CORPORATION
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(Translation of co-registrants' and guarantors' names into English)
United Mexican States
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(Jurisdiction of incorporation or organization)
Av. Ricardo Margain Zozaya #325, Colonia del Valle Campestre,
Garza Garcia, Nuevo Leon, Mexico 66265
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Name of each exchange on
Title of each class which registered
American Depositary Shares ("ADSs"),
each ADS representing five
Ordinary Participation Certificates
(Certificados de Participacion
Ordinarios) ("CPOs"), each CPO
representing two Series A shares
and one Series B share New York Stock Exchange
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American Depositary Warrants ("ADWs"),
each ADW representing five
Appreciation Warrants (Titulos Opcionales) New York Stock Exchange
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Securities registered or to be registered pursuant to Section 12(g) of the Act.
Not applicable
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
9.625% Notes due 2009 guaranteed by CEMEX Mexico, S.A. de C.V. and Empresas
Tolteca de Mexico, S.A. de C.V.
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(Title of Class)
Guarantees of the 9.625% Notes due 2009 by CEMEX Mexico, S.A. de C.V.
and Empresas Tolteca de Mexico, S.A. de C.V.
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by
the annual report.
1,711,320,746 CPOs
3,547,614,432 Series A shares (including Series A shares underlying CPOs)
1,773,807,216 Series B shares (including Series B shares underlying CPOs)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes |X| No____
Indicate by check mark which financial statement item the registrant
has elected to follow.
Item 17 ___ Item 18 |X|
TABLE OF CONTENTS
Page
----
PART I
Item 1 - Identity of Directors, Senior Management and Advisors..............2
Item 2 - Offer Statistics and Expected Timetable............................2
Item 3 - Key Information....................................................2
Risk Factors...............................................................2
Cautionary Statement Regarding Forward Looking Statements..................7
Mexican Peso Exchange Rates................................................8
Selected Consolidated Financial Information................................9
Item 4 - Information on the Company........................................13
Business Overview.........................................................13
Our Production Process....................................................16
User Base.................................................................16
Our Business Strategy.....................................................16
Our Corporate Structure...................................................19
North America.............................................................20
Europe, Asia and Africa...................................................27
South America, Central America and the Caribbean..........................36
Our Trading Operations....................................................46
Regulatory Matters and Legal Proceedings..................................47
Item 5 - Operating and Financial Review and Prospects......................54
Critical Accounting Policies..............................................55
Results of Operations.....................................................57
Liquidity and Capital Resources...........................................73
Research and Development, Patents and Licenses, etc.......................78
Trend Information.........................................................79
Summary of Material Contractual Obligations and Commercial Commitments....79
Off-Balance Sheet Arrangements............................................81
Qualitative and Quantitative Market Disclosure............................81
Investments, Acquisitions and Divestitures................................86
The Euro Conversion.......................................................87
U.S. GAAP Reconciliation..................................................88
Newly Issued Accounting Pronouncements Under U.S. GAAP....................88
Item 6 - Directors, Senior Management and Employees........................90
Senior Management and Directors...........................................90
Board Practices...........................................................95
Compensation of Our Directors and Members of Our Senior Management........95
Employees.................................................................99
Share Ownership..........................................................100
Item 7 - Major Shareholders and Related Party Transactions................101
Major Shareholders.......................................................101
Related Party Transactions...............................................102
i
Item 8 - Financial Information............................................103
Consolidated Financial Statements and Other Financial Information........103
Legal Proceedings........................................................103
CEMEX Dividends..........................................................103
Significant Changes......................................................104
Item 9 - Offer and Listing................................................105
Market Price Information.................................................105
Item 10 - Additional Information..........................................106
Articles of Association and By-laws......................................106
Material Contracts.......................................................113
Exchange Controls........................................................114
Taxation.................................................................114
Documents on Display.....................................................119
Item 11 - Quantitative and Qualitative Disclosures About Market Risk......120
Item 12 - Description of Securities Other than Equity Securities..........120
PART II
Item 13 - Defaults, Dividend Arrearages and Delinquencies.................121
Item 14 - Material Modifications to the Rights of Security Holders
and Use of Proceeds.............................................121
Item 15 - Controls and Procedures.........................................121
Item 16A - Audit Committee Financial Expert...............................121
Item 16B - Code of Ethics.................................................121
Item 16C - Principal Accountant Fees and Services.........................122
PART III
Item 17 - Financial Statements............................................123
Item 18 - Financial Statements............................................123
Item 19 - Exhibits........................................................123
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES ..................F-1
SCHEDULE I - Parent Company Only Financial Statements......................S-2
SCHEDULE II - Valuation and Qualifying Accounts............................S-11
ii
INTRODUCTION
CEMEX, S.A. de C.V. is incorporated as a stock corporation with
variable capital organized under the laws of the United Mexican States. As
used in this annual report and except as the context otherwise may require,
"CEMEX" refers to CEMEX, S.A. de C.V., its consolidated subsidiaries and,
except for accounting purposes, its non-consolidated affiliates. For
accounting purposes, "CEMEX" refers solely to CEMEX, S.A. de C.V. and its
consolidated subsidiaries. See note 1 to our consolidated financial statements
included elsewhere in this annual report.
PRESENTATION OF FINANCIAL INFORMATION
Our consolidated financial statements included elsewhere in this
annual report have been prepared in accordance with Generally Accepted
Accounting Principles in Mexico ("Mexican GAAP"), which differ in significant
respects from U.S. GAAP. We are required, pursuant to Mexican GAAP, to present
our financial statements in constant Pesos representing the same purchasing
power for each period presented. Accordingly, all financial data presented
below and, unless otherwise indicated, elsewhere in this annual report are
stated in constant Pesos as of December 31, 2003. See note 23 to our
consolidated financial statements included elsewhere in this annual report for
a description of the principal differences between Mexican GAAP and U.S. GAAP
as they relate to us. Non-Peso amounts included in those statements are first
translated into Dollar amounts, in each case at a commercially available or an
official government exchange rate for the relevant period or date, as
applicable. Those Dollar amounts are then translated into Peso amounts at the
CEMEX accounting rate, described under Item 3 -- "Key Information -- Mexican
Peso Exchange Rates" as of the relevant period or date, as applicable.
References in this annual report to "U.S.$" and "Dollars" are to U.S.
Dollars, references to "(euro)" are to Euros, references to "(Y)" are to
Japanese Yen and, unless otherwise indicated, references to "Ps," "Mexican
Pesos" and "Pesos" are to constant Mexican Pesos as of December 31, 2003. The
Dollar amounts provided in the financial statements included in this annual
report and, unless otherwise indicated, elsewhere in this annual report are
translations of constant Peso amounts, at an exchange rate of Ps11.24 to
U.S.$1.00, the CEMEX accounting rate as of December 31, 2003. However, in the
case of transactions conducted in Dollars, we have presented the Dollar amount
of the transaction and the corresponding Peso amount that is presented in our
consolidated financial statements. These translations have been prepared
solely for the convenience of the reader and should not be construed as
representations that the Peso amounts actually represent those Dollar amounts
or could be converted into Dollars at the rate indicated. See Item 3 -- "Key
Information -- Selected Consolidated Financial Information."
The noon buying rate for Pesos on December 31, 2003 was Ps11.242 to
U.S.$1.00 and on April 30, 2004 was Ps11.402 to U.S.$1.00.
CO-REGISTRANTS
Our co-registrants are wholly-owned subsidiaries that have provided a
corporate guarantee guaranteeing payment of our 9.625% Notes due 2009. These
subsidiaries, which we refer to as our guarantors, are CEMEX Mexico, S.A. de
C.V., or CEMEX Mexico, and Empresas Tolteca de Mexico, S.A. de C.V., or
Empresas Tolteca de Mexico. The guarantors, together with their subsidiaries,
account for substantially all of our revenues and operating income. See Item 4
-- "Information on the Company -- North America -- Our Mexican Operations."
Pursuant to Rule 12h-5 under the Exchange Act, no separate financial
statements or other disclosures concerning the guarantors other than the
narrative disclosures and financial information set forth in note 23(x) to our
consolidated financial statements have been presented in this annual report.
PART I
Item 1 - Identity of Directors, Senior Management and Advisors
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Not applicable.
Item 2 - Offer Statistics and Expected Timetable
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Not applicable.
Item 3 - Key Information
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Risk Factors
Many factors could have an effect on our financial condition, cash
flows and results of operations. We are subject to various risks resulting
from changing economic, environmental, political, industry, business and
financial conditions. The principal factors are described below.
Our ability to pay dividends and repay debt depends on our subsidiaries'
ability to transfer income and dividends to us.
We are a holding company with no significant assets other than the
stock of our wholly-owned and non-wholly-owned subsidiaries and our holdings
of cash and marketable securities. Our ability to pay dividends and repay debt
depends on the continued transfer to us of dividends and other income from our
wholly-owned and non-wholly-owned subsidiaries. The ability of our
subsidiaries to pay dividends and make other transfers to us is limited by
various regulatory, contractual and legal constraints that affect our
subsidiaries.
We have incurred and will continue to incur debt, which debt could have an
adverse effect on the price of our CPOs, ADSs, appreciation warrants and ADWs,
result in us incurring increased interest costs and limit our ability to
distribute dividends, finance acquisitions and expansions and maintain
flexibility in managing our business activities.
We have incurred and will continue to incur significant amounts of
debt, which could have an adverse effect on the price of our Ordinary
Participation Certificates, or CPOs, and American Depositary Shares, or ADSs.
Since the values of our appreciation warrants and American Depositary
Warrants, or ADWs, are linked to the price of our CPOs and ADSs, their prices
could also be adversely affected by our debt levels. Our indebtedness may have
important consequences, including increased interest costs if we are unable to
refinance existing indebtedness on satisfactory terms. In addition, the debt
instruments governing a substantial portion of our indebtedness contain
various covenants that require us to maintain financial ratios, restrict asset
sales and restrict our ability to use the proceeds from a sale of assets.
Consequently, our ability to distribute dividends, finance acquisitions and
expansions and maintain flexibility in managing our business activities could
be limited. As of December 31, 2003, we had outstanding debt equal to Ps65.9
billion (U.S.$5.9 billion), not including obligations under preferred stock
transactions and under equity derivative transactions in our own stock and in
stock of our subsidiaries.
We have to service our Dollar and Yen denominated debt with revenues generated
in Pesos or other currencies, as we do not generate sufficient revenue in
Dollars and Yen from our operations to service all our Dollar and Yen
denominated debt. This could adversely affect our ability to service our debt
in the event of a devaluation or depreciation in the value of the Peso, or any
of the other currencies of the countries in which we operate.
A substantial portion of our outstanding debt is denominated in
Dollars and Yen. This debt, however, must be serviced by funds generated from
sales by our subsidiaries. Currently, we do not generate sufficient revenue in
Dollars and Yen from our operations to service all our Dollar and Yen
denominated debt. Consequently, we have to use revenues generated in Pesos or
other currencies to service our Dollar and Yen denominated debt. See Item 5
"Operating and Financial Review and Prospects--Qualitative and Quantitative
Market Disclosure -- Interest Rate
2
Risk, Foreign Currency Risk and Equity Risk -- Foreign Currency Risk." A
devaluation or depreciation in the value of the Peso, or any of the other
currencies of the countries in which we operate, compared to the Dollar or the
Yen could adversely affect our ability to service our debt. During 2003,
Mexico and Spain, our main non-U.S. Dollar denominated operations, generated
approximately half of our sales (approximately 34% and 16%, respectively),
before eliminations resulting from consolidation. In 2003, approximately 22%
of our sales were generated in the United States, with the remaining 28% of
our sales being generated in several countries, with a number of currencies
also having material depreciations against the Dollar and the Yen. During
2003, the Peso depreciated 8.3% against the Dollar and depreciated 16.5%
against the Yen, while the Euro appreciated 16.5% against the Dollar and
appreciated 8.3% against the Yen.
We may not be able to continue our growth if our acquisition strategy is not
successful.
A key element of our growth strategy is to integrate our recently
acquired operations with existing operations. Our ability to realize the
expected benefits from future acquisitions depends, in large part, on our
ability to integrate the new operations with existing operations in a timely
and effective manner. We cannot assure you that these efforts will be
successful with respect to future acquisitions by us. Furthermore, our
strategy depends on our ability to identify and acquire suitable assets at
desirable prices. We cannot assure you that we will be successful in
identifying or purchasing suitable assets in the future. If we fail to make
further acquisitions, we may not be able to continue to grow in the long term
at our historic rate.
We are subject to restrictions due to minority interests in our consolidated
subsidiaries.
We conduct our business through subsidiaries. In some cases,
third-party shareholders hold minority interests in these subsidiaries.
Various disadvantages may result from the participation of minority
shareholders whose interests may not always coincide with ours. Some of these
disadvantages may, among other things, result in our inability to implement
organizational efficiencies and transfer cash and assets from one subsidiary
to another in order to allocate assets most effectively.
Our derivative instruments and other financing arrangements may have adverse
effects on the market for our securities and some of our subsidiaries'
securities, and may adversely affect our ability to achieve operating
efficiencies as a combined group.
In recent years, we have entered into several derivative instruments
and engaged in other financing transactions involving shares of our capital
stock and shares of capital stock of some of our subsidiaries under equity
forward contracts as a source of financing and as a means of meeting our
obligations that may require us to deliver significant numbers of shares of
our own stock.
We have equity forward agreements in our own stock, which estimated
fair value is linked to the market price of our CPOs or ADSs. As of December
31, 2003, the notional amount of our outstanding obligations under our equity
forward contracts was approximately U.S.$1.1 billion, with an estimated fair
value gain of U.S.$16.4 million. In addition to the estimated fair value gain
of our equity forward agreements, a portion of which corresponds to the
contracts designated as hedges of our stock option programs which are
periodically recorded in our income statements, during 2003 we had gains
amounting to approximately U.S.$19.5 million (Ps219.2 million) resulting from
the net settlement in October 2003 of forward contracts entered into to cover
our obligations under our appreciation warrants. See note 16A to our
consolidated financial statements included elsewhere in this annual report.
The increase in the estimated fair value of our outstanding equity forward
contracts is due to an increase in the market price of our listed securities
(ADSs and CPOs). Pursuant to the terms of our equity forward contracts, if the
shares underlying our equity forward agreements suffer a substantial decrease
in market value, we could be required to compensate for the decrease in market
value. If we default in this obligation, the counterparties to our equity
forward agreements have the option of either selling the underlying shares
into the market or requiring us to repurchase the underlying shares.
As stated above, if we default on the terms of our equity forward
agreements, our counterparties may sell the shares underlying these
agreements, which may:
3
o dilute shareholders' interests in our equity securities;
o have an adverse effect on the market for our equity securities;
o have an adverse effect on the market for the equity securities of
some of our subsidiaries;
o reduce the amount of dividends and other distributions that we
receive from our subsidiaries;
o create public minority interests in some of our subsidiaries that may
adversely affect our ability to realize operating efficiencies as a
combined group; and
o have an adverse effect on other financing agreements.
Any of these factors could adversely affect the price of our CPOs and ADSs and
our other securities, such as our appreciation warrants and ADWs, whose prices
are dependent on the prices of our CPOs and ADSs.
We are subject to several anti-dumping rulings that may limit our ability to
export cement to the United States.
Our Mexican operations are subject to anti-dumping rulings by the
U.S. Commerce Department which may limit our ability to export cement to the
United States. Since April 1990, our exports of gray Portland cement and
clinker to the United States from Mexico, which represented 3.8% of total
sales volume of our Mexican operations in 2003, have been subject to U.S.
anti-dumping duties. In addition, importers of gray Portland cement and
clinker from Mexico, including our U.S. operations, have been required to pay
substantial cash deposits to the U.S. Customs Service to secure the eventual
payment of those duties.
We are disputing some tax claims an adverse resolution of which may result in
a significant additional tax expense.
We have received notices from the Mexican tax authorities of tax
claims in respect of the tax years from 1992 through 1996 for an aggregate
amount of approximately Ps4.9 billion, including interest and penalties
through December 31, 2003. An adverse resolution of these claims could
materially reduce our net income. See Item 4 -- "Information on the Company --
Regulatory Matters and Legal Proceedings -- Tax Matters."
Our operations are subject to environmental laws and regulations.
Our operations are subject to laws and regulations relating to the
protection of the environment in the various jurisdictions in which we
operate, such as regulations regarding the release of cement dust into the
air. Stricter laws and regulations, or stricter interpretation of existing
laws or regulations, may impose new liabilities on us or result in the need
for additional investments in pollution control equipment, either of which
could result in a material decline in our profitability in the short term.
We are an international company and are exposed to risks in the countries in
which we have significant operations or interests.
We are dependent, in large part, on the economies of the countries in
which we market our products. The economies of these countries are in
different stages of socioeconomic development. Consequently, like many other
companies with significant international operations, we are exposed to risks
from changes in foreign currency exchange rates, interest rates, inflation,
governmental spending, social instability and other political, economic or
social developments that may materially reduce our net income.
In 2003, the largest percentage of our net sales (34%) and total
assets (22%), at year-end, were in Mexico. If the Mexican economy experiences
a recession or if Mexican inflation and interest rates increase significantly,
our net income from our Mexican operations may decline materially because
construction activity may decrease, which may lead to a decrease in sales of
cement and ready-mix concrete. The Mexican government does not currently
4
restrict the ability of Mexicans or others to convert Pesos to Dollars, or
vice versa. The Mexican Central Bank has consistently made foreign currency
available to Mexican private sector entities to meet their foreign currency
obligations. Nevertheless, if shortages of foreign currency occur, the Mexican
Central Bank may not continue its practice of making foreign currency
available to private sector companies, and we may not be able to purchase the
foreign currency we need to service our foreign currency obligations without
substantial additional cost.
We also have operations in the United States (22% of net sales and
18% of total assets in 2003), Spain (16% of net sales and 14% of total
assets), Venezuela (4% of net sales and 3% of total assets), Central America
and the Caribbean (8% of net sales and 5% of total assets), Colombia (3% of
net sales and 3% of total assets), the Philippines (2% of net sales and 3% of
total assets), other Asian countries, including Thailand (2% of total assets),
and Egypt (2% of net sales and 2% of total assets). As in the case of Mexico,
adverse economic conditions in any of these countries may produce a negative
impact on our net income from our operations in that country.
In recent years, Venezuela has experienced considerable volatility
and depreciation of its currency, high interest rates, political instability
and declining asset values. Additionally, Venezuela has experienced increased
inflation, decreased gross domestic product and labor unrest, including a
general strike. In response to this situation, and in an effort to shore up
the economy and control inflation, Venezuelan authorities have imposed foreign
exchange and price controls on specified products, including cement. Further
economic stagnation in the private sector may result as a consequence of these
market distortions and political unrest. These developments have had and may
continue to have an impact on cement prices and an adverse effect on the
construction sector in Venezuela, reducing demand for cement and ready-mix
concrete, which may continue to affect our sales and net income adversely.
We believe that Asia represents an important market for our future
growth. However, since mid-1997, many countries in Asia in which we have made
significant investments have experienced considerable volatility and
depreciation of their currencies, high interest rates, banking sector crises,
stock market volatility, political instability and declining asset values.
These developments have had and may continue to have an adverse effect on the
Asian construction sector, as a result of reduced demand for cement and
ready-mix concrete, which has adversely affected our sales and net income.
We believe that Egypt also represents an important market for our
future growth. Rising instability in the Middle East, however, has resulted
from, among other things, civil unrest, extremism, the continued deterioration
of Israeli-Palestinian relations and the recent war in Iraq. There can be no
assurance that political turbulence in the Middle East will abate at any time
in the near future or that neighboring countries, including Egypt, will not be
drawn into the conflict. In Egypt, extremists have engaged in a sometimes
violent campaign against the government in recent years. There can be no
assurance that extremists will not escalate their opposition in Egypt or that
the government will continue to be successful in maintaining the prevailing
levels of domestic order and stability. Since 2000, the Egyptian government
devalued the pound four times, and in January 2003, it decided to let the
pound trade as a freely floating currency. Since that time, the Egyptian pound
has depreciated significantly against the Dollar. Future depreciation of the
Egyptian pound relative to other currencies could create additional
inflationary pressures in Egypt by generally increasing the price of imported
products and requiring recessionary government policies to curb aggregate
demand. On the other hand, if the Egyptian pound were to appreciate against
other currencies, this could dampen export-driven growth, thereby weakening
the Egyptian economy and indirectly adversely affecting cement demand. The
potential impact of the floating exchange rate system and of measures by the
Egyptian government aimed at improving Egypt's investment climate is
uncertain. The Egyptian Central Bank continues to monitor the exchange rate
and reserves the right to intervene without notice. We still consider the
depreciation of the Egyptian pound a significant risk to our results in Egypt.
The overall lack of confidence in monetary policy and speculation with respect
to the Egyptian pound during 2003 resulted in a 35% local currency
depreciation against the U.S. Dollar, which in turned created inflationary
pressures, fueled increases in commodity prices and caused an overall negative
affect on GDP growth through reduced private spending. Weakened investor
confidence as a result of currency instability as well as any of the other
foregoing circumstances could have a material adverse effect on the political
and economic stability of Egypt and consequently on our Egyptian operations.
The September 11, 2001 terrorist attacks on the World Trade Center
and the Pentagon temporarily disrupted the trading markets in the United
States and caused declines in major stock markets around the world. Since
those attacks, there have been terrorist attacks in Indonesia and Spain and
ongoing threats of future terrorist
5
attacks in the United States and abroad. In response to these terrorist
attacks and threats, the United States has instituted several anti-terrorism
measures, most notably, the formation of the Office of Homeland Security, a
formal declaration of war against terrorism and the recent war in Iraq.
Although it is not possible at this time to determine the long-term effect of
these terrorist threats and attacks and the consequent response by the United
States, including the war in Iraq, there can be no assurance that there will
not be other attacks or threats in the United States or abroad that will lead
to further economic contraction in the United States or any other of our major
markets. In the short-term, however, terrorist activity against the United
States and the consequent response by the United States has contributed to the
uncertainty of the stability of the United States economy as well as global
capital markets. The current weakness of the United States economy has had,
and may continue to have, an adverse effect on the private construction
sector. In addition, the projected United States budget deficits may have an
adverse effect on the public construction sector. Further economic contraction
in the United States or any of our major markets could affect domestic demand
for cement and have a material adverse effect on our operations.
On October 31, 2001, certain individuals purporting to represent the
people of the Indonesian province of West Sumatra, in which the Padang plant
of PT Semen Gresik (Persero) Tbk., or Gresik, is located, issued a declaration
which stated that, commencing November 1, 2001, PT Semen Padang , or Semen
Padang, the 99.99%-owned subsidiary of Gresik that owns and operates the
Padang plant, was placed under the temporary control of the people of West
Sumatra. The declaration ordered the management of Semen Padang to report to
the local government of the West Sumatra Province, under the supervision of
the People's Representative Assembly of West Sumatra, pending a "spin-off" of
the Semen Padang subsidiary. On November 1, 2001, the People's Representative
Assembly of West Sumatra issued a decision approving this declaration. We
believe the provincial administration lacks legal authority to direct or
interfere with the affairs of Semen Padang. Since the attempt by the West
Sumatra provincial administration in November 2001 to arrogate to itself the
management of Semen Padang, several groups opposed to any further sale of
Indonesia's stock ownership in Gresik have threatened strikes and other
actions that would affect our Indonesian operations. Further attempts to
reassume control at Semen Padang, including shareholder-approved changes in
management, have been met with resistance and lawsuits by various interest
groups. The former management of Semen Padang refused to relinquish control
until September 2003 when the newly-appointed management was finally permitted
to enter the Padang Facility and assume control of Semen Padang. However, we
believe that the newly-appointed management was admitted on condition that it
encourage a spin-off of Semen Padang, and in October 2003, it explicitly
agreed to do so.
Gresik has experienced other ongoing difficulties at Semen Padang,
including the effective loss of operational and financial control of Semen
Padang, the inability to prepare consolidated financial statements that
include Semen Padang's operations and the inability of its independent
auditors to provide an unqualified audit opinion on such financial statements.
After the failure of several attempts to reach a negotiated or mediated
solution to these problems involving Gresik, on December 10, 2003, CEMEX Asia
Holdings, Ltd., or CAH, our subsidiary through which we hold our interest in
Gresik, filed a request for arbitration against the Republic of Indonesia and
the Indonesian government before the International Centre for Settlement of
Investment Disputes, or ICSID, based in Washington D.C. CAH is seeking, among
other things, rescission of the purchase agreement entered into with the
Republic of Indonesia in 1998, plus repayment of all costs and expenses, and
compensatory damages. ICSID has accepted and registered CAH's request for
arbitration and issued a formal notice of registration on January 27, 2004. As
a result of the registration, an Arbitral Tribunal will be established to hear
the dispute. We cannot predict, however, what effect, if any, this action will
have on our investment in Gresik or what the ruling of the Arbitral Tribunal
will be.
You may be unable to enforce judgments against us
You may be unable to enforce judgments against us. We are a stock
corporation with variable capital, or sociedad anonima de capital variable,
organized under the laws of Mexico. Substantially all our directors and
officers and some of the experts named in this prospectus reside in Mexico,
and all or a significant portion of the assets of those persons may be, and
the majority of our assets are, located outside the United States. As a
result, it may not be possible for investors to effect service of process
within the United States upon those persons or to enforce judgments against
them or against us in U.S. courts, including judgments predicated upon the
civil liability provisions of the U.S. federal securities laws. We have been
advised by Lic. Ramiro G. Villarreal, General Counsel of CEMEX, that it may
not be possible to enforce, in original actions in Mexican courts, liabilities
predicated solely
6
on the U.S. federal securities laws and it may not be possible to enforce, in
Mexican courts, judgments of U.S. courts obtained in actions predicated upon
the civil liability provisions of the U.S. federal securities laws.
Cautionary Statement Regarding Forward Looking Statements
Some of the information in this annual report may constitute
forward-looking statements, which are subject to various risks and
uncertainties. Such statements can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue," "plan" or other similar words. These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other "forward-looking" information. When considering such
forward-looking statements, holders of our securities should keep in mind the
factors described in "Risk Factors" and other cautionary statements appearing
in Item 5 -- "Operating and Financial Review and Prospects" and elsewhere in
this annual report. These risk factors and statements describe circumstances
that could cause actual results to differ materially from those contained in
any forward-looking statement.
This annual report also includes statistical data regarding the
production, distribution, marketing and sale of cement, ready-mix concrete and
clinker. We generated some of these data internally, and some were obtained
from independent industry publications and reports that we believe to be
reliable sources. We have not independently verified these data nor sought the
consent of any organizations to refer to their reports in this annual report.
7
Mexican Peso Exchange Rates
Mexico has had no exchange control system in place since the dual
exchange control system was abolished on November 11, 1991. The Mexican Peso
has floated freely in foreign exchange markets since December 1994, when the
Mexican Central Bank (Banco de Mexico) abandoned its prior policy of having an
official devaluation band. Since then, the Peso has been subject to
substantial fluctuations in value. The Peso appreciated against the Dollar by
3.9% in 1999, depreciated against the Dollar by 1.2% in 2000, appreciated
against the Dollar by 4.7% in 2001, depreciated against the Dollar by 13% in
2002 and depreciated against the Dollar by 8.3% in 2003. These percentages are
based on the exchange rate that we use for accounting purposes, or the CEMEX
accounting rate. The CEMEX accounting rate represents the average of three
different exchange rates that are provided to us by Banco Nacional de Mexico,
S.A., Grupo Financiero, or Banamex. For any given date, the CEMEX accounting
rate may differ from the noon buying rate for Pesos in New York City published
by the U.S. Federal Reserve Bank of New York. We cannot predict the value of
the Peso or assure you that the Mexican government will not establish new
exchange controls in the future.
The following table sets forth, for the periods and dates indicated,
the end-of-period, average and high and low points of the CEMEX accounting
rate as well as the noon buying rate for Pesos, expressed in Pesos per
U.S.$1.00.
CEMEX Accounting Rate Noon Buying Rate
---------------------------------------- ------------------------------------------
End of End of
Year ended December 31, Period Average(1) High Low Period Average(1) High Low
------ ---------- ------ ------- ------ ---------- ------ ---------
1999....................... 9.510 9.547 10.607 9.263 9.480 9.562 10.600 9.240
2000....................... 9.620 9.461 10.098 9.189 9.618 9.459 10.087 9.183
2001....................... 9.170 9.332 9.988 8.954 9.156 9.337 9.972 8.946
2002....................... 10.380 9.755 10.350 9.016 10.425 9.664 10.425 9.000
2003....................... 11.240 10.840 11.385 10.101 11.242 10.846 11.406 10.113
Monthly (2003-2004)
October................ 11.000 -- 11.310 11.002 11.055 -- 11.318 10.969
November............... 11.380 -- 11.385 10.951 11.395 -- 11.395 10.979
December............... 11.240 -- 11.370 11.142 11.242 -- 11.406 11.173
January................ 11.080 -- 11.134 10.822 11.012 -- 11.097 10.805
February............... 11.070 -- 11.187 10.910 11.062 -- 11.245 10.910
March.................. 11.120 -- 11.230 10.931 11.183 -- 11.229 10.918
April.................. 11.420 -- 11.429 11.150 11.402 -- 11.432 11.157
(1) The average of the CEMEX accounting rate or the noon buying rate for Pesos,
as applicable, on the last day of each full month during the relevant
period.
On April 30, 2004, the noon buying rate for Pesos was Ps11.402 to
U.S.$1.00 and the CEMEX accounting rate was Ps 11.420 to U.S.$1.00.
The Mexican government does not currently restrict the ability of
Mexicans or others to convert Pesos to Dollars, or vice versa. The Mexican
Central Bank has consistently made foreign currency available to Mexican
private sector entities to meet their foreign currency obligations.
Nevertheless, if renewed shortages of foreign currency occur, the Mexican
Central Bank may not continue its practice of making foreign currency
available to private sector companies and we may not be able to purchase the
foreign currency we need to service our foreign currency obligations without
substantial additional cost.
For a discussion of the financial treatment of our operations
conducted in other currencies, See Item 3 -- "Key Information -- Selected
Consolidated Financial Information."
8
Selected Consolidated Financial Information
The financial data set forth below as of and for each of the five
years ended December 31, 2003 have been derived from our audited consolidated
financial statements. The financial data set forth below as of December 31,
2002 and 2003 and for each of the three years ended December 31, 2003, have
been derived from, and should be read in conjunction with, and are qualified
in their entirety by reference to, the consolidated financial statements and
the notes thereto included elsewhere in this annual report.
Our consolidated financial statements included elsewhere in this
annual report have been prepared in accordance with Mexican GAAP, which
differs in significant respects from U.S. GAAP. We are required, pursuant to
Mexican GAAP, to present our financial statements in constant Pesos
representing the same purchasing power for each period presented. Accordingly,
all financial data presented below and, unless otherwise indicated, elsewhere
in this annual report are stated in constant Pesos as of December 31, 2003.
See note 23 to our consolidated financial statements included elsewhere in
this annual report for a description of the principal differences between
Mexican GAAP and U.S. GAAP as they relate to us.
Non-Peso amounts included in the financial statements are first
translated into Dollar amounts, in each case at a commercially available or an
official government exchange rate for the relevant period or date, as
applicable, and those Dollar amounts are then translated into Peso amounts at
the CEMEX accounting rate, described under Item 3 - "Key Information - Mexican
Peso Exchange Rates," as of the relevant period or date, as applicable.
Under Bulletin B-15 of the Mexican Institute of Public Accountants,
each time we report results for the most recently completed period, the Pesos
previously reported in prior periods should be adjusted to Pesos of constant
purchasing power as of the most recent balance sheet by multiplying the
previously reported Pesos by a weighted average inflation index. This index is
calculated based upon the inflation rates of the countries in which we operate
and the changes in the exchange rates of each of these countries, weighted
according to the proportion our assets in each country represent of our total
assets. The following table reflects the factors that have been used to
restate the originally reported Pesos to Pesos of constant purchasing power as
of December 31, 2003:
Cumulative Weighted
Annual Weighted Average Factor to
Average Factor December 31, 2003
--------------------------------------------
1999............................. 1.0134 1.2100
2000............................. 0.9900 1.1940
2001............................. 1.0916 1.2061
2002............................. 1.1049 1.1049
--------------------------------------------------------------------------------
The Dollar amounts provided below and, unless otherwise indicated,
elsewhere in this annual report are translations of constant Peso amounts at
an exchange rate of Ps11.24 to U.S.$1.00, the CEMEX accounting rate as of
December 31, 2003. However, in the case of transactions conducted in Dollars,
we have presented the Dollar amount of the transaction and the corresponding
Peso amount that is presented in our consolidated financial statements. These
translations have been prepared solely for the convenience of the reader and
should not be construed as representations that the Peso amounts actually
represent those Dollar amounts or could be converted into Dollars at the rate
indicated. The noon buying rate for Pesos on December 31, 2003 was Ps11.242 to
U.S.$1.00 and on April 30, 2004 was Ps11.402 to U.S.$1.00. From December 31,
2003 through April 30, 2004, the Peso depreciated by approximately 1.4%
against the Dollar, based on the noon buying rate for Pesos.
9
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
Selected Consolidated Financial Information
As of and for the year ended December 31,
--------------------------------------------------------------------------
1999 2000 2001 2002 2003 2003
--------- ---------- --------- ---------- --------- -----------
(in millions of constant Pesos as of December 31, 2003 and
Dollars, except ratios and share and per share amounts)
Income Statement Information:
Net sales............................. Ps 56,117 Ps 64,566 Ps 76,572 Ps 75,042 Ps 80,528 Ps 7,164
Cost of sales(1)...................... (31,266) (36,078) (43,070) (41,925) (46,422) (4,130)
Gross profit.......................... 24,851 28,488 33,502 33,117 34,106 3,034
Operating expenses.................... (8,154) (9,489) (15,216) (18,088) (17,750) (1,579)
Operating income...................... 16,697 18,999 18,286 15,029 16,356 1,455
Comprehensive financing income (cost), (336) (1,997) 2,927 (3,777) (3,006) (267)
net(2)................................
Other income (expense), net........... (3,450) (2,692) (4,611) (4,465) (5,133) (457)
Income before income tax, business
assets tax, employees' statutory
profit sharing and equity in income
of affiliates.................... 12,911 14,310 16,602 6,787 8,217 731
Minority interest(3).................. 655 896 1,696 425 342 30
Majority interest net income.......... 11,304 11,479 13,027 5,967 7,067 629
Earnings per share(4)(5).............. 2.99 2.78 3.05 1.33 1.49 0.13
Dividends per share(4)(6) (7)......... 0.62 0.72 0.77 0.80 0.78 0.07
Number of shares outstanding(4)(8).... 4,098 4,169 4,379 4,562 4,861 4,861
Balance Sheet Information:
Cash and temporary investments........ 3,794 3,539 4,738 4,142 3,275 291
Net working capital investment(9)..... 8,121 10,637 10,315 8,022 6,471 576
Property, machinery and equipment, net 80,453 103,772 98,881 102,797 104,143 9,265
Total assets.......................... 137,903 181,024 179,506 182,750 180,017 16,016
Short-term debt....................... 11,973 34,021 11,365 15,980 14,938 1,329
Long-term debt........................ 38,827 31,118 48,054 50,164 50,994 4,537
Minority interest(3)(10).............. 14,559 27,542 21,848 13,840 5,979 532
Stockholders' equity (excluding minority
interest)(11).................... 60,234 60,318 68,314 65,881 70,072 6,234
Book value per share(4)(8)............ 14.71 14.46 15.60 14.44 14.42 1.28
Other Financial Information:
Operating margin...................... 29.8% 29.4% 23.9% 20.0% 20.3% 20.3%
EBITDA(12)............................ 20,823 23,314 24,948 21,987 23,694 2,108
Ratio of EBITDA to interest expense,
capital securities dividends and
preferred equity dividends....... 3.50 4.00 4.39 5.23 5.27 5.27
Investment in property, machinery and
equipment, net................... 3,089 4,575 5,649 4,863 4,427 394
Depreciation and amortization......... 5,039 5,617 8,767 8,776 9,271 825
Net resources provided by operating
activities(13)................... 17,919 19,990 26,104 19,081 17,604 1,566
Basic earnings per CPO(4) (5)......... 8.98 8.35 9.15 3.98 4.47 0.40
As of and for the year ended December 31,
-----------------------------------------------------------------
2001 2002 2003 2003
------------- ------------- ------------- --------------
(in millions of constant Pesos as of December 31, 2003 and
Dollars, except per share amounts)
U.S. GAAP(14):
Income Statement Information:
Majority net sales.......................... Ps 69,031 Ps 69,882 Ps 79,749 U.S.$7,095
Operating income............................ 11,034 11,295 13,606 1,211
Majority net income......................... 11,044 5,867 8,274 736
Basic earnings per share.................... 2.76 1.39 1.75 0.16
Diluted earnings per share.................. 2.73 1.39 1.71 0.15
Balance Sheet Information:
Total assets................................ 169,643 176,118 184,471 16,412
Total long-term debt........................ 40,884 42,817 44,790 3,985
Shares subject to mandatory redemption (15). -- -- 742 66
Minority interest........................... 8,333 5,396 5,419 482
Other mezzanine items (15).................. 17,659 13,598 -- --
Total majority stockholders' equity......... 51,037 53,697 71,121 6,328
(footnotes on next page)
10
______________
(1) Cost of sales includes depreciation.
(2) Comprehensive financing income (cost), net, includes financial expenses,
financial income, gain (loss) from valuation and liquidation of
financial instruments, including derivatives and marketable securities,
foreign exchange result, net and monetary position result. See Item 5
-"Operating and Financial Review and Prospects."
(3) In connection with an equity swap transaction involving 24.8% of the
shares of our subsidiary, CEMEX Espana, S.A., the balance sheet item
minority interest in 1999 includes the value of these shares as if owned
by a third party. In September 2000, we terminated this transaction and
repurchased the shares of CEMEX Espana. See Item 5 -"Operating and
Financial Review and Prospects -Derivatives and Other Hedging
Instruments."
(4) Our capital stock consists of series A shares and series B shares. Each
of our CPOs represents two Series A shares and one Series B share. As of
December 31, 2003, approximately 96.5% of our outstanding share capital
was represented by CPOs.
(5) Earnings per share are calculated based upon the weighted average number
of shares outstanding during the year, as described in note 20 to the
consolidated financial statements included elsewhere in this annual
report. Basic earnings per CPO is determined by multiplying each year's
basic earnings per share by three (the number of shares underlying each
CPO). Basic earnings per CPO is presented solely for the convenience of
the reader and does not represent a measure under Mexican GAAP.
(6) Dividends declared at each year's annual shareholders' meeting are
reflected as dividends of the preceding year.
(7) In recent years, our board of directors has proposed, and our
shareholders have approved, dividend proposals, whereby our shareholders
have had a choice between stock dividends or cash dividends declared in
respect of the prior year's results, with the stock issuable to
shareholders who elect the stock dividend over the cash dividend being
issued at a 20% discount from then current market prices. The dividends
declared per share or per CPO in these years, expressed in constant
Pesos as of December 31, 2003, were as follows: 2000, Ps1.83 per CPO (or
Ps0.62 per share); 2001, Ps2.17 per CPO (or Ps0.72 per share); 2002,
Ps2.31 per CPO (or Ps0.77 per share); and 2003, Ps2.40 per CPO (or
Ps0.80 per share). As a result of dividend elections made by
shareholders, in 2000, Ps312 million in cash was paid and approximately
59 million additional CPOs were issued in respect of dividends declared
for the 1999 fiscal year; in 2001, Ps93 million in cash was paid and
approximately 70 million additional CPOs were issued in respect of
dividends declared for the 2000 fiscal year; in 2002, Ps257 million in
cash was paid and approximately 64 million additional CPOs were issued
in respect of dividends declared for the 2001 fiscal year; and in 2003,
Ps66.8 million in cash was paid and approximately 99 million additional
CPOs were issued in respect of dividends declared for the 2002 fiscal
year. For purposes of the table, dividends declared at each year's
annual shareholders' meeting for each period are reflected as dividends
for the preceding year. At our 2003 annual shareholders' meeting, which
was held on April 29, 2004, our shareholders approved a dividend of
Ps2.35 per CPO (Ps0.78 per share) for the 2003 fiscal year. Shareholders
will be entitled to receive the dividend in either stock or cash
consistent with our past practices.
(8) Based upon the total number of shares outstanding at the end of each
period, expressed in millions of shares, and includes shares subject to
financial derivative transactions, but does not include shares held by
our subsidiaries.
(9) Net working capital investment equals trade receivables plus inventories
less trade payables.
(10) In connection with a preferred equity transaction relating to the
financing of our acquisition of Southdown, Inc., now named CEMEX, Inc.,
the balance sheet item minority interest at December 31, 2000, 2001 and
2002 includes a notional amount of U.S.$1.5 billion (Ps16.9 billion),
U.S.$900 million (Ps10.1 billion) and U.S.$650 million (Ps7.3 billion),
respectively, of preferred equity issued in November 2000 by our Dutch
subsidiary. In October 2003, in connection with the establishment of a
new U.S.$1.15 billion senior unsecured term loan facility by our Dutch
subsidiary, we redeemed all of the U.S.$650 million of preferred equity
outstanding. The balance sheet item minority interest at December 31,
2003 includes an aggregate liquidation amount of U.S.$66 million (Ps742
million) of 9.66% Putable Capital Securities, which were initially
issued by one of our subsidiaries in May 1998 in an aggregate
liquidation amount of U.S.$250 million. In April 2002, approximately
U.S.$184 million in aggregate liquidation amount of these capital
securities were tendered to, and accepted by, us in a tender offer. In
addition, minority interest net income in 2003 includes preferred
dividends in the amount of approximately U.S.$12.5 million (Ps140
million) and capital securities dividends in the amount of approximately
U.S.$6.4 million (Ps72 million).
(11) In December 1999, we entered into forward contracts with a number of
banks covering 21,000,000 ADSs. In December 2002, we agreed with the
banks to settle those forward contracts for cash and simultaneously
entered into new forward contracts with the same banks on similar terms
to the original forward transactions. Under the new forward contracts
the banks retained the ADSs underlying the original forward contracts,
which had increased to 24,008,313 ADSs as of the settlement date as a
result of stock dividends and which further increased to 25,457,378 ADSs
as a result of stock dividends through June 2003. As a result of this
net settlement, we recognized in December 2002 a decrease of
approximately U.S.$98.3 million (Ps1,104.9 million) in our stockholders'
equity, arising from changes in the valuation of the ADSs. In October
2003, in connection with the non-dilutive equity offering by the banks
of all of the ADS underlying those forward contracts, we agreed with the
banks to settle those forward contracts for cash. As a result of the
final settlement in October 2003, we recognized an increase of
approximately U.S.$18.1 million (Ps203.4 million) in our stockholders'
equity, arising from changes in the valuation of the ADSs from December
2002 through October 2003. During the life of these forward contracts,
the underlying ADSs were considered to have been owned by the banks and
the forward contracts were treated as equity transactions, and,
therefore, changes in the fair value of the ADSs were not recorded until
settlement of the forward contracts.
(12) EBITDA equals operating income before amortization expense and
depreciation. Under Mexican GAAP, amortization of goodwill is not
included in operating income, but instead is recorded in other income
(expense). EBITDA and the ratio of EBITDA to interest expense, capital
securities dividends and preferred equity dividends are presented herein
because we believe that they are widely accepted as financial indicators
of the our ability to internally fund capital expenditures and service
or incur debt and preferred equity. EBITDA and such ratios should not be
considered as indicators of our financial performance, as alternatives
to cash flow, as measures of liquidity or as being comparable to other
similarly titled measures of other companies. EBITDA is reconciled below
to operating income, which we consider to be the most comparable measure
as determined under Mexican GAAP. We are not required to prepare a
statement of cash flows under Mexican GAAP and therefore do not have
such Mexican GAAP cash flow measures to present as comparable to EBITDA.
11
For the year ended December 31,
---------------------------------------------------------------------
1999 2000 2001 2002 2003 2003
---------- ------------ ---------- ---------- ---------- ------------
(in millions of constant Pesos as of December 31, 2003 and Dollars)
Reconciliation of EBITDA to operating
income
EBITDA............................... Ps 20,823 Ps 23,314 Ps 24,948 Ps 21,987 Ps 23,694 US$ 2,108
Less:
Depreciation and amortization
expense......................... 4,126 4,315 6,662 6,958 7,338 653
---------- ------------ ---------- ---------- ---------- ------------
Operating income..................... 16,697 18,999 18,286 15,029 16,356 1,455
========== ============ ========== ========== ========== ============
(13) Net resources provided by operating activities equals majority interest
net income plus items not affecting cash flow plus investment in working
capital excluding effects from acquisitions. In accordance with Mexican
GAAP, operating activities include gain and loss from trading in
marketable securities.
(14) We have restated the information at and for the years ended December 31,
2001 and 2002 under U.S. GAAP using the inflation factor derived from
the national consumer price index, or NCPI, in Mexico. See note 23 to
our consolidated financial statements included elsewhere in this annual
report for a description of the principal differences between Mexican
GAAP and U.S. GAAP as they relate to CEMEX.
(15) For financial reporting under U.S. GAAP, until December 31, 2002,
elements that did not meet either the definition of equity, or the
definition of debt, were presented under a third group, commonly
referred to as "mezzanine items." As of December 31, 2001 and 2002,
these elements, as they relate to us, included our preferred equity
described in note 10 above, our Putable Capital Securities described in
note 10 above and our obligation under the forward contracts described
in note 11 above. As of December 31, 2003, as a result of the adoption
of the SFAS 150 "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity," these elements, which
include our Putable Capital Securities described in note 10 above, are
presented as a separate line item within liabilities. For a more
detailed description of these elements, as they relate to us, see notes
14(E), 14(F) and 23(O) to our consolidated financial statements included
elsewhere in this annual report.
12
Item 4 - Information on the Company
--------------------------
Unless otherwise indicated, references in this annual report to our
sales and assets, including percentages, for a country or region are
calculated before eliminations resulting from consolidation, and thus include
intercompany balances between countries and regions. These intercompany
balances are eliminated when calculated on a consolidated basis.
Business Overview
We are a stock corporation with variable capital, or sociedad anonima
de capital variable, organized under the laws of the United Mexican States
("Mexico") with our principal executive offices in Av. Ricardo Margain Zozaya
#325, Colonia del Valle Campestre, Garza Garcia, Nuevo Leon, Mexico 66265. Our
main phone number is (011-5281) 8888-8888. CEMEX's agent for service,
exclusively for actions brought by the Securities and Exchange Commission
pursuant to the requirements of the United States Federal securities laws, is
CEMEX, Inc., located at 840 Gessner Road, Suite 1400, Houston, Texas 77024.
CEMEX was founded in 1906 and was registered with the Mercantile
Section of the Public Register of Property and Commerce in Monterrey, N.L.,
Mexico, on June 11, 1920 for a period of 99 years. At the 2002 annual
shareholders' meeting, this period was extended to the year 2100. CEMEX's full
legal and commercial name is CEMEX, S.A. de C.V.
CEMEX is the third largest cement company in the world, based on
installed capacity as of December 31, 2003 of approximately 81.5 million tons.
We are one of the world's largest traders of cement and clinker, having traded
over 9 million tons of cement and clinker in 2003. We are a holding company
primarily engaged, through our operating subsidiaries, in the production,
distribution, marketing and sale of cement, ready-mix concrete and clinker. We
are a global cement manufacturer with operations in North, Central and South
America, Europe, the Caribbean, Asia and Africa. As of December 31, 2003, we
had worldwide assets of approximately Ps180.0 billion (U.S.$16.0 billion). On
April 30, 2004, we had an equity market capitalization of approximately Ps108.7
billion (U.S.$9.5 billion).
As of December 31, 2003, our main cement production facilities were
located in Mexico, Spain, Venezuela, Colombia, the United States, Egypt, the
Philippines, Thailand, Costa Rica, the Dominican Republic, Panama, Nicaragua
and Puerto Rico. As of December 31, 2003, our assets, cement plants and
installed capacity, on an unconsolidated basis, were as set forth below.
Installed capacity, which refers to theoretical annual production capacity,
represents gray cement equivalent capacity, which counts each ton of white
cement capacity as approximately two tons of gray cement capacity. It also
includes our proportional interest in the installed capacity of companies in
which we hold a minority interest.
As of December 31, 2003
------------------------------------------------
Installed
Assets Number Capacity
(in billions of (millions
of constant Cement of tons
Pesos) Plants per annum)
------------ -------- -----------
North America
Mexico.............................................. Ps 55.8 15 27.2
United States....................................... 46.8 13 14.2
Europe, Asia and Africa
Spain............................................... 35.2 8 10.8
Asia................................................ 12.2 4 10.9
Egypt............................................... 4.1 1 4.9
South America, Central America and the Caribbean
Venezuela........................................... 8.7 3 4.6
Colombia............................................ 7.6 5 4.8
Central America and the Caribbean................... 12.2 5 4.1
Cement and Clinker Trading Assets and Other Operations... 73.9 -- --
13
In the above table, "Asia" includes our Asian subsidiaries, and, for
purposes of the columns labeled "Assets" and "Installed Capacity," includes
our 25.5% interest, as of December 31, 2003, in Gresik, an Indonesian cement
producer. In addition to the three cement plants owned by our Asian
subsidiaries, Gresik operated four cement plants with an installed capacity of
17.3 million tons, as of December 31, 2003. In the above table, "Central
America and the Caribbean" includes our subsidiaries in Costa Rica, the
Dominican Republic, Panama, Nicaragua, Puerto Rico and other assets in the
Caribbean region. In the above table, "Cement and Clinker Trading Assets and
Other Operations" includes in the column labeled "Assets" our 11.9% interest
in Cementos Bio Bio, a Chilean cement producer having three cement plants with
an installed capacity of approximately 2.25 million tons at December 31, 2003,
and intercompany accounts receivable of CEMEX (the parent company only) in the
amount of Ps35.3 billion, which would be eliminated if these assets were
calculated on a consolidated basis.
During the last decade, we embarked on a major geographic expansion
program to diversify our cash flows and enter markets whose economic cycles
within the cement industry largely operate independently from that of Mexico
and which offer long-term growth potential. We have built an extensive network
of marine and land-based distribution centers and terminals that give us
marketing access around the world. The following have been our most
significant acquisitions over the last five years:
o In August and September 2003, we acquired 100% of the outstanding
shares of Mineral Resource Technologies Inc., and the cement assets of
Dixon-Marquette Cement for a combined purchase price of approximately
U.S.$99.7 million, subject to adjustments. Located in Dixon,
Illinois, the single cement facility has an annual production
capacity of 560,000 metric tons.
o In July and August 2002, through a tender offer and subsequent
merger, we acquired 100% of the outstanding shares of Puerto Rican
Cement Company, Inc., or PRCC. The aggregate value of the transaction
was approximately U.S.$281.0 million, including approximately
U.S.$100.8 million of assumed net debt.
o On July 12, 2002, we purchased 25,429 shares of common stock
(approximately 0.3% of the outstanding share capital) of CEMEX Asia
Holdings, Ltd., or CAH, from a CAH investor for a purchase price of
approximately U.S.$2.3 million, increasing our equity interest in CAH
to 77.7%. CAH is a subsidiary originally created to co-invest with
institutional investors in Asian cement operations. At the same time,
we entered into agreements to purchase an additional 1,483,365 shares
of CAH common stock (approximately 14.6% of the outstanding share
capital) from several other CAH investors in exchange for 28,195,213
CEMEX CPOs (subject to anti-dilution adjustments), which exchange was
originally scheduled to take place in four equal quarterly tranches
commencing on March 31, 2003. The exchange of 84,763 of these CAH
shares took place in four quarterly tranches in 2003 as originally
scheduled. In April 2003, we amended the terms of the July 12, 2002
agreements with respect to the remaining 1,398,602 of the CAH shares.
Instead of purchasing those CAH shares in four equal quarterly
tranches during 2003, we agreed to purchase those CAH shares in four
equal quarterly tranches commencing on March 31, 2004. On March 31,
2004, the exchange of the first tranche of 349,650 CAH shares took
place as scheduled, and was settled on April 1, 2004. Notwithstanding
the amendments, for accounting purposes, the CAH shares to be
received by us in exchange for CEMEX CPOs are considered to be owned
by us effective as of July 12, 2002. As a result of these
transactions and pending their successful consummation, we will have
increased our stake in CAH to 92.3%.
o In May 2001, we acquired, through CAH, a 100% economic interest in
Saraburi Cement Company Ltd., a cement company based in Thailand with
an installed capacity of approximately 700,000 metric tons, for a
total consideration of approximately U.S.$73 million. In July 2002,
Saraburi Cement Company changed its legal name to CEMEX (Thailand)
Co. Ltd., or CEMEX (Thailand).
o In November 2000, through a tender offer and subsequent merger, we
acquired 100% of the outstanding shares of common stock of Southdown,
Inc., or Southdown, a U.S. cement producer. The total cost of the
acquisition of Southdown was approximately U.S.$2.8 billion. In March
2001,
14
through a corporate restructuring, we integrated the Southdown
operations with our other U.S. operations and "Southdown" changed its
legal name to CEMEX, Inc.
o In November 1999, we acquired a 77% interest in Assiut Cement
Company, or Assiut, an Egyptian cement producer, and in 2000, we
increased our interest to 92.9%. In January 2001, we further
increased our interest in Assiut to 95.8%.
o In June 1999, we acquired an 11.9% interest in Cementos Bio Bio,
Chile's largest cement producer.
o In April 1999, we acquired a 15.8% interest in Cementos del Pacifico,
now CEMEX (Costa Rica), S.A., or CEMEX Costa Rica, a Costa Rican
cement producer. In September 1999, we increased our interest in
CEMEX Costa Rica to 95.3%. As of December 31, 2003, we had increased
our interest in CEMEX Costa Rica to approximately 98.4%.
o In February 1999, we acquired a 99.9% economic interest in APO Cement
Corporation, or APO, a Philippine cement producer. In September 1999,
we contributed our interest in APO to CAH.
For the year ended December 31, 2003, our net sales, before
eliminations resulting from consolidation, were divided among the countries in
which we operate as follows:
United States 22% Central America
Mexico 34% and the Carribbean 8%
Spain 16% Philippines 2%
Venezuela 4% Egypt 2%
Colombia 3% Others 9%
For a description of a breakdown of total revenues by geographic markets for
each of the years ended December 31, 2001, 2002 and 2003, please see Item 5 --
"Operating and Financial Review and Prospects."
15
Our Production Process
Cement is a binding agent, which, when mixed with sand, stone or
other aggregates and water, produces either ready-mix concrete or mortar.
Mortar is the mixture of cement with finely ground limestone used in some
construction applications. Ready-mix concrete is the mixture of cement,
aggregates such as sand and gravel and water.
We manufacture cement through a closely controlled chemical process,
which begins with the mining and crushing of limestone and clay, and, in some
instances, other raw materials. The clay and limestone are then
pre-homogenized, a process which consists of combining different types of clay
and limestone in different proportions in a large storage area. The mix is
usually dried by the application of heat in order to remove humidity acquired
in the quarry. The crushed raw materials are fed in pre-established
proportions, which vary depending on the type of cement to be produced, into a
grinding process, which mixes the various materials more thoroughly and
reduces them further in size in preparation for the kiln. In the kiln, the raw
materials are calcined, or, processed at a very high temperature, to produce
clinker. Clinker is the intermediate product used in the manufacture of cement
obtained from the mixture of limestone and clay with iron oxide.
There are two primary processes used to manufacture cement, the dry
process and the wet process. The dry process is more fuel efficient. As of
December 31, 2003, 47 of our 54 operative production plants used the dry
process, five used the wet process and two used both processes. Three of the
seven production plants that use the wet process are located in Venezuela. The
remaining four production plants that use the wet process are located in
Colombia, Nicaragua, and the Philippines. In the wet process, the raw
materials are mixed with water to form slurry which is fed into the kiln. Fuel
costs are greater in the wet process than in the dry process because the water
that is added to the raw materials to form slurry must be evaporated during
the clinker manufacturing process. In the dry process, the addition of water
and the formation of slurry are eliminated, and clinker is formed by calcining
the dry raw materials. In the most modern application of this dry process
technology, the raw materials are first blended in a homogenizing silo and
processed through a pre-heater tower that utilizes exhaust heat generated by
the kiln to pre-calcine the raw materials before they are calcined to produce
clinker. Finally, clinker and gypsum are fed in pre-established proportions
into a cement grinding mill where they are ground into an extremely fine
powder to produce finished cement.
User Base
In most of the markets in which we compete, cement is the primary
building material in the industrial and residential construction sectors. The
lack of available cement substitutes further enhances the marketability of our
product. The primary end-users of cement in each region in which we operate
vary but usually include, among others, wholesalers, ready-mix concrete
producers, industrial customers and contractors in bulk.
Our Business Strategy
We seek to continue to strengthen our leadership position in the
cement industry and to maximize our overall performance by employing the
following strategies:
Reduce overall costs related to cement production.
By continuing to produce cement at a low cost we believe that we will
continue to generate the necessary cash flows to support our present and
future growth. We strive to reduce our overall cement production related costs
through strict cost management and a constant search for efficiencies. By
taking actions such as the use of alternative energy sources and the
incorporation of technological improvements at the plant level we have reduced
and expect to continue to reduce costs.
We plan to continue to eliminate redundancies at all levels,
streamline corporate structures and centralize administrative functions to
increase our efficiency and lower costs. In addition, in the last few years,
we have carried out various procedures to improve the environmental impact
of our activities as well as our overall product
16
quality. With each international acquisition, we have refined the
implementation of both the technological and managerial processes required to
rapidly integrate acquisitions into our existing corporate structure.
We have implemented the "CEMEX Way" as part of this process. The
CEMEX Way is a program designed to develop efficiencies and improved ways of
working, which will further reduce our costs, streamline our processes and
extract synergies from our global operations going forward. As a result, we
have developed centralized management information systems, including
administrative, accounting, purchasing, customer management, budget
preparation and control systems, which have been implemented throughout our
operations and that are expected to assist us in lowering costs.
Develop new competitive advantages.
We continue to focus on developing new competitive advantages that
will differentiate us from our competitors, and we are strengthening our
commercial and corporate brands in this highly competitive industry in an
effort to further enhance the value of our products for our final customers.
Our lower cost combined with our higher quality service has allowed us to make
significant inroads in these areas.
We believe our Construrama branding and our other marketing
strategies in Mexico will strengthen our distribution network, foster greater
loyalty among distributors and further fortify our commercial network. With
Construrama, we are enhancing the operating and service standards of our
distributors, providing them with training, a standard image and national
publicity, while our other strategy, which we call "Multiproductos," helps our
distributors offer a wider array of construction materials and reinforces the
subjective value of our products in their customers. In Spain, we have
implemented several initiatives to increase the value of our services to our
clients such as mobile access to account information, 24-hour bulk cement
dispatch capability, night delivery of ready-mix cement, and a customer
loyalty incentive program.
Expand into selected new markets.
Subject to economic conditions that may affect our ability to
consummate acquisitions, we intend to continue adding assets to our existing
portfolio. By selectively participating in markets that have long-term growth
potential, in most cases we have been able to increase our cash flow and
return on equity. We evaluate potential acquisitions in light of our three
primary investment principles:
o the potential for increasing the acquired entity's value should be
principally driven by factors that we can influence, particularly the
application of our management and turnaround expertise;
o the acquisition should not compromise our financial strength; and
o the acquisition should offer a higher long-term return on our
investment than our cost of capital.
In order to minimize our capital commitment and to maximize our
return on stockholders' equity, we will continue to analyze the potential
capital raising sources available in connection with acquisitions, including
sources of local financing and possible joint ventures. We normally consider
opportunities for, and routinely engage in preliminary discussions concerning,
acquisitions.
Strengthen our financial structure.
We believe our strategy of cost-cutting initiatives, increased value
proposition and geographic expansion will translate into growing operating
cash flows. Our objective is to strengthen our financial structure by:
o optimizing our borrowing costs and debt maturities;
o increasing our access to various capital sources; and
o maintaining the financial flexibility needed to pursue future growth
opportunities.
17
We intend to continue monitoring our credit risk while maintaining
the flexibility to support our business strategy.
Optimize distribution of our products through global coordination.
Through a worldwide import and export strategy, we will continue to
optimize capacity utilization and maximize profitability by directing our
products from countries experiencing downturns in their respective economies
to target export markets where demand may be greater. Our global trading
system enables us to coordinate our export activities globally and to take
advantage of demand opportunities and price movements worldwide.
Focus on attracting, retaining and developing a diverse, experienced
and motivated management team.
We will continue to focus on recruiting and retaining motivated and
knowledgeable professional managers.
Our senior management encourages managers to continually review our
processes and practices, and to identify innovative management and business
approaches to improve our operations. By rotating our managers from one
country to another and from one area of our operations to another, we increase
their diversity of experience. We provide our senior management with ongoing
training throughout their careers. In addition, through our stock-based
compensation program, our senior management has a stake in our financial
success.
The implementation of our business strategy demands effective
dynamics within our organization. Our corporate infrastructure is based on
internal collaboration and global management platforms. We will continue to
strengthen and develop this infrastructure to effectively support our
strategy.
18
Our Corporate Structure
We are a holding company and operate our business through
subsidiaries that, in turn, hold interests in our cement and ready-mix
concrete operating companies, as well as other businesses. The following chart
summarizes our corporate structure as of December 31, 2003. The chart also
shows, for each company, our approximate direct or indirect percentage equity
or economic ownership interest. The chart has been simplified to show only our
major holding companies in the principal countries in which we operate and
does not include our intermediary holding companies and our operating company
subsidiaries.
----------------------
| CEMEX, |
| S.A. de C.V. |
| (Mexico) |
----------------------
|
----------------------
| CEMEX Mexico, |
| S.A. de C.V. |
| (Mexico) |
| 100% |
---------------------
|
____________________________
| |
---------------------- - ---------------------
| Empresas Tolteca de | | Centro Distributor de |
| Mexico, S.A. de C.V. | | Cemento, S.A. de C.V. |
| (Mexico) | | (Mexico) |
| 100% | | 100% |
---------------------- ---------------------
|
----------------------
| CEMEX Espana, S.A. |
| (Spain) |
| 99.5% |
-----------------------
|
-------------------------- | -------------------------
| CEMEX Colombia, S.A. | | | CEMEX Corp. |
| (Colombia) |_______________________| (United States) |
| 98.2%(1) | | | 100% |
-------------------------- | -------------------------
| | ---------------------
| |________________| CEMEX, Inc.
| | (United States)
| | 100%
| ---------------------
|
-------------------------- | --------------------------
| Assiut Cement Company | | | CEMEX (Costa Rica), S.A.|
| (Egypt) | _______________________| (Costa Rica) |
| 95.8% | | | 98.4%(2) |
--------------------------- | --------------------------
| | -----------------------
| |________________| CEMEX Nicaragua, S.A. |
| | (Nicaragua) |
| | 100% |
| -----------------------
--------------------------- | ---------------------------
| CEMEX Asia Holdings Ltd. | | | CEMEX Venezuela, S.A.C.A. |
| (Singapore) |______________________| (Venezuela) |
| 92.3%(3) | | | 75.7% |
--------------------------- | ---------------------------
| ---------------------- |
| | Puerto Rican Cement | | ---------------------------
| | Company, Inc. | | | Cementos Nacionales, S.A. |
| | (Puerto Rico) | |____| (Dominican Republic) |
| | 100% | | | 99.9% |
| ---------------------- | ---------------------------
------------------- | --------------------------- |
|Solid Cement Corp. | | | CEMEX (Thailand) Co. Ltd. | |
| (Philippines) |_____| (Thailand) | ---------------------- | -------------------------
| 100%(4) | | | 100%(5) | | Cemento Bayano, S.A. |___| | Cementos Bio Bio, S.A. |
-------------------- | -------------------------- | (Panama) | |____| (Chile) |
| | 99.2% | | 11.9% |
| ---------------------- -------------------------
|
------------------ | -----------------------
| APO Cement | | | PT Semen Gresik |
| Corporation |______| (Persero) Tbk |
| (Philippines) | | (Indonesia) |
| 99.9%(5) | | 25.5% |
------------------ -----------------------
(1) Includes 98.2% of total shares and 99.3% of ordinary shares.
(2) Formerly, Cementos del Pacifico, S.A.
(3) In July 2002, we entered into a transaction with several CEMEX Asia
Holdings minority investors, which we amended in April 2003, pursuant to
which we will increase our interest in CEMEX Asia Holdings to 92.3% through
four quarterly share exchanges scheduled to take place in 2004. For
accounting purposes, such increase was effective as of July 2002. See Item
5 - "Operating and Financial Review and Prospects - Investments,
Acquisitions and Divestitures."
(4 )Formerly, Rizal Cement Co. Inc. Includes CEMEX Asia Holdings' 70%
economicinterest and a 30% economic interest held by a wholly-owned
subsidiary of CEMEX Espana, S.A.
(5) Represents CEMEX Asia Holdings' economic interest.
19
North America
As of and for the year ended December 31, 2003, North America, which
includes our operations in Mexico and the United States, represented
approximately 56% of our net sales, 50% of our total installed capacity and
40% of our total assets.
Our Mexican Operations
Overview
Our Mexican operations represented approximately 34% of our net sales
in 2003.
At December 31, 2003, we owned or had economic rights to 100% of the
outstanding capital stock of CEMEX Mexico. CEMEX Mexico is a direct subsidiary
of CEMEX and is both a holding company for some of our operating companies in
Mexico and an operating company involved in the manufacturing and marketing of
cement, plaster, gypsum, groundstone and other construction materials and
cement by-products in Mexico. CEMEX Mexico, indirectly, is also the holding
company for our international operations.
At December 31, 2003, CEMEX Mexico owned approximately 100% of the
outstanding capital stock of Empresas Tolteca de Mexico. Empresas Tolteca de
Mexico is a holding company for some of our operating companies in Mexico.
CEMEX Mexico and Empresas Tolteca de Mexico, together with their
subsidiaries, account for substantially all the revenues and operating income
of our Mexican operations.
Since the early 1970s, we have pursued a growth strategy designed to
strengthen our core operations and to expand our activities beyond our
traditional market in northeastern Mexico. This strategy has transformed our
Mexican operations from a regional participant into the leading Mexican cement
manufacturer. The process was largely completed with our acquisition of
Cementos Tolteca, S.A. de C.V. in 1989, which increased our installed capacity
for cement production by 6.5 million tons. Since the Cementos Tolteca
acquisition, we have added 7.0 million tons of installed capacity in Mexico
through acquisitions, expansion, modernization and the construction of new
plants. Our largest new construction project in Mexico in the 1990s was the
Tepeaca plant, which began operations in 1995 and had an installed capacity as
of December 31, 2003 of 3.3 million tons. During the second quarter of 2002,
the production operations at our oldest plant (Hidalgo) were temporarily
halted and remain suspended pending our review of the cost effectiveness of
continued production operations at this plant. We do not presently foresee any
significant capacity expansion in our Mexican operations in 2004.
In 2001, we launched the Construrama program, a registered brand name
for construction material stores. Through the Construrama program, we offer to
an exclusive group of our Mexican distributors the opportunity to sell a
variety of products under the Construrama brand name, a concept that includes
the standardization of stores, image, marketing, products and services. By the
end of 2003, 750 independent concessionaries with close to 2,100 stores were
integrated into the Construrama program in more than 700 towns and cities
throughout Mexico. By the end of 2004, we expect to have approximately 2,300
stores under the Construrama program.
The Mexican Cement Industry
Cement in Mexico is sold principally through distributors with the
remaining balance sold through ready-mix concrete producers, manufacturers of
pre-cast concrete products and construction contractors. Cement sold through
distributors is mixed with aggregates and water by the end user at the
construction site to form concrete. Ready-mix concrete producers mix the
ingredients of concrete in plants and deliver it to local construction sites
in mixer trucks, which pour the concrete. Unlike more developed economies,
where purchases of cement are concentrated in the commercial and industrial
sectors, retail sales of cement through distributors typically account for
around 75% of Mexico's demand. Individuals who purchase bags of cement for
self-construction and other basic construction needs are a significant
component of the retail sector. We estimate that as much as 50% of total
20
demand in Mexico comes from individuals who address their own construction
needs. We believe that this large retail sales base is a factor that
significantly contributes to the overall performance of the Mexican cement
market.
Competition. As recently as the early 1970s, the Mexican cement
industry was regionally fragmented. However, over the last 30 years, the
Mexican cement industry has consolidated into a national market, thus becoming
increasingly competitive. As of December 31, 2003, according to publicly
available information, the major cement producers in Mexico are CEMEX; Holcim
Apasco, an affiliate of Holcim; Sociedad Cooperativa Cruz Azul, a Mexican
operator; Cementos Moctezuma, an associate of Ciments Molins; and Lafarge.
Potential entrants into the Mexican cement market face various
impediments to entry including:
o the time-consuming and expensive process of establishing a
retail distribution network and developing the brand
identification necessary to succeed in the retail market, which
represents the bulk of the domestic market;
o the lack of port infrastructure and the high inland
transportation costs resulting from the low value-to-weight
ratio of cement;
o the distance from ports to major consumption centers and the
presence of significant natural barriers, such as mountain
ranges, which border Mexico's east and west coasts.
o the extensive capital investment requirements;
o the length of time required for construction of new plants
(approximately two years).
Our Mexican Operating Network
[MAP GRAPHIC OMITTED]
(1) In 2002, production operations at the Hidalgo cement plant were
temporarily halted and remain suspended pending our review of the cost
effectiveness of continued production operations at this plant.
Currently, we operate 14 plants (not including Hidalgo) and 76
distribution centers 68 land terminals and 8 marine terminals) located
throughout Mexico. We operate modern plants on Mexico's Atlantic and Pacific
coasts,
21
allowing us to take advantage of low-cost maritime transportation to
the Asian, Caribbean, Central and South American and U.S. markets.
We believe that geographic diversification in Mexico is important
because:
o it decreases the effect of regional cyclicality on total demand
for our Mexican operations' products;
o it places our Mexican operations in physical proximity to
customers in each major region of Mexico, allowing more
cost-effective distribution; and
o it allows us to optimize production processes by shifting
output to those facilities better suited to service the areas
with the highest demand and prices.
Products and Distribution Channels
Our domestic cement sales represented approximately 96% in 2001, 97%
in 2002 and 97% in 2003 of our total Mexican cement sales revenues.
Cement. As a result of the retail nature of the Mexican market, our
Mexican operations are not dependent on a limited number of large customers.
In 2003, our Mexican operations sold approximately 73% of their cement sales
volume through more than 5,900 distributors throughout the country, most of
whom work on a regional basis. The five most important distributors in the
aggregate accounted for approximately 4% of our Mexican operations' total
sales by volume for 2003.
The retail nature of the Mexican cement market also enables us to
foster brand loyalty, which distinguishes us from other worldwide producers
selling primarily in bulk in the commodity market. We own the registered
trademarks for our major brands in Mexico, such as "Monterrey," "Tolteca" and
"Anahuac." We believe that these brand names are important in Mexico since
cement is principally sold in bags to retail customers who may develop brand
loyalty based on differences in quality and service. Our domestic cement sales
volumes decreased 7% in 2001, increased 4% in 2002 and 4% in 2003. In
addition, we own the registered trademark for the "Construrama" brand name for
construction material stores. See "Our Mexican Operations - Overview" above
for a description of our recently launched Construrama program.
Ready-Mix Concrete. Ready-mix concrete sales volumes by our Mexican
operations decreased 3% in 2001, increased 10% in 2002 and 13% in 2003.
Although traditionally ready-mix concrete has not been an important product in
Mexico because of the availability of low-cost labor and the relatively small
size of private sector construction projects, for the year ended December 31,
2003, ready-mix concrete sales represented 12% of our Mexican operations'
total cement sales volume.
Demand for ready-mix concrete in Mexico depends on various factors
over which we have no control. These include the overall rate of growth of the
Mexican economy and plans of the Mexican government regarding major
infrastructure and housing projects.
Exports. Our Mexican operations export a portion of their cement
production. Exports of cement and clinker by our Mexican operations decreased
10% in 2001, 25% in 2002 and 24% in 2003. In 2003, approximately 71% of our
exports from Mexico were to the United States, 28% to Central America and the
Caribbean and 1% to South America.
Our Mexican operations' cement and clinker exports to the U.S. are
marketed through wholly-owned subsidiaries of CEMEX Corp., the holding company
of CEMEX, Inc. All transactions between CEMEX and the subsidiaries of CEMEX
Corp., which act as our U.S. importers, are conducted on an arm's-length
basis. Imports of cement and clinker into the U.S. from Mexico are subject to
anti-dumping duties. See "Regulatory Matters and Legal Proceedings -- U.S.
Anti-Dumping Rulings -- Mexico" below.
22
Production Costs
Our Mexican operations' cement plants primarily utilize pet coke, but
several are designed to switch to fuel oil and natural gas with minimum
downtime. We have entered into two 20-year contracts with Petroleos Mexicanos,
or Pemex, pursuant to which Pemex agreed to supply us with 1,750,000 tons of
pet coke per year, 850,000 tons per year commencing in 2002 with respect to the
first contract and 900,000 tons per year commencing in 2003 with respect to the
second contract. Pet coke is petroleum coke, a solid or fixed carbon substance
that remains after the distillation of hydrocarbons in petroleum and that may
be used as fuel in the production of cement. We expect the Pemex pet coke
contracts to reduce the volatility of our fuel costs and provide us with a
consistent source of pet coke throughout their 20-year terms. In addition,
since 1992, our Mexican operations have begun to use alternate fuels, to
further reduce the consumption of residual fuel oil and natural gas. These
alternate fuels represented 1.8% (based on a yearly average) of the total fuel
consumption for our Mexican operations in 2003, and we expect to increase it to
around 4% during 2004.
In 1999, we reached an agreement with ABB Alstom Power and Sithe
Energies, Inc. requiring Alstom and Sithe to finance, build and operate
"Termoelectrica del Golfo," a 230 megawatt energy plant in Tamuin, San Luis
Potosi, Mexico and to supply electricity to us for a period of 20 years. The
total cost of the project is approximately U.S.$360 million. Pursuant to the
agreement, we are obligated to purchase the full electric capacity generated
by the power plant during the 20-year period. We are also obligated to supply
Alstom and Sithe with 1,200,000 tons of pet coke per year for the 20-year
period for the consumption of this power plant and another power plant built
and operated by Alstom and Sithe for Penoles, a Mexican mining company. We
expect to meet our pet coke delivery requirements to Alstom and Sithe through
several pet coke supply agreements, including our pet coke supply contract
with Pemex. Pursuant to the agreement, we may be obligated to purchase the
Termoelectrica del Golfo plant upon the occurrence of specified material
defaults or events, such as failure to pay when due, bankruptcy or insolvency,
and revocation of permits necessary to operate the facility, and upon
termination of the 20 year period, we will have the right to purchase the
assets of the power plant. We expect this arrangement to reduce the volatility
of our energy costs and to provide approximately 80% of CEMEX Mexico's
electricity needs. The power plant commenced commercial operations on April
29, 2004.
We have from time to time purchased hedges from third parties to
reduce the effect of volatility in energy prices in Mexico. See Item 5 --
"Operating and Financial Review and Prospects -- Liquidity and Capital
Resources."
Description of Properties, Plants and Equipment
As of December 31, 2003, we operated 14 wholly-owned cement plants
(not including Hidalgo) located throughout Mexico, with a total installed
capacity of 27.2 million tons per year. Our Mexican operations' most
significant gray cement plants are the Huichapan, Tepeaca and Barrientos
plants, which serve the central region of Mexico, the Monterrey, Valles and
Torreon plants, which serve the northern region of Mexico, and the Guadalajara
and Yaqui plants, which serve the Pacific region of Mexico. We have exclusive
access to limestone quarries and clay reserves near each of our plant sites in
Mexico. We estimate that these limestone and clay reserves have an average
life of more than 60 years, assuming 2003 production levels. As of December
31, 2003, all our production plants in Mexico utilized the dry process.
As of December 31, 2003, we had a network of 68 land distribution
centers in Mexico, which are supplied through a fleet of our own trucks and
rail cars, as well as leased trucks and rail facilities and eight marine
terminals. In addition, we had 211 ready-mix concrete plants throughout 74
cities in Mexico and 1,367 ready-mix concrete delivery trucks.
Capital Investments
We made capital expenditures of approximately U.S.$109.4 million in
2003 in our Mexican operations. We currently expect to make capital
expenditures of approximately U.S.$79.0 million during 2004.
23
Our U.S. Operations
Overview
Our U.S. operations represented approximately 22% of our net sales in
2003. As of December 31, 2003, we had a cement manufacturing capacity of
approximately 14.2 million metric tons per year in our United States
operations, including nearly 600,000 metric tons in proportional interests
through minority holdings.
As of December 31, 2003, we operated a geographically diverse base of
13 cement plants located in Alabama, California, Colorado, Florida, Georgia,
Illinois, Kentucky, Michigan, Ohio, Pennsylvania, Tennessee and Texas. As of
that date, we also had 53 rail or water served active cement distribution
terminals in the United States and one in Canada. We also market ready-mix
concrete products in four of our largest cement markets, California, Arizona,
Texas, and Florida, and mine, process and sell construction aggregates in these
four states as well. In addition, with the acquisition of Mineral Resource
Technologies, Inc. in August 2003 through an indirect subsidiary, CEMEX, Inc.
has achieved a competitive position in the growing fly ash market. Fly ash is a
material having the properties of cement that is used in the production of
high-quality concrete. Mineral Resource Technologies, Inc. is one of the four
largest fly ash companies in the United States, providing fly ash to customers
in 26 states.
The Cement Industry in the United States
Competition. As a result of the lack of product differentiation and
the commodity nature of cement, the cement industry in the U.S. is highly
competitive. We compete with national and regional cement producers in the
U.S. CEMEX, Inc.'s principal competitors in the United States are Holcim,
Lafarge, Buzzi-Dyckerhoff, Heidelberg Cement and Ash Grove Cement.
The U.S. ready-mix concrete industry is highly fragmented, and few
producers have annual sales in excess of U.S.$3 million or have a fleet of
more than 20 mixers. Given that the concrete industry has historically
consumed approximately 70% of all cement produced annually in the U.S., many
cement companies choose to be vertically integrated.
Aggregates are widely used throughout the U.S. for all types of
construction because they are the most basic materials for building activity.
The U.S. aggregates industry is highly fragmented and geographically
dispersed. According to the U.S. Geological Survey, in 2003, approximately
4,000 companies operated approximately 6,400 quarries and pits.
24
Our United States Operating Network
[MAP GRAPHIC OMITTED]
In 2001, production operations at the Pittsburgh cement plant were
shut down. It now operates as a distribution terminal.
Products and Distribution Channels
CEMEX, Inc. delivers a substantial portion of cement by rail.
Occasionally, these rail shipments go directly to customers. Otherwise,
shipments go to distribution terminals where customers pick up the product by
truck or CEMEX, Inc. delivers the product by truck. The majority of our cement
sales are made directly to users of gray Portland and masonry cements,
generally within a radius of approximately 200 miles of each plant. As
discussed below, cement demand in the United States has become less dependent
upon the more cyclical residential and commercial sectors. Because of the
distribution of operations across the U.S., we are able to achieve stability
of cash flows should market conditions deteriorate in any one region of the
U.S.
Cement. Our cement operations represented approximately 62% of our
2003 U.S. operations revenues. Our U.S. operations sales volumes increased
183% in 2001, mainly as a result of our acquisition of Southdown, now named
CEMEX, Inc., decreased 5.3% in 2002 due to the economic downturn in the United
States, and increased 2% in 2003 due to strong demand from the public works
sector, in particular street and highway construction, and the residential
sector during the second half of 2003.
Demand for cement is derived from the demand for ready-mix concrete
and concrete products which, in turn, is dependent on the demand for
construction. According to estimates of the Portland Cement Association, the
three construction sectors that are the major components of cement consumption
are public works construction, commercial and industrial construction, and
residential construction.
Cement demand has recently been much less vulnerable to a downturn
than in previous cycles due to increased public infrastructure spending. In
2003, according to our estimates, public infrastructure spending accounted for
approximately 50% of the total cement consumption in the U.S. Strong cement
demand over the past decade has driven industry capacity utilization up to
maximum levels. According to the Portland Cement Association, domestic
capacity utilization reached 95.5% in 2001, 93.3% in 2002 and 90.7% in the
first 10 months of 2003.
25
Ready-Mix Concrete. Concrete operations represented approximately 27%
of our 2003 revenues in the U.S. We have ready-mix operations in California,
Arizona, Texas and Florida. Our concrete operations in those states purchase
most of their cement requirements from our cement operations in the U.S.
Aggregates. Our construction aggregates operations include mining,
processing and selling construction aggregates in California, Arizona, Texas
and Florida. Aggregates operations represented approximately 6% of our 2003
U.S. revenues. At 2003 production levels, it is anticipated that over 80% of
our construction aggregates reserves in the U.S. will last from 10 years to
more than 50 years.
Production Costs
The largest cost components of our plants are electricity and fuel,
which accounted for approximately 34% of CEMEX, Inc.'s total production costs
in 2003. CEMEX, Inc. is currently implementing an alternative fuels program to
gradually replace coal with more economic fuels such as petcoke and tires,
which has resulted in reduced energy costs. By retrofitting our cement plants
to handle alternative energy fuels, we have gained more flexibility in
supplying our energy needs and become less vulnerable to potential price
spikes. In 2003, the use of alternative fuels offset the effect on our fuel
costs of a significant increase in coal prices. Power costs in 2003
represented approximately 18% of the cash manufacturing cost, which represents
production cost before depreciation. We have improved the efficiency of CEMEX,
Inc.'s electricity usage, concentrating our manufacturing activities in
off-peak hours and negotiating lower rates with electricity suppliers.
Description of Properties, Plants and Equipment
As of December 31, 2003, we operated 13 cement manufacturing plants
in the U.S., with a total installed capacity of 14.2 million metric tons per
year, including nearly 600,000 metric tons in proportional interests through
minority holdings. All our cement production facilities are wholly owned
except for the Balcones plant, which is leased, and the Louisville plant and
Pittsburgh terminal. The Louisville and Pittsburgh facilities are owned by
Kosmos Cement Company, a joint venture in which CEMEX, Inc. owns 75% and a
subsidiary of Dyckerhoff AG owns 25% of the interests.
During the fourth quarter of 2001, we substantially completed a
capacity expansion project at our Victorville manufacturing facility, which
resulted in a net capacity increase of approximately one million metric tons
per year.
In September 2003, an indirect subsidiary of CEMEX, Inc. acquired a
cement plant in Dixon, Illinois. The Dixon plant has a production capacity of
560,000 metric tons per year and serves Illinois and Wisconsin as its main
markets.
As of December 31, 2003, we operated a distribution network of 86
ready-mix concrete plants, 54 cement terminals, five of which are deep-water
terminals, and 23 aggregate locations throughout the U.S. Also, we distributed
fly ash through 10 stand-alone terminals and 10 third-party-owned utility
plants. The latter operate both as sources of fly ash and distribution
terminals.
Capital Investment
We made capital expenditures of approximately U.S.$179.5 million in
2001, U.S.$95.9 million in 2002 and U.S.$96.6 million in 2003 in our U.S.
operations. We currently expect to make capital expenditures in our U.S.
operations of approximately U.S.$79.8 million during 2004.
26
Europe, Asia and Africa
As of December 31, 2003, our business in Europe, Asia and Africa,
which included our majority-owned operations in Spain, the Philippines,
Thailand and Egypt, as well as our minority interests in Indonesia and other
Asian investments, represented approximately 20% of our net sales, 32% of our
total installed capacity and 21% of our total assets.
Our Spanish Operations
Overview
Our Spanish operations represented approximately 16% of our net sales
in 2003. We conduct our Spanish operations through our operating subsidiary
CEMEX Espana, S.A. or CEMEX Espana. CEMEX Espana is also a holding company for
most of our international operations. Our cement activities are conducted by
CEMEX Espana itself and Cementos Especiales de las Islas, S.A. a joint venture
50% owned by Cemex Espana. Our ready-mix concrete activities and our
aggregates activities are conducted by Hormicemex, S.A. and Aricemex S.A.,
respectively.
The Spanish Cement Industry
In 2003, the construction sector of the Spanish economy grew 3.7%,
primarily as a result of the growth of construction in the residential sector
of the Spanish economy. Cement consumption in Spain increased approximately
9.7% in 2001, 4.7% in 2002 and 4.4% in 2003. Our domestic cement and clinker
sales volumes in Spain increased approximately 4.1% in 2001, 2.5% in 2002 and
4.5% in 2003.
During the past several years, the level of cement imports into Spain
has been influenced by the strength of domestic demand. Cement imports
increased 22.2% in 2001 and 5.5% in 2002 but decreased 25% in 2003. Clinker
imports have demonstrated an intense dynamism, with increases of 43.6% in
2001, 18.2% in 2002 and 25.6% in 2003. Imports primarily had an impact on
coastal zones, since transportation costs make it less profitable to sell
imported cement in inland markets. Nonetheless, sales from imports have been
increasing in the center of Spain.
In the past, Spain has traditionally been one of the leading
exporters of cement in the world exporting up to 6 million tons per year.
Nevertheless, exports of producers in Spain have been reduced in recent years
to 1.2 million tons in 2003 to meet strong domestic demand. Our Spanish
operations' cement and clinker export volumes decreased 42% in 2001, increased
5% in 2002 and decreased 21% in 2003.
Competition.
In 2003, the world's second largest producer, the Holcim group of
Switzerland, bought a cement plant of 0.75 million tons of total cement
capacity in the center of Spain from Dyckehoff group, a German company.
According to the Asociaciun de Fabricantes de Cemento de Espana, or OFICEMEN,
the Spanish cement trade organization, as of December 31, 2003, approximately
60% of installed capacity for production of cement in Spain was owned by five
multinational groups, including CEMEX.
Competition in the ready-mix concrete industry is particularly
intense in large urban areas. Our subsidiary Hormicemex has achieved a sizable
market presence in areas such as Baleares, Canarias, Levante and Aragon. In
other areas, such as the central and Cataluna regions, our market share is
smaller due to greater competition in the relatively larger urban areas. The
overall high degree of competition in the Spanish ready-mix concrete industry
has led to weak pricing, which, in turn, has affected Hormicemex's
profitability. Despite this fact, the distribution of ready-mix concrete
remains a key component of CEMEX Espana's business strategy.
OFICEMEN reported that, based on 2003 sales, CEMEX Espana had a
market share of 22.2% in gray and white cement, making us the leader in the
Spanish cement industry. We believe that we maintain this leading market
position because of our customer service and our geographic diversification,
which includes extensive
27
distribution channels that enable us to cope with downturns in demand more
effectively than many of our competitors because we are able to shift our
production to serve areas with the strongest demand and prices.
Our Spanish Operating Network
[MAP GRAPHIC OMITTED]
Products and Distribution Channels. CEMEX Espana offers various types
of cement, targeting specific products to specific markets and users. In 2003,
approximately 17% of CEMEX Espana's domestic sales volumes consisted of bagged
cement through distributors, and the remainder of CEMEX Espana's domestic
sales volumes consisted of bulk cement, primarily to ready-mix concrete
operators, which include CEMEX Espana's own subsidiaries, as well as
industrial customers that use cement in their production processes and
construction companies.
Exports. In general, despite increases in domestic demand in recent
years, we have been able to export excess capacity through collaboration
between CEMEX Espana and our trading network. Export prices, however, are
usually lower than domestic market prices, and costs are usually higher for
export sales. Of our total exports from Spain in 2003, 90% consisted of white
cement and 10% consisted of gray cement. In 2003, 61% of our exports from
Spain were to the United States, 14% to Europe and 25% to Africa.
Production Costs
We have improved the profitability of our Spanish operations by
introducing technological improvements that have significantly reduced our
energy costs, including the use of alternative fuels, in accordance with our
cost reduction policy. We have reduced the clinker-cement ratio (the
proportion of clinker used in the production of cement) by 4.6 percentage
points over the last five years. In 2003, we maintained the same
clinker-cement ratio. Additionally, the increased capacity in 2002 of the San
Vicente plant (approximately 400,000 tons) has allowed us to reduce the
clinker transportation costs between plants and the need for imported clinker.
In 2003, we burned meal flour and tires as fuel, achieving in December a 1.8%
substitution rate for petcoke. During 2004, in addition to those alternative
fuels, we expect to initiate the burning of organic waste and plastics.
28
Description of Properties, Plants and Equipment
As of December 31, 2003, our Spanish operations operated eight plants
located in Spain, with a cement equivalent capacity of 10.8 million tons,
including 860,000 tons of white cement. We also operated 77 ready-mix concrete
plants, including 16 aggregate and 10 mortar plants. CEMEX Espana also owns
two cement mills, one of which is operated through a joint venture 50%-owned
by CEMEX Espana, and 31 distribution centers, including 12 land and 19 marine
terminals.
As of December 31, 2003, CEMEX Espana owned 8 limestone quarries
located in close proximity to its plants, which have useful lives ranging from
10 to 30 years, assuming 2003 production levels. Additionally, we have rights
to expand those reserves to 50 years of limestone reserves, assuming 2003
production levels.
Capital Investments
We made capital expenditures of approximately U.S.$53.9 million in
2003 in our Spanish operations. We currently expect to make capital
expenditures in our Spanish operations of approximately U.S.$48.6 million
during 2004.
Our Asian Operations
As of December 31, 2003, our business in Asia, which includes our
operations in the Philippines and Thailand, as well as our minority interests
in Indonesia and other assets in Asia, represented approximately 3% of our net
sales, 13.4% of our total installed capacity and 5% of our total assets.
Our Philippine Operations
Overview
In 1997, we acquired a 30% economic interest in Rizal Cement Company,
or Rizal (now, Solid Cement Corporation, or Solid, as a result of the merger
of Rizal into Solid on December 23, 2002), a Philippine cement producer, and
in 1998, we increased our economic interest to 70%. In September 1999, we
contributed our interest in Rizal to CAH. On July 31, 2002, we purchased,
through a wholly-owned subsidiary, the remaining 30% economic interest that
was not previously acquired by CAH in Rizal (now, Solid), for approximately
U.S.$95 million. At December 31, 2003, as a consequence of these transactions
and the increase of our stake in CAH, as described under "Business Overview"
above, our proportionate economic interest in Solid (formerly, Rizal) was
approximately 94.6%.
The Philippine Cement Industry
During 2003, cement consumption in the Philippine market totaled 12.6
million tons. Since there is currently underutilization of existing capacity
in the Philippines, we intend to use our trading network to export a
substantial amount of our Philippine clinker and cement production.
The Philippine cement market is primarily retail, similar to Mexico.
During 2003, approximately 90% of our Philippine cement volume was sold in
bags through distributors and retailers. The balance was sold through
ready-mix concrete producers, large and small contractors and hollow block
manufacturers, among others.
After four years of continual decline since the 1997 Asian economic
recession, cement demand in the Philippines recovered during 2002 as the
overall economy showed a slight improvement. However, industry demand
decreased by 2.7% in 2003 compared to 2002. As such, demand growth is lagging
when compared to other countries in the region and is below pre-crisis levels
in Asia.
Competition. As of December 31, 2003, the Philippine cement industry
had a total of 20 cement plants and three cement grinding mills. Annual
installed capacity is 26.8 million tons, according to the Cement
Manufacturers' Association of the Philippines. Major global cement producers
own approximately 88% of this capacity.
29
Our major competitors in the Philippine cement market are Holcim,
which has interests in six local cement plants, and Lafarge, which has
interests in eight local cement plants.
Our Philippine Operating Network
[MAP GRAPHIC OMITTED]
*Solid consists of two plants in the Manila metropolitan region. The
operation of one of these plants has been suspended in 1999.
We have three cement plants in the Philippines with a total of eight
production lines, three utilizing the dry process (73% of our capacity) and
five wet process (27% of our capacity), as well as distribution centers in
Batangas and Iloilo. Only the dry production lines are currently in use. Three
of the five wet production lines are located in the plant that suspended
operations in 1999.
Production Costs
Costs of production include energy, labor, transportation, raw
materials, maintenance and packaging. The limestone mining license held by an
APO affiliate does not expire until 2022, and mining license for pozzolan,
another material used in making cement, held by the same APO affiliate does
not expire until 2018. A subsidiary of Solid holds a mining license that
expires in 2023. All three licenses are renewable for another 25 years upon
mutual agreement with the Philippine government. Other raw materials, such as
gypsum and iron ore, which are used in smaller quantities than limestone,
pozzolan and clay, are purchased from outside suppliers.
Our plants have their own electricity generating capacity, which
allows us to reduce our production costs since our self-generated electricity
cost is usually cheaper than electricity supplied by either government-owned
or privately-owned grids. However, one of our Manila plants can still avail
itself of electricity from local suppliers when production reaches its peak or
when rates are economically attractive.
30
Description of Properties, Plants and Equipment
Our Philippine operations include three plants with a total capacity
of 5.8 million tons per year and two marine distribution terminals. Our cement
plants include two Solid plants, with five wet process production lines and
one dry process production line and an installed capacity of 2.8 million tons,
serving the Manila metropolitan region; and the APO plant, with two dry
process production lines and a jetty terminal for local and export markets
with installed capacity of 3.0 million tons, serving the Visayas, North
Mindanao and South of Luzon regions.
Capital Investments
We made approximately U.S.$1.7 million of capital expenditures in
2003 in our Philippine operations. We currently expect to make capital
expenditures of approximately U.S.$1.9 million during 2004.
Our Indonesian Equity Investment
Overview
In October 1998, we purchased from the Republic of Indonesia a 14%
interest in PT Semen Gresik (Persero) Tbk., or Gresik, Indonesia's largest
cement producer. In 1999, we increased our interest in Gresik to approximately
25.5%. The Republic of Indonesia retains a 51% interest in Gresik. In October
2000, by means of capital contributions made by us and the minority investors,
CAH acquired our interest in Gresik. As a result of this transaction and the
increase of our stake in CAH, as described under "Business Overview" above, at
December 31, 2003, our proportionate economic interest through CAH in Gresik
was approximately 23.5%. Currently, we hold two seats on both the board of
directors and the board of commissioners of Gresik, as well as the right to
approve Gresik's business plan jointly with the Indonesian government.
Gresik owns (directly or indirectly through its subsidiaries) four
cement plants in Indonesia with a total installed capacity of 17.3 million
tons.
On October 31, 2001, certain individuals purporting to represent the
people of the Indonesian province of West Sumatra, in which Gresik's Padang
plant is located, issued a declaration which stated that, commencing November
1, 2001, PT Semen Padang , or Semen Padang, the 99.99%-owned subsidiary of
Gresik that owns and operates the Padang plant, was placed under the temporary
control of the people of West Sumatra. The declaration ordered the management
of Semen Padang to report to the local government of the West Sumatra
Province, under the supervision of the People's Representative Assembly of
West Sumatra, pending a "spin-off" of the Semen Padang subsidiary. On November
1, 2001, the People's Representative Assembly of West Sumatra issued a decree
approving this declaration. We believe the provincial administration lacks
legal authority to direct or interfere with the affairs of Semen Padang.
Since the attempt by the West Sumatra provincial administration in
November 2001 to arrogate to itself the management of Semen Padang, several
groups opposed to any further sale of Indonesia's stock ownership in Gresik
have threatened strikes and other actions that would affect our Indonesian
operations. We have discussed our concerns with the Indonesian government,
which agreed to implement management changes to seek to re-attain normality in
the Semen Padang plant's operations. Gresik, as the controlling shareholder of
Semen Padang, took steps to seek to convene a general meeting of shareholders
to replace the management of Semen Padang. The management of Semen Padang
refused to convene such a meeting, and such refusal was upheld by the Padang
District Court in September 2002.
After a protracted process that included several legal actions,
including proceedings before the Indonesian Supreme Court, the extraordinary
general meeting of shareholders of Semen Padang was finally convened on May
12, 2003 and Gresik, as the controlling shareholder of Semen Padang, approved
the replacement of Semen Padang's management.
The Semen Padang management that was replaced, however, refused to
recognize these management changes, and employees at Semen Padang physically
prevented the newly appointed management from entering the
31
facility. Finally, on September 8, 2003, the newly-appointed management was
permitted to enter the Semen Padang facility amid a police escort. However, we
believe that the newly-appointed management was admitted on condition that it
encourage a spin-off of Semen Padang, and in October 2003 the newly-appointed
management explicitly agreed to encourage a spin-off of Semen Padang.
Gresik has experienced other ongoing difficulties at Semen Padang,
including the effective loss of operational and financial control of Semen
Padang, the inability to prepare consolidated financial statements that
include Semen Padang's operations and the inability of its independent
auditors to provide an unqualified audit opinion on such financial statements.
As a result of these difficulties, we have not been able to independently
verify certain information with respect to Semen Padang's facilities and
operations and thus, the overall description of Gresik's facilities and
operations below assumes the validity of the information provided by Semen
Padang's management.
In March 2003, a lawsuit was filed in the Padang District Court
against Gresik, Semen Padang and several Indonesian government agencies. The
lawsuit, which was filed by a foundation purporting to act in the interest of
the people of West Sumatra, challenged the validity of the sale of Semen
Padang by the Indonesian government to Gresik in 1995 on the grounds that the
Indonesian government did not obtain the necessary approvals for such sale. On
May 9, 2003, the Padang District Court issued an interim decision suspending
Gresik's rights as a shareholder in Semen Padang on the grounds that ownership
of Semen Padang was an issue in dispute. On March 31, 2004, the Padang
District Court announced its final decision in favor of the foundation. On
April 12, 2004, Gresik filed an appeal of this decision with the Padang
District Court, which will in turn forward the appeal to the High Court of the
West Sumatra province.
After the failure of several attempts to reach a negotiated or
mediated solution to these problems involving Gresik, on December 10, 2003,
CAH filed a request for arbitration against the Republic of Indonesia and the
Indonesian government before the International Centre for Settlement of
Investment Disputes, or ICSID, based in Washington D.C. ICSID was established
by the Convention on the Settlement of Investment Disputes between States and
Nationals of other States, and is intended to facilitate the resolution of
international investment disputes. ICSID is an autonomous international
organization with close links to the World Bank. CAH is seeking, among other
things, rescission of the purchase agreement entered into with the Republic of
Indonesia in 1998, plus repayment of all costs and expenses, and compensatory
damages. ICSID has accepted and registered CAH's request for arbitration and
issued a formal notice of registration on January 27, 2004. As a result of the
registration, an Arbitral Tribunal will be established to hear the dispute. We
cannot predict, however, what effect, if any, this action will have on our
investment in Gresik or what the ruling of the Arbitral Tribunal will be.
The Indonesian Cement Industry
The Indonesian cement industry is one of the two largest in South
East Asia, accounting for about 26% of the approximately 106 million tons of
cement consumed in South East Asia in 2003, according to our estimates.
Despite the continuing economic and political problems experienced by
Indonesia and the difficulties involving Gresik described above, we believe
the Indonesian cement market is important to our Asian expansion strategy due
to its strategic location, size, potential as an anchor for our South East
Asian trading network and the significant growth potential of the Indonesian
economy.
Indonesian domestic cement demand increased approximately 14.2% in
2001, 6.8% in 2002 and 1.0% in 2003. However, as of December 31, 2003, the
Indonesian cement industry still had substantial excess capacity, which has
required Indonesian producers to seek export markets.
Competition. As of December 31, 2003, the Indonesian cement industry
had 13 cement plants, including the four plants owned by Gresik, with a
combined installed capacity of approximately 47.5 million tons. Foreign
companies continue their efforts to increase their participation in the
industry. Lafarge holds a majority position in P.T. Semen Andalas,
Heidelberger holds a majority interest in Indocement and Holcim holds a
majority interest in Cibinong.
32
Gresik's Indonesian Operating Network
[MAP GRAPHIC OMITTED]
Gresik, with an installed capacity of 17.3 million tons, is
Indonesia's largest cement producer. Gresik's production facilities include
four plants with twelve dry production lines and one wet production line, with
access to most of Indonesia's regions.
As of December 31, 2003, Gresik was operating at approximately 84%
capacity utilization, including export sales. In 1998, CEMEX reached an
agreement in principle with Gresik for the exportation of cement. Pursuant to
the agreement, Gresik had the option of requesting CEMEX's assistance in
exporting 1.5 million tons of cement during each of the years 2000, 2001 and
2002. A similar arrangement remained in place for 2003.
Exports. During 2003, Gresik exported approximately 17% of its total
sales volume, mainly through its own efforts. Gresik exports mainly to
Bangladesh and Africa.
Description of Properties, Plants and Equipment
As of December 31, 2003, Gresik had four cement plants with an
installed capacity of 17.3 million tons, and 27 land distribution centers and
10 marine terminals. Gresik's cement plants include the Padang plant, with one
production line that utilizes the wet process and four production lines that
utilize the dry process and an installed capacity of 5.6 million tons; the
Gresik plant, which has two production lines that utilize the dry process and
an installed capacity of 1.3 million tons; the Tuban plant, which has three
production lines that utilize the dry process and an installed capacity of 6.9
million tons; and the Tonasa plant, which has three production lines that
utilize the dry process and an installed capacity of 3.5 million tons.
Our Thai Operations
Overview
In May 2001, through CAH, we acquired a 100% economic interest in
Saraburi Cement Co. Ltd., a cement producer based in Thailand. The company was
later renamed CEMEX (Thailand) Co., Ltd. Our proportionate economic interest
in CEMEX (Thailand) through CAH is approximately 92.3% as of December 31,
2003.
33
The Thai Cement Industry
According to our estimates, at December 31, 2003, the cement industry
in Thailand had a total of 13 cement plants, with an aggregate annual
installed capacity of approximately 54.3 million tons. We estimate that there
are five major cement producers in Thailand, four of which represent 99% of
installed capacity and 97% of the market.
Competition. Our major competitors in the Thailand market, which have
a significantly larger presence than CEMEX (Thailand), are Siam Cement,
Holcim, TPI Polene and Italcementi.
Our Thai Operating Network
[MAP GRAPHIC OMITTED
Description of Properties, Plant and Equipment
CEMEX (Thailand) owns one dry process cement plant located north of
Bangkok and has been operating at full capacity. As of December 31, 2003,
CEMEX (Thailand) had an installed capacity of approximately 720,000 tons.
Capital Investments
We made approximately U.S.$1.72 million of capital expenditures in
our Thai operations in 2003. We currently expect to make capital expenditures
of approximately U.S.$2.4 million during 2004.
Other Asian Investments
As part of our strategy to strengthen our presence in South Asia,
between May 2000 and April 2001, we invested approximately U.S.$34 million in
the construction of a grinding mill near Dhaka, Bangladesh. The grinding mill
began operating in April 2001 and has a cement milling production capacity of
520,000 tons per year. A majority of the supply of clinker for the mill is
produced by our operations in the region.
In March 2001, we acquired a cement terminal in Sukematsu Port,
Izumiotsu City, near Osaka, Japan for U.S.$2.8 million. The terminal is
situated on land leased for a period of 30 years and has a storage capacity of
9,000 metric tons. Additional investments will be required to make the
terminal operational. We have not yet made these investments pending our
review of the Japanese cement industry. The terminal has potential annual
throughput volume of approximately 300,000 tons.
34
To further support our trading activities in the Asia region, as of
June 2001, we acquired a 100% interest in Tunwoo Co. Ltd., a company based in
Taiwan, for a total consideration of approximately U.S.$27 million. Tunwoo
owns a license to operate a cement terminal in the port of Taichung located on
the west coast of Taiwan. The import terminal has cement storage capacity of
60,000 tons.
Our Egyptian Operations
Overview
As of December 31, 2003, we had a 95.8% interest in Assiut, which has
an installed capacity of approximately 4.9 million tons.
The Egyptian Cement Industry
The Egyptian cement market consumed approximately 25.7 million tons
of cement during 2003. Cement consumption decreased by 4.6% in 2003, as a
result of a slowdown in the Egyptian economy and the diminishing availability
of foreign currency in Egypt, which has affected most sectors of the Egyptian
economy, in particular, the Egyptian construction sector.
Competition. As of December 31, 2003, the Egyptian cement industry
had a total of ten cement producers, with an aggregate annual installed
capacity of approximately 36 million tons. We estimate that during 2003,
Holcim (Egyptian Cement Company), Lafarge (Alexandria Portland Cement and Beni
Suef Cement) and CEMEX (Assiut Cement Company), the three largest cement
producers in the world, were responsible for 42% of the total cement sales in
Egypt. Other competitors in the Egyptian market are Suez and Tourah Cement
Companies (Italcementi) and Helwan Portland Cement Company. In addition,
cement prices in Egypt are influenced to a significant degree by the Egyptian
government, which controls almost 40% of the industry's capacity.
Our Egyptian Operating Network
[MAP GRAPHIC OMITTED
Distribution Channels
As a result of the retail nature of the Egyptian market, over 90% of
our cement sales volumes are typically sold in bags. Through our commercial
strategy we have been able to serve retail customers throughout the country
directly without having to depend on wholesalers and distributors.
35
Description of Properties, Plant and Equipment
As of December 31, 2003, Assiut operated one cement plant with an
installed capacity of approximately 4.9 million tons with three dry process
production lines. Assiut's cement plant serves upper Egypt as well as Cairo
and the Delta region, Egypt's main cement market.
Capital Investments
We made capital expenditures of approximately U.S.$14.1 million in
our Egyptian operations in 2003. We currently expect to make capital
expenditures of approximately U.S. $8.0 million during 2004.
South America, Central America and the Caribbean
As of December 31, 2003, our business in South America, Central
America and the Caribbean, which includes our operations in Venezuela,
Colombia, Costa Rica, the Dominican Republic, Panama, Nicaragua and Puerto
Rico, as well as other assets in the Caribbean, represented approximately 15%
of our net sales, 18% of our total installed capacity and 11% of our total
assets.
Our Venezuelan Operations
Overview
Our Venezuelan operations represented approximately 4% of our net
sales in 2003. As of December 31, 2003, we held a 75.7% interest in CEMEX
Venezuela, S.A.C.A., or CEMEX Venezuela, a company listed on the Caracas Stock
Exchange. CEMEX Venezuela also serves as the holding company for our interests
in Chile, the Dominican Republic and Panama. CEMEX Venezuela is the largest
cement producer in Venezuela, based on an installed capacity of 4.6 million
tons as of December 31, 2003.
The Venezuelan Cement Industry
Cement consumption in Venezuela fell 17.5% in 2003 compared to 2002
according to the Venezuelan Cement Producer Association (AVPC), primarily due
to Venezuela's political and economic turmoil. A nation-wide general strike
that began in December 2002 caused a significant reduction in oil production
and has had a material adverse effect on Venezuela's oil-dependent economy. As
a consequence, in 2003, average inflation in Venezuela reached 31.1%, the
Venezuelan Bolivar depreciated 14.0% against the Dollar and gross domestic
product (GDP) decreased 9.2%. In February 2003, Venezuelan authorities imposed
foreign exchange controls and implemented price controls on many products,
including cement. The adverse economic situation in Venezuela has dampened the
construction sector, which declined 37.4% in 2003.
Competition. As of December 31, 2003, the Venezuelan cement industry
included five cement producers, with a total installed capacity of
approximately 9.5 million tons, according to our estimates. We estimate that
CEMEX Venezuela's installed capacity in 2003 represented approximately 49% of
that total, almost twice that of its next largest competitor.
Our global competitors, Holcim and Lafarge, have acquired controlling
interests in Venezuela's second and third largest cement producers,
respectively.
In 2003, the ready-mix concrete market accounted for only about 10%
of cement consumption in Venezuela, according to our estimates. We believe
that Venezuela's construction companies, which typically prefer to install
their own ready-mix concrete plants on-site, are the most significant barrier
to penetration of the ready-mix concrete sector, with the result that on-site
ready-mix concrete mixing represents a high percentage of total ready-mix
concrete production.
36
Other than CEMEX Venezuela, the ready-mix concrete market is
concentrated in two companies, Premezclado Caribe, which is owned by Holcim,
and Premex, which is owned by Lafarge. The rest of the ready-mix concrete
sector in Venezuela is highly fragmented.
Our Venezuelan Operating Network
As shown below, CEMEX Venezuela's three cement plants and one
grinding facility are located near the major population centers and the coast
of Venezuela.
[MAP GRAPHIC OMITTED
As of December 31, 2003, CEMEX Venezuela was the leading Venezuelan
domestic supplier of cement, based on our estimates of sales of gray and white
cement in Venezuela. In addition, CEMEX Venezuela was the leading domestic
supplier of ready-mix concrete in 2003 with 30 ready-mix production plants
throughout Venezuela. During 2003, CEMEX Venezuela achieved production of 3.3
million tons of clinker.
Distribution Channels
Transport by land is handled primarily by CEMEX Venezuela. During
2003, approximately 30% of CEMEX Venezuela's total domestic sales were
transported through its own fleet of trucks. CEMEX Venezuela also serves a
significant number of its retail customers directly through its wholly-owned
distribution centers.
Exports
During 2003, exports from Venezuela represented approximately 21% of
CEMEX Venezuela's net sales. CEMEX Venezuela's main export markets
historically have been the Caribbean and the east coast of the United States.
In 2003, 63.6% of our exports from Venezuela were to the United States, and
36.4% were to the Caribbean and South America.
Description of Properties, Plants and Equipment
As of December 31, 2003, CEMEX Venezuela operated three wholly-owned
cement plants, Lara, Mara and Pertigalete, with a combined installed capacity
of clinker production of approximately 4.3 million tons. CEMEX Venezuela also
operates the Guayana grinding facility with a cement capacity of 360,000 tons.
All the plants are strategically located to serve both domestic areas with the
highest levels of cement consumption and export markets. CEMEX Venezuela also
owns 30 ready-mix concrete production facilities and 12 distribution centers.
CEMEX Venezuela owns 4 limestone quarries with reserves sufficient for over
100 years at 2003 production levels.
37
The Lara and Mara plants and one production line at the Pertigalete
plant utilize the wet process; the other production line at the Pertigalete
plant utilizes the dry process. All the plants utilize natural gas as fuel.
CEMEX Venezuela has its own electricity generating facilities, which are
powered by natural gas and diesel fuel.
As of December 31, 2003, CEMEX Venezuela owned and operated four port
facilities, three marine terminals and one river terminal. One port facility
is located at the Pertigalete plant, one at the Mara plant, one at the Catia
La Mar terminal on the Caribbean Sea near Caracas, and one at the Guayana
Plant on the Orinoco River in the Guayana Region. CEMEX Venezuela's cement is
transported either in bulk or in bags.
Capital Investments
We made capital expenditures of approximately U.S.$10.8 million in
2003 in our Venezuelan operations. We currently expect to make capital
expenditures of approximately U.S.$7.9 million during 2004.
Our Colombian Operations
Overview
In 1996, we acquired controlling interests in Cementos Diamante, S.A.
and Industrias e Inversiones Samper, S.A., which combined are Colombia's
second largest cement producer. In 1998, we increased our equity interest in
Cementos Diamante (now, CEMEX Colombia, S.A., or CEMEX Colombia, as a result
of a legal name change in August 2002), to approximately 78% and integrated
the operations of CEMEX Colombia and Industrias e Inversiones Samper, S.A.,
into a single company, making CEMEX Colombia the second largest cement
producer in Colombia. In 1999 and 2000, we increased our equity interest in
CEMEX Colombia to approximately 98.2% of total shares and 99.3% of ordinary
shares.
Our Colombian operations represented approximately 3% of our net
sales in 2003.
As of December 31, 2003, CEMEX Colombia was the second-largest cement
producer in Colombia, based on installed capacity of 4.8 million tons,
according to the Colombian Institute of Cement Producers, or ICPC.
CEMEX Colombia has a significant market share in the cement and
ready-mix concrete market in the so-called "Urban Triangle" of Colombia
comprising the cities of Bogota, Medellin and Cali. During 2003, these three
metropolitan areas accounted for approximately 49.4% of Colombia's cement
consumption. CEMEX Colombia's Ibague plant, which uses the dry process and is
strategically located between Bogota, Cali and Medellin, is Colombia's largest
and had an installed capacity of 2.5 million tons as of December 31, 2003.
CEMEX Colombia, through its Bucaramanga and Cucuta plants, is also an active
participant in Colombia's northeastern market. CEMEX Colombia's strong
position in the Bogota ready-mix concrete market is largely due to its access
to a ready supply of aggregate deposits in the Bogota area.
The Colombian Cement Industry
Competition. The Sindicato Antioqueno, or Argos, which either owns or
has interests in eight of Colombia's eighteen cement plants, has dominated the
Colombian cement industry. Argos has established a leading position in the
Colombian coastal markets through Cementos Caribe in Barranquilla, Compania
Colclinker in Cartagena and Tolcemento in Sincelejo. The other principal
cement producer is Cementos Boyaca, an affiliate of Holcim.
38
Our Colombian Operating Network
[MAP GRAPHIC OMITTED
CEMEX Colombia owns quarries with minimum reserves sufficient for
over 100 years at 2003 production levels. In addition to mining its own raw
materials, CEMEX Colombia also purchases raw materials from third parties. The
majority of CEMEX Colombia's cement is distributed through independent
distributors.
CEMEX Colombia's principal concrete product is ready-mix concrete,
produced to client specifications and delivered directly to job sites. CEMEX
Colombia also produces other specialized cement-based building materials,
including mortars, antibacterial concrete, shotcrete (sprayable concrete) and
pre-fabricated concrete construction products.
CEMEX Colombia operates its ready-mix concrete business through 21
ready-mix plants. CEMEX Colombia also uses 12 portable ready-mix plants, which
allow concrete to be mixed at major building sites, reducing transportation
costs and eliminating the need to acquire additional permanent ready-mix
concrete sites.
Description of Properties, Plants and Equipment
As of December 31, 2003, CEMEX Colombia owned five cement plants, one
clinker facility, and one grinding mill, having a total installed capacity of
4.8 million tons per year. Two of these plants and the clinker facility
utilize the wet process and three plants utilize the dry process. The Ibague
plant serves the Urban Triangle, while Cucuta and Bucaramanga plants, located
in the northeastern part of the country, serve local and coastal markets. The
La Esperanza cement plant and the Santa Rosa clinker mill are close to Bogota.
CEMEX Colombia also has an internal electricity generating capacity of 24.7
megawatts through a leased facility. In addition, CEMEX Colombia owns two land
distribution centers, one mortar plant, 21 ready-mix concrete plants, one
concrete products plant, eight aggregate mines and six aggregate operations.
Capital Investments
We made capital expenditures of approximately U.S.$6.0 million in
2003 in our Colombian operations. We currently expect to make capital
investments of approximately U.S.$6.2 million during 2004.
39
Other South American Investments
Our Equity Investment in Chile
We hold a 11.9% interest in Cementos Bio Bio, S.A., Chile's largest
cement producer according to our estimates, with an installed capacity as of
December 31, 2003 of approximately 2.3 million tons. Cementos Bio Bio owns and
operates three cement plants. Two of the cement plants are located in the
Santiago-Concepcion corridor, and the third plant is located in the northern
Antofogasta region. Cementos Bio Bio's primary market is the Concepcion
market. In addition, Cementos Bio Bio has 1.2 million cubic meters of
ready-mix concrete production capacity.
Central America and the Caribbean
As for the year ended December 31, 2003, Central America and the
Caribbean, which includes our operations in Costa Rica, the Dominican
Republic, Panama, Nicaragua, Puerto Rico and other assets in the Caribbean,
represented approximately 8% of our net sales, 5% of our total installed
capacity and 5% of our total assets.
Through our investments in Costa Rica, Panama and Nicaragua, we have
established a strategic presence in the mainland markets of Central America.
Our Costa Rican Operations
Overview. As of December 31, 2003, we held a 98.4% interest in CEMEX
(Costa Rica), S.A., or CEMEX Costa Rica, which was formerly named Cementos del
Pacifico, S.A. until it changed its legal name in August 2003.
The Costa Rican Cement Industry
Approximately 1.109 million tons of cement were sold in Costa Rica
during 2003, according to Camara de la Construccion de Costa Rica, the Costa
Rican construction industry association. The Costa Rican cement market is a
predominantly retail market, and we estimate that over three quarters of
cement sold is bagged cement.
Competition. The Costa Rican cement industry includes two producers,
CEMEX Costa Rica and Industria Nacional de Cemento, an affiliate of Holcim. We
estimate that the two companies control roughly equal proportions of the
market.
Our Costa Rican Operating Network. CEMEX Costa Rica owns and operates
one grinding mill and cement plant in northwest Costa Rica and one grinding
mill in San Jose.
[MAP GRAPHIC OMITTED
40
Products and Distribution Channels. CEMEX Costa Rica has five
strategically located distribution centers, two on the Pacific coast and three
in metropolitan areas, where 72% of total 2003 sales were made.
Exports. During 2003, exports of cement by our Costa Rican operations
represented approximately 40% of our total cement production in Costa Rica. In
2003, 26% of our exports from Costa Rica were to Nicaragua, 13% to El
Salvador, 53% to Guatemala and 8% to Panama.
Production Costs. In January 2001, we commenced using pet coke as
fuel in the production of cement to reduce our production costs. During 2003,
our energy costs decreased approximately 2.0% in Costa Rica.
Description of Properties, Plant and Equipment. Our Costa Rican
operations' cement plant has one dry process production line with an installed
capacity of 850,000 tons. Our grinding mill in northwest Costa Rica has a
grinding capacity of 657,000 tons. Our second grinding mill in San Jose has a
capacity of 201,480 tons.
Capital Investments. We made capital expenditures of approximately
U.S.$7.1 million in 2003 in our Costa Rican operations. We currently expect to
make capital expenditures of approximately U.S.$2.6 million during 2004.
Our Dominican Republic Operations
Overview
As of December 31, 2003, we owned 99.9% of Cementos Nacionales, a
cement producer in the Dominican Republic with an installed capacity of 2.4
million tons of cement, 10 distribution centers, and a concrete, aggregate and
gypsum operation through a 25 year lease with the Dominican Republic
government, which enables us to supply all local and regional gypsum
requirements.
In June 2003, Cementos Nacionales announced a U.S.$130 million
investment plan to install a new kiln for producing clinker with an annual
capacity of 1.6 million metric tons of clinker. This new kiln, which would
increase our total clinker production capacity in the Dominican Republic to
2.2 million metric tons per year, is expected to be completed in early 2005.
We invested approximately U.S.$12.3 million in this project in 2003 and expect
to invest approximately U.S.$57.7 million in 2004 and the remaining U.S.$60
million during 2005.
The Dominican Republic Cement Industry
In 2003, Dominican Republic cement consumption reached 3.0 million
metric tons, and some cement imports were necessary to fulfill domestic
demand. According to our estimates, about 28,000 metric tons were imported for
a special marine project in the east zone of the country.
Competition. Cementos Nacionales serves the cement market throughout
the Dominican Republic. Its principal competitors are Cementos Cibao, a local
competitor, and Cemento Colon, an affiliate of Holcim.
41
Our Dominican Republic Operating Network. As of December 31, 2003,
Cementos Nacionales was the leading cement producer in the Dominican Republic,
based on installed capacity as reported by International Cement Review in the
Global Cement Report. Cementos Nacionales' sales network covers the country's
main consumption areas, which are Santo Domingo, Santiago de los Caballeros,
La Vega, San Pedro de Macoris and Azua.
[MAP GRAPHIC OMITTED
Production Costs. Cementos Nacionales uses a dry production process
and has an internal electricity generating capacity of approximately 37.7
megawatts. This generating capacity covers our total demand for electricity at
2003 levels, providing Cementos Nacionales with a competitive cost advantage.
Cementos Nacionales maintains its own limestone and clay quarries,
which we expect will provide sufficient reserves for up to 150 years at 2003
production levels. Sand and other auxiliary raw materials are purchased on the
domestic market.
Description of Properties, Plant and Equipment. Cementos Nacionales
currently owns one dry process cement plant in San Pedro de Macoris with an
installed capacity of 0.7 million tons per year of clinker, in addition to six
ready-mix concrete production plants, three grinding mills with an installed
capacity of 2.4 million tons per year, 10 distribution centers located
throughout the country and two marine terminals. During 2003, our Dominican
Republic clinker production facilities operated at full capacity and our
grinding mills operated at 70% capacity.
Capital Investments. We made capital expenditures of approximately
U.S.$ 13.4 million in 2003 in our Dominican Republic operations. We currently
expect to make capital investments of approximately U.S.$57.6 million during
2004.
Our Panamanian Operations
Overview. As of December 31, 2003, we owned a 99.2% interest in
Cemento Bayano.
The Panamanian Cement Industry
Approximately 706,000 cubic meters of ready-mix concrete were sold in
Panama during 2003, according to the General Comptroller of the Republic of
Panama (Contraloria General de la Republica de Panama). Panamanian cement
consumption increased 15% in 2003, according to our estimates.
Competition. The Panamanian cement industry includes two cement
producers, Cemento Bayano and Cemento Panama, S.A., an affiliate of Holcim and
Cementos del Caribe.
42
Our Panamanian Operating Network. As of December 31, 2003, Cemento
Bayano had an installed capacity for cement production of approximately
402,000 tons per year. As of December 31, 2003, we operated a distribution
network of six ready-mix concrete plants. Our cement plant utilizes the dry
process.
[MAP GRAPHIC OMITTED
Production Costs. Panama has one of the highest energy costs of any
country in which CEMEX has operations. In response, Cemento Bayano has taken
significant steps to reduce energy costs. Cemento Bayano now runs on a more
cost-efficient mix of fuels (15% alternative fuels, which have completely
replaced fuel oil, and 85% petcoke). Currently, fuel oil is just used in start
up.
Cemento Bayano also reduced its energy cost per ton, a critical cost
of our manufacturing process, by securing a consistent supply of electric
energy and decreasing prices per kwh through negotiating the bulk purchase of
electric energy in the "spot market" as a "large consumer."
Description of Properties, Plant and Equipment. Our operations in
Panama include one dry production process cement plant, with an installed
clinker capacity of 382,000 tons per year. In addition, Cemento Bayano owns
and operates six ready-mix concrete facilities; three in Panama City, one in
Colon, one in Aguadulce and one in Chiriqui. In December 2003, Cemento Bayano
acquired for U.S.$4 million a new quarry to supply aggregates for its
ready-mix operations.
Capital Investments. We made capital expenditures of approximately
U.S.$7.6 million in 2003 in our Panamanian operations, including an investment
of approximately U.S.$2.5 million in a new kiln dust filter. We currently
expect to make capital expenditures of approximately U.S.$4.3 million during
2004.
Our Nicaragua Operations
Overview. According to our estimates, Nicaraguan cement production
during 2003 grew 7.8% compared to 2002. The increase was primarily due to
improved political and economic conditions in 2003 following political turmoil
in 2002, including the conviction of former President Aleman of corruption
charges. In addition, eighty percent of Nicaragua's external debt was forgiven
under the auspices of the HIPC (High Indebted Poor Countries) initiative, and
the government achieved some success in its fight against corruption.
Increases in the amount of public investment and the number of private
residential projects also contributed to the increase in cement consumption.
The Nicaraguan Cement Industry
According to our estimates, 560,000 tons of cement were sold in
Nicaragua during 2003.
43
Competition. Two participants compete in the Nicaraguan cement
industry: CEMEX Nicaragua and Holcim. Our market share in 2003 was 55.5%,
according to our estimates. Our product, "Cemento Canal", has a high brand
recognition because it has been 100% made in Nicaragua since 1942. Holcim
started its milling operations in Nicaragua in 1997 with two brands,
"Supernic" and "Cemenic." In 2003 Holcim discontinued these brand names and
introduced its worldwide cement brand, "Holcim."
Our Nicaraguan Operating Network. CEMEX Nicaragua leases and operates
one cement plant, located in San Rafael del Sur, approximately 45 kilometers
southwest of the capital Managua. Since March 2003 Cemex has leased a 100,000
ton milling plant in Managua, which has been used exclusively for pet-coke
milling.
[MAP GRAPHIC OMITTED
Description of Properties, Plant and Equipment. Our Nicaraguan leased
cement plant has five kilns utilizing the wet production process with an
installed milling capacity of 470,000 tons.
Capital Investments. We made capital expenditures of approximately
U.S.$4.6 million in 2003 in our Nicaraguan operations. We currently expect to
make capital expenditures of approximately U.S.$2.3 million during 2004.
Our Puerto Rico Operations
Overview. Our Puerto Rican operations, acquired in the third quarter
of 2002, represented approximately 22% of our cement sales volumes in the
Caribbean region in 2003.
As of December 31, 2003, we owned 100% of Puerto Rican Cement Company,
Inc., or PRCC.
The Puerto Rican Cement Industry
In 2003, Puerto Rican cement consumption reached 1.8 million tons.
Competition. PRCC serves the cement market throughout Puerto Rico. The
Puerto Rican cement industry in 2003 was comprised of two cement producers,
PRCC, which we estimate had 51% market share, and San Juan Cement Co., an
affiliate of Italcementi, which we estimate had 31% market share. In addition,
we estimate an independent cement importer, Antilles Cement Co., had a 18%
market share.
44
Our Puerto Rican Operating Network. As of December 31, 2003, PRCC had
an installed capacity for cement production of approximately 1.2 million tons
per year. PRCC utilizes the dry process. In addition, we operate a distribution
network of ten ready-mix concrete plants and one distribution center.
[MAP GRAPHIC OMITTED]
Production Costs. At the time of acquisition, PRCC had one of the
highest energy costs of any region in which CEMEX has operations. In response,
we have taken significant steps to reduce energy cost.
PRCC has focused on reducing its energy cost by:
o securing a consistent supply of electric energy and decreasing
prices per kwh through negotiating the bulk purchase of electric
energy;
o negotiating energy tariffs charged during both peak and off-peak
hours; and
o rationalizing the use of energy in accordance with CEMEX "best
practices" standards for low average energy consumption.
PRCC invested U.S.$750,000 during 2003 in an electric sub-station. This project
was completed in December 2003 and will allow us to decrease energy consumption
during off-peak hours starting in 2004.
Description of Properties, Plant and Equipment. Our operations in
Puerto Rico include one 100%-owned cement plant utilizing the dry production
process, with an installed clinker capacity of approximately 1.1 million tons
per year. In addition, PRCC owns and operates ten ready-mix concrete
facilities, mainly serving the sector of the Puerto Rican market located on the
eastern part of the island.
Capital Investments. We made capital expenditures of approximately
U.S.$26.0 million in 2003 in our Puerto Rican operations. We currently expect
to make capital investments of approximately U.S.$8.3 million during 2004.
Our Other Caribbean Operations
We are a party to a strategic alliance in Trinidad and Tobago, through
which we have the right to participate jointly in the production and sale of
cement from these islands and from the Arawak plant on the island of Barbados
to customers in various countries in the eastern Caribbean. We operate in the
Bahamas, Bermuda, the Cayman Islands and Haiti through one of our subsidiaries.
We believe that the Caribbean region holds considerable strategic
importance because of its geographic location, which facilitates exports from
our operations in Mexico, Venezuela, Costa Rica, Spain, Colombia and Panama as
well as other countries through a network of nine land distribution centers and
six marine terminals.
45
Our Trading Operations
We traded more than 9 million tons of cement and clinker in 2003.
Approximately 51% of this amount consisted of exports from our operations in
Venezuela, Mexico, Philippines, Costa Rica, Spain, Puerto Rico, Nicaragua and
Egypt. Approximately 49% was purchased from third parties in countries such as
Thailand, Turkey, South Korea, Taiwan, the United States, Peru, Lebanon, China,
Cyprus, Peru, Venezuela, Indonesia, Belgium, Portugal, Malaysia, France,
Colombia, Spain, Morocco and Egypt. During 2003, we conducted trading
activities in 70 countries.
To enhance our trading operations in the Mediterranean region, we are
currently building three grinding mills in Italy, each with a capacity of
approximately 350 thousand tons per year. The mills are expected to begin
operating during the second half of 2004. With respect to these operations, we
made capital investments of approximately U.S.$13 million during 2003, and we
currently expect to make capital investments of approximately U.S.$41 million
during 2004.
Our trading network enables us to maximize the capacity utilization of
our facilities worldwide while reducing our exposure to the inherent
cyclicality of the cement industry. We are able to distribute excess capacity
to regions around the world where there is demand.
46
Regulatory Matters and Legal Proceedings
A description of material regulatory and legal matters affecting us is
provided below.
Tariffs
Mexican tariffs on imported goods vary by product and have been as
high as 100%. In recent years, import tariffs have been substantially reduced,
and currently range from none at all for raw materials to over 20% for finished
products, with an average weighted tariff for Mexican industry of approximately
10%. As a result of the North American Free Trade Agreement, or NAFTA, as of
January 1, 1998, the tariff on cement imported into Mexico from the United
States or Canada was eliminated. However, a tariff in the range of 13% ad
valorem will continue to be imposed on cement produced in all other countries
unless tariff reduction treaties are implemented or the Mexican government
unilaterally reduces that tariff. While the reduction in tariffs could lead to
increased competition from imports in our Mexican markets, we anticipate that
the cost of transportation from most producers outside Mexico to central
Mexico, the region of highest demand, will remain an effective barrier to
entry.
Spain, as a member of the European Union, is subject to the uniform
European Union commercial policy. There is no tariff on cement imported into
Spain from another European Union country or on cement exported from Spain to
another member country. For cement imported into a member country from a
non-member country, the tariff is currently 1.7% of the customs value. Any
country with preferential treatment with the European Union is subject to the
same tariffs as members of the European Union. Most Eastern European producers
who export cement into Spain currently pay no tariff.
Environmental Matters
We use processes that are designed to protect the environment
throughout all the production stages in all our operations worldwide. We
believe that we are in substantial compliance with all material environmental
laws applicable to us.
European Union directives imposing stricter environmental standards
are expected to be implemented in Spain by 2007. For the purpose of adopting
the directives, on July 3, 2002, Spain promulgated Law 16/2002, which
establishes mechanisms for the prevention and integrated control of pollution.
The new law requires that factories operating in Spain receive an integrated
environmental authorization from the relevant regulatory body at the autonomous
region level, generally the department of the environment. This new law came
into force on July 3, 2002; however, due to a transitional period, existing
industries need not comply until October 30, 2007. In anticipation of our
compliance by this date, one of our eight plants in Spain has already received
the required authorization. With respect to our other plants, we already comply
or believe that we would be able to comply with the requisite standards, if
necessary, without significant expenditures. In addition, we are not aware of
any material environmental liabilities with respect to our Spanish operations.
CEMEX Venezuela's cement production plants are subject to and comply
with Venezuelan environmental regulations. The Ministerio del Ambiente y los
Recursos Naturales, or Ministry of the Environment and Natural Resources, is
the regulatory body in Venezuela with jurisdiction over environmental matters.
CEMEX Venezuela has decreased the emission levels of cement dust, through dust
extraction equipment installed in all its cement plants.
We were one of the first industrial groups in Mexico to sign an
agreement with the Secretaria del Medio Ambiente y Recursos Naturales, or
SEMARNAT, the Mexican government's environmental ministry, to carry out
voluntary environmental audits in our 15 Mexican cement plants, including our
Hidalgo plant, which temporarily halted operations in 2002, under a
government-run program. In 2001, the Mexican environmental agency in charge
of the voluntary environmental auditing program, the Procuraduria Federal de
Proteccion al Ambiente, or PROFEPA, which is part of SEMARNAT, completed
auditing our 15 cement plants and awarded all our plants, including our
Hidalgo plant, a Certificado de Industria Limpia, Clean Industry Certificate,
certifying that our plants are in compliance with environmental laws. The
Clean Industry Certificates are strictly renewed every two years. For over a
decade, the technology for recycling used tires into an energy source has
been employed in our Ensenada
47
and Huichapan plants. Our Monterrey plant and our Hermosillo plant started
using tires as an energy source in September 2002 and November 2003,
respectively. Collection centers in Tijuana, Mexicali and Ensenada currently
enable us to recycle an estimated one million tires per year. During 2003,
approximately 4.1% of the total fuel consumed in the Ensenada plant was
provided by this alternative fuel. The Huichapan, Monterrey and Hermosillo
plants substituted approximately 1.6%, 2.3% and 0.3%, respectively, of their
total fuel used with this alternative fuel.
Between 1998 and 2003, our Mexican operations have invested
approximately U.S.$19.1 million in the acquisition of environmental protection
equipment and the implementation of the ISO 14001 environmental management
standards of the International Organization for Standardization, or ISO.
Currently, 14 of our cement plants in Mexico have been awarded the ISO 14001
certification for environmental management systems.
As of December 31, 2003, our eight cement plants in Spain and our
cement mill in Tenerife, Spain have received the ISO 14001 certification for
environmental management systems.
CEMEX, Inc. is subject to a wide range of U.S. Federal, state and
local laws, regulations and ordinances dealing with the protection of human
health and the environment. These laws are strictly enforced and can lead to
significant monetary penalties for noncompliance. These laws regulate water
discharges, noise, and air emissions, including dust, as well as the handling,
use and disposal of hazardous and non-hazardous waste materials. These laws
also create a shared liability by responsible parties for the cost of cleaning
up or correcting releases to the environment of designated hazardous
substances. We therefore may have to remove or mitigate the environmental
effects of the disposal or release of these substances at CEMEX, Inc.'s various
operating facilities or elsewhere. We believe that our current procedures and
practices for handling and managing materials are generally consistent with the
industry standards and legal and regulatory requirements and that we take
appropriate precautions to protect employees and others from harmful exposure
to hazardous materials.
Several of CEMEX, Inc.'s previously owned and currently owned
facilities have become the subject of various local, state or Federal
environmental proceedings and inquiries in the past. While some of these
matters have been settled, others are in their preliminary stages and may not
be resolved for years. The information developed to date on these matters is
not complete. CEMEX, Inc. does not believe it will be required to spend
significantly more on these matters than the amounts already recorded in our
consolidated financial statements included elsewhere in this annual report.
However, it is impossible for CEMEX, Inc. to determine the ultimate cost that
it might incur in connection with such environmental matters until all
environmental studies and investigations, remediation work, negotiations with
other parties that may be responsible, and litigation against other potential
sources of recovery have been completed. With respect to known environmental
contingencies, CEMEX, Inc. has recorded provisions for estimated probable
liabilities and does not believe that the ultimate resolution of such matters
will have a material adverse effect on CEMEX's financial results.
U.S. Anti-Dumping Sunset Reviews
Under the U.S. anti-dumping and countervailing duty laws, the Commerce
Department and the International Trade Commission, or ITC, are required to
conduct "sunset reviews" of outstanding anti-dumping and countervailing duty
orders and suspension agreements every five years. At the conclusion of these
reviews, the Commerce Department is required to terminate the order or
suspension agreement unless the agencies have found that termination is likely
to lead to continuation or recurrence of dumping, or a subsidy in the case of
countervailing duty orders, and material injury. Under special transition
rules, the first sunset reviews commenced in August 1999 for cases involving
gray Portland cement and clinker from Mexico and Venezuela (described below),
which had orders and agreements issued before 1995, and were concluded by the
Commerce Department in July 2000 and by the ITC in October 2000.
In July 2000, the Commerce Department determined not to revoke the
anti-dumping order on imports from Mexico. On October 5, 2000, the ITC found
likelihood of injury to the U.S. industry and determined not to revoke this
anti-dumping order. Thus, the order remains in place. On September 19, 2001,
CEMEX filed a petition for a "changed circumstances" review. The International
Trade Commission decided in December 2001 not to initiate such a review. CEMEX
has appealed the ITC's decision in the "sunset review" and the "changed
circumstances" review to NAFTA. As of March 1, 2004, no NAFTA Panel has been
formed to review the ITC's decision to initiate a "changed circumstances"
review.
48
On October 5, 2000, the ITC determined that terminating the
Anti-Dumping Suspension Agreement involving imports from Venezuela would not
likely lead to a continuation or recurrence of injury to the U.S. market, and
voted to terminate the agreement. Consequently, on November 8, 2000, the
Commerce Department issued a notice terminating the Anti-Dumping Suspension
Agreement covering imports of cement from Venezuela. On July 28, 2003, the
United States Court of International Trade upheld the Commerce Department's
decision to terminate the Suspension Agreement. The U.S. cement industry has
appealed the decision of the Court of International Trade to the Court of
Appeals for the Federal Circuit. The appeal is currently pending before the
appellate court.
U.S. Anti-Dumping Rulings--Mexico
Our exports of Mexican gray cement from Mexico to the United States
are subject to an anti-dumping order that was imposed by the Commerce
Department on August 30, 1990. Pursuant to this order, firms that import gray
Portland cement from us in the United States must make cash deposits with the
U.S. Customs Service to guarantee the eventual payment of anti-dumping duties.
Mexican importers' deposits are being liquidated in stages, as appeals
are exhausted for each annual review period. When the final anti-dumping rate
for any review period causes the amount due to exceed the amount that was
deposited, the Mexican importers are required to pay the difference with
interest. When the final anti-dumping rate for any review period is lower than
the amount that was deposited, the U.S. Customs Service refunds the difference,
with interest, to the Mexican importers.
As of December 31, 2003, CEMEX Corp., as the parent company to our
U.S. subsidiaries that import Mexican cement into the United States, had
accrued liabilities of U.S.$132.9 million, including accrued interest, for the
difference between the amount of anti-dumping duties paid on imports and the
latest findings by the Commerce Department in its administrative reviews.
The Commerce Department has published its final dumping determinations
for the first, second, third, fourth, fifth and seventh review periods. The
Commerce Department's final results of its final determinations for the sixth,
eighth, ninth, tenth, eleventh and twelfth review periods have also been
published, but have been suspended pending review by NAFTA panels.
On October 20, 2003, the NAFTA Extraordinary Challenge Committee
upheld the NAFTA Panel reviewing the final results of the fifth administrative
review, covering the period August 1, 1994 - July 1, 1995. The NAFTA Panel
upheld the Commerce Department's remand results which lowered the antidumping
duty margin for imports during the fifth review period to 44.9% ad valorem. The
Customs Service has begun liquidating entries of cement from Mexico made during
the fifth review period.
On November 25, 2003, the NAFTA Panel reviewing the final results of
the seventh review period upheld the Commerce Department's remand results of
the seventh review period. The remand results lowered the antidumping margin
for imports made during the seventh review period to 37.3% ad valorem.
The latest final determination by the Commerce Department covering
twelfth review period, commencing on August 1, 2001 and ending on July 31,
2002, was issued on September 16, 2003. The Commerce Department determined that
the antidumping margin was 80.8% ad valorem. The final results for the twelfth
review period establish the cash deposit rate for imports of gray Portland
cement and cement clinker from Mexico made on or after September 16, 2003. The
cash deposit rate was established at $52.41 per metric ton, which will remain
in effect until the final results of the thirteenth review period are
published.
49
The status of each period still under review or appeal is as follows:
Period Cash Deposits Status
------ ------------- ------
8/1/95-7/31/96 61.85% 37.49% determined by the Commerce Department upon review.
(effective 5/5/1997) Liquidation suspended pending NAFTA panel review.
8/1/97-7/31/98 73.69%, 35.88% and 37.49% 45.98% determined by the Commerce Department upon review.
(effective 5/4/1998) Liquidation suspended pending NAFTA panel review.
8/1/98-7/31/99 37.49%, 49.58% (effective 38.65% determined by the Commerce Department upon review.
3/17/1999) Liquidation suspended pending NAFTA panel review.
8/1/99-7/31/00 49.58%, 45.98% (effective 50.98% determined by the Commerce Department upon review.
3/16/2000) Liquidation suspended pending appeal to NAFTA panel review.
8/1/00-7/31/01 49.58%, 38.65% (effective 73.74% determined by the Commerce Department upon review.
5/14/2001) Liquidation suspended pending appeal to NAFTA panel review.
8/1/01-7/31/02 38.65%, 50.98% 80.75% determined by the Commerce Department upon review.
(effective 3/19/2002) Liquidation suspended pending appeal to NAFTA panel review.
8/1/02 - 7/31/03 50.98%, 73.74% (effective Currently under review by the Commerce Department.
1/14/2003)
8/1/03 - to date 73.74%, U.S.$52.41 per Subject to review by the Commerce Department.
metric ton
(effective 10/15/2003)
U.S. Anti-Dumping Rulings--Venezuela
On May 21, 1991, U.S. producers of gray cement and clinker filed
petitions with the Commerce Department and the ITC claiming that imports of
gray cement and clinker from Venezuela were subsidized by the Venezuelan
government and were being dumped into the U.S. market. The producers asked the
U.S. government to impose anti-dumping and countervailing duties on these
imports. These claims arose prior to our acquisition of our Venezuelan
operations in 1994, but for purposes of the following discussion, we refer to
the actions taken by the predecessor company as actions taken by CEMEX
Venezuela. CEMEX Venezuela contested the dumping claim and the countervailing
duty claim, and both cases were suspended.
The Commerce Department's preliminary determination regarding the
dumping claim was published on November 4, 1991. The Commerce Department
initially found that CEMEX Venezuela had a dumping margin of 49.2%. Rather than
proceeding with the final Commerce Department and ITC determinations, CEMEX
Venezuela and the Commerce Department entered into an Anti-Dumping Suspension
Agreement on February 11, 1992. Under the Anti-Dumping Suspension Agreement,
CEMEX Venezuela agreed not to sell gray cement or clinker in the United States
at a price less than the "foreign market value." The foreign market value was
determined by the Commerce Department based on information provided by CEMEX
Venezuela each quarter. CEMEX Venezuela was required to report to the Commerce
Department sales in the U.S. market, costs of production and related data.
During its sunset review of the Anti-Dumping Suspension Agreement, the ITC
determined that terminating the agreement would not likely lead to a
continuation or recurrence of injury to the U.S. market, and voted to terminate
the Anti-Dumping Suspension Agreement on October 5, 2000. Consequently, on
November 8, 2000, the Commerce Department issued a notice terminating the
Anti-Dumping Suspension Agreement.
On July 28, 2003, the Court of International Trade upheld the Commerce
Department's termination of the Suspension Agreement. The domestic petitioners
have appealed the court's decision to the U.S. Court of Appeals for the Federal
Circuit. No decision is expected until the second quarter of 2004 at the
earliest.
50
Anti-Dumping in Taiwan
Five Taiwanese cement producers--Asia Cement Corporation, Taiwan
Cement Corporation, Lucky Cement Corporation, Hsing Ta Cement Corporation and
China Rebar--filed before the Tariff Commission under the Ministry of Finance
(MOF) of Taiwan an anti-dumping case involving imported gray Portland cement
and clinker from the Philippines and Korea.
In a letter dated July 19, 2001, the MOF informed the petitioners and
the respondent producers in exporting countries that a formal investigation had
been initiated. Among the respondents in the petition are APO Cement
Corporation or APO, Rizal and Solid, indirect subsidiaries of CEMEX, which
received their anti-dumping questionnaires from the International Trade
Commission under the Ministry of Economic Affairs (ITC-MOEA) on August 2, 2001,
and from the MOF on August 16, 2001.
Rizal and Solid replied to the ITC-MOEA by confirming that they were
not exporting cement/clinker during the covered period. On the other hand, in
its position paper filed on August 18, 2001 and in the public hearing held on
August 20, 2001, APO contested the allegation of "injury" in the anti-dumping
proceedings before the ITC-MOEA.
In a letter dated October 2, 2001, the ITC-MOEA notified the
respondent producers about the result of the preliminary injury investigation
and its determination that there is a reasonable indication that the domestic
industry in Taiwan was materially injured by reason of imports of Portland
cement and clinker from South Korea and the Philippines that are alleged to be
sold in Taiwan at less than normal value. In keeping with the implementing
regulations on the imposition of antidumping duties in Taiwan, the ITC-MOEA has
transferred the case to the MOF for further investigation.
On October 12, 2001 and November 2, 2001, APO filed its replies to the
MOF questionnaire to contest the allegation of "dumping" in the anti-dumping
proceedings before the MOF. In a letter dated January 22, 2002, the MOF
notified the petitioner and respondents that it adopted on January 15, 2002 a
resolution preliminarily finding that there was "dumping" and resolving that
investigation on the issue of "dumping" would continue, but that no provisional
anti-dumping duty would be imposed.
In a letter dated June 26, 2002, the ITC-MOEA notified respondent
producers that its final injury investigation concluded that the imports from
South Korea and the Philippines have caused material injury to the domestic
industry in Taiwan.
In a letter dated July 12, 2002, the MOF notified the respondent
producers that a dumping duty would be imposed on Portland cement and clinker
imports from the Philippines and South Korea commencing from July 19, 2002. The
duty rate imposed on imports from APO, Rizal and Solid was 42%.
On September 17, 2002, APO, Rizal and Solid filed before the Taipei
High Administrative Court an appeal in opposition to the anti-dumping duty
imposed by the MOF. As of April 30, 2004, there have been no material
developments. We anticipate further hearings to be conducted with respect to
this appeal.
Tax Matters
As of December 31, 2003, we and some of our Mexican subsidiaries have
been notified of several tax assessments determined by the Mexican tax office
with respect to the tax years from 1992 through 1996 in a total amount of
Ps4,885 million. With respect to the tax years from 1993 through 1996, the tax
assessments are based primarily on: (i) recalculations of the inflationary tax
deduction, since the tax authorities claim that "Advance Payments to Suppliers"
and "Guaranty Deposits" are not by their nature credits, (ii) disallowed
restatement of tax loss carryforwards in the same period in which they
occurred, (iii) disallowed determination of tax loss carryforwards, and (iv)
disallowed amounts of business asset tax, commonly referred to as BAT,
creditable against the controlling entity's income tax liability on the grounds
that the creditable amount should be in proportion to the equity interest that
the controlling entity has in its relevant controlled entities. We have filed
an appeal for each of these tax claims before the Mexican federal tax court,
and the appeals are pending resolution.
51
As of December 31, 2003, the Philippene Bureau of Internal Revenue, or
BIR, assessed APO for a deficiency in the amount of income tax paid in the tax
years 1998 through 2001 amounting to PhP832.1 million (U.S.$15.0 million as of
December 31, 2003, based on an exchange rate of PhP55.569 to U.S.$1.00, which
was the Philippine Peso/Dollar exchange rate on December 31, 2003 as published
by the Bangko Sentral ng Pilipinas, the central bank of the Republic of the
Philippines). The assessment disallows APO's income tax holiday related income.
We have contested BIR's findings with the Court of Tax Appeal, or CTA. We
believe that these claims will not have a material adverse effect on us.
However, an adverse resolution of these claims could have a material adverse
effect on our results of operations in the Philippines.
The BIR also finalized its tax assessments for Solid's 1999 tax year
amounting to PhP387.6 million (U.S.$7.0 million as of December 31, 2003, based
on an exchange rate of PhP55.569 to U.S.$1.00) and APO's 1999 tax year
amounting to PhP833.3 million (U.S.$15.0 million as of December 31, 2003, based
on an exchange rate of PhP55.569 to U.S.$1.00). We continue to submit relevant
evidence to the BIR to contest these assessments. Our next recourse is to
contest these assessments with the CTA if the BIR issues a final collection
letter.
In addition, Solid's 1998 tax year and APO's 1997-1998 tax years are
under preliminary review for deficiency taxes. Finalization of the assessment
was held in abeyance by the BIR as we continue to present evidence to dispute
their findings. We intend to contest any and all assessments if they arise.
Other Legal Proceedings
In May 1999, several companies filed a civil liability suit in the
civil court of the circuit of Ibague, Colombia, against two of our Colombian
subsidiaries, alleging that these subsidiaries were responsible for
deterioration in the rice production capacity of land of the plaintiffs, caused
by pollution emanating from our cement plants located in Ibague, Colombia. On
December 15, 2003, a judgment was entered against us under which we were
ordered to pay to the plaintiffs an amount equal to CoP21,114 million (U.S.$7.6
million as of December 31, 2003, based on an exchange rate of CoP2,778.21 to
U.S.$1.00, which was the Colombian Peso/Dollar exchange rate on December 31,
2003 as published by the Banco de la Republica de Colombia, the central bank of
Colombia). We filed an appeal on January 13, 2004, and the case will be sent to
the Superior Court of Ibague for review.
In March 2001, 42 transporters filed a civil liability suit in the
civil court of Ibague, Colombia, against three of our Colombian subsidiaries.
The plaintiffs contend that these subsidiaries are responsible for the alleged
damages caused by breach of raw material transportation contracts. The
plaintiffs asked for relief in the amount of CoP127,242 million (U.S.$45.8
million as of December 31, 2003, based on an exchange rate of CoP2,778.21 to
U.S.$1.00). As of April 30, 2004, this proceeding had not reached the
evidentiary stage. Typically, proceedings of this nature continue for several
years before final resolution.
As of December 31, 2003, CEMEX, Inc. had accrued liabilities
specifically relating to environmental matters in the aggregate amount of U.S.$
32.4 million. The environmental matters relate to (i) the disposal of various
materials in accordance with past industry practice, which might be categorized
as hazardous substances or wastes, and (ii) the cleanup of sites used or
operated by CEMEX, Inc., including discontinued operations, in regard to the
disposal of hazardous substances or wastes, either individually or jointly with
other parties. Most of the proceedings are in the preliminary stage, and a
final resolution might take several years. For purposes of recording the
provision, CEMEX, Inc. considers that it is probable that a liability has been
incurred and the amount of the liability is reasonably estimable, whether or
not claims have been asserted, and without giving effect to any possible future
recoveries. Based on information developed to date, CEMEX, Inc. does not
believe it will be required to spend significant sums on these matters in
excess of the amounts previously recorded. Until all environmental studies,
investigations, remediation work, and negotiations with or litigation against
potential sources of recovery have been completed, the ultimate cost that might
be incurred to resolve these environmental issues cannot be assured.
In December 2002, an ex-maritime broker for PRCC filed a civil
liability lawsuit in Puerto Rico against CEMEX, S.A. de C.V., PRCC and other
unaffiliated entities, including Puerto Rican authorities. The plaintiff
contends that the defendants conspired to violate state and federal antitrust
laws so that one of the defendants, who is not affiliated with us, could gain
control of the maritime broker market in Port of Ponce,
52
Puerto Rico. The plaintiff has asked for relief in the amount of approximately
U.S.$18 million. In September 2003, the United States District Court for the
District of Puerto Rico dismissed all claims against us, and entered judgment
accordingly. The plaintiff has subsequently filed two post-judgment motions
requesting reconsideration of the court's opinion, and we have requested the
denial of such motions. Resolution of these motions is still pending before the
court.
In March 2003, a lawsuit was filed in the Indonesian province of West
Sumatra in the Padang District Court against (i) Gresik, an Indonesian cement
producer in which we own a 25.5% interest through CAH and the Republic of
Indonesia owns a 51% interest, (ii) Semen Padang, a 99.9%-owned subsidiary of
Gresik that owns and operates Gresik's Padang cement plant, and (iii) several
Indonesian government agencies. The lawsuit, which was filed by a foundation
purporting to act in the interest of the people of West Sumatra, challenged the
validity of the sale of Semen Padang by the Indonesian government to Gresik in
1995 on the grounds that the Indonesian government did not obtain the necessary
approvals for such sale. On May 9, 2003, the Padang District Court issued an
interim decision suspending Gresik's rights as a shareholder in Semen Padang on
the grounds that ownership of Semen Padang was an issue in dispute. On March
31, 2004, the Padang District Court announced its final decision in favor of
the foundation. On April 12, 2004, Gresik filed an appeal of this decision with
the Padang District Court, which will in turn forward the appeal to the High
Court of the West Sumatra province.
After the failure of several attempts to reach a negotiated or
mediated solution to these problems involving Gresik, on December 10, 2003, CAH
filed a request for arbitration against the Republic of Indonesia and the
Indonesian government before the International Centre for Settlement of
Investment Disputes, or ICSID, based in Washington D.C. CAH is seeking, among
other things, rescission of the purchase agreement entered into with the
Republic of Indonesia in 1998, plus repayment of all costs and expenses, and
compensatory damages. ICSID has accepted and registered CAH's request for
arbitration and issued a formal notice of registration on January 27, 2004. As
a result of the registration, an Arbitral Tribunal will be established to hear
the dispute. We cannot predict, however, what effect, if any, this action will
have on our investment in Gresik or what the ruling of the Arbitral Tribunal
will be. For a more detailed description of our investment in Gresik and the
ongoing difficulties with Semen Padang, please see "Europe, Asia and
Africa--Our Asian Operations--Our Indonesian Equity Investment" above.
On April 27, 2004, a subsidiary of CEMEX Colombia received notice as a
co-defendant, along with a government agency in charge of urban development in
Bogota, another supplier, and a ready-mix industry association, in an action
brought by a Colombian law firm on "public interest" grounds. The lawsuit
alleges that the use of a certain type of cement-based material in the
construction of roads for the "Transmilenio" public transport system and for
regular traffic resulted in defects that impede the proper functioning of the
"Transmilenio" system and hamper traffic flow. The lawsuit argues that CEMEX
Colombia's subsidiary, the other supplier, and the ready mix-industry
association promoted the use of the material, and seeks damages to pay for the
repair of the defects or, if repair is not possible, the rebuilding of the
defective road sections. We are currently evaluating the potential impact of
this matter on our Colombian operations. Because it is very early in the
process, we cannot estimate the financial implications of an adverse
resolution, but we believe that it is unlikely to have a material adverse
effect on our results of operations. We believe that this will be a protracted
matter that may result in additional lawsuits or actions. We intend to defend
our interests vigorously.
In the ordinary course of our business, we are party to various legal
proceedings. Other than as disclosed herein, we are not currently involved in
any litigation or arbitration proceedings, including any such proceedings which
are pending, which we believe will have, or have had, a material adverse effect
on us, nor, so far as we are aware, are any proceedings of that kind
threatened.
53
Item 5 - Operating and Financial Review and Prospects
--------------------------------------------
The following discussion should be read in conjunction with our
consolidated financial statements included elsewhere in this annual report. Our
financial statements have been prepared in accordance with Mexican GAAP, which
differ in significant respects from U.S. GAAP. See note 23 to our consolidated
financial statements, included elsewhere in this annual report, for a
description of the principal differences between Mexican GAAP and U.S. GAAP as
they relate to us.
Mexico experienced annual inflation rates of 4.6% in 2001, 5.6% in
2002 and 3.9% in 2003. Mexican GAAP requires that our consolidated financial
statements recognize the effects of inflation. Consequently, financial data for
all periods in our consolidated financial statements and throughout this annual
report, except as otherwise noted, have been restated in constant Mexican Pesos
as of December 31, 2003. See note 2B to our consolidated financial statements
included elsewhere in this annual report.
The percentage changes in cement sales volumes described in this
annual report for our operations in a particular country include the number of
tons of cement sold to our operations in other countries. Likewise, unless
otherwise indicated, the net sales financial information presented in this
annual report for our operations in each country include the Mexican Peso
amount of sales derived from sales of cement to our operations in other
countries, which have been eliminated in the preparation of our consolidated
financial statements included elsewhere in this annual report.
The following table sets forth selected financial information as of
and for each of the three years ended December 31, 2001, 2002, and 2003 by
principal geographic area expressed as an approximate percentage of our total
consolidated group before eliminations resulting from consolidation. We operate
in countries with economies in different stages of development and structural
reform, some of which are subject to fluctuations in exchange rates, inflation
and interest rates. These economic factors may affect our results of operations
and financial condition depending upon the depreciation or appreciation of the
exchange rate of each country in which we operate compared to the Mexican Peso
and the rate of inflation of each of these countries. The variations in (1) the
exchange rates used in the translation of the local currency to Mexican Pesos,
and (2) the rates of inflation used for the restatement of our financial
information to constant Mexican Pesos, as of the latest balance sheet
presented, may affect the comparability of our results of operations and
consolidated financial position from period to period.
%
Central
% America
% United % % % % % and the %
Mexico States Spain Venezuela Colombia Egypt Philippines Caribbean Others Combined Elimination Consolidated
(in millions of constant Mexican Pesos as of December 31, 2003, except percentages)
Net Sales For
the
Period Ended:
December 31, 2001 35% 26% 10% 6% 3% 2% 2% 6% 10% 85,330 (8,758) 76,572
December 31, 2002 34% 24% 14% 4% 3% 2% 2% 7% 10% 83,192 (8,150) 75,042
December 31, 2003 34% 22% 16% 4% 3% 2% 2% 8% 9% 87,849 (7,321) 80,528
Operating Income
For the Period
Ended:
December 31, 2001 65% 19% 12% 9% 6% 2% 1% 4% -18% 18,286 -- 18,286
December 31, 2002 72% 21% 18% 8% 6% 1% -- 7% -33% 15,029 -- 15,029
December 31, 2003 70% 14% 18% 7% 6% 2% -- 7% -24% 16,356 -- 16,356
Total Assets at:
December 31, 2001 22% 17% 7% 4% 3% 3% 3% 3% 38% 312,550 (133,044) 179,506
December 31, 2002 24% 19% 9% 3% 3% 2% 4% 5% 31% 262,488 (79,738) 182,750
December 31, 2003 22% 18% 14% 3% 3% 2% 3% 5% 30% 256,442 (76,425) 180,017
54
Critical Accounting Policies
We have identified below the accounting policies we have applied under
Mexican GAAP that are critical to understanding the overall financial reporting
of CEMEX.
Income Taxes
Our operations are subject to taxation in many different jurisdictions
throughout the world. Under Mexican GAAP, we recognize deferred tax assets and
liabilities using a balance sheet methodology which requires a determination of
the permanent and temporary differences between the financial statements
carrying amounts and the tax basis of assets and liabilities. Our worldwide tax
position is highly complex and subject to numerous laws that require
interpretation and application and that are not consistent among the countries
in which we operate. Our overall strategy is to structure our worldwide
operations to take greatest advantage of opportunities provided under the tax
laws of the various jurisdictions to minimize or defer the payment of income
taxes on a consolidated basis.
Many of the activities we undertake in pursuing this tax reduction
strategy are highly complex and involve interpretations of tax laws and
regulations in multiple jurisdictions and are subject to review by the relevant
taxing authorities. It is possible that the taxing authorities could challenge
our application of these regulations to our operations and transactions. The
taxing authorities have in the past challenged interpretations that we have
made and have assessed additional taxes. Although we have from time to time
paid some of these additional assessments, in general we believe that these
assessments have not been material and that we have been successful in
sustaining our positions. No assurance can be given, however, that we will
continue to be as successful as we have been in the past or that pending
appeals of current tax assessments will be judged in our favor. Significant
judgment is required to appropriately assess the amounts of tax assets. We
record tax assets when we believe that the recoverability of the asset is
determined to be more likely than not in accordance with established accounting
principles. If this determination cannot be made, a valuation allowance is
established to reduce the carrying value of the asset.
Recognition of the effects of inflation
Under Mexican GAAP, the financial statements of each subsidiary are
restated to reflect the loss of purchasing power (inflation) of its functional
currency. The inflation effects arising from holding monetary assets and
liabilities are reflected in the income statements as monetary position result.
Inventories, fixed assets and deferred charges, with the exception of fixed
assets of foreign origin and the equity accounts, are restated to account for
inflation using the consumer price index applicable in each country. The result
is reflected as an increase in the carrying value of each item. Fixed assets of
foreign origin are restated using the inflation index of the assets' origin
country and the variation in the foreign exchange rate between the country of
origin currency and the functional currency. The difference between the
inflation of the country and the factor utilized to restate a fixed asset of
foreign origin is presented in consolidated stockholders' equity in the line
item Effects from Holding Non-Monetary Assets. Income statement accounts are
also restated for inflation into constant Mexican Pesos as of the reporting
date.
In the event of a sudden increase in the rate of inflation in Mexico,
the adjustment that the market makes on the exchange rate of the Mexican Peso
against other currencies resulting from such inflation is not immediate and may
take several months, if it occurs at all. In this situation, the value
expressed in the consolidated financial statements for fixed assets of foreign
origin will be understated in terms of Mexican inflation, given that the
restatement factor arising from the inflation of the assets' origin country and
the variation in the foreign exchange rate between the country of origin
currency and the Mexican Peso will not offset the Mexican inflation.
A sudden increase in inflation could also occur in other countries in
which we operate.
Foreign currency translation
As mentioned above, the financial statements of consolidated foreign
subsidiaries are restated for inflation in their functional currency based on
the subsidiary country's inflation rate. Subsequently, the restated financial
55
statements are translated into Mexican Pesos using the foreign exchange rate at
the end of the corresponding reporting period for balance sheet and income
statement accounts.
In the event of an abrupt and deep depreciation of the Mexican Peso
against the U.S. Dollar, which would not be aligned with a corresponding
inflation of the same magnitude, the carrying amounts of the Mexican assets,
when presented in convenience translation into U.S. Dollars, will show a
decrease in value, in terms of Dollars, by the difference between the rate of
depreciation against the U.S. Dollar and the Mexican inflation rate.
Derivative financial instruments
As mentioned in note 2N to our consolidated financial statements
included elsewhere in this annual report, in compliance with the controls and
procedures established by our risk management committee, we use derivative
financial instruments such as interest rate and currency swaps, currency and
stock forward contracts, options and futures, in order to reduce risks
associated with changes in interest rates and foreign exchange rates of debt
agreements and as a vehicle to reduce financing costs, as well as: (i) hedges
of contractual cash flows and forecasted transactions, (ii) hedges of CEMEX's
net investments in foreign subsidiaries, and (iii) hedges of the future
exercise of options under our stock option programs. These instruments have
been negotiated with institutions and corporations with significant financial
capacity; therefore, we consider the risk of non-compliance with the
obligations agreed to by such counterparties to be minimal. Some of these
instruments have been designated as hedges of CEMEX's raw materials costs as
well as debt or equity instruments. In other cases, although some derivatives
comprise part of our financial strategy, they have not been designated as hedge
instruments because accounting hedge requirements were not met.
Effective January 1, 2001, in accordance with Bulletin C-2 "Financial
Instruments", we recognize all derivative financial instruments as assets or
liabilities in the balance sheet at their estimated fair value and the changes
in such values in the income statement for the period in which they occurred.
There are several exemptions to the general rule when derivatives are qualified
as accounting hedges (see note 2N to our consolidated financial statements
included elsewhere in this annual report). Premiums paid or received on hedge
derivative instruments are deferred and amortized over the life of the
underlying hedged instrument or immediately when they are settled; in other
cases, premiums are recorded in the income statement, at the time that they are
received or paid. See notes 11 and 16 to our consolidated financial statements
included elsewhere in this annual report.
Pursuant to the accounting principles established by Bulletin C-2, our
balance sheets and income statements are subject to volatility arising from
variations in interest rates, exchange rates, share prices and other conditions
established in our derivative instruments. The estimated fair value represents
a valuation effect at the reporting date, and the final cash inflows or
outflows that we will receive or make to our counterparties will not be known
until settlement of the derivative instruments occurs. The estimated fair
values of derivative instruments, used by us for recognition and disclosure
purposes in the financial statements and their notes, are supported by
confirmations of these values received from the counterparties to these
financial instruments; nonetheless, significant judgment is required to account
appropriately for the effects of derivative financial instruments in the
financial statements.
The estimated fair values of derivative financial instruments may
fluctuate over time, and are based on estimated settlement costs or quoted
market prices. These values should be viewed in relation to the fair values of
the underlying instruments or transactions, and as part of our overall exposure
to fluctuations in foreign exchange rates, interest rates and prices of shares.
The notional amounts of derivative instruments do not necessarily represent
amounts exchanged by the parties and, therefore, are not a direct measure of
our exposure through our use of derivatives. The amounts exchanged are
determined on the basis of the notional amounts and other items included in the
derivative instruments.
Impairment of long-lived assets
Our balance sheet reflects significant amounts of long-lived assets
(mainly fixed assets and goodwill) associated with our operations throughout
the world. Many of these amounts have resulted from past acquisitions, which
have required us to reflect these assets at their fair market values at the
dates of acquisition. We assess the recoverability of our long-lived assets
periodically or whenever events or circumstances arise that we believe trigger
a requirement to review such carrying values. This determination requires
substantial judgment and is highly complex when considering the myriad of
countries in which we operate, each of which has its own economic circumstances
that have to be monitored. Additionally, we monitor the lives assigned to these
long-lived assets for purposes of depreciation and amortization, when
applicable. This determination is subjective and is integral to the
determination of whether an impairment has occurred.
Valuation reserves on accounts receivable and inventories
On a periodic basis, we analyze the recoverability of our accounts
receivable and our inventories (supplies, raw materials, work-in-process and
finished goods), in order to determine if due to credit risk or other factors
in the case of our receivables and due to weather or other conditions in the
case of our inventories, some receivables may not be recovered or certain
materials in our inventories may not be utilizable in the production process
or for sale purposes. If we determine such a situation exists, the book value
related to the non-recoverable assets are adjusted and charged to the income
statement through an increase in the doubtful accounts reserve or the
inventory obsolescence reserve, as appropriate. These determinations require
substantial management judgment and are highly
56
complex when considering the various countries in which we have operations,
each having its own economic circumstances that requires continuous
monitoring, and our numerous plants, deposits, warehouses and quarries. As a
result, final losses from doubtful accounts or inventory obsolescence could
differ from our estimated reserves.
Transactions in our own stock
We have entered into various transactions involving our own stock.
These transactions have been designed to achieve various financial goals but
were primarily executed to give us a means of satisfying future transactions
that may require us to deliver significant numbers of shares of our own stock.
These transactions are described in detail in the notes to our consolidated
financial statements included elsewhere in this annual report. We view these
transactions as hedges against future exposure even though they do not meet the
definition of hedges under accounting principles. There is significant judgment
necessary to properly account for these transactions. Also, in some cases, the
obligations underlying the related transactions are required to be reflected at
market value, with the changes in such value reflected in our income statement.
There is the possibility that we could be required to reflect losses on the
transactions in our own shares without having a converse reflection of gains on
the transactions under which we would deliver such shares to others.
Results of Operations
Consolidation of Our Results of Operations
Our consolidated financial statements, included elsewhere in this
annual report, include those subsidiaries in which we hold a majority interest
or which we otherwise exercise control. All significant intercompany balances
and transactions have been eliminated in consolidation.
For the periods ended December 31, 2001, 2002 and 2003, our
consolidated results reflect the following transactions:
o In August and September 2003, we acquired 100% of the
outstanding shares of Mineral Resource Technologies Inc., and
the cement assets of Dixon-Marquette Cement for a combined
purchase price of approximately U.S.$99.7 million, subject to
adjustments. Located in Dixon, Illinois, the single cement
facility has an annual production capacity of 560,000 metric
tons.
o In July and August 2002, through a tender offer and subsequent
merger, we acquired 100% of the outstanding shares of PRCC. The
aggregate value of the transaction was approximately U.S.$281.0
million, including approximately U.S.$100.8 million of assumed
net debt.
o On July 12, 2002, we purchased 25,429 shares of common stock
(approximately 0.3% of the outstanding share capital) of CAH
from a CAH investor for a purchase price of approximately
U.S.$2.3 million, increasing our equity interest in CAH to
77.7%. At the same time, we entered into
57
agreements to purchase an additional 1,483,365 shares of CAH
common stock (approximately 14.6% of the outstanding share
capital) from several other CAH investors in exchange for
28,195,213 CEMEX CPOs (subject to anti-dilution adjustments),
which exchange was originally scheduled to take place in four
equal quarterly tranches commencing on March 31, 2003. The
exchange of 84,763 of these CAH shares took place in four
quarterly tranches in 2003 as originally scheduled. In April
2003, we amended the terms of the July 12, 2002 agreements with
respect to the remaining 1,398,602 of the CAH shares. Instead of
purchasing those CAH shares in four equal quarterly tranches
during 2003, we agreed to purchase those CAH shares in four
equal quarterly tranches commencing on March 31, 2004. On March
31, 2004, the exchange of the first tranche of 349,650 CAH
shares took place as scheduled, and was settled on April 1, 2004.
Notwithstanding the amendments, for accounting purposes, the
CAH shares to be received by us in exchange for CEMEX CPOs are
considered to be owned by us effective as of July 12, 2002. As
a result of these transactions and pending their successful
consummation, we will have increased our stake in CAH to 92.3%.
o On July 31, 2002, we purchased, through a wholly-owned indirect
subsidiary, the remaining 30% economic interest that was not
previously acquired by CAH in Solid, for approximately U.S.$95
million. At December 31, 2003, as a consequence of this
transaction and the increase of our stake in CAH, as described
above, our diluted economic interest in Solid was approximately
94.6%.
o In May 2001, we acquired through CAH a 100% economic interest in
Saraburi Cement Company, now known as CEMEX (Thailand) Co. Ltd.
or CEMEX (Thailand), a cement company based in Thailand with an
installed capacity of approximately 700,000 metric tons, for a
total consideration of approximately U.S.$73 million.
o In November 2000, we acquired 100% of the outstanding shares of
common stock of Southdown, now CEMEX, Inc., in the United States
for a total cost of approximately U.S.$2.8 billion.
o In October 2000, CAH acquired our interest in Gresik. As a
result of these transactions and the increase of our stake in
CAH as described above, at December 31, 2003, our diluted
economic interest in Gresik was 23.5%.
o In November 1999, we acquired a 77% interest in Assiut for
approximately U.S.$318.8 million. In 2000, we increased our
interest in Assiut to 92.9%. In March 2001, we further increased
our interest in Assiut to 95.8%.
o In April 1999, we acquired a 15.8% interest in Cementos del
Pacifico, now CEMEX (Costa Rica), S.A., or CEMEX Costa Rica, a
Costa Rican cement producer. In September 1999, we increased our
interest in CEMEX Costa Rica to 95.3%. As of December 31, 2003,
we had increased our interest in CEMEX Costa Rica to
approximately 98.4%.
58
Selected Consolidated Income Statement Data
The following table sets forth selected consolidated income statement
data for CEMEX for each of the three years ended December 31, 2001, 2002, and
2003 expressed as a percentage of net sales.
Year Ended December 31,
------------------------------------
2001 2002 2003
-------- -------- --------
Net sales....................................................... 100.0 100.0 100.0
Cost of sales................................................... (56.2) (55.9) (57.6)
-------- -------- --------
Gross profit............................................... 43.8 44.1 42.4
Operating expenses:
Administrative............................................... (11.4) (12.6) (11.1)
Selling...................................................... (8.5) (11.5) (11.0)
-------- -------- --------
Total operating expenses................................... (19.9) (24.1) (22.1)
-------- -------- --------
Operating income............................................. 23.9 20.0 20.3
Net comprehensive financing income (cost):
Financial expense............................................ (5.9) (5.1) (5.3)
Financial income............................................. 0.6 0.7 0.2
Foreign exchange gain (loss), net............................ 2.2 (1.2) (2.4)
Gain (loss) on valuation of marketable securities and other
investments................................................ 2.9 (4.8) (0.8)
Monetary position gain....................................... 4.0 5.4 4.6
-------- -------- --------
Net comprehensive financing income (cost).................... 3.8 (5.0) (3.7)
-------- -------- --------
Other expenses, net............................................. (6.0) (5.9) (6.4)
Income before income tax, business assets tax, employees'
statutory profit sharing and equity in income of affiliates 21.7 9.0 10.2
-------- -------- --------
Income tax and business assets tax, net......................... (2.4) (0.8) (1.3)
Employees' statutory profit sharing............................. (0.4) (0.2) (0.2)
-------- -------- --------
Total income taxes, business assets tax and employees' statutory
profit sharing............................................. (2.8) (1.0) (1.5)
Income before equity in income of affiliates................. 18.9 8.0 8.7
Equity in income of affiliates.................................. 0.3 0.5 0.5
-------- -------- --------
Consolidated net income......................................... 19.2 8.5 9.2
-------- -------- --------
Minority interest net income.................................... 2.2 0.6 0.4
-------- -------- --------
Majority interest net income.................................... 17.0 8.0 8.8
-------- -------- --------
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Overview
Summarized in the table below are the percentage (%) increases (+) and
decreases (-) in 2003 compared to 2002 in our net sales, before eliminations
resulting from consolidation, sales volumes and prices for the major countries
in which we have operations. Variations in net sales determined on the basis of
constant Mexican Pesos include the appreciation or depreciation which occurred
during the period between the country's local currency vis-a-vis the Mexican
Peso, as well as the effects of inflation as applied to the Mexican Peso
amounts using our weighted average inflation factor; therefore, such variations
differ substantially from those based solely on the country's local currency:
59
----------------- ------------------------------------------ ------------------------ ------------- -----------------------
Net Sales
----------------- ------------- --------------- ------------ ------------------------ ------------- -----------------------
Approximate
currency
fluctuations, Variations
-------------- in
Variations net of constant Export Average Domestic
in local inflation Mexican Sales Prices in local
currency effects Pesos Domestic Sales Volumes Volumes currency
------------- --------------- ------------
Country Cement Ready-Mix Cement Cement Ready-Mix
----------------- ------------- --------------- ------------ --------- -------------- ------------- ---------- ------------
Mexico +15.3% -11.6% +3.7% +4% +13% -24% +2% -2%
----------------- ------------- --------------- ------------ --------- -------------- ------------- ---------- ------------
United States -1.0% -2.0% -3.0% +2% +4% N/A -2% Flat
----------------- ------------- --------------- ------------ --------- -------------- ------------- ---------- ------------
Spain +3.5% +17.5% +21.0% +5% +5% -21% -1% Flat
----------------- ------------- --------------- ------------ --------- -------------- ------------- ---------- ------------
Venezuela -5.7% +8.7% +3.0% -13% -6% +17% +3% +6%
----------------- ------------- --------------- ------------ --------- -------------- ------------- ---------- ------------
Colombia +11.4% +0.2% +11.6% +1% +34% N/A +6% +4%
----------------- ------------- --------------- ------------ --------- -------------- ------------- ---------- ------------
Central America
and the
Caribbean +14.1% +1.90% +16.0% +7% +72% N/A -1% -4%
----------------- ------------- --------------- ------------ --------- -------------- ------------- ---------- ------------
Philippines +6.1% -5.3% +0.8% -2.3% +86% +44% +4% -9%
----------------- ------------- --------------- ------------ --------- -------------- ------------- ---------- ------------
Egypt +20.6% -32.5% -11.9% -12% +193% N/A +22% +13%
----------------- ------------- --------------- ------------ --------- -------------- ------------- ---------- ------------
N/A = Not Applicable
On a consolidated basis, our cement sales volumes increased
approximately 5%, from 61.8 million tons in 2002 to 64.7 million tons in 2003,
and our ready-mix concrete sales volumes increased approximately 13%, from 19.2
million cubic meters in 2002 to 21.7 million cubic meters in 2003. Our net
sales increased approximately 7% from Ps75,042 million in 2002 to Ps80,528
million in 2003 in constant Peso terms, and our operating income increased
approximately 9% from Ps15,029 million in 2002 to Ps16,356 million in 2003 in
constant Peso terms.
Net Sales
Our net sales increase of 7% in constant Peso terms during 2003 was
primarily attributable to higher sales volumes in most of our markets, and the
consolidation of the results of operations of PRCC for the entire year in 2003
compared to just five months in 2002, which were partially offset by a decrease
in domestic cement sales volumes in Venezuela, Philippines and Egypt and lower
domestic cement prices in the United States and Central America and the
Caribbean. Of our consolidated net sales in constant Peso terms in 2002 and
2003, approximately 76% and 73%, respectively, were derived from sales of
cement, approximately 19% and 22%, respectively, from sales of ready-mix
concrete and approximately 5% in both years from sales of other construction
materials and services.
Additionally, set forth below is a quantitative and qualitative
analysis of the effects of the various factors affecting our net sales on a
country-by-country basis.
Mexico
------
Our Mexican operations' domestic gray cement sales volumes increased
approximately 4% in 2003 compared to 2002, and ready-mix concrete sales volumes
increased approximately 13% during the same period. The increase in sales
volumes resulted primarily from increased demand in the public sector,
particularly from infrastructure projects and social housing, while the
industrial and commercial sectors remained stable during the year. However, the
sales volumes increases were partially offset by a significant decrease in
cement export volumes. Our Mexican operations' cement export volumes, which
represented 5% of our Mexican cement sales volumes in 2003, decreased
approximately 24% in 2003 compared to 2002, despite stable exports to the U.S.
market, due mainly to a reduction in our exports from Mexico to the Caribbean
region. Responsibility for exports to the Caribbean region has been assumed by
our Venezuelan operations. Of our Mexican operations' cement export volumes
during 2003, 71.4% was shipped to the United States, 27.4% to Central America
and the Caribbean and 1.2% to South America. The average cement price in Mexico
increased approximately 2% in constant Peso terms in 2003 compared to 2002, and
the average ready-mix concrete price decreased approximately 2% in constant
Peso terms over the same period (these prices increased 6% and 0.1%,
respectively, in nominal Peso terms).
As a result of the increases in cement and ready-mix concrete sales
volumes and the increase in the average domestic cement price, partially offset
by a decrease in the average ready-mix prices, net sales in Mexico, in
60
constant Peso terms reflecting Mexican inflation, increased approximately 4% in
2003 compared to 2002, despite the decline in cement export volumes.
United States
-------------
Our United States operations' cement sales volumes, which include
cement purchased from our other operations, increased approximately 2% in 2003
compared to 2002, and ready-mix concrete sales volumes increased approximately
4% over the same period. The increases in sales volumes is primarily
attributable to strong demand from the cement-intensive public works sector, in
particular street and highway construction, and the residential sector during
the second half of 2003, while the industrial and commercial sectors reversed
their downward trend and are now more stable. The average sales price of cement
decreased approximately 2% in Dollar terms during 2003 compared to 2002. The
average price of ready-mix concrete remained flat during 2003 compared to 2002.
As a result of the decrease in the average sales price of cement and
the sale of some of our mineral products businesses, net sales in the United
States declined approximately 1% in U.S. Dollar terms in 2003 compared to 2002,
despite the increases in cement and ready-mix concrete sales volumes.
Spain
-----
Our Spanish operations' domestic cement sales volumes increased
approximately 5% in 2003 compared to 2002, and ready-mix concrete sales volumes
increased approximately 5% during the same period. The increase in sales
volumes was primarily driven by strong residential construction activity and
increased spending in public works due to Spain's infrastructure program. Our
Spanish operations' cement export volumes, which represented 3% of our Spanish
cement sales volumes in 2003, decreased approximately 21% in 2003 compared to
2002 primarily due to increased domestic demand. Of our Spanish operations'
total cement export volumes during 2003, 47.8% was shipped to the United
States, 31.4% to Africa and 20.8% to Europe and the Middle East. The average
sales price of cement decreased approximately 1% in Euro terms during 2003
compared to 2002, and the average price of ready-mix concrete remained flat in
Euro terms over the same period.
As a result of the increases in cement and ready-mix concrete sales
volumes, net sales in Spain, in Euro terms, increased approximately 3.5% in
2003 compared to 2002, despite the decline in cement export volumes and in
domestic cement prices.
Venezuela
---------
Our Venezuelan operations' domestic cement sales volumes decreased
approximately 13% in 2003 compared to 2002, while ready-mix concrete sales
volumes decreased approximately 6% during the same period. The decreases in
sales volumes and ready-mix concrete sales volumes were mainly driven by the
downturn in construction activity in Venezuela and limited government spending
on infrastructure as a result of the continuing political and economic turmoil
in Venezuela, which were partially offset by increased demand from the
self-construction sector.
Our Venezuelan operations' cement export volumes, which represented
56% of our Venezuelan cement sales volumes in 2003, increased approximately 17%
in 2003 compared to 2002. The increase in cement export volumes was due to an
increased focus on the export market to offset the contraction of the local
market. Of our Venezuelan operations' total cement export volumes during 2003,
63.6% was shipped to the United States and 36.4% to the Caribbean and South
America.
Our Venezuelan operations' average domestic sales price of cement
increased approximately 3% in constant Bolivar terms in 2003 compared to 2002,
while the average domestic sales price of ready-mix concrete increased
approximately 6% in constant Bolivar terms over the same period.
As a result of the decreases in domestic cement and ready mix sales
volumes, net sales in Venezuela, in constant Bolivar terms, decreased
approximately 5.7% in 2003 compared to 2002.
61
Colombia
--------
Our Colombian operations' domestic cement sales volumes increased
approximately 1% in 2003 compared to 2002, primarily as a result of increased
demand from the private residential construction sector. Our Colombian
operations' ready-mix concrete sales volumes increased approximately 34% in
2003 compared to 2002, primarily as a result of an increase in government
spending on infrastructure, particularly on transportation. For the year ended
December 31, 2003, sales of ready-mix concrete in Colombia represented
approximately 33% of our Colombian operations' net sales.
Our Colombian operations' average sales price of cement increased 6%
in Colombian Peso terms in 2003 compared to 2002, while the average domestic
sales price of ready-mix concrete increased approximately 4% in Colombian Peso
terms over the same period.
As a result of the increases in domestic cement and ready-mix concrete
sales volumes and the increases in the average domestic sales prices of cement
and ready-mix concrete, net sales in Colombia, in Colombian Peso terms,
increased approximately 11.4% in 2003 compared to 2002.
Central America and the Caribbean
---------------------------------
Our Central American and Caribbean operations consist of our
operations in Costa Rica, the Dominican Republic, Panama, Nicaragua and Puerto
Rico, as well as several cement terminals in other Caribbean countries and our
trading operations in the Caribbean region. Most of these trading operations
consist of the resale in the Caribbean region of cement produced by our
operations in Venezuela and Mexico. Our Central American and Caribbean
operations' domestic cement sales volumes increased approximately 8% in 2003
compared to 2002, primarily as a result of the inclusion of our Puerto Rican
operations in our consolidated results for the entire year in 2003
(representing approximately 22% of our total cement sales volume in the region
during 2003) and just five months (August through December) for 2002. Excluding
our trading operations in the Caribbean region, domestic cement sales volumes
increased 7% in 2003 compared to 2002. Our Caribbean region trading operations'
cement sales volumes increased approximately 36% in 2003 compared to 2002,
primarily as a result of exports to the United States from the Caribbean region
instead of from Venezuela for several months in the beginning of 2003 due to
the political and economic turmoil and general labor strikes in Venezuela at
that time, as well as increased sales of white cement to several Central
American countries during the third quarter of 2003. Our Central American and
Caribbean operations' ready-mix concrete sales volumes increased approximately
72% in 2003 compared to 2002, primarily due to the inclusion of our Puerto
Rican operations for the entire year in 2003, which operations represented
approximately 60% of our total ready-mix concrete sales volumes in the region.
We also benefited from higher volumes in most of our markets in the region
during 2003 and the inclusion of a full year of ready-mix concrete sales in
Costa Rica, since these ready-mix operations in Costa Rica only began in the
third quarter of 2002.
Our Central American and Caribbean operations' average domestic cement
sales price decreased approximately 1% in Dollar terms in 2003 compared to
2002, while the average ready-mix concrete sales price decreased approximately
4% in Dollar terms over the same period.
As a result of the increases in domestic cement and ready-mix concrete
sales volumes, net sales in our Central American and Caribbean region, in
Dollar terms, increased approximately 14.1% in 2003 compared to 2002, despite
the decline in the average sales price of both domestic cement and ready-mix
concrete prices.
The Philippines
---------------
Our Philippine operations' domestic cement sales volumes decreased
approximately 2.3% in 2003 compared to 2002, primarily as a result of decreased
demand in the public works sector due to reductions in government spending on
infrastructure, which was offset by a 4% increase, in Philippine Peso terms, in
the average domestic sales price of cement over the same periods. Our ready-mix
concrete sales volumes in the Philippines increased approximately 86% in 2003
compared to 2002, while the average ready-mix concrete price decreased
approximately 9% in Philippine Peso terms over the same periods. The increase
in ready-mix concrete sales volumes was primarily attributable to a weak
economic environment during 2002 and new construction contracts in
62
2003. Our Philippine operations' ready-mix concrete business, which began in
2001, is still under development and represents a relatively small portion of
our overall Philippine operations. For the year ended December 31, 2003, sales
of ready-mix concrete in the Philippines represented approximately 1% of our
Philippine operations' net sales.
As a result of the increases in ready-mix concrete sales volumes and
in the average cement sales price, which were partially offset by decreases in
domestic cement volumes and in the average ready-mix concrete sales price, net
sales in the Philippines, in Philippine Peso terms, increased approximately 6%
in 2003 compared to 2002.
Thailand
--------
Our Thai operations' domestic cement sales volumes increased
approximately 10% in 2003 compared to 2002, primarily due to increased
government spending on infrastructure projects. Our Thai operations' average
sales price of cement increased approximately 16% in Baht terms in 2003
compared to 2002. Cement prices in Thailand are indirectly controlled by the
Thai government.
As a result of the increases in domestic cement sales volumes and the
average cement sales price, net sales in Thailand, in Baht terms, increased
approximately 28% in 2003 compared to 2002.
Egypt
-----
Our Egyptian operations' domestic cement sales volumes decreased
approximately 12% in 2003 compared to 2002, primarily as a result of
exceptionally high cement volumes in 2002 and decreased demand in the
commercial and tourism sectors. These factors, however, were partially offset
by increased government spending on infrastructure and a strong
self-construction sector. The decrease in domestic sales volumes was also
partially offset by a 22% increase, in Egyptian pound terms, in the average
domestic sales price of cement in 2003 compared to 2002, which was primarily
due to our commercial strategy. Our Egyptian operations' cement export volumes
represented 13% of our Egyptian cement sales volumes in 2003. We only began
exporting cement from Egypt during the second quarter of 2003. Of our Egyptian
operations' cement export volumes during 2003, 61% was shipped to Africa and
39% was shipped to Europe and the Middle East. Our Egyptian operations'
ready-mix sales volumes increased 193% in 2003 compared to 2002, primarily
because sales volumes in 2002 were negligible. Our ready-mix operations in
Egypt, which began in 2002, are still under development and constitute a
relatively minor portion of our overall Egyptian operations. For the year ended
December 31, 2003, sales of ready-mix concrete in Egypt represented
approximately 3% of our Egyptian operations' net sales.
As a result of the decrease in cement sales volumes combined with the
offsetting increase in domestic cement sales prices, net sales in Egypt, in
Egyptian pound terms, increased approximately 21% in 2003 compared to 2002.
Cost of Sales
Our cost of sales, including depreciation, increased 11% from Ps41,925
million in 2002 to Ps46,422 million in 2003 in constant Peso terms, primarily
as a result of a higher percentage of sales of ready-mix concrete and other
products, which have a higher cost of sales as compared to cement, as well as
increased energy and insurance costs, and the consolidation of our Puerto Rican
operations for the entire year in 2003 compared to just five months in 2002,
which represented approximately 13% of the increase. As a percentage of sales,
cost of sales increased 1.7% from 55.9% in 2002 to 57.6% in 2003.
Gross Profit
Our gross profit increased by 3% from Ps33,117 million in 2002 to
Ps34,106 million in 2003 in constant Peso terms. Our gross margin decreased
from 44.1% in 2002 to 42.4% in 2003, as a result of the changes in our product
mix described above. The increase in our gross profit is primarily attributable
to the 7% increase in our net sales in 2003 compared to 2002, partially offset
by the 11% increase in our cost of sales in 2003 compared to 2002.
63
Operating Expenses
Our operating expenses decreased 2% from Ps18,088 million in 2002 to
Ps17,750 million in 2003 in constant Peso terms, primarily as a result of our
continuing cost-reduction efforts, including reductions in corporate overhead
and travel expenses. As a percentage of sales, our operating expenses decreased
from 24.1% in 2002 to 22.1% in 2003.
Operating Income
For the reasons mentioned above, our operating income increased 9%
from Ps15,029 million in 2002 to Ps16,356 million in 2003.
Comprehensive Financing Income (Expense)
Pursuant to Mexican GAAP, the comprehensive financing result should
measure the real cost (gain) of an entity's financing, net of the foreign
currency fluctuations and the inflationary effects on monetary assets and
liabilities. In periods of high inflation or currency depreciation, significant
volatility may arise and is reflected under this caption. For presentation
purposes, comprehensive financing income (expense) includes:
o financial or interest expense on borrowed funds;
o financial income on cash and temporary investments;
o appreciation or depreciation resulting from the valuation of
financial instruments, including derivative instruments and
marketable securities, as well as the realized gain or loss from
the sale or liquidation of such instruments or securities;
o foreign exchange gains or losses associated with monetary assets
and liabilities denominated in foreign currencies; and
o gains and losses resulting from having monetary liabilities or
assets exposed to inflation (monetary position result).
Year Ended December 31,
--------------------------------
2002 2003
-------------- -------------
(in millions of constant Pesos)
Net comprehensive financing income (expense):
Financial expense....................................... Ps (3,814) Ps (4,278)
Financial income........................................ 512 188
Foreign exchange gain (loss), net....................... (884) (1,929)
Gain (loss) on valuation and liquidation of financial
instruments.......................................... (3,630) (670 )
Monetary position gain.................................. 4,039 3,683
---------- ------------
Net comprehensive financing income (expense)........ Ps (3,777) Ps (3,006)
========== ============
Our net comprehensive financing result improved from an expense of
Ps3,777 million in 2002 to an expense of Ps3,006 million in 2003. The
components of the change are shown above. Our financial expense was Ps4,278
million for 2003, an increase of 12% from Ps3,814 million in 2002. The increase
was primarily attributable to a higher level of interest rates swaps at a level
above current market rates during 2003, which were entered into in an effort to
shift our interest rate profile to more fixed rates. Our financial income
decreased 63% from Ps512 million in 2002 to Ps188 million in 2003 as a result
of the decline in interest rates. Our net foreign exchange results deteriorated
from a loss of Ps884 million in 2002 to a loss of Ps1,929 million in 2003. The
foreign exchange loss in 2003 is primarily attributable to the depreciation of
the Peso against the Dollar and the appreciation of the Japanese Yen against
the Dollar as compared to the foreign exchange loss in 2002, which also was
primarily attributable to the depreciation of the Peso against the Dollar, but
was partially offset by the depreciation of the Japanese Yen against the
Dollar. Our gain (loss) from valuation and liquidation of financial instruments
improved from a loss of
64
Ps3,630 million in 2002 to a loss of Ps670 million in 2003, primarily
attributable to valuation improvements from our derivative financial
instruments portfolio (discussed below) during 2003. See notes 11 and 16 to our
consolidated financial statements included elsewhere in this annual report. Our
monetary position gain (generated by the recognition of inflation effects over
monetary assets and liabilities) decreased from a gain of Ps4,039 million
during 2002 to a gain of Ps3,683 million during 2003, mainly as a result of the
decrease in the weighted average inflation index used in the determination of
the monetary position result, combined with the decrease in our monetary
liabilities in 2003 compared to 2002.
Derivative Financial Instruments
Our derivative financial instruments that have a potential impact on
our comprehensive financing result consist of equity forward contracts
designated as hedges of our executive stock option programs (see notes 15 and
16 to our consolidated financial statements included elsewhere in this annual
report), foreign exchange derivative instruments, excluding our foreign
exchange forward contracts designated as hedges of our net investment in
foreign subsidiaries, interest rate swaps, cross currency swaps, interest rate
swap options (swaptions), other interest rate derivatives, fuel and energy
derivatives and third party equity forward contracts. Of the loss of Ps670
million in 2003 recognized in the item gain (loss) on valuation and liquidation
of financial instruments, an approximate loss of Ps984 million is attributable
to changes in the fair value of our interest rate derivatives, while an
approximate loss of Ps80 million resulted from changes in the fair value of our
foreign currency derivatives. These losses were partially offset by a net
valuation gain of approximately Ps343 million resulting from changes in the
fair value of our equity forward contracts that hedge our stock option
programs, net of the costs generated by such programs, and an approximate
valuation gain of Ps51 million resulting from changes in the fair value of our
marketable securities. These valuation effects accounted for substantially all
the loss recorded in 2003 under the line item gain (loss) on valuation and
liquidation of financial instruments presented above. Despite the overall
valuation loss, we experienced valuation improvements in most of these
financial derivatives in 2003 compared to 2002. See "Qualitative and
Quantitative Market Disclosure --Our Derivative Financial Instruments" and
"Qualitative and Quantitative Market Disclosure -- Interest Rate Risk, Foreign
Currency Risk and Equity Risk." See also notes 11 and 16 to our consolidated
financial statements included elsewhere in this annual report. The estimated
net gain mentioned above, determined by the excess between the fair value gain
of our equity forward contracts that hedge the potential exercise of our
executive stock option programs over the costs associated with the intrinsic
value of our executives' options, is primarily attributable to slight
differences in the strike price established in the forward contracts as
compared to those of the options. The fair value gain of our equity forward
contracts and the costs associated with the stock options both are attributable
to the increase, during 2003, in the market price of our listed securities
(ADSs and CPOs) as compared to 2002. The estimated fair value loss of our
interest rate derivatives is primarily attributable to the continuing decline
in market interest rates, as we had fixed our interest rate profile at a level
above current market rates.
Other Expenses, Net
Our other expenses for 2003 were Ps5,133 million, a 15% increase from
Ps4,465 million in 2002. The increase was primarily attributable to the
recognition of impairment charges on several long-lived assets during 2003 of
approximately Ps1,118.3 million compared with Ps102.9 million in 2002. See
notes 9 and 10 to our consolidated financial statements included elsewhere in
this annual report.
Excluding impairment charges, other expenses decreased approximately
8% in 2003 as compared to 2002, mainly as a result of lower anti-dumping duty
expense during 2003 compared to 2002 and also the absence of the extraordinary
expense incurred during 2002 as a result of the premium paid on our cash tender
offer for our 12 3/4% notes due 2006, the consent fee paid in connection with
our consent solicitation for our 9.625% notes due 2009 and a non-recurring
expense related to the termination of our distribution agreement in Taiwan. See
notes 11 and 21F to our consolidated financial statements included elsewhere in
this annual report.
Income Taxes, Business Assets Tax and Employees' Statutory Profit Sharing
Our effective tax rate was 12.3% in 2003 compared to 9.3% in 2002. Our
tax expense, which primarily consists of income taxes and business assets tax,
increased 60% from Ps629 million in 2002 to Ps1,007 million in
65
2003. The increase was attributable to higher taxable income in 2003 as
compared to 2002. Our average statutory income tax rate was approximately 34%
in 2003 and approximately 35% in 2002.
Employees' statutory profit sharing increased from Ps118 million
during 2002 to Ps191 million during 2003 due to higher taxable income for
profit sharing purposes in Mexico. See note 17B to our consolidated financial
statements included elsewhere in this annual report.
Majority Interest Net Income
Majority interest net income represents the difference between our
consolidated net income and minority interest net income, which is the portion
of our consolidated net income attributable to those of our subsidiaries in
which non-affiliated third parties hold interests. Changes in minority interest
net income in any period reflect changes in the percentage of the stock of our
subsidiaries held by non-affiliated third parties as of the end of each month
during the relevant period and consolidated net income attributable to those
subsidiaries.
For the reasons described above, our consolidated net income (before
deducting the portion allocable to minority interest) for 2003 increased 16%,
from Ps6,392 million in 2002 to Ps7,409 million in 2003. The percentage of our
consolidated net income allocable to minority interests decreased from 6.6% in
2002 to 4.6% in 2003, as a result of our prepayment in October 2003 of the
remaining portion of the preferred equity balance of the preferred equity
transaction related to the financing of our acquisition of Southdown, Inc., now
CEMEX, Inc., in 2000. Majority interest net income increased by 18%, from
Ps5,967 million in 2002 to Ps7,067 million in 2003, mainly as a result of our
increase in net sales, the decrease in our valuation losses on derivative
financial instruments and a lower portion of consolidated net income allocable
to minority interests, partially offset by the increases in our foreign
exchange loss, the decrease in our monetary position gain, the increase in our
other expenses and higher income taxes. As a percentage of net sales, majority
interest net income increased from 8.0% in 2002 to 8.8% in 2003.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Overview
During 2002, we experienced significant declines in our consolidated
results of operations as a consequence of unfavorable market conditions in
several of the countries in which we have operations. In addition, as a result
of the general decline in global capital markets as well as the volatility in
the interest rate and currency markets, during 2002, we experienced significant
valuation losses in our income statement, arising from our derivative financial
instruments portfolio.
These unfavorable economic conditions have been partially offset by:
o our ability to enter into new markets in the Caribbean, through
our acquisition of PRCC in July 2002, and
o favorable markets in several of the countries in which we
operate, particularly in Spain, which experienced robust
spending in public works and strong residential construction
activity.
Summarized in the table below are the percentage (%) increases (+) and
decreases (-) in 2002 compared to 2001 in our net sales, before eliminations
resulting from consolidation, sales volumes and prices for the major countries
in which we have operations. Variations in net sales determined on the basis of
constant Mexican Pesos include the appreciation or depreciation occurred during
the period between the country's local currency vis-a-vis the Mexican Peso, as
well as the effects of inflation as applied to the Mexican Peso amounts using
CEMEX's weighted average inflation factor; therefore, such variations
substantially differ from those based solely on the country's local currency:
66
--------------- ----------------------------------------- --------------------------- ------------ ------------------------
Net Sales
--------------- ------------ --------------- ------------ --------------------------- ------------ ------------------------
Approximate Domestic Sales Volumes Export Average Domestic
Variations currency Variations Sales Prices in local
in local fluctuations, in Volumes currency
currency net of constant
inflation Mexican
effects Pesos
Country Cement Ready-Mix Cement Cement Ready-Mix
--------------- ------------ --------------- ------------ ------------ -------------- ------------ ----------- ------------
Mexico -1.0% -3.0% -4.0% +4% +10% -25% -6% -8%
--------------- ------------ --------------- ------------ ------------ -------------- ------------ ----------- ------------
United States -7.7% -2.0% -9.7% -5% Flat N/A -1% +1%
--------------- ------------ --------------- ------------ ------------ -------------- ------------ ----------- ------------
Spain +3.5% +25.8% +29.3% +2% +6% +5% +1% -1%
--------------- ------------ --------------- ------------ ------------ -------------- ------------ ----------- ------------
Venezuela -7.8% -24.4% -32.2% -17% -23% -15% +12% +5%
--------------- ------------ --------------- ------------ ------------ -------------- ------------ ----------- ------------
Colombia +9.4% -16.4% -7.0% +2% -3% N/A +9% +3%
--------------- ------------ --------------- ------------ ------------ -------------- ------------ ----------- ------------
Central +16.5% +0.8% +17.3% +14% +152% N/A +5% N/A
America and
the Caribbean
--------------- ------------ --------------- ------------ ------------ -------------- ------------ ----------- ------------
Philippines -8.2% +8.3% +0.1% +36% -68% -33% -23% Flat
--------------- ------------ --------------- ------------ ------------ -------------- ------------ ----------- ------------
Egypt +10.1% +1.0% +11.1% +18% N/A N/A -8% N/A
--------------- ------------ --------------- ------------ ------------ -------------- ------------ ----------- ------------
N/A = Not Applicable
On a consolidated basis, our cement sales volumes increased 1%, from
61.2 million tons in 2001 to 61.8 million tons in 2002, and our ready-mix
concrete sales volumes increased 6%, from 18.2 million cubic meters in 2001 to
19.2 million cubic meters in 2002. However, our net sales decreased 2% from
Ps76,572 million in 2001 to Ps75,042 million in 2002 in constant Peso terms,
and our operating income decreased 18% from Ps18,286 million in 2001 to
Ps15,029 million in 2002 in constant Peso terms.
Net Sales
Our net sales decrease of 2% in constant Peso terms during 2002 was
primarily attributable to unfavorable economic conditions in many of our
markets, which affected cement sales volumes and prices in those markets. A
decrease in weighted average cement prices and weighted average ready-mix
concrete prices in 2002 compared to 2001 accounted for approximately, 4% and
1%, respectively, of our various markets' negative impact on net sales. These
decreases were partially offset by a 1% positive effect resulting from the
increase in cement sales volumes, a 1% positive effect resulting from the
increase in ready-mix concrete sales volumes and a 1% positive effect resulting
from the consolidation of our newly acquired operations in Puerto Rico.
Additionally, set forth below is a quantitative and qualitative analysis of the
effects of the various factors affecting our net sales on a country-by-country
basis.
Mexico
------
Our Mexican operations' domestic gray cement sales volumes increased
4% in 2002 compared to 2001, and ready-mix concrete sales volumes increased 10%
during the same period. The increase in sales volumes resulted primarily from
increased demand in the public sector, while the self-construction sector
remained stable during the year. However, lower cement prices and lower
ready-mix concrete prices in Mexico offset the sales volumes increases. The
average cement price in Mexico decreased 6% in constant Peso terms in 2002
compared to 2001, and the average ready-mix concrete price decreased 8% in
constant Peso terms over the same period (1.5% and 3.5% in nominal Peso terms,
respectively). The principal reason for the decrease in our average cement
price and our average ready-mix concrete price, both in constant Peso terms and
nominal Peso terms, is due to increased competition.
The increase in our domestic cement sales volumes was also offset by a
significant decrease in cement export volumes. Our Mexican operations' cement
export volumes, which represented 7% of our Mexican cement sales volumes in
2002, decreased 25% in 2002 compared to 2001 due mainly to the weakness of the
U.S. market, our most important foreign consumer. Of our Mexican operations'
cement export volumes during 2002, 36% was shipped to Central America and the
Caribbean, 63% to the United States and 1% to South America.
67
As a result of the decline in average cement and ready-mix prices and
the decline in cement export volumes, net sales in Mexico, in constant Peso
terms using Mexican inflation, declined approximately 1% in 2002 compared to
2001, despite increases in domestic cement sales volumes and ready-mix concrete
sales volumes.
United States
-------------
Our United States operations' cement sales volumes, which include
cement purchased from our other operations decreased 5% in 2002 compared to
2001. Ready-mix concrete sales volumes remained flat. The decrease in cement
sales volumes is attributable to the general weakness of the United States
economy. Industrial and commercial construction declined as a result of
continued weakness in the manufacturing and commercial sectors of the economy,
while the cement-intensive public works sector, in particular highway
construction, our strongest source of cement demand, did not grow as much as in
prior years. In addition, the average sales price of cement decreased 1% in
Dollar terms during 2002 compared to 2001. This decrease was only partially
offset by a corresponding 1% increase in the average price of ready-mix
concrete.
As a result of the decline in cement sales volumes and average cement
prices, net sales in the United States declined approximately 7.7% in U.S.
Dollar terms in 2002 compared to 2001.
Spain
-----
Our Spanish operations' domestic cement sales volumes increased 2% in
2002 compared to 2001, and ready-mix concrete sales volumes increased 6% during
the same period. The increase in sales volumes was primarily driven by
increased spending in public works and strong residential construction
activity, combined with the effects of a strong Euro. Our Spanish operations'
cement export volumes, which represented 3% of our Spanish cement sales volumes
in 2002, increased 5% in 2002 compared to 2001 (despite the strong Euro) due to
our Spanish operations' expansion into new markets in Mauritania (Africa) and
the Caribbean during the second half of 2002. Of our Spanish operations' total
cement export volumes during 2002, 20% was shipped to Europe and the Middle
East, 39% to Africa, 37% to the United States and 4% to the Caribbean region.
In addition, the average sales price of cement increased 1% in Euro terms
during 2002 compared to 2001. This increase was only partially offset by a
corresponding 1% decrease in the average price of ready-mix concrete.
As a result of the increase in cement sales volumes and prices, net
sales in Spain, in Euro terms, increased 3.5% in 2002 compared to 2001.
Venezuela
---------
Our Venezuelan operations' domestic cement sales volumes decreased 17%
in 2002 compared to 2001, while ready-mix concrete sales volumes decreased 23%
during the same period. The decreases in sales volumes and ready-mix concrete
sales volumes were mainly driven by the downturn in construction activity in
Venezuela, which was the direct consequence of the political and economic
turmoil in Venezuela during 2002. In addition, the on-going nation-wide general
strike that began in early December 2002 caused significant reduction in oil
production in Venezuela and brought Venezuela's oil-dependent economy virtually
to a halt.
Our Venezuelan operations' cement export volumes, which represented
50% of our Venezuelan cement sales volumes in 2002, decreased 15% in 2002
compared to 2001. The decrease was due in part to the weakness of the economy
in the United States, which is the main destination of Venezuelan exports. Of
our Venezuelan operations' total cement export volumes during 2002, 65% was
shipped to North America and 35% to the Caribbean and South America.
Our Venezuelan operations' average domestic sales price of cement
increased 12% in constant Bolivar terms in 2002 compared to 2001, while the
average domestic sales price of ready-mix concrete increased approximately 5%
in constant Bolivar terms over the same period. However, these increases in
average prices were not sufficient to offset the decrease in sales volumes;
therefore, net sales in Venezuela, in constant Bolivar terms, declined
approximately 7.8% in 2002 compared to 2001.
68
During the end of the second and beginning of the third quarter of
2002, we experienced a 36 day labor strike in the Pertigalete plant, our major
cement plant in Venezuela. However, local market supply was met by existing
inventory, and our trading network covered volumes which otherwise would have
been exported from Venezuela.
Colombia
--------
Our Colombian operations' domestic sales volumes increased 2% in 2002
compared to 2001. This increase was primarily attributable to a recovery in the
public works sector, which increased toward the end of 2002, and our increased
penetration in the residential construction sector. Ready-mix concrete sales
volumes decreased 3% in 2002 compared to 2001, due primarily to reduced
construction activity during the first half of 2002.
Our Colombian operations' average sales price of cement increased 9%
in Colombian Peso terms in 2002 compared to 2001, while the average domestic
sales price of ready-mix concrete increased 3% in Colombian Peso terms over the
same period. As a result of the increases in cement sales volumes and average
cement and ready-mix concrete prices, slightly offset by the decrease in
ready-mix concrete volumes, our net sales in Colombia, in Colombian Peso terms,
increased 9.4% in 2002 compared to 2001.
Central America and the Caribbean
---------------------------------
Our Central American and Caribbean operations consist of our
operations in Costa Rica, the Dominican Republic, Panama, Nicaragua and Puerto
Rico, as well as our trading operations in the Caribbean region. Most of these
trading operations consist of the resale in the Caribbean region of cement
produced by our operations in Spain, Venezuela and Mexico. Our Central American
and Caribbean operations' domestic cement sales volumes increased approximately
12% (or approximately 15%, excluding our trading operations in the Caribbean
region) in 2002 compared to 2001, primarily as a result of our acquisition of
PRCC in July 2002, which represented 9% of our total cement sales volume in
that region during 2002. Our Central American and Caribbean operations'
ready-mix concrete sales volumes increased approximately 152% in 2002 compared
to 2001, primarily due to the inclusion of our Puerto Rican operations, and the
beginning of ready-mix concrete sales in Costa Rica in the third quarter of
2002.
Our operations in Panama and in the Dominican Republic increased their
ready-mix sales volumes by 23% and 7%, respectively, in 2002 compared to 2001,
and our Caribbean region trading operations' cement sales volumes increased
approximately 2% in 2002 compared to 2001, despite the political and economic
turmoil in Venezuela because we were able to supply the Caribbean trading
market with exports from Spain.
Lastly, our Central American and Caribbean operations' average
domestic cement sales price increased 5% in Dollar terms in 2002 compared to
2001, primarily due to increases in the average sales prices of cement in Costa
Rica, the Dominican Republic and Nicaragua of 5%, 9% and 12%, respectively, as
a result of strong domestic demand, while the average sales price of cement
decreased 5% in Panama.
As a result of the increase in cement sales volumes and prices,
combined with the inclusion of our Puerto Rican operations, net sales in the
Central American and Caribbean region, in U.S. Dollar terms, increased 16.5% in
2002 compared to 2001.
The Philippines
---------------
Our Philippines domestic cement sales volumes increased 36% in 2002
compared to 2001, which was partially offset by a 23% decrease in Philippine
Peso terms in the average domestic sales price of cement during the same
period. Our Philippine operations' domestic cement sales volumes increase was
primarily a result of our commercial marketing programs and our increased
market participation in the country due to fewer cement imports from our
competitors. The construction sector of the economy, however, remained weak as
a result of reductions in public spending and private investments. Our
Philippines ready-mix concrete business, which began in 2001, is still under
development. Our ready-mix sales volumes in the Philippines decreased 68% in
2002 compared to 2001, but,
69
in contrast to sharply declining prices for cement, the average ready-mix
concrete price remained flat. The decrease in ready-mix concrete sales volumes
was also attributable to the weak economic environment in the country.
Principally as a result of the decrease in the average cement prices
and the weak ready-mix concrete operations, which was partially offset by the
increase in domestic cement sales volumes, our net sales in the Philippines, in
Philippine Peso terms, decreased 8.2% in 2002 compared to 2001.
Thailand
--------
Our Thai operations include Saraburi, now named CEMEX (Thailand),
which we acquired in May 2001 through our 92.3%-owned subsidiary CEMEX Asia
Holdings, Ltd. Accordingly, CEMEX (Thailand)'s results of operations are
consolidated in our results of operations for all of 2002, but only for seven
months in 2001. CEMEX (Thailand)'s net sales accounted for approximately 0.2%
of our consolidated net sales for the seven-month period ended December 31,
2001 and approximately 0.3% of our consolidated net sales for the year ended
December 31, 2002.
Egypt
-----
Our Egyptian operations' domestic cement sales volumes increased 18%
in 2002 compared to 2001, primarily as a result of our higher penetration in
Lower Egypt and a strong self-construction sector. The increase in domestic
sales volumes was partially offset by a 8% decrease, in Egyptian pound terms,
in the average domestic sales price of cement, also the result of increased
sales in Lower Egypt, where prices are lower due to the high concentration of
competitors in the region. In addition to being subject to market pressures,
cement prices in Egypt are controlled to a significant degree by the Egyptian
government as a result of the government's control of almost 50% of the
industry's capacity.
In addition, the Egyptian pound has undergone four devaluations since
late 2000 (most recently, in February 2003 when it began trading as a freely
floating currency). Devaluations of the Egyptian pound relative to the U.S.
dollar create inflationary pressures in Egypt by generally increasing the price
of imported products and requiring recessionary government policies to curb
aggregate demand.
As a result of the increase in cement sales volumes combined with the
offsetting decline in domestic cement sales prices, net sales in Egypt, in
Egyptian pound terms, increased 10.1% in 2002 compared to 2001.
Cost of Sales
Our cost of sales, including depreciation, decreased 3% from Ps43,070
million in 2001 to Ps41,925 million in 2002 in constant Peso terms, as a result
of the reclassification of the expenses related to distribution of our products
as operating expenses in the income statement for the full year in 2002 and
partially in 2001. During 2001, approximately Ps1,725 million of such expenses
were included in cost of sales. During 2002, the reclassification of expenses
accounted for substantially all the 3% decrease in cost of sales. As a
percentage of sales, cost of sales decreased from 56.2% in 2001 to 55.9% in
2002.
Gross Profit
Our gross profit decreased by 1% from Ps33,502 million in 2001 to
Ps33,117 million in 2002 in constant Peso terms. Our gross margin increased
slightly from 43.8% in 2001 to 44.1% in 2002, reflecting the reclassification
of distribution expenses discussed above. The decrease in our gross profit is
mainly attributable to the 2% decrease in net sales, partially offset by the 3%
decrease in cost of sales from 2001 to 2002.
Operating Expenses
Our operating expenses increased 19% from Ps15,216 million in 2001 to
Ps18,088 million in 2002 in constant Peso terms. This increase was primarily a
result of our rollout expenses related to the implementation of the CEMEX Way,
which included increased efforts to strengthen our commercial and distribution
network
70
worldwide in an effort to lower our costs in the future and make our business
processes more efficient. Also affecting operating expenses was the
reclassification of the expenses related to distribution of our products as
operating expenses in the income statement for the full year in 2002 and
partially in 2001; during 2001, approximately Ps1,725 million of such expenses
were included in cost of sales, representing approximately 37% of the increase
in operating expenses discussed above. As a percentage of sales, our
administrative and selling expenses increased from 19.9% in 2001 to 24.1% in
2002.
Operating Income
The 18% decrease in our operating income in 2002 compared to 2001 is a
result of a 2% decrease in net sales combined with a 19% increase in operating
expenses, partially offset by a 3% decrease in our cost of sales from 2001 to
2002.
Comprehensive Financing Income (Expense)
Pursuant to Mexican GAAP, the comprehensive financing result should
measure the real cost (gain) of an entity's financing, net of the foreign
currency fluctuations and the inflationary effects on monetary assets and
liabilities. In periods of high inflation or currency depreciation, significant
volatility may arise and is reflected under this caption. For presentation
purposes, comprehensive financing income (expense) includes:
o financial or interest expense on borrowed funds;
o financial income on cash and temporary investments;
o appreciation or depreciation resulting from the valuation of
financial instruments, including derivative instruments and
marketable securities, as well as the realized gain or loss from
the sale or liquidation of such instruments or securities;
o foreign exchange gains or losses associated with monetary assets
and liabilities denominated in foreign currencies; and
o gains and losses resulting from having monetary liabilities or
assets exposed to inflation (monetary position result).
Year Ended December 31,
--------------------------------
2001 2002
-------------- -------------
(in millions of constant Pesos)
Net comprehensive financing income (expense):
Financial expense....................................... Ps (4,554) Ps (3,814)
Financial income........................................ 451 512
Foreign exchange gain (loss), net....................... 1,701 (884)
Gain (loss) on valuation and liquidation of financial
instruments............................................ 2,209 (3,630)
Monetary position gain.................................. 3,120 4,039
---------- -----------
Net comprehensive financing income (expense)........ Ps 2,927 Ps (3,777)
========== ===========
Our net comprehensive financing income (expense) decreased from income
of Ps2,927 million in 2001 to an expense of Ps3,777 million in 2002. The
components of the change are shown above. Our financial expense was Ps3,814
million for 2002, a decrease of 16% from Ps4,554 million in 2001. The decrease
was primarily attributable to lower average interest rates as a result of
market conditions. Our financial income increased 14% from Ps451 million in
2001 to Ps512 million in 2002 as a result of a higher level of investments in
fixed rate instruments during the year. Our net foreign exchange results
amounted to a loss of Ps884 million in 2002 compared to a gain of Ps1,701
million in 2001. The foreign exchange loss in 2002 is primarily attributable to
the appreciation of the Japanese Yen and the Dollar against the Peso and the
effect that such appreciation had in our Japanese Yen and Dollar denominated
debt. Our gain (loss) from valuation and liquidation of financial instruments
decreased from a gain of Ps2,209 million in 2001 to a loss of Ps3,630 million
in 2002, primarily attributable to a non-recurring gain
71
obtained in 2001 through the sale of marketable securities of approximately
Ps1,474 million, combined with valuation losses in 2002 on our derivative
financial instruments portfolio (discussed below). See notes 11, 12, and 16 to
our consolidated financial statements included elsewhere in this annual report.
Our monetary position gain (generated by the recognition of inflation effects
over monetary assets and liabilities) increased from Ps3,120 million during
2001 to Ps4,039 million during 2002, as a result of the increase in the
weighted average inflation index in 2002 compared to 2001.
Derivative Financial Instruments
Our derivative financial instruments that have a potential impact on
our Comprehensive Financing Result consist of equity forward contracts
designated as hedges of our executive stock option programs (see notes 15 and
16 to our consolidated financial statements included elsewhere in this annual
report), foreign exchange derivative instruments, excluding our foreign
exchange forward contracts designated as hedges of our net investment in
foreign subsidiaries, interest rate swaps, cross currency swaps, interest rate
swap options (swaptions), other interest rate derivatives, fuel and energy
derivatives and third party equity forward contracts. We suffered valuation
losses in most of these financial derivatives in 2002 compared to 2001, which
accounted for substantially all the loss recorded in 2002 under the line item
valuation and liquidation of financial instruments presented above. See
"Qualitative and Quantitative Market Disclosure --Our Derivative Financial
Instruments" and "Qualitative and Quantitative Market Disclosure -- Interest
Rate Risk, Foreign Currency Risk and Equity Risk." See also note 16A to our
consolidated financial statements included elsewhere in this annual report. The
decline in the estimated fair value of our equity forward contracts that hedge
the potential exercise of our executive stock option programs is primarily
attributable to a decrease in the market price of our listed securities (ADSs
and CPOs). The decline in the estimated fair market value of our interest rate
derivatives is primarily attributable to the continuing decline in market
interest rates, as CEMEX has fixed its interest rate profile in a level above
current market rates. With respect to our cross currency swaps, the decrease in
our estimated fair value is primarily attributable to the appreciation of the
Yen against the Mexican Peso during 2002.
Other Expenses, Net
Our other expenses for 2002 were Ps4,465 million, a 3% decrease from
Ps4,611 million in 2001. The decrease was primarily attributable to expenses
related to a voluntary exchange program of options under our stock option
program during 2001. See note 15C to our consolidated financial statements
included elsewhere in this annual report. This decrease was partially offset by
the expense incurred during 2002 as a result of the premium paid on our cash
tender offer for our 12 3/4% notes due 2006, the consent fee paid in connection
with our consent solicitation for our 9.625% notes due 2009 and a non-recurring
expense related to the termination of our distribution agreement in Taiwan. See
note 21F to our consolidated financial statements included elsewhere in this
annual report.
Income Taxes, Business Assets Tax and Employees' Statutory Profit Sharing
Our effective tax rate was 9.3% in 2002 compared to 11.1% in 2001. Our
tax expense, which primarily consists of income taxes and business assets tax,
decreased 66% from Ps1,845 million in 2001 to Ps629 million in 2002.
Approximately 32% of the decrease was attributable to lower taxable income in
2002 as compared to 2001, and 34% of the decrease resulted from the recognition
of the deferred income taxes for the year that was an income of Ps434.8 million
in 2002 as compared to an expense of Ps221.1 million in 2001 due mainly to the
change in the enacted income tax ratio in Mexico which decreased to 34% in 2002
from 35% in 2001, and also to variations in temporary differences between book
and taxable amounts that occurred during 2002. Our average statutory income tax
rate was approximately 34% in 2002 and approximately 35% in 2001.
Employees' statutory profit sharing decreased from Ps261 million
during 2001 to Ps118 million during 2002 due to lower taxable income for profit
sharing purposes in Mexico and Venezuela. See note 17B to our consolidated
financial statements included elsewhere in this annual report.
72
Majority Interest Net Income
Majority interest net income represents the difference between our
consolidated net income and minority interest net income, which is the portion
of our consolidated net income attributable to those of our subsidiaries in
which non-affiliated third parties hold interests. Changes in minority interest
net income in any period reflect changes in the percentage of the stock of our
subsidiaries held by non-affiliated third parties as of the end of each month
during the relevant period and consolidated net income attributable to those
subsidiaries.
For the reasons described above, our consolidated net income (before
deducting the portion allocable to minority interest) for 2002 decreased 57%,
from Ps14,723 million in 2001 to Ps6,392 million in 2002. The percentage of our
consolidated net income allocable to minority interests decreased from 12% in
2001 to 7% in 2002, as a result of our prepayment of a portion of the preferred
equity balance of the preferred equity transaction related to the financing of
our acquisition of Southdown, now renamed CEMEX, Inc., in 2000. Majority
interest net income decreased by 54%, from Ps13,027 million in 2001 to Ps5,967
million in 2002, mainly as a result of our decrease in net sales, the increase
in operating expenses and the increase in our valuation losses on derivative
financial instruments, partially offset by our reductions in cost of sales,
interest expense and income taxes and the increase in our monetary position
gain. As a percentage of net sales, majority interest net income decreased from
17% in 2001 to 8% in 2002.
Liquidity and Capital Resources
Operating Activities
We have satisfied our operating liquidity needs primarily through
operations of our subsidiaries and expect to continue to do so for both the
short-term and long-term. Although cash flow from our operations has
historically overall met our liquidity needs for operations, servicing debt and
funding acquisitions, our subsidiaries are exposed to risks from changes in
foreign currency exchange rates, price and currency controls, interest rates,
inflation, governmental spending, social instability and other political,
economic or social developments in the countries in which they operate, any one
of which may materially reduce our net income and cash from operations.
Consequently, we also rely on cost-cutting and continual operating improvements
to optimize capacity utilization and maximize profitability as well as to
offset the risks associated with having worldwide operations. Our consolidated
net resources provided by operating activities were Ps26.1 billion in 2001,
Ps19.1 billion in 2002 and Ps17.6 billion in 2003. (See our Statement of
Changes in the Financial Position included elsewhere in this annual report.)
Our Indebtedness
As of December 31, 2003, we had approximately U.S.$5.9 billion (Ps65.9
billion) of total debt, of which approximately 23% was short-term and 77% was
long-term. Approximately 22% of our long-term debt, or U.S.$1.0 billion (Ps11.4
billion), is to be paid in 2005, unless extended. As of December 31, 2003, 68%
of our consolidated debt was Dollar-denominated, 18% was Euro-denominated, 14%
was Japanese Yen-denominated and immaterial amounts were denominated in other
currencies, after giving effect to our cross currency swap arrangements
discussed elsewhere in this annual report. The weighted average interest rates
paid by us in 2003 in our main currencies were 5.4% on our Dollar-denominated
debt, 3.1% on our Euro-denominated debt and 0.9% on our Yen-denominated debt.
The ratio of total indebtedness, including certain transactions that do not
qualify as debt instruments under Mexican GAAP and that are used to calculate
this ratio for financial covenant purposes, to total capitalization as of
December 31, 2003 was approximately 46.7% and as of December 31, 2002 was
approximately 47.5%.
From time to time, as part of our financing activities, we and our
subsidiaries have entered into various financing agreements, including bank
loans, credit facilities, sale-leaseback transactions, forward contracts,
forward lending facilities and equity swap transactions. Additionally, we and
our subsidiaries have issued notes, commercial paper, bonds, preferred equity
and putable capital securities.
73
Most of our outstanding indebtedness has been incurred to finance our
acquisitions and to finance our capital investment programs. CEMEX Mexico and
Empresas Tolteca de Mexico, two of our principal Mexican subsidiaries, have
provided guarantees of our indebtedness in the amount of U.S.$3.1 billion
(Ps35.3 billion), as of December 31, 2003. See Item 3 -- "Key Information --
Risk Factors -- Our ability to pay dividends and repay debt depends on our
ability to transfer income and dividends from our subsidiaries," "--We have
incurred and will continue to incur debt, which could have an adverse effect on
the price of our CPOs, ADSs, appreciation warrants and ADWs," and note 23(x) to
our consolidated financial statements included elsewhere in this annual report.
As of December 31, 2003, we and our subsidiaries had lines of credit
totaling Ps43.7 billion at annual rates of interest ranging from 0.6% to 13.5%,
in accordance with the currency in which they were negotiated. The unused
amounts of those lines of credit totaled approximately Ps25.7 billion as of
December 31, 2003. In addition to these lines of credit, from time to time we
borrow money from banks and other financial institutions.
Some of the debt instruments in respect of our and our subsidiaries'
indebtedness contain various covenants, which, among other things, require us
and them to maintain specific financial ratios, restrict asset sales and
dictate the use of proceeds from the sale of assets. These restrictions may
adversely affect our ability to finance our future operations or capital needs
or to engage in other business activities, such as acquisitions, which may be
in our interest. From time to time, we have sought and obtained waivers and
amendments to some of our and our subsidiaries' debt agreements, principally in
connection with acquisitions. Our failure to obtain any required waivers may
result in the acceleration of the affected indebtedness and could trigger our
obligations to make payments of principal, interest and other amounts under our
other indebtedness, which could have a material adverse effect on our financial
condition. We believe that we have good relations with our lenders and the
lenders to our subsidiaries, and nothing has come to our attention that would
lead us to believe that any future waivers, if required, would not be
forthcoming. However, we cannot assure you that future waivers would be
forthcoming, if requested. As of December 31, 2003, we were in compliance with
all the financial covenants in our own and our subsidiaries' debt instruments.
In addition, a considerable amount of our debt is subject to credit
ratings triggers that require us to pay a step-up in the coupon rate of the
affected notes in the event that certain minimum credit ratings are not
maintained. Significantly, the CEMEX, Inc. Note and Guarantee Agreement, dated
March 15, 2001, described under Item 10 "-- Additional Information -- Material
Contracts," requires us to make all reasonable efforts to ensure that the notes
issued pursuant to that agreement maintain a private letter rating of at least
BBB- by Standard & Poor's and Baa3 by Moody's. If the notes fail to maintain
this required rating, we would have to pay a step-up in the coupon rate and,
if, after a continuous period of two years, the notes have not re-attained
these ratings, we would have to repay them or obtain a waiver of this
requirement. As of December 31, 2003, the notes were rated BBB- by Standard &
Poor's and Baa3 by Moody's.
Our Preferred Equity Arrangements
In November 2000, we formed a Dutch subsidiary which issued preferred
equity for an amount of U.S.$1.5 billion (Ps16.9 billion) to provide funds for
our acquisition of Southdown on terms we believe are advantageous. This
structure was designed to strengthen our capital structure while providing
financing on favorable terms. The preferred equity granted its holders 10% of
the subsidiary's voting rights, as well as the right to receive a preferred
dividend. Under the terms of the preferred equity financing arrangements,
Sunward Acquisitions N.V., or Sunward Acquisitions, our indirect Dutch
subsidiary, contributed its 85.2% interest in CEMEX Espana to New Sunward
Holding B.V., or New Sunward Holding in exchange for all its ordinary shares. A
special purpose entity, which was neither owned nor controlled by us, borrowed
U.S.$1.5 billion from a syndicate of banks and New Sunward Holding issued
preferred equity to the special purpose entity in exchange for the U.S.$1.5
billion, which was used to subscribe for further shares in CEMEX Espana. During
2001, we redeemed a portion of the then-outstanding preferred equity in the
amount of U.S.$600 million, and at year-end 2001, the balance outstanding was
U.S.$900 million. In February 2002, we refinanced this preferred equity
transaction, pursuant to which we redeemed U.S.$250 million of the outstanding
preferred equity and extended the termination date on the remaining U.S.$650
million with U.S.$195 million due in February 2004 and U.S.$455 million due in
August 2004. In October 2003, in connection with the establishment of the new
U.S.$1.15 billion senior unsecured term loan facility by our Dutch subsidiary
described under Item 10 "-- Additional Information -- Material Contracts," we
redeemed before maturity all of the U.S.$650 million (Ps7,306.0) of preferred
equity outstanding.
74
Until its liquidation, for accounting purposes under Mexican GAAP, the
preferred equity was recorded as a minority interest on our balance sheet until
its liquidation. Dividends paid on the preferred equity were recorded as a
minority interest on our income statement. For the years ended December 31,
2001, 2002 and 2003, preferred equity dividends amounted to approximately
U.S.$76 million, U.S.$23.2 million and U.S.$12.5 million, respectively.
In May 1998, a subsidiary of CEMEX Espana issued U.S.$250 million
aggregate liquidation amount of 9.66% Putable Capital Securities. In April
2002, approximately U.S.$184 million in aggregate liquidation amount of these
capital securities were tendered to, and accepted by, us in a tender offer. The
Putable Capital Securities are guaranteed on a subordinated basis by CEMEX
Espana. We have an option to repurchase the Putable Capital Securities from the
holders on November 15, 2004, or on any subsequent dividend payment date. We
are required to make an offer to purchase the Putable Capital Securities from
their holders on May 15, 2005 and after the occurrence of specified put events,
which include, among other things, a payment default or a deferral of dividends
by the issuer of the Putable Capital Securities. Our obligation to purchase the
Putable Capital Securities is guaranteed by CEMEX Mexico and Empresas Tolteca
de Mexico. As of December 31, 2003, we had U.S.$66 million of the Putable
Capital Securities outstanding.
For accounting purposes under Mexican GAAP, the Putable Capital
Securities are recorded as a minority interest on our balance sheet. Dividends
paid on the Putable Capital Securities are recorded as a minority interest on
our income statement. For the years ended December 31, 2001, 2002 and 2003,
Putable Capital Securities dividends amounted to approximately U.S.$24.2
million, U.S.$11.9 million and U.S.$6.4 million, respectively.
Our Equity Arrangements
In December 1995, we entered into a transaction in which one of our
Mexican subsidiaries transferred some of its cement assets to a trust, while,
simultaneously, a third party purchased a beneficial interest in the trust for
approximately U.S.$123.5 million in exchange for notes issued by the trust. We
had the right to reacquire these assets on various dates until 2007. In
December 2003, we acquired the remaining assets for approximately U.S. $75.9
million.
From inception of the transaction until repurchase of the assets, the
assets related to this transaction were considered as owned by third parties;
therefore, for accounting purposes under Mexican GAAP, this transaction was
included as minority interest in our balance sheet. For the years ended
December 31, 2001, 2002 and 2003, the expense generated by retaining the option
to re-acquire the assets amounted to approximately U.S.$13.8 million, U.S.$13.2
million and U.S.$14.5 million, respectively, and was included as financial
expense in our income statements.
In December 1999, we issued to our shareholders, members of our board
of directors and other executives 105 million appreciation warrants maturing on
December 13, 2002, at a subscription price in pesos of Ps3.2808 per
appreciation warrant. A portion of the appreciation warrants was subscribed as
American Depositary Warrants, or ADWs, each ADW representing five appreciation
warrants.
In November 2001, we launched a voluntary public exchange offer of new
appreciation warrants and new ADWs maturing on December 21, 2004, for our
existing appreciation warrants and our existing ADWs on a one-for-one basis. Of
the total 105 million appreciation warrants originally issued, 103,790,945, or
98.9%, were tendered in exchange for the new appreciation warrants. Both the
old appreciation warrants and the new appreciation warrants were designed to
allow the holder to benefit from future increases in the market price of our
CPOs, with any appreciation value to be received in the form of our CPOs or
ADSs, as applicable. The old appreciation warrants expired on December 13, 2002
in accordance with their terms without any payments to the holders. See note
14F to our consolidated financial statements included elsewhere in this annual
report and "-- Our Equity Derivative Forward Arrangements."
In November 2003, we launched a modified "Dutch Auction" cash tender
offer to purchase up to 90,018,042 of the new appreciation warrants (including
appreciation warrants represented by ADWs) at a single price in Pesos not
greater than Ps8.10 per appreciation warrant (Ps40.50 per ADW) nor less than
Ps5.10 per appreciation warrant (Ps25.50 per ADW), as specified by tendering
holders. Holders of appreciation warrants and
75
ADWs tendered 96,641,388 appreciation warrants (including 23,575,907
appreciation warrants represented by ADWs) at prices at or below Ps8.10 per
appreciation warrant (Ps40.50 per ADW) in the offer, which expired on January
26, 2004. In accordance with the terms of the offer, CEMEX purchased 90,018,042
appreciation warrants (including appreciation warrants represented by ADWs),
representing approximately 86.7% of the 103,790,945 new appreciation warrants
outstanding immediately prior to the commencement of the offer, on a pro rata
basis (except for odd lot tenders, which were purchased on a priority basis) at
a final purchase price of Ps8.10 per appreciation warrant (Ps40.50 per ADW).
The final proration factor for the offer was 93.146058%. All appreciation
warrants and ADWs not accepted because of proration were promptly returned.
Following the completion of the offer, approximately 11,668,132 new
appreciation warrants (including appreciation warrants represented by ADWs)
were held by persons other than CEMEX and its subsidiaries.
Our Equity Derivative Forward Arrangements
In connection with our appreciation warrants transaction, during 1999,
we entered into equity forward contracts with a number of banks and other
financial institutions with an original maturity in December 2002, pursuant to
which the banks purchased our ADSs and shares of common stock of CEMEX Espana
(formerly Compania Valenciana de Cementos Portland, S.A.), our Spanish
subsidiary. In December 2002, we agreed with the banks to settle the forward
transactions for cash and simultaneously enter into new forward transactions
with the same banks on similar terms to the original forward transactions with
respect to the underlying ADSs and CEMEX Espana shares, maturing on December
12, 2003. Under the new forward contracts, the banks retained the 24,008,313
ADSs and 33,751,566 CEMEX Espana shares underlying the original forward
contracts, for which they agreed to pay us an aggregate price of approximately
U.S.$828.5 million, or the notional amount. We agreed with the banks that the
purchase price payable to us under the new forward contracts would be netted
against the adjusted forward settlement price of the original forward contracts
and any advance payments made by us in connection with the closing of the new
forward contracts. Upon closing of the new forward transactions, we made an
advance payment to the banks of approximately U.S.$380.1 million of the forward
purchase price, U.S.$285 million of which represented payment in full of the
portion of the forward purchase price relating to the CEMEX Espana shares and
U.S.$95.1 million of which was an advance payment against the final forward
purchase price. As of December 13, 2002, the adjusted forward settlement price
of the new forward contracts was U.S.$448.4 million. In December 2002, as a
result of the net settlement and renegotiation of the forward contracts, we
recognized, in accordance with Mexican GAAP, a loss of approximately U.S.$98.3
million (Ps1,104.9 million) in our stockholders' equity, arising from changes
in the valuation of the underlying shares.
In October 2003, in connection with the non-dilutive equity offering
by the banks of all of the ADS underlying those forward contracts, which had
increased to 25,457,378 ADSs as a result of stock dividends through June 2003,
we agreed with the banks to settle those forward contracts for cash. As a
result of the final settlement in October 2003, we recognized a gain of
approximately U.S.$18.1 million (Ps203.4 million) in our stockholders' equity,
arising from changes in the valuation of the ADSs from December 2002 through
October 2003.
For accounting purposes under Mexican GAAP, during the life of these
forward contracts, the underlying ADSs were considered to have been owned by
the banks and the forward contracts were treated as equity transactions, and,
therefore, changes in the fair value of the ADSs were not recorded until
settlement of the forward contracts. With respect to the portion of the forward
contracts relating to CEMEX Espana shares, the sale of the CEMEX Espana shares
to the banks was not considered to be a sale under Mexican GAAP because we
continued to retain the economic and voting rights associated with these shares
and were obligated to repurchase them upon termination of the forward
contracts, and because our obligations to the banks relating to those shares
were prepaid. As a result, the transaction did not have any effect on minority
interests, in either our income statements or our balance sheets.
As of December 31, 2002 and 2003, we were also subject to equity
forward contracts with different maturities until October 2006, for a
notional amount of U.S.$436.1 million and U.S.$789.3 million, respectively,
covering a total of 16,005,620 ADSs in 2002 and 29,314,561 ADSs in 2003,
negotiated to hedge the future exercise of options granted under our
executive stock option programs and voluntary employee stock option
programs. See note 15 to our consolidated financial statements included
elsewhere in this annual report. Starting in 2001, we recorded the changes
in the estimated fair value of these contracts in the balance sheet as
assets or liabilities against the income statement, in addition to the
costs originated by our option programs, which these forwards are hedging.
76
As of December 31, 2002 and 2003, the estimated fair value of these contracts
was a loss of approximately U.S.$47.0 million (Ps539 million) and a gain of
approximately U.S.$28 million (Ps314.7 million), respectively.
As of December 31, 2003, in relation to the acquisition of 1,483,365
shares of CAH common stock, we had forward contracts for a notional amount of
U.S.$122.9 million, covering 23,622,500 CPOs, maturing in August, September and
October 2004 hedging the acquisition of CAH shares to be acquired in exchange
for CEMEX CPOs. The effects to be generated upon settlement of the forward
contracts will be recognized as an adjustment to the acquisition cost of the
CAH shares. As of December 31, 2003, the estimated fair value of these
contracts, which is not periodically recorded, had an approximate gain of
U.S.$1.8 million (Ps20.2 million). See note 8A to our consolidated financial
statements included elsewhere in this annual report.
Finally, as of December 31, 2002 and 2003, we had forward contracts
with different maturities until February 2006, for an approximate notional
amount of U.S.$ 452.4 million and U.S.$172.8 million, respectively, covering a
total of 15,316,818 ADSs in 2002 and 5,268,939 ADSs in 2003. Based on our
intention to settle these contracts physically at maturity, the estimated fair
value of these contracts is not periodically recognized. The effects originated
by these contracts will be recognized at maturity as an adjustment to our
stockholders' equity. As of December 31, 2002 and 2003, the estimated fair
value of these contracts represented a loss of approximately U.S.$110.6 million
(Ps1, 243.1 million) and approximately U.S.$27.1 million (Ps304.6 million),
respectively.
Our Receivables Financing Arrangements
We have established sales of trade accounts receivable programs with
financial institutions, referred to as securitization programs. These programs
were negotiated by CEMEX Mexico and CEMEX Concretos, S.A. de C.V. during 2002,
by CEMEX, Inc. in the United States during 2001 and by CEMEX Espana in 2000.
Through the securitization programs, our subsidiaries effectively surrender
control, risks and the benefits associated to the accounts receivable sold;
therefore, the amount of receivables sold is recorded as a sale of financial
assets and the balances are removed from the balance sheet at the moment of
sale, except for the amounts that the counterparties have not paid, which are
reclassified to other accounts receivable. See notes 4 and 5 to our
consolidated financial statements included elsewhere in this annual report. The
balances of receivables sold pursuant these securitization programs as of
December 31, 2002 and 2003 were Ps5,575 million (U.S.$496 million) and Ps6,125
million (U.S.$545 million), respectively. The accounts receivable qualifying
for sale do not include amounts over certain days past due or concentrations
over certain limit to any one customer, according to the terms of the programs.
Expenses incurred under these programs, originated by the discount granted to
the acquirers of the accounts receivable, are recognized in the income
statements and were approximately Ps120 million (U.S.$10.7 million) in 2002 and
Ps107 million (U.S.$9.5 million) in 2003. The proceeds obtained through these
programs have been used primarily to reduce net debt.
Stock Repurchase Program
Under Mexican law, our shareholders may authorize a stock repurchase
program at our annual shareholders meeting. Unless otherwise instructed by our
shareholders, we are not required to purchase any minimum number of shares
pursuant to such program.
In connection with our 2001 annual shareholders' meeting held on April
25, 2002, our shareholders approved a stock repurchase program in an amount of
up to Ps5 billion (approximately U.S.$482 million) to be implemented between
April 2002 and April 2003. See note 14A to our consolidated financial
statements included elsewhere in this annual report. During 2002, we purchased
7.6 million CPOs for a total of Ps392.2 million.
In connection with our 2002 annual shareholders' meeting held on April
24, 2003, our shareholders approved a stock repurchase program in an amount of
up to Ps6 billion (approximately U.S.$534 million) to be implemented between
April 2003 and April 2004. See note 14A to our consolidated financial
statements included elsewhere in this annual report. During 2003, we did not
purchase any CPOs under this program.
In connection with our 2003 annual shareholders' meeting held on April
29, 2004, our shareholders approved a stock repurchase program in an amount of
up to Ps6 billion (approximately U.S.$534 million) to be implemented between
April 2004 and the date of the 2004 annual shareholders' meeting.
77
Recent Developments
On March 30, 2004, CEMEX Espana, with Sandworth Plaza Holding B.V.,
Cemex Caracas Investments B.V., Cemex Caracas II Investments B.V., Cemex Manila
Investments B.V. and Cemex Egyptian Investments, B.V., as guarantors, entered
into a Term and Revolving Facilities Agreement with Banco Bilbao Vizcaya
Argentaria, S.A. and Societe Generale, as mandated lead arrangers, relating to
three credit facilities with an aggregate amount of (euro)250,000,000 and
(Y)19,308,000,000. The first facility is a five-year multi-currency term loan
facility with a variable interest rate; the second facility is a 364-day
multi-currency revolving credit facility; and the third facility is a five-year
Yen-denominated term loan facility with a fixed interest rate. The proceeds of
these facilities will be used to prepay CEMEX Espana's outstanding revolving
credit facility and for general corporate purposes.
On April 15, 2004, CEMEX Espana Finance LLC, as issuer, CEMEX Espana
S.A., Sandworth Plaza Holding B.V., Cemex Caracas Investments B.V., Cemex
Caracas II Investments B.V., Cemex Manila Investments B.V. and Cemex Egyptian
Investments B.V., as guarantors, and several institutional purchasers, entered
into a Note Purchase Agreement in connection with a private placement by CEMEX
Espana Finance, LLC. CEMEX Espana Finance, LLC issued to the institutional
purchasers (Y)4,980,600,000 aggregate principal amount of 1.79% Senior Notes
due 2010 and (Y)6,087,400,000 aggregate principal amount of 1.99% Senior Notes
due 2011. The proceeds from the private placement were used to repay debt.
Research and Development, Patents and Licenses, etc.
Our research and development, or R&D, efforts help us in achieving our
goal of increasing market share in the markets in which we operate. The
department of the Vice President of Technology is responsible for developing
new products for our cement and ready-mix businesses that respond to our
clients needs. The department of the Vice President of Energy also has
responsibility for developing of new processes, equipment and methods to
optimize operational efficiencies and reduce our costs. For example, we have
developed methods that allow us to use alternative fuel sources, which, in
turn, reduce our fuel costs.
We have five laboratories dedicated to our research and development
efforts. Four of these laboratories are strategically located in close
proximity to our plants to assist our operating subsidiaries with
troubleshooting, optimization techniques and quality assurance methods. One of
our laboratories is located in Switzerland where we are constantly improving
and consolidating our research and development efforts in the areas of cement
technology, information technology and energy management. We have several
patent registrations and pending applications in different countries, related
mainly to the cement production process, including methods for increasing
energy efficiencies.
Our Information Technology divisions have developed information
management systems and software relating to cement and ready-mix operational
practices, automation and maintenance. These new systems have helped us to
better serve our clients with respect to purchasing, delivery and payment.
R&D activities comprise part of the daily routine of the departments
and divisions mentioned above; therefore, the costs associated with such
activities are expensed as incurred. However, the costs incurred in the
development of software for internal use are capitalized and amortized to
operating results over the estimated useful life of the software, which is
approximately 4 years.
In 2002 and 2003, the combined total expense of the departments of the
Vice President of Energy and the Vice President of Technology, which includes
research and development activities, amounted to U.S.$52.9 million and
U.S.$40.9 million, respectively. In addition, in 2002 and 2003, we capitalized
approximately U.S.$90.1 million and U.S.$11.3 million, respectively, related to
internal use software development. See note 10 to our consolidated financial
statements included elsewhere in this annual report.
78
Trend Information
Overview
We believe 2003 was a very challenging, but ultimately successful year
for CEMEX. In the beginning of 2003, we faced a global economy burdened by
uncertainty and volatility that offered few visible growth opportunities and
was subject to significant downside risks. Our year-end results, however, were
better than we expected as demand in markets such as the United States, for
which our outlook was negative a year ago, grew significantly during the second
half of 2003.
Led by the U.S. economic expansion, we believe the global economic
environment has also moderately improved and offers better prospects for 2004.
For example, cement demand in Mexico and Spain, our two other major markets,
grew at twice the rate of gross domestic product (GDP) growth or more during
2003. Also, we believe visibility has improved for most of the markets in our
portfolio. We believe that these are growth markets on an upward trend, and
that we are well prepared to capitalize on their accelerating development
during 2004.
In contrast to 2003, during which cement demand grew in only half of
the largest markets in which we operate, we expect cement volume growth in 2004
in most of the markets in our portfolio. We expect this growth to be
accompanied by a gradual price recovery.
Outlook for Our Major Markets
The following is a discussion of our outlook for our three major
markets, Mexico, the United States and Spain, which together generated
approximately 72% of our net sales in 2003.
In Mexico, we are optimistic about the positive trend in cement
consumption in 2003, and we believe it will extend well into 2004. We expect
our cement volumes in Mexico to increase in 2004 over 2003, primarily as a
result of continued government spending on infrastructure projects, increased
demand in the low- and middle-income housing sectors and a stable but growing
self-construction sector. In addition, due the upward trend in Mexico's GDP, we
expect a recovery in the industrial sector during 2004, which we expect will
lead to increased employment levels and renewed growth in the self-construction
sector, which remained relatively flat during 2003. We expect cement prices in
Mexico will remain flat in constant Peso terms for 2004.
In the United States, we expect cement consumption in the industrial
and commercial sectors to grow in 2004 following a reversal of their downward
trend during the second half of 2003, primarily as a result of improved vacancy
rates and increased economic activity. We also expect cement demand from the
streets and highways sector to grow in 2004, due to the improving economic
environment. As a result, we expect our cement volumes in the United States to
increase in 2004 over 2003, despite an expected slowdown in cement consumption
in the residential sector due to a likely increase in interest rates. In
addition, we believe the U.S. government's proposed new highway construction
program, the Safe, Accountable, Flexible, and Efficient Transportation Equity
Act of 2003 (SAFETEA), will be a positive factor that will influence cement
demand in 2005 and beyond. With respect to our national average pricing, we
expect a slight increase in Dollar terms in 2004 over 2003.
In Spain, we expect cement demand from the housing sector to remain
strong due to a favorable mortgage environment and the immigration of northern
Europeans. We also expect demand from the public works sector, which is
primarily driven by Spain's infrastructure program, to be an important
component of cement consumption. Although we expect to see slower activity in
this sector through the transitional phase that will follow the recent
elections, we expect government spending on infrastructure programs to continue
through 2007. As a result, we expect our cement volumes in Spain to remain flat
or decrease slightly in 2004 compared to 2003. We expect cement prices in Spain
will remain flat in Euro terms for 2004.
Summary of Material Contractual Obligations and Commercial Commitments
As of December 31, 2003, our subsidiaries have future commitments for
the purchase of raw materials for an approximate amount of U.S.$113.0 million.
79
In March 1998, we entered into a 20-year contract with Pemex providing
that Pemex's refinery in Cadereyta would supply us with 900,000 tons of petcoke
per year, commencing in 2003. In July 1999, we entered into a second 20-year
contract with Pemex providing that Pemex's refinery in Madero would supply us
with 850,000 tons of petcoke per year, commencing in 2002. We expect the Pemex
petcoke contracts to reduce the volatility of our fuel costs and provide us
with a consistent source of petcoke throughout their 20-year terms.
In 1999, we reached an agreement with ABB Alstom Power and Sithe
Energies, Inc. requiring Alstom and Sithe to finance, build and operate
"Termoelectrica del Golfo," a 230 megawatt energy plant in Tamuin, San Luis
Potosi, Mexico and to supply electricity to us for a period of 20 years.
Pursuant to the agreement, we are obligated to purchase the full electric
capacity generated by the power plant during the 20-year period. We are also
obligated to supply Alstom and Sithe with 1,200,000 tons of pet coke per year
for the 20-year period for the consumption of this power plant and another
power plant built and operated by Alstom and Sithe for Penoles, a Mexican
mining company. We expect to meet our pet coke delivery requirements to Alstom
and Sithe through several pet coke supply agreements, including our pet coke
supply contract with Pemex. Pursuant to the agreement, we may be obligated to
purchase the Termoelectrica del Golfo plant upon the occurrence of specified
material defaults or events, such as failure to pay when due, bankruptcy or
insolvency, and revocation of permits necessary to operate the facility, and
upon termination of the 20 year period, we will have the right to purchase the
assets of the power plant. We expect this arrangement to reduce the volatility
of our energy costs and to provide approximately 80% of CEMEX Mexico's
electricity needs. The power plant commenced commercial operations on April 29,
2004.
For purposes of presenting the approximate cash flows that will be
required to meet our other material contractual obligations, the following
table presents a summary of those obligations, as of December 31, 2003:
Payments Due by Period
--------------------------------------------------------------
(In millions of U.S. Dollars)
Within 2-3 4-5 After
Contractual Obligations (1) Total 1 Year Years Years 5 Years
-------------------------------------------------- -------- -------- ------ ------- -------
Long-Term Bank Loans and Notes Payable............ 5,346 840 2,881 950 675
Capital Lease Obligations......................... 34 3 4 2 25
-------- -------- ------ ------- -------
Total Debt (2).............................. 5,380 843 2,885 952 700
Operating Leases (3).............................. 343 65 110 82 86
Shares Subject to Mandatory Redemption (4)........ 66 - 66 - -
Unconditional Purchase Obligations Under Equity
Forward Contracts (5)......................... 1,085 561 524 - -
(1) The data set forth in this table are expressed in nominal terms and do
not include financing expenses or preferred dividends on Putable Capital
Securities.
(2) Total long-term debt including maturities is presented in note 11 to our
consolidated financial statements included elsewhere in this annual
report. In addition, as of December 31, 2003, we had lines of credit
totaling approximately U.S.$3.9 billion, of which the available portion
amounts to approximately U.S.$2.3 billion.
(3) Operating leases have not been calculated on the basis of net present
value instead they are presented in the basis of nominal future cash
flows. See note 21D to our consolidated financial statements included
elsewhere in this annual report. Our operating leases include the lease
of a cement plant in New Braunfels, Texas, which expires on September 9,
2009. We have an option to purchase this plant at the termination of the
lease for fair value and an early buy-out option that can be exercised in
January 2007 for a fixed amount.
(4) Refers to the Putable Capital Securities issued by our subsidiary in
Spain. See note 14E to our consolidated financial statements included
elsewhere in this annual report.
(5) The scenario under which the amounts presented under this line item are
determined assumes that, upon settlement of our equity forward contracts,
we will repurchase all the underlying CPOs or ADSs. Even when this
scenario is possible, we consider that it is not probable considering
that in order for such a repurchase to take place, all the underlying
transactions to which the equity forward contracts are related, such as
our employee stock option programs, would expire unexercised (out of the
money). Also, the scenario does not take into account that we may elect
net cash settlement at maturity of the equity forward contracts and
permit our counterparties to sell the underlying CPOs into the market, in
which case, the expected cash flow would be materially different. As of
December 31, 2003, the aggregate estimated fair value of these contracts
was a gain of approximately U.S.$16.4 million.
Of the total amount of U.S.$561 million due in the short-term,
approximately U.S.$122.9 million is related to the contracts that hedge
our forward exchange transaction of CAH shares, and approximately
U.S.$413.3 million is related to the contracts that hedge our employee
stock option programs. We expect that these contracts will be refinanced
from time to time relative to the underlying hedged items.
80
In addition, we have provided third party standby letters of credit for
the benefit of our counterparties in the equity forward contracts and
other financial transactions in the amount of U.S.$55 million at December
31, 2003. For accounting purposes these letters of credit represent
contingent obligations. See note 21A to our consolidated financial
statements included elsewhere in this annual report.
Off-Balance Sheet Arrangements
The only off-balance sheet arrangements we have that are reasonably
likely to have a material effect on our financial condition, operating results,
liquidity or capital resources are the equity forward contracts described above
under "Liquidity and Capital Resources -- Our Equity Derivative Financing
Transactions" (other than those equity forward contracts negotiated to hedge
the future exercise of options granted under our stock option programs), the
receivables financing arrangements described above under "Liquidity and Capital
Resources -- Our Receivables Financing Arrangements" and the electricity supply
agreement described above under "Liquidity and Capital Resources -- Summary of
Material Contractual Obligations and Commercial Commitments."
Qualitative and Quantitative Market Disclosure
Our Derivative Financial Instruments
In compliance with the procedures and controls established by our risk
management committee, we have entered into various derivative financial
instrument transactions in order to manage our exposure to market risks
resulting from changes in interest rates, foreign exchange rates and the price
of our common stock. We actively evaluate the creditworthiness of the financial
institutions and corporations that are counterparties to our derivative
financial instruments, and we believe that they have the financial capacity to
meet their obligations in relation to these instruments.
The fair value of derivative financial instruments is based on
estimated settlement costs or quoted market prices and are supported by
confirmations of these values received from the counterparties to these
financial instruments. The notional amounts of derivative financial instrument
agreements are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss.
(U.S.$ millions)
----------------------------------------------------------------
At December 31, 2002 At December 31, 2003
-------------------- --------------------
Notional Estimated Notional Estimated
Derivative Instruments amount fair value amount fair value Maturity Date
-------------------------------- -------- ---------- -------- ---------- -------------
Equity forward contracts...... 1,445.1 (90.6) 1,085.0 16.4 Feb 04-Oct 06
Foreign exchange forward
contracts..................... 1,325.7 (201.4) 1,445.9 (191.6) Jan 04-Jun 05
Interest rates swaps.......... 1,106.0 (72.5) 1,850.0 (228.1) Jan 08-Feb 09
Cross currency swaps.......... 1,847.9 234.6 1,446.6 262.0 Jan 04-Dec 08
Interest rate swap options.... 1,000.0 (140.9) 200 (24.9) Oct 04
Other interest rate derivatives 1,361.0 (157.7) -- -- --
Fuel and energy derivatives... 177.0 (.5) 174.5 (7.4) May 2017
Third party equity forward
contracts..................... 7.1 (.1) -- -- --
Our Equity Derivative Forward Contracts
Our equity derivative forward contracts in the table above, including
the appreciation warrant-related forward contracts at December 31, 2002, are
accounted for as equity instruments, and gains and losses are recognized as an
adjustment to stockholders' equity upon settlement, with the exception of a
portion of our equity forward contracts as of December 31, 2002 and 2003 with a
notional amount of U.S.$436.1 million and U.S.$789.3 million, respectively,
which, beginning in 2001, have been designed as hedges of a portion of our
executive stock option plans, and for which changes in their estimated fair
value have been recognized through the income statement, in addition to the
costs generated by the stock option programs. The estimated fair value of these
forward contracts represented a loss of U.S.$47.0 million a gain of
approximately U.S.$28.0 million, as of December 31, 2002 and 2003, respectively.
See "-- Liquidity and Capital Resources -- Our Equity Derivative Forward
81
Arrangements" and notes 15 and 16 to our consolidated financial statements
included elsewhere in this annual report.
Our Foreign Exchange Forward Contracts
The foreign exchange forward contracts are accounted for at their
estimated market value as hedge instruments for our net investments in foreign
subsidiaries. Gains or losses are recognized as an adjustment to stockholders'
equity within the related foreign currency translation adjustment. In addition,
as of December 31, 2002 and 2003, we held foreign exchange options for notional
amounts of U.S.$59.7 million and U.S.$886.6 million, respectively, maturing on
different dates until June 2005, which accounted for estimated fair value
losses of approximately U.S.$44.4 million (Ps509.2 million) in 2002 and
approximately U.S.$57.2 million (Ps642.9 million) in 2003, recorded in the
income statement. See note 16B to our consolidated financial statements
included elsewhere in this annual report.
Our Interest Rate Swaps
As of December 31, 2002 and 2003, we were parties to interest rate
swaps for a notional amount of U.S.$1,106 million and U.S.$1,850.0 million,
respectively, entered into in order to reduce the financial cost of debt
negotiated at fixed rates and, in some cases, hedge contractual cash flows
(interest payments) of underlying debt negotiated at floating rates. These
interest rate swaps, with the exception of contracts for a notional amount of
U.S. $1,050 million in 2003, are accounted for as hedge instruments for
contractual cash flows (interest payments) of the underlying short-term and
long-term debt transactions, and periodic payments under the contracts are
recognized in the income statements as an adjustment to the effective interest
rate of the related debt. For the year ended December 31, 2002 and 2003,
changes in the estimated fair value of the interest rate swaps resulted in
losses of approximately U.S.$72.5 million and U.S.$228.1 million, respectively.
From the amount recorded in 2003, a loss of approximately U.S.$124.4 million,
related to those interest rate swaps not designated as hedges, was recorded in
earnings. In addition, a loss of approximately U.S.$103.7 million, related to
those swaps designated as hedge instruments, was recorded in the balance sheet
as liabilities against stockholders' equity. This amount will be reversed
through the income statement as the financial expense of the related financing
debt is accrued. See note 11A to our consolidated financial statements included
elsewhere in this annual report.
During 2003, in agreement with our financial counterparty and
resulting from changes in the interest rate mix of our financial debt
portfolio, we settled all the interest rate swap contracts we held as of
December 31, 2002. At settlement, the fair value of such instruments was
received or paid, representing losses of U.S.$41.9 million (Ps471 million).
These losses were recorded in earnings as part of the comprehensive financing
result.
Our Cross Currency Swaps
As of December 31, 2002 and 2003, we held cross currency swap
contracts related to our short-term and long-term financial debt portfolio for
notional amounts of U.S$1,743.4 million and U.S.$1,446.6 million, respectively.
Through these contracts, we carried out the exchange of the originally
contracted currencies and interest rates, over a determined amount of
underlying debt. During the life of these contracts, the cash flows originated
by the exchange of interest rates under the cross currency swap contracts match
the interest payment dates and conditions of the underlying debt. Likewise, at
maturity of the contracts and the underlying debt, we will exchange with the
counterparty notional amounts provided by the contracts so that we will receive
an amount of cash flow equal to cover our primary obligation under the
underlying debt. In exchange, we will pay the notional amount in the exchanged
currency. As a result, we have effectively exchanged the risks related to
interest rates and foreign exchange variations of the underlying debt to the
rates and currencies negotiated in the cross currency swap contracts. See note
11B to our consolidated financial statements included elsewhere in this annual
report.
The periodic cash flows on the cross currency swap instruments arising
from the exchange of interest rates are recorded in the comprehensive financing
result as part of the effective interest rate of the related debt. We recognize
the estimated fair value of the cross currency swap contracts as assets or
liabilities in the balance sheet, with changes in the estimated fair value
being recognized through the income statement. All financial assets and
liabilities with the same maturity, for which our intention is to
simultaneously realize or settle, have been offset for
82
presentation purposes, in order to reflect the cash flows that we
expect to receive or pay upon settlement of the financial instruments.
In respect of the estimated fair value recognition of the cross
currency swap contracts, as of December 31, 2002 and 2003, we recognized net
assets of U.S.$241.4 million (Ps2,713.3 million) and U.S.$262.0 million
(Ps2,944.9 million), respectively, related to the estimated fair value of the
short-term and long-term cross currency swap contracts, of which,
o U.S.$194.2 million (Ps2,182.8 million) as of December 31, 2002
and U.S.$364.5 million (Ps4,097.0 million) as of December 31,
2003 relate to prepayments made to Yen and Dollar obligations
under our cross currency swaps, thereby decreasing the carrying
amounts of the related debt, and
o A gain of approximately U.S.$47.2 million (Ps530.5 million) in
2002 and a loss of approximately U.S.$102.5 million (Ps1,152.1
million) in 2003 represented the contracts' estimated fair value
before prepayment effects and includes:
o Losses of approximately U.S.$ 20.0 million (Ps224.8
million) in 2002 and approximately U.S.$171.9 million
(Ps1,932.2 million) in 2003, which are directly related to
variations in exchange rates between the inception of the
contracts and the balance sheet date, and which were offset
for presentation purposes as part of the related debt
carrying amount,
o Gains of approximately U.S.$25.9 million (Ps291.1 million)
in 2002 and approximately U.S.$12.2 million (Ps137.1
million), identified with the periodic cash flows for the
interest rates swap, and which were recognized as an
adjustment of the related financing interest payable, and
o Remaining net assets of approximately U.S.$41.3 million
(Ps464.2 million) in 2002 and approximately U.S.$57.2
million (Ps642.9 million) in 2003, which were recognized
within other short-term and long-term assets and
liabilities, as applicable. See note 11B to our
consolidated financial statements included elsewhere in
this annual report.
As of December 31, 2002 and 2003, the effect on our balance sheet
arising from the accounting assets and liabilities offset, was that the book
value of the financial liabilities directly related to the cross currency swap
contracts is presented as if such financial liabilities had been effectively
negotiated in the exchange currency instead of in the originally contracted
currency. For the years ended December 31, 2002 and 2003, the changes in the
estimated fair value of our cross currency swap contracts, excluding prepayment
effects in 2002 and 2003, resulted in a loss of approximately U.S.$192.2
million (Ps2,204 million) and a loss of approximately U.S.$ 149.7 million
(Ps1,682.6 million), respectively, which were recognized within the
comprehensive financing result.
Our Interest Rate Swap Options
As of December 31, 2002 and 2003, we held call option contracts
negotiated with financial institutions to exchange floating for fixed interest
rates (swaptions) for a notional amount of U.S.$1,000 million and U.S.$200
million, respectively. For the sale of these options, we received premiums of
approximately U.S.$57.6 million (Ps647.4 million) in 2002 and U.S.$25 million
(Ps281 million) in 2003. During 2003, U.S.$800 million of the U.S.$1,000
million notional amount of the swaptions held by us as of December 31, 2002
matured, and we entered into interest rate swaps for a notional amount of
U.S.$800 million in connection with the counterparties' election under the
swaptions to receive from us fixed interest rates and pay to us floating
interest rates for a five-year period. The remaining swaptions for a notional
amount of U.S.$200 million mature in October 2004, and grant the counterparties
the option to elect, at maturity of the options and at current market rates, to
receive from us fixed rates and pay to us variable rates for a five-year period
or request net settlement in cash. As of December 31, 2002 and 2003, premiums
received, as well as the changes in the estimated fair value of these
contracts, which represented a loss of approximately U.S.$110.9 million
(Ps1,271.9 million) and a gain of approximately U.S.$1.6 million (Ps18.0
million), respectively, were recognized in the comprehensive financing result.
During 2002 and 2003, the call options that expired resulted in losses of
approximately U.S.$92.3 million (Ps1,037.5) and U.S.$23.9
83
million (Ps268.6 million), respectively, which were recognized in the
comprehensive financing result. See note 11A to our consolidated financial
statements included elsewhere in this annual report.
Our Other Interest Rate Derivatives
As of December 31, 2003, we did not hold any interest rate derivative
instruments other than the swaptions described above. As of December 31, 2002,
we held forward rate agreement contracts for a notional amount of U.S.$650
million that we entered into to fix the interest rate of debt that had not been
incurred as of December 31, 2002, but was expected to be incurred in early
2003. These contracts expired in June 2003, and new interest rate swaps were
negotiated. As of December 31, 2002, we also held floor and cap option
contracts for a notional amount of U.S.$711 million linked to an interest rate
swap with an equal notional amount that was settled during 2002. These floor
and cap option contracts, which were scheduled to mature in March 2008, were
settled in May 2003. The changes in the estimated fair value of the forward
rate agreement contracts and the floor and cap option contracts until
expiration or settlement represented a loss of approximately U.S.$88.9 million
(Ps999.2 million) in 2002, and solely with respect to the floor and cap option
contracts, a loss of U.S.$0.1 million (Ps1.5 million) in 2003. These losses
were recognized against the comprehensive financing result, except for a loss
in 2002 of approximately U.S.$42.4 million (Ps476.6 million) related solely to
the forward rate agreement contracts, which was recognized in stockholders'
equity given that it corresponded to the change in valuation after the forward
rate agreement contracts were designated as an accounting hedge of forecasted
cash flows (interest payments) related to new debt issuances. The U.S.$42.4
million (Ps476.6 million) that was recognized in stockholders equity in 2002
was recognized in the income statement during 2003 as the effects of the
related debt had an impact on the financial expense. See note 11A to our
consolidated financial statements included elsewhere in this annual report.
Our Fuel and Energy Derivatives
As of December 31, 2002 and 2003, we had an interest rate swap
maturing in May 2017, for a notional amount of U.S.$177 million and U.S.$162.1
million, respectively, negotiated to exchange floating for fixed interest
rates, in connection with agreements we entered into for the acquisition of
electric energy for a 20-year period commencing in 2003. See note 21F to our
consolidated financial statements included elsewhere in this annual report.
During the life of the derivative contract and over its notional amount, we
will pay LIBOR rates and receive a 7.5% fixed rate until maturity in May 2017.
In addition, during 2001 we sold a floor option for a notional amount of
U.S.$177 million and U.S.$174.5 million in 2002 and 2003, respectively, related
to the interest rate swap contract, pursuant to which, commencing in 2003 and
until 2017, we pay the difference between the 7.5% fixed rate and the LIBOR
rates. Through the sale of this option, we received a premium of approximately
U.S.$22 million (Ps247.3 million) in 2001. As of December 31, 2002 and 2003,
the combined estimated fair value of the swap and floor contracts, amounting to
approximate losses of U.S.$0.5 million and U.S.$7.4 million, respectively, were
recorded in the comprehensive financing result for each period. As of December
31, 2002 and 2003, the notional amount of both contracts is not aggregated,
considering that there is only one notional amount with exposure to changes in
interest rates and the effects of one instrument are proportionally inverse to
the changes in the other one. See note 16D to our consolidated financial
statements included elsewhere in this annual report.
Our Third Party Equity Forwards
As of December 31, 2002, we had a third party equity forward contract
for a notional amount of U.S.$7.1 million, and the estimated fair value of this
contract was an approximate gain of U.S.$0.1 million (Ps)1.1 million). During
January 2003, this contract was settled, resulting in a gain of U.S.$0.6
million (Ps$6.7 million) that was recognized in earnings.
Interest Rate Risk, Foreign Currency Risk and Equity Risk
Interest Rate Risk
The table below presents tabular information of our fixed and
floating rate long-term foreign currency-denominated debt as of December 31,
2003. It includes the effects generated by the interest rate swaps and the
cross currency swap contracts that we have entered into, covering a portion
of our financial debt originally negotiated in
84
Mexican Pesos and U.S. Dollars. See note 11 to our consolidated financial
statements included elsewhere in this annual report. Average floating interest
rates are calculated based on forward rates in the yield curve as of December
31, 2003. Future cash flows represent contractual principal payments. The fair
value of our floating rate long-term debt is determined by discounting future
cash flows using borrowing rates currently available to us as of December 31,
2003 and is summarized as follows:
Expected maturity dates as of December 31, 2003
----------------------------------------------------------------------
After Fair
Debt 2004 2005 2006 2007 2008 2009 Total Value
------------------------------ ------ ------- ------- -------- ------- ------ ------- -------
(Millions of U.S. Dollars equivalents of debt denominated in foreign currencies)
Variable rate................. 813 831 765 158 3 27 2,597 2,598
Average interest rate......... 3.71% 4.99% 5.83% 6.21% 6.29% 6.48% -- --
Fixed rate.................... 30 188 1.101 71 719 673 2,782 3,129
Average interest rate......... 6.51% 6.45% 5.98% 5.99% 6.19% 5.81% -- --
As of December 31, 2003, we were subject to the volatility of the
floating interest rates, which, if such rates were to increase, may adversely
affect our financing cost and our net income. As of December 31, 2003, 48% of
our foreign currency-denominated long-term debt bears floating rates at a
weighted average interest rate of LIBOR plus 86 basis points, after giving
effect to our interest rate swaps and cross currency swaps.
As previously mentioned, as of December 31, 2003, we had entered into
interest rate swaps as part of a strategy intended to reduce our overall
financing cost. See "-- Our Derivative Financial Instruments." At that date the
estimated fair value of all of our interest rate swaps was a loss of
approximately U.S.$ 228.1 million. The potential change in the fair value as of
December 31, 2003 of these contracts that would result from a hypothetical,
instantaneous decrease of 50 basis points in the interest rates would be a loss
of approximately U.S.$15.4 million (Ps173.1 million).
In addition, as mentioned above, we have entered into interest rate
swap options. See "-- Our Derivative Financial Instruments." As of December 31,
2003, the estimated fair value of these instruments was a loss of approximately
U.S.$24.9 million. The potential change in the fair value as of December 31,
2003 of these contracts that would result from a hypothetical, instantaneous
decrease of 50 basis points in the interest rates would be a loss of
approximately U.S.$4.6 million (Ps51.7 million).
Foreign Currency Risk
Due to our geographic diversification, our revenues are generated in
various countries and settled in different currencies. However, some of our
production costs, including fuel and energy, and some of our cement prices, are
periodically adjusted to take into account fluctuations in the Dollar/Peso
exchange rate. For the year ended December 31, 2003, approximately 34% of our
sales, before eliminations resulting from consolidation, were generated in
Mexico, 22% in the United States, 16% in Spain, 4% in Venezuela, 8% in Central
America and the Caribbean, 3% in Colombia, 2% in the Philippines, 2% in Egypt
and 9% from other regions and our cement and clinker trading activities. As of
December 31, 2003, our debt, considering the effects in the original currencies
generated by our cross currency swaps, amounted to Ps65.9 billion, of which
approximately 68% was Dollar-denominated, 14% was Yen-denominated and 18% was
Euro-denominated; therefore, we have a foreign currency exposure arising from
the Dollar-denominated debt, the Yen-denominated debt and the Euro-denominated
debt, versus the currencies in which our revenues are settled in most countries
in which we operate. See "-- Liquidity and Capital Resources -- Our
Indebtedness," Item 10 -- "Additional Information -- Material Contracts" and
"Risk Factors -- We have to pay our Dollar and Yen denominated debt with
revenues generated in Pesos or other currencies, as we do not generate
sufficient revenue in Dollars and Yen from our operations to service all our
Dollar and Yen denominated debt, which could adversely affect our ability to
service our debt in the event of a devaluation or depreciation in the value of
the Peso, or any of the other currencies of the countries in which we operate."
Although we also have a small portion of our debt in other currencies, we have
generated enough cash flow in those currencies to service that debt. Therefore,
we believe there is no material foreign currency risk exposure with respect to
that debt.
As previously mentioned, we have entered into cross currency swap
contracts, designed to change the original profile of interest rates and
currencies over a portion of our financial debt. See "-- Our Derivative
85
Financial Instruments." As of December 31, 2003, the estimated fair value of
these instruments was a gain of approximately U.S.$262 million (Ps2,944.9
million). The potential change in the fair value of these contracts as of
December 31, 2003 that would result from a hypothetical, instantaneous
appreciation of 10% in the exchange rate of the Yen against the Dollar,
combined with a depreciation of 10% of the Mexican Peso against the Dollar,
would be a loss of approximately U.S.$135.7 million (Ps1,525.3 million).
Additionally, as previously mentioned, we have entered into foreign
exchange forward contracts designed to hedge our net investment in foreign
subsidiaries, as well as other currency derivative instruments. See "-- Our
Derivative Financial Instruments." The combined estimated fair value of our
foreign exchange forwards and our other currency derivatives as of December 31,
2003 was a loss of approximately U.S.$191.6 million. The potential change in
the fair value as of December 31, 2003 that would result from a hypothetical,
instantaneous depreciation of 10% in the exchange rate of the Peso against the
Dollar would be a loss of approximately U.S.$124.9 million (Ps1,403.9 million),
which would be offset by a corresponding foreign translation gain as a result
of our net investment in foreign subsidiaries.
Equity Risk
We have entered into equity forward contracts on our own stock. Upon
liquidation and at our option, the equity forward contracts provide for
physical settlement or net cash settlement of the estimated fair value, and the
effects are recognized in the income statement or as part of the stockholders'
equity, depending upon their designation and the underlying instrument or
program being hedged. At maturity, if these forward contracts are not settled
or replaced, or if we default on these agreements, our counterparties may sell
the shares underlying the contracts. Such sales may have an adverse effect on
our stock market price and our subsidiaries' stock market price. It may also
reduce the amount of dividends and other distributions that we would receive
from our subsidiaries and/or may create a public minority interest that may
adversely affect our ability to realize operating efficiencies as a combined
group.
As previously discussed, we have entered into equity forward contracts
on our own stock, pursuing different goals such as hedging our old and new
appreciation warrants program and our several stock option plans. See "--
Liquidity and Capital Resources." As of December 31, 2003, the estimated fair
market value of our equity forward contracts was a gain of approximately
U.S.$16.4 million. The potential change in the fair value as of December 31,
2003 that would result from a hypothetical, instantaneous decrease of 10% in
the market value of our stock would be a loss of approximately U.S.$93.6
million (Ps1,052.1 million).
Investments, Acquisitions and Divestitures
The transactions described below represent our principal investments,
acquisitions and divestitures completed during 2001, 2002, and 2003.
Investments and Acquisitions
In August and September 2003, we acquired 100% of the outstanding
shares of Mineral Resource Technologies Inc., and the cement assets of
Dixon-Marquette Cement for a combined purchase price of approximately U.S.$99.7
million, subject to adjustments. Located in Dixon, Illinois, the single cement
facility has an annual production capacity of 560,000 metric tons.
In June 2003, Cementos Nacionales announced a U.S.$130 million
investment plan to install a new kiln for producing clinker with an annual
capacity of 1.6 million metric tons of clinker. This new kiln, which would
increase our total clinker production capacity in the Dominican Republic to 2.2
million metric tons per year, is expected to be completed in early 2005. We
invested approximately U.S.$12.3 million in this project in 2003 and we expect
to invest approximately U.S.$57.7 million in 2004 and the remaining U.S.$60
million during 2005.
In July and August 2002, through a tender offer and subsequent merger,
we acquired 100% of the outstanding shares of PRCC. The aggregate value of the
transaction was approximately U.S.$281.0 million, including approximately
U.S.$100.8 million of assumed net debt.
86
On July 12, 2002, we purchased 25,429 shares of common stock
(approximately 0.3% of the outstanding share capital) of CAH from a CAH investor
for a purchase price of approximately U.S.$2.3 million, increasing our equity
interest in CAH to 77.7%. At the same time, we entered into agreements to
purchase an additional 1,483,365 shares of CAH common stock (approximately 14.6%
of the outstanding share capital) from several other CAH investors in exchange
for 28,195,213 CEMEX CPOs (subject to anti-dilution adjustments), which exchange
was originally scheduled to take place in four equal quarterly tranches
commencing on March 31, 2003. The exchange of 84,763 of these CAH shares took
place in four quarterly tranches in 2003 as originally scheduled. In April 2003,
we amended the terms of the July 12, 2002 agreements with respect to the
remaining 1,398,602 of the CAH shares. Instead of purchasing those CAH shares in
four equal quarterly tranches during 2003, we agreed to purchase those CAH
shares in four equal quarterly tranches commencing on March 31, 2004. On March
31, 2004, the exchange of the first tranche of 349,650 CAH shares took place as
scheduled, and was settled on April 1, 2004. Notwithstanding the amendments, for
accounting purposes, the CAH shares to be received by us in exchange for CEMEX
CPOs are considered to be owned by us effective as of July 12, 2002. As a result
of these transactions and pending their successful consummation, we will have
increased our stake in CAH to 92.3%.
On July 31, 2002, we purchased, through a wholly-owned subsidiary, the
remaining 30% economic interest that was not previously acquired by CAH in
Solid, for approximately U.S.$95 million. At December 31, 2003, as a
consequence of this transaction and the increase of our stake in CAH, as
described above, our proportionate economic interest in Solid was approximately
94.6%.
In May 2001, we acquired through CAH a 100% economic interest in
Saraburi Cement Company, now known as CEMEX (Thailand) Co. Ltd. or CEMEX
(Thailand), a cement company based in Thailand with an installed capacity of
approximately 700,000 metric tons, for a total consideration of approximately
U.S.$73 million. As a result of the increase of our stake in CAH, as described
above, at December 31, 2003, our proportionate economic interest in CEMEX
(Thailand) through CAH was approximately 92.3%.
In addition to the above-mentioned acquisitions, our net investment in
property, machinery and equipment, as reflected in our consolidated statements
of changes in financial position included elsewhere in this annual report,
excluding acquisitions of equity interests in subsidiaries and affiliates, was
approximately Ps5,649 million (U.S.$502.6 million) in 2001, Ps4,863 million
(U.S.$432.6 million) in 2002 and Ps4,427 million (U.S.$393.9 million) in 2003.
This net investment in property, machinery and equipment has been applied to
the construction and upgrade of plants and equipment, to the maintenance of
plants and equipment, including environmental controls and technology updates.
Divestitures
During 2001 CEMEX, Inc., our subsidiary in the United States, sold its
Eastern aggregates business, composed of several quarries in Kentucky and one
in Missouri, and other related assets for approximately U.S.$42 million. During
2002, CEMEX, Inc. sold its specialty mineral products business, composed of one
quarry in each of Virginia, New Jersey and Massachusetts and two quarries in
Pennsylvania, and other related assets for approximately U.S.$49 million.
See note 8A to our consolidated financial statements included
elsewhere in this annual report.
The Euro Conversion
We have operations in Spain, which adopted the common Euro currency on
January 1, 1999. Since January 1, 2002, the Euro is the official currency of
all Euro zone countries.
We have examined the risks of the Euro for our Spanish operations'
business and markets. We do not believe that the Euro conversion has had a
material short-term impact on our business, our Spanish operations' exposure to
currency risk, or our market position, although we believe that the Euro will
contribute to the ongoing convergence of prices in Europe over the longer term.
In 2003, our Spanish sales amounted to 16% of our net sales. As of December 31,
2003, 18% of our consolidated debt was Euro-denominated.
87
U.S. GAAP Reconciliation
Our consolidated financial statements included elsewhere in this
annual report have been prepared in accordance with Mexican GAAP, which differ
in some significant respects from U.S. GAAP. The Mexican GAAP consolidated
financial statements include the effects of inflation as provided for under
Bulletin B-10 and Bulletin B-15 and are presented in constant Pesos
representing the same purchasing power for each period presented, whereas
financial statements prepared under U.S. GAAP are presented on a historical
cost basis. The reconciliation to U.S. GAAP included as note 23 to our
consolidated financial statements presented elsewhere in this annual report
includes (i) a reconciling item for the reversal of the effect of applying
Bulletin B-15 for the restatement to constant pesos for the years ended
December 31, 2001 and 2002, and (ii) a reconciling item to reflect the
difference in the carrying value of machinery and equipment of foreign origin
and related depreciation between the methodology set forth by Bulletin B-10
(integrated document) and the amounts that would be determined by using the
historical cost/constant currency method. As described below, these provisions
of inflation accounting under Mexican GAAP do not meet the requirements of Rule
3-20 of Regulation S-X of the Securities and Exchange Commission. Our
reconciliation does not include the reversal of other Mexican GAAP inflation
accounting adjustments as these adjustments represent a comprehensive measure
of the effects of price level changes in the inflationary Mexican economy and,
as such, is considered a more meaningful presentation than historical
cost-based financial reporting for both Mexican and U.S. accounting purposes.
Majority net income under U.S. GAAP for the years ended December 31,
2001, 2002, and 2003 amounted to Ps11,044 million, Ps5,867 million and Ps8,274
million, respectively, compared to majority net income under Mexican GAAP for
the years ended December 31, 2001, 2002 and 2003 of approximately Ps13,027
million, Ps5,967 million and Ps7,067 million, respectively. See note 23 to our
consolidated financial statements included elsewhere in this annual report for
a description of the principal differences between Mexican GAAP and U.S. GAAP
as they relate to us and the effects that newly issued accounting
pronouncements have had in our financial position.
Newly Issued Accounting Pronouncements Under U.S. GAAP
Effective January 1, 2003, for purposes of the reconciliation to U.S.
GAAP, we adopted SFAS 143 "Accounting for Asset Retirement Obligations." SFAS
No. 143 requires an entity to record the fair value of an asset retirement
obligation as a liability in the period in which it incurs a legal obligation
associated with the retirement of tangible long lived assets that result from
the acquisition, construction, development, and/or normal use of the assets.
Such liability would be recorded against a corresponding asset that is
depreciated over the life of the long lived asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be adjusted
at the end of each period to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation. See note 23(k) to our
consolidated financial statements included elsewhere in this annual report for
a description of the effects of the new accounting principle.
In November 2002, the FASB issued Interpretation 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements 5,
57 and 107 and a rescission of FASB Interpretation 34." This interpretation
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees issued. The
interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the
interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on our financial
statements. The disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. See note 23(u) to
our consolidated financial statements included elsewhere in this annual report
for a description of the effects of this interpretation.
In December 2002, the FASB issued SFAS 148 "Accounting for Stock Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123." This statement amends FASB Statement 123 "Accounting for Stock Based
Compensation" to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock based employee
compensation. In addition, this statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
our consolidated financial statements included elsewhere in this annual report.
As of
88
December 31, 2003, for purposes of our consolidated financial statements,
we account for our executive stock option programs under APB Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"). See note 23(r) to our
consolidated financial statements included elsewhere in this annual report for
the fair value disclosures pertaining to our programs.
In January 2003, the FASB issued Interpretation 46 "Consolidation of
Variable Interest Entities, an interpretation of ARB 51". This interpretation
addresses the consolidation by business enterprises of variable interest
entities as defined in the interpretation. The interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The interpretation requires certain
disclosures in financial statements issued after January 31, 2003 if it is
reasonably possible that we will consolidate or disclose information about
variable interest entities when the interpretation becomes effective. See note
23(u) to our consolidated financial statements included elsewhere in this
annual report for a description of the effects of this interpretation.
In December 2003, FASB issued SFAS 132 (revised) Employers'
Disclosures about Pensions and Other Postretirement Benefits--an amendment of
FASB Statements No. 87, 88, and 106. This statement revises requirements
pertaining to employers' disclosures about pension plans and other
postretirement benefit plans, retaining the disclosures required by previous
SFAS 132, but requiring additional disclosures describing the types of plan
assets, investment strategy, measurement date(s), plan obligations, cash flows,
and components of net periodic benefit cost recognized during interim periods.
The required information should be provided separately for pension plans and
for other postretirement benefit plans. This statement does not change the
measurement or recognition methods. The new requirements are effective for
periods beginning after December 15, 2003.
89
Item 6 - Directors, Senior Management and Employees
------------------------------------------
Senior Management and Directors
Senior Management
Set forth below is the name and position of each of our executive
officers as of December 31, 2003. The terms of office of the executive officers
are indefinite.
Lorenzo H. Zambrano, Joined CEMEX in 1968. During his
Chief Executive Officer career with CEMEX, Mr. Zambrano
has been involved in all
operational aspects of our
business. He held several
positions in CEMEX prior to his
appointment as director of
operations in 1981. In 1985, Mr.
Zambrano was appointed chief
executive officer, and in 1995 he
was elected chairman of the board
of directors. Mr. Zambrano is a
graduate of Instituto Tecnologico
y de Estudios Superiores de
Monterrey, A.C., or ITESM, with a
degree in mechanical engineering
and administration and holds an
M.B.A. from Stanford University.
Mr. Zambrano has been a member of
our board of directors since 1979
and chairman of our board of
directors since 1995. He is a
member of the board of directors
of IBM, the International
Advisory Board of Citigroup, and
the Chairman's Council of Daimler
Chrysler AG. He is also a member
of the board of directors of
Fomento Economico Mexicano, S.A.
de C.V., Empresas ICA, S.A. de
C.V., Alfa, S.A. de C.V., Grupo
Financiero Banamex, S.A. de C.V.,
Vitro, S.A. and Grupo Televisa,
S.A. Mr. Zambrano is chairman of
the board of directors of Consejo
de Ensenanza e Investigacion
Superior, A.C., which manages
ITESM and a member of the
Stanford Business School's
advisory board.
In addition, he is member of the
board of directors of Museo de
Arte Contemporaneo de Monterrey
A.C (MARCO), Conservacion
Internacional, and the Americas
Society, Inc. Lorenzo H. Zambrano
is a first cousin of Lorenzo
Milmo Zambrano and Rogelio
Zambrano Lozano, both members of
our board of directors, as well
as of Rodrigo Trevino, our chief
financial officer. He is also a
second cousin of Roberto Zambrano
Villareal and Mauricio Zambrano
Villareal, both members of our
board of directors.
Hector Medina, Joined CEMEX in 1988. He has held
Executive Vice President of several positions in CEMEX,
Planning and Finance including director of strategic
planning from 1991 to 1994,
president of CEMEX Mexico from
1994 to 1996, and has served as
executive vice president of
planning and finance since 1996.
He is a graduate of ITESM with a
degree in chemical engineering and
administration. He also received a
Masters of Science degree in
management studies from the
management Center of the
University of Bradford in England
and a Masters of Science diploma
in Operations Research from the
Escuela de Organizacion Industrial
in Spain in 1975. Among the
positions he previously held are
those of Project Director at Grupo
Protexa, S.A. de C.V.,
Administrative Director at Grupo
Xesa, S.A. de C.V., Commercial
Director at Direcplan, S.A. and
Industrial Relations Sub-Director
at Hylsa, S.A. de C.V. Mr. Medina
is a member of the board of
Cementos Chihuahua, Cia Minera
Autlan, Mexifrutas, S.A. de C.V.
and Chocota Productos del Mar,
S.A. de C.V. and member of the
"consejo de vigilancia" of
Ensenanza e Investigacion Superior
A.C. and ITESM.
90
Armando J. Garcia Segovia, Initially joined CEMEX in 1975 and
Executive Vice President of rejoined CEMEX in 1985. He has
Development served as director of operational
and strategic planning from 1985
to 1988, director of operations
from 1988 to 1991, director of
corporate services and affiliate
companies from 1991 to 1994,
director of development from 1994
to 1996, general director of
development from 1996 to 2000, and
executive vice president of
development since 2000. He is a
graduate of ITESM with a degree in
mechanical engineering and
administration and holds an M.B.A.
from the University of Texas. He
was employed at Cydsa, S.A. from
1979 to 1981 and at Conek, S.A. de
C.V. from 1981 to 1985 . He is a
brother of Jorge Garcia Segovia,
an alternate member of our board
of directors, and a first cousin
of Rodolfo Garcia Muriel, a member
of our board of directors.
Armando J. Garcia Segovia has been
a member of our board of directors
since 1983. He also serves as a
member of the board of directors
of Materiales Industriales de
Chihuahua, S.A. de C.V., Calhidra
y Mortero de Chihuahua, S.A. de
C.V., Grupo Cementos de Chihuahua,
S.A. de C.V., Construcentro de
Chihuahua, S.A. de C.V., Control
Administrativo Mexicano, S.A. de
C.V., Compania Industrial de
Parras, S.A. de C.V., Fabrica La
Estrella, S.A. de C.V., Prendas
Textiles, S.A. de C.V., Telas de
Parras, S.A. de C.V., Canacem,
Confederacion Patronal de la
Republica Mexicana, Centro
Patronal de Nuevo Leon, and
Instituto Mexicano del Cemento y
del Concreto. He is a member of
the board and former chairman of
Centro de Estudios del Sector
Privado para el Desarrollo
Sostenible, and member of the
board of the World Environmental
Center.
He is also founder and chairman of
the board of Comenzar de Nuevo,
A.C.
Victor Romo, Joined CEMEX in 1985 and has
Executive Vice President of served as director of
Administration administration of CEMEX Espana
from 1992 to 1994, general
director of administration and
finance of CEMEX Espana from 1994
to 1996, president of CEMEX
Venezuela from 1996 to 1998,
president of the South American
and Caribbean region from 1998 to
May 2003, and executive vice
president of administration since
May 2003. He is a graduate in
public accounting and holds a
master's degree in administration
and finance from ITESM.
Previously, he worked for Grupo
Industrial Alfa, S.A. de C.V. from
1979 to 1985.
Francisco Garza, Joined CEMEX in 1988 and has
President of CEMEX served as director of trading from
North America Region 1988 to 1992, president of CEMEX
and Trading Corp. from 1992 to 1994, president
of CEMEX Venezuela and Cemento
Bayano from 1994 to 1996,
president of CEMEX Mexico
and CEMEX Corp. from 1996 to 1998,
when he was appointed president of
the North American region and
trading. He is a graduate in
business administration of ITESM
and holds an M.B.A. from the
Johnson School of Management at
Cornell University.
Jose Luis Saenz de Miera, Joined CEMEX Espana in 1993 as
President of CEMEX Europe, general manager of administration
Africa and Asia and finance, and in 1994 he was
appointed president of CEMEX
Espana. Mr. Saenz de Miera has
served as president of the Europe,
Africa and Asia region since
October 1998. He studied economic
sciences in Universidad
Complutense de Madrid and is a
certified public accountant from
Instituto de Censores Jurados de
Cuentas in Spain. Previously, he
was employed from 1973 to 1993 at
KPMG Peat Marwick, since 1982 as
91
partner and between 1988 and 1993
as deputy senior partner. Mr.
Saenz de Miera is a citizen of
Spain.
Fernando Gonzalez, Joined CEMEX in 1989 and has
President of CEMEX South served as vice-president-human
America and the Caribbean resources from 1992 to 1994,
vice-president-strategic planning
from 1994 to 1998, president of
CEMEX Venezuela from 1998 to 2000,
president of CEMEX Asia from 2000
to May 2003, and president of the
South American and Caribbean
region since May 2003. He is a
graduate in business
administration and holds a
master's degree in administration
from ITESM. Previously, he worked
for Grupo Industrial Alfa, S.A. de
C.V. from 1976 to 1989.
Rodrigo Trevino, Joined CEMEX in 1997 and has
Chief Financial Officer served as chief financial officer
since then. He holds both bachelor
and master of science degrees in
industrial engineering from
Stanford University. Prior to
joining CEMEX, he served as the
country corporate officer for
Citicorp/Citibank Chile from 1995
to 1996, and prior to that, he
worked at Citibank, N.A. from 1979
to 1994. Rodrigo Trevino is a
first cousin of Lorenzo H.
Zambrano, our chief executive
officer and chairman of our board
of directors.
Ramiro G. Villarreal, Joined CEMEX in 1987 and has
General Counsel served as general counsel since
then, and also has served as
secretary of our board of
directors since 1995. He is a
graduate of the Universidad
Autonoma de Nuevo Leon with a
degree in law. He also received a
masters of science degree in
finance from the University of
Wisconsin. Prior to joining CEMEX,
he served as assistant general
director of Grupo Financiero
Banpais from 1985 to 1987.
Board of Directors
Set forth below are the names of the members of the our board of
directors. The members of our board of directors serve for one-year terms. At
our 2003 annual shareholders' meeting held on April 29, 2004, our shareholders
re-elected all the members of our board of directors to serve until the next
annual shareholders' meeting.
Lorenzo H. Zambrano, See "--Senior Management."
Chairman
Lorenzo Milmo Zambrano Has been a member of our board of
directors since 1977. He is also
general director of Inmobiliaria
Ermiza, S.A. de C.V. He is a
first cousin of Lorenzo H.
Zambrano, chairman of our board of
directors and our chief executive
officer, and a first cousin of
Rogelio Zambrano Lozano, a member
of our board of directors.
Armando J. Garcia Segovia See "--Senior Management."
Rodolfo Garcia Muriel Has been a member of our board of
directors since 1985. He is also
the chief executive officer of
Compania Industrial de Parras,
S.A. de C.V. and Parras Cone de
Mexico, S.A. de C.V. He is member
of the board of directors of
Parras Williamson, S.A. de C.V.,
Telas de Parras, S.A. de C.V.,
IUSA-GE, S. de R.L., and
Industrias Unidas, S.A. Mr. Garcia
Muriel is also vice president of
Camara Nacional de la Industria
Textil. Rodolfo Garcia Muriel is a
first cousin of Armando J. Garcia
Segovia, executive vice president
of development of CEMEX and a
member of our board of directors,
and Jorge Garcia Segovia, an
alternate member of our board of
directors.
92
Rogelio Zambrano Lozano Has been a member of our board of
directors since 1987. He is also a
member of the advisory board of
Grupo Financiero Banamex Accival,
S.A. de C.V. Zona Norte, director
of Carza, S.A. de C,V. and Parque
Plaza Sesamo, S.A. de C.V., and a
member of the board of directors
of Hospital San Jose. Rogelio
Zambrano Lozano is a first cousin
of Lorenzo H. Zambrano, chairman
of our board of directors and our
chief executive officer, and of
Lorenzo Milmo Zambrano, a member
of our board of directors.
Roberto Zambrano Villarreal Has been a member of our board of
directors since 1987. He is
chairman of the board of directors
of Desarrollo Integrado, S.A. de
C.V., Administracion Ficap, S.A.
de C.V., Aero Zano, S.A. de C.V.,
Ciudad Villamonte, S.A. de C.V.,
Focos, S.A. de C.V., C & I
Capital, S.A. de C.V., Industrias
Diza, S.A. de C.V., Inmobiliaria
Sanni, S.A. de C.V., Inmuebles
Trevisa, S.A. de C.V., Servicios
Tecnicos Hidraulicos, S.A. de
C.V., Mantenimiento Integrado,
S.A. de C.V., , Pilatus PC-12
Center de Mexico, S.A. de C.V.,
and Pronatura, A.C. He is a member
of the board of directors of
S.L.I. de Mexico, S.A. de C.V.,
and Compania de Vidrio Industrial,
S.A. de C.V. He is a brother of
Mauricio Zambrano Villarreal, a
member of our board of directors.
Bernardo Quintana Isaac Has been a member of our board of
directors since 1990. He is chief
executive officer and chairman of
the board of directors of Empresas
ICA Sociedad Controladora, S.A. de
C.V., and a member of the board of
directors of Telefonos de Mexico,
S.A. de C.V., Grupo Financiero
Banamex Accival, S.A. de C.V.,
Grupo Financiero Inbursa, S.A. de
C.V., Grupo Carso, S.A. de C.V.,
and Grupo Maseca, S.A. de C.V. He
is also a member of Consejo
Mexicano de Hombres de Negocios,
Fundacion UNAM, Fundacion ICA and
Patronato UNAM. He is a founding
associate of Fundacion Octavio
Paz.
Dionisio Garza Medina Has been a member of our board of
directors since 1995. He is also
chairman of the board and chief
executive officer of Alfa, S.A. de
C.V. He is a member of the board
of directors of Vitro, S.A.,
Cydsa, S.A., ING Mexico, and
Autoliv. He is also chairman of
the executive board of the
Universidad de Monterrey, A.C.,
and a member of Consejo Mexicano
de Hombres de Negocios, the
advisory committee of the David
Rockefeller Center for Latin
American Studies of Harvard
University, the board of Harvard
Business School, and the advisory
committee of the New York Stock
Exchange.
Alfonso Romo Garza Has been a member of our board of
directors since 1995. He is
chairman of the board and chief
executive officer of Savia, S.A.
de C.V. and Seminis, Inc., and
chairman of the board of ING
Mexico. He is also a member of the
board of Nacional de Drogas, S.A.
de C.V., Grupo Maseca, S.A. de
C.V., and Grupo Comercial
Chedraui, S.A. de C.V. He is an
external advisor of the World Bank
Board for Latin America and the
Caribbean, and a member of the
board of The Donald Danforth Plant
Science Center.
Mauricio Zambrano Villarreal Has been a member of our board of
directors since 2001. Mr. Zambrano
Villarreal served as an alternate
member of our board of directors
from 1995 to 2001. He is also
general vice-president of
Desarrollo Integrado, S.A. de
C.V., chairman of the board of
directors of Empresas Falcon, S.A.
de C.V. and Trek Associates, Inc.,
93
secretary of the board of
directors of Administracion Ficap,
S.A. de C.V., Aero Zano, S.A. de
C.V., Ciudad Villamonte, S.A. de
C.V., Focos, S.A. de C.V.,
Compania de Vidrio Industrial,
S.A. de C.V., C & I Capital, S.A.
de C.V., Industrias Diza, S.A. de
C.V., , Inmuebles Trevisa, S.A. de
C.V., and Servicios Tecnicos
Hidraulicos, S.A. de C.V., and a
member of the board of directors
of Sylvania Lighting International
Mexico, S.A. de C.V. and Invercap,
S.A. de C.V. He is a brother of
Roberto Zambrano Villarreal, a
member of our board of directors.
Tomas Brittingham Longoria Has been a member of our board of
directors since 2002. Previously
served as an alternate member of
our board of directors from 1987
until 2002. He is also the chief
executive officer of Laredo Autos,
S.A. de C.V. He is a son of
Eduardo Brittingham Sumner, an
alternate member of our board of
directors.
Jose Manuel Rincon Gallardo Has been a member of our board of
directors since 2003. He is also
the board's "financial expert" and
a member of our Audit Committee.
He is president of the board of
directors of Sonoco de Mexico,
S.A. de C.V., member of the board
of directors and audit committee
of Grupo Financiero Banamex, S.A.
de C.V., Grupo Herdez, S.A. de
C.V., and Grupo Celanese Mexicana
, S.A. de C.V., and member of the
board of directors of Grupo
Transportacion Ferroviaria
Mexicana, S.A. de C.V., Grupo
Cuervo, S.A. de C.V., Laboratorio
Sanfer-Hormona, and Alexander
Forbes Mexico. Mr. Rincon Gallardo
is a member of Pro-Dignidad, A.C.,
Organizacion Monte Fenix, A.C.,
Instituto Mexicano de Contadores
Publicos, A.C., Instituto Mexicano
de Ejecutivos de Finanzas, A.C.,
and member of the board of Consejo
Mexicano de Normas de Informacion
Financiera. Mr. Rincon Gallardo
was managing partner of KPMG
Mexico, and was a member of the
board of directors of KPMG United
States and KPMG International.
Alternate Directors
Set forth below are the names of the alternate members of our board of
directors. The alternate members of our board serve for one-year terms.
Eduardo Brittingham Sumner Has been an alternate member of
our board of directors since 2002.
Previously served as a regular
member of our board of directors
from 1967 until 2002. He is also
general director of Laredo Autos,
S.A. de C.V., Auto Express Rapido
Nuevo Laredo, S.A. de C.V,
Consorcio Industrial de
Exportacion, S.A. de C.V., and an
alternate member of the board of
directors of Vitro, S.A. He is the
father of Tomas Brittingham
Longoria, a member of our board of
directors.
Tomas Milmo Santos Has been an alternate member of
our board of directors since 2001.
He is Chief Executive Officer and
member of the board of directors
of Axtel, S.A. de C.V., a
telecommunications company that
operates in the local, long
distance and data transfer market.
He is also a member of the board
of directors of Coparmex, Cemex
Mexico and the Universidad de
Monterrey. Mr. Milmo Santos is a
nephew of Lorenzo H. Zambrano, our
chief executive officer and
chairman of our board of
directors, and a nephew of Lorenzo
Milmo Zambrano, a member of our
board of directors.
94
Jorge Garcia Segovia Has been an alternate member of
our board of directors since 1985.
He is also a member of the board
of directors of Compania
Industrial de Parras, S.A. de
C.V. He is a brother of Armando
J. Garcia Segovia and a first
cousin of Rodolfo Garcia Muriel,
both members of our board of
directors.
Board Practices
In compliance with amendments to Mexican securities laws enacted in
2001, our shareholders approved, at a general extraordinary meeting of
shareholders held on April 25, 2002, a proposal to amend various articles of
CEMEX's by-laws, or estatutos sociales, in order to improve our standards of
corporate governance and transparency, among other matters. The amendments
require that at least 25% of our directors qualify as independent directors;
that our board of directors, at its first meeting after the adoption of the
amendments, establish an audit committee; and that shareholders representing at
least 10% of our shares have the right to designate an examiner and an
alternate examiner.
We have not entered into any service contracts with our directors that
provide for benefits upon termination of employment.
The Audit Committee
The audit committee is responsible for reviewing related party
transactions and is required to submit an annual report of its activities to
our board of directors. The audit committee is also responsible for the
appointment, compensation and oversight of our external auditors. The audit
committee has also adopted procedures for handling complaints regarding
accounting and auditing matters, including anonymous and confidential methods
for addressing concerns raised by employees. Under our by-laws, the majority of
the members of the audit committee, including its president, are required to be
independent directors.
Set forth below are the names of the members of CEMEX's audit
committee. The terms of the members of our audit committee are indefinite, and
they may only be removed by a resolution of the board of directors. Jose Manuel
Rincon Gallardo qualifies as an "audit committee financial expert." See "Item
16A--Audit Committee Financial Expert."
Roberto Zambrano Villarreal See "--Board of Directors."
President
Jose Manuel Rincon Gallardo See "--Board of Directors."
Lorenzo Milmo Zambrano See "--Board of Directors."
Alfonso Romo Garza See "--Board of Directors."
Tomas Brittingham Longoria See "--Board of Directors."
Compensation of Our Directors and Members of Our Senior Management
For the year ended December 31, 2003, the aggregate amount of
compensation we paid, or our subsidiaries paid, to all members of our board of
directors, alternate members of our board of directors and senior managers, as
a group, was approximately U.S.$17,388,739. Approximately U.S.$5,085,279 of
this amount was paid pursuant to a bonus plan based on our performance. During
2003, as part of the compensation, the members of our board of directors,
alternate members of our board of directors and senior managers, as a group,
received options to acquire 5,400,074 CPOs at a weighted average nominal
exercise price of U.S.$4.18 per CPO. These options expire in 2012
95
and 2013. As of December 31, 2003, anti-dilution provisions in these options
increased the number of underlying CPOs to 5,516,655 and the adjusted weighted
average exercise price per CPO was U.S.$4.29.
In addition, approximately U.S.$178,873 was set aside or accrued to
provide pension, retirement or similar benefits.
Employee Stock Option Plan (ESOP)
In 1995, we adopted an employee stock option plan, or ESOP, under
which we were authorized to grant members of our board of directors, members of
our senior management and other eligible employees options to acquire our CPOs.
Our obligations under the plan are covered by shares held in a trust created
for such purpose (initially 216,300,000 shares). As of December 31, 2003, after
giving effect to the exchange program implemented in November 2001 described
below, a total of 4,689,335 options to acquire 5,778,308 CPOs remain
outstanding under this program, with a weighted average nominal exercise price
of approximately Ps29.33 per CPO. As of December 31, 2003, the outstanding
options under this program had a weighted average remaining tenure of
approximately 3.7 years.
In November 2001, we implemented a voluntary exchange program to offer
participants in our ESOP new options intended to better align employee
interests with those of shareholders in exchange for their existing options.
The new options have an escalating strike price in U.S. Dollars and are hedged
by our equity forward contracts, while the old options have a fixed strike
price in Pesos. The executives who participated in this program exchanged their
options to purchase CPOs at a weighted average strike price of Ps34.11 per CPO,
for cash equivalent to the intrinsic value on the exchange date and new options
to purchase CPOs with an escalating dollar strike price set at U.S.$4.93 per
CPO as of December 31, 2001, growing by 7% per annum less dividends on the
CPOs. Of the old options, 57,448,219 (approximately 90.1%) were exchanged for
new options in the voluntary exchange program and 8,695,396 were not exchanged.
In the context of the program, 81,630,766 new options were issued, in addition
to 7,307,039 of the new options that were purchased by participants under a
voluntary purchase option that was also part of the exchange. As of December
31, 2003, considering the options granted as a result of the exchange program
implemented in November 2001, the options granted thereunder and the exercise
of options through that date, a total of 120,916,763 options to acquire
130,831,601 CPOs remain outstanding under this program, with a weighted average
exercise price of approximately U.S.$5.02 (Ps56.43) per CPO. As of December 31,
2003, the outstanding options under this program had a weighted average
remaining tenure of approximately 9.1 years.
As a result of the acquisition of CEMEX, Inc. (formerly Southdown), we
established a stock option program for CEMEX, Inc.'s executives for the
purchase of our ADSs. The options granted under the program have a fixed
exercise price in U.S. Dollars equivalent to the market price of one ADS as of
the grant date and have a 10-year term. Twenty-five percent of the options vest
annually during the first four years after having been granted. The options are
hedged using shares currently owned by our subsidiaries, thus potentially
increasing stockholders' equity and the number of shares outstanding. As of
December 31, 2003, considering the options granted as a result of the exchange
program implemented in 2001, the options granted thereunder and the exercise of
options that has occurred through that date, a total of 7,629,260 options to
acquire the same number of CPOs, or 1,525,582 ADSs, remain outstanding under
this program. These options have a weighted average exercise price of
approximately U.S.$4.62 (Ps51.93) per CPO or U.S.$23.09 (Ps259.49) per ADS as
each ADS represents five CPOs. The number of options under these ADS programs
are presented below in terms of CPO equivalents.
Stock options activity during 2002 and 2003, the balance of options
outstanding as of December 31, 2002 and 2003 and other general information
regarding our stock option programs is presented in note 15 to our consolidated
financial statements included elsewhere in this annual report.
Certain key executives also participate in a plan that distributes a
bonus pool based on actual business results. This bonus is calculated and paid
annually, 50% in cash and 50% under an ESOP.
As of December 31, 2003, the following ESOP options to purchase our
securities were outstanding:
96
Number of CPOs or Range of exercise prices
Title of security CPO equivalents per CPOs or CPO
underlying options underlying options Expiration Date equivalents
------------------ ------------------ --------------- -------------------------
CPOs (Pesos) 5,778,308 2005-2011 Ps15.60 - 39.44
CPOs (Dollars) 130,831,601 2011-2013 U.S.$5.12 - 5.66
ADSs 7,629,260 2011-2013 U.S.$3.89 - 5.44
As of December 31, 2003, our senior management and directors held the
following ESOP options to acquire our securities:
Number of CPOs or Range of exercise prices
Title of security CPO equivalents per CPOs or CPO
underlying options underlying options Expiration Date equivalents
------------------ ------------------ --------------- -------------------------
CPOs (Pesos) 2,191,817 2005-2011 Ps15.60 - 39.44
CPOs (Dollars) 39,291,397 2011-2013 U.S.$5.12 - 5.66
ADSs 0 2011-2013 U.S.$3.89 - 5.44
As of December 31, 2003, our employees and former employees, other
than senior management and directors, held the following ESOP options to
acquire our securities:
Number of CPOs or Range of exercise prices
Title of security CPO equivalents per CPOs or CPO
underlying options underlying options Expiration Date equivalents
------------------ ------------------ --------------- -------------------------
CPOs (Pesos) 3,586,491 2005-2011 Ps15.60 - 39.44
CPOs (Dollars) 91,540,204 2011-2013 U.S.$5.12 - 5.66
ADSs 7,629,260 2011-2013 U.S.$3.89 - 5.44
In February 2004, we implemented a voluntary exchange program to offer
participants in our ESOP new options intended to better align employee
interests with those of shareholders in exchange for their existing options.
Under the terms of the exchange offer, participating employees surrendered
their options in exchange for new options with an initial strike price of
U.S.$5.05 and a life of 8.4 years, representing the weighted average strike
price and maturity of existing options. The strike price of the new options
will increase annually at a 7% rate. The new options may be exercised at
anytime at the holders option and will be automatically exercised if, at any
time during the life of the options, the CPO market price reaches U.S.$7.50.
Any gain realized through the exercise of the new options will be
invested in restricted CPOs at a 20% discount to market. The restricted CPOs
received upon exercise of the new options will be held in a trust on behalf of
the employee until the CPOs are vested, at which time the restriction expires
and the CPOs will be freely transferable. A percentage of the restricted CPOs
will vest on a monthly basis, which percentage varies based on when the
restricted CPOs are received.
Holders of the new options will also receive an annual payment of
$U.S.0.10 per CPO covered by the option outstanding as of the payment date
until exercise or maturity of the options. This payment will grow annually at a
10% rate.
The exchange period expired on February 13, 2004. As of March 31,
2004, as a result of the voluntary exchange offer, 122,708,146 new options were
issued in exchange for 113,906,002 existing options, which were subsequently
cancelled. All existing options not exchanged in the offer maintained their
existing terms and conditions.
For accounting purposes under Mexican and U.S. GAAP, we will account
for the new options, including the $U.S.0.10 per option payment made to
employees, under the intrinsic value method through earnings in the same
97
manner as we currently do under existing plans. See notes 2W and 15 to our
consolidated financial statements included elsewhere in this annual report.
This exchange offer is part of our new strategy, beginning in 2004, of
migration away from stock options and into restricted stock as compensation for
eligible employees.
Voluntary Employee Stock Option Plan (VESOP)
During 1998 and 1999, we established voluntary employee stock option
plans, or VESOPs, pursuant to which managers and senior executives elected to
purchase options to acquire up to 36,468,375 CPOs. These VESOP options,
exercisable quarterly over a period of five years, have a predefined exercise
price which increases quarterly in U.S. Dollars, thereby taking into account
the funding cost in the market. As of December 31, 2003, options to acquire
3,927,693 CPOs were outstanding.
During 2002, we established an additional VESOP, pursuant to which
managers and senior executives elected to purchase, on a monthly basis, new
options for up to a number equivalent to those exercised in the same period
within the new program initiated in November 2001. During 2002, we sold
2,120,395 options and received a premium equivalent to a percentage of the CPO
price, which amounted to approximately U.S.$1.5 million (Ps16.9 million). As of
December 31, 2003, anti-dilution provisions in these options increased the
number of underlying CPOs to 2,335,191 CPOs with a weighted average exercise
price of approximately U.S.$5.68 (Ps63.80) per CPO.
In January 2003, we established a new VESOP through which our
employees who held options under our old VESOPs, as well as members of our
senior management and other eligible executives, elected to purchase 38,583,989
new options for a premium of approximately U.S.$9.7 million (Ps101.5 million).
The new options, which had an increasing U.S. Dollar exercise price of
approximately U.S.$3.58 per CPO, equal to the market price of one CPO at the
date of sale, and a five-year term, contained an automatic mandatory exercise
condition that would be triggered when the CPO market price reached a certain
level. The CPO market price reached this level in September 2003 and, as a
result, all of the options were exercised. Employees and directors who
exercised their options under the new VESOP received the corresponding gain in
CPOs, which they are obligated to hold in their entirety for a period of two
years after exercise. Following the second anniversary of the exercise date,
one half of the CPOs acquired under the VESOP may be sold by the holder, and
the remaining CPOs may be sold following the third anniversary of the exercise
date.
In connection with the new VESOP, in March 2003, we repurchased
29,001,358 appreciation warrants from several of the eligible executives, at a
price per appreciation warrant of Ps3.70, the market price for our appreciation
warrants on February 6, 2003, the date of the offer to purchase appreciation
warrants from the executives. Executives with outstanding loans from CEMEX used
the proceeds from the repurchase of 5,942,724 appreciation warrants to repay
these loans. The remaining proceeds were used to partially pay for the
subscription for options under our new VESOP program. Also, as part of the new
VESOP program, in March 2003, we repurchased from some of the eligible
employees and directors 294,074 options under our old VESOPs at a price per
option of U.S.$ 0.0096, and 8,158,574 options under our old VESOPs at a price
per option of U.S.$0.1164. These prices represented a fraction of the
theoretical value of the options on January 6, 2003, the date of the offer to
purchase the options from the employees and directors. The proceeds from the
repurchase of the options under the old VESOPs were used to subscribe for
options under our new VESOP, as mandated by the new VESOP program.
As of December 31, 2003, all options under the new VESOP had been
exercised so that no options remained outstanding thereunder.
As of December 31, 2003, the following VESOP options to acquire our
securities were outstanding:
Title of security Number of CPOs Range of exercise
underlying options underlying options Expiration Date Purchase Price price per CPO
------------------ ------------------ --------------- -------------- -------------
CPOs 3,927,693 2004 U.S.$.19 U.S.$3.3069
CPOs 2,335,191 2011 U.S.$0.76 - 0.63 U.S.$5.76 - 5.53
98
As of December 31, 2003, our senior management and directors held the
following VESOP options to acquire our securities:
Title of security Number of CPOs Range of exercise
underlying options underlying options Expiration Date Purchase Price price per CPO
------------------ ------------------ --------------- -------------- -------------
CPOs 3,266,158 2004 U.S.$.19 U.S.$3.3069
CPOs 1,228,390 2011 U.S.$0.76 - 0.63 U.S.$5.76 - 5.53
As of December 31, 2003, our employees, other than senior management
and directors, held the following VESOP options to acquire our securities:
Title of security Number of CPOs Range of exercise
underlying options underlying options Expiration Date Purchase Price price per CPO
------------------ ------------------ --------------- -------------- -------------
CPOs 661,535 2004 U.S.$.19 U.S.$3.3069
CPOs 1,106,801 2011 U.S.$0.76 - 0.63 U.S.$5.76 - 5.53
Employees
As of December 31, 2003, we had approximately 25,965 employees
worldwide, which represented a decrease of 1.8% from year-end 2002.
The following table sets forth the number of our full-time employees
and a breakdown of their geographic location at the end of each of the last
three fiscal years:
Central
America
United and the
Mexico States** Spain Venezuela Colombia Egypt Philippine Thailand Caribbean* Others Total
2001 8,740 5,056 3,114 2,576 932 749 734 221 1,512 2,285 25,919
2002 9,184 4,608 3,035 2,334 858 891 692 220 2,569 2,361 26,452
2003 8,942 4,709 2,963 1,700 800 873 669 224 2,599 2,486 25,965
* 2002 and 2003 include Puerto Rico
** 2003 includes Dixon-Marquette Cement
Employees in Mexico have collective bargaining agreements on a
plant-by-plant basis, which are renewable on an annual basis with respect to
salaries and on a biannual basis with respect to benefits. Approximately one
fourth of our employees in the United States are represented by unions, with the
largest number being members of the International Brotherhood of Boilermakers.
With the exception of the non-union facility located in Florida, collective
bargaining agreements are in effect at all our U.S. cement plants and have
various expiration dates ending from 2004 through 2009. Our Spanish union
employees have contracts that are renewable every two to three years on a
company-by-company basis. Each of our subsidiary companies operating CEMEX
Venezuela's plants has its own union, and each company has separately negotiated
three-year labor contracts with the union employees of the relevant plants.
Except during January and February, when the political situation in Venezuela
deteriorated and the operations of most companies in Venezuela were suspended,
the labor situation in Venezuela in 2003 remained normal. A single union
represents the union employees of all of CEMEX Colombia's plants and negotiates
labor contracts on their behalf. Our Panamanian union employees have one labor
contract that is renewable every four years. Our Philippine union employees are
represented by four unions and have collective bargaining agreements that have a
term of five years, which are typically renegotiated in the third and fifth
years of the term. Our Egyptian union employees are represented by one union.
Assiut has adopted new internal regulations that govern the labor union
arrangements. We consider labor relations with our employees to be satisfactory,
but we have experienced minor disruptions of our operations in a few plants in
Mexico and internationally as a result of labor disagreements from time to time.
Approximately 1,800 former union employees in Egypt filed individual lawsuits
against Assiut, claiming unfair employment practices relating to the
implementation of an employee early retirement program. A
99
total of 660 of these lawsuits have already been dismissed by the court, and we
do not consider the amount sought by the remaining plaintiffs to be material to
our operations.
Share Ownership
As of March 19, 2004, our senior management and directors and their
immediate families owned, collectively, approximately 5.76% of our outstanding
shares, including shares underlying CPOs. This percentage does not include
shares held by the extended families of members of our senior management and
directors, since to the best of our knowledge, no voting arrangements or other
agreements exist with respect to those shares. No individual director or member
of our senior management beneficially owned one percent or more of any class of
our outstanding capital stock.
100
Item 7 - Major Shareholders and Related Party Transactions
-------------------------------------------------
Major Shareholders
Based upon information contained in a statement on Schedule 13G filed
with the SEC on February 17, 2004, as of December 31, 2003, Brandes Investment
Partners, LLC, an investment adviser registered under the Investment Advisers
Act of 1940, as amended, beneficially owned 27,247,403 ADSs, representing
136,237,015 CPOs or approximately 7.7% of our outstanding capital stock.
Brandes Investment Partners, LLC does not have different voting rights than our
other shareholders.
Other than Brandes Investment Partners, LLC, the CPO trust and the
shares and CPOs owned by our subsidiaries, we are not aware of any person that
is the beneficial owner of five percent or more of any class of our voting
securities.
As of March 31, 2004, our outstanding capital stock consisted of
3,548,893,516 Series A shares and 1,774,446,758 Series B shares, in each case
including shares held by our subsidiaries.
As of March 31, 2004, a total of 3,423,890,668 Series A shares and
1,711,945,334 Series B shares were held by the CPO trust. Each CPO represents
two Series A shares and one Series B share. A portion of the CPOs is
represented by ADSs. Under the terms of the CPO trust agreement, non-Mexican
holders of CPOs and ADSs have no voting rights with respect to the A shares
underlying those CPOs and ADSs. All ADSs are deemed to be held by non-Mexican
nationals. At every shareholders' meeting, the A shares held in the CPO trust
are voted in accordance with the vote cast by holders of the majority of A
shares held by Mexican nationals and B shares voted at that meeting of
shareholders.
As of March 31, 2004, through our subsidiaries, we owned approximately
153 million CPOs, representing approximately 8.9% of our outstanding CPOs and
8.6% of our outstanding voting stock An additional 197 million CPOs,
representing approximately 11.5% of our outstanding CPOs and 11.1% of our
outstanding voting stock, were held subject to equity derivative and other
transactions. These CPOs are voted at the direction of our management. From
time to time, our subsidiaries are active participants in the trading market
for our capital stock; as a result, the levels of our CPO and share ownership
by those subsidiaries are likely to fluctuate. Our voting rights over those
CPOs are the same as those of any other CPO holder.
Our by-laws, or estatutos sociales, provide that our board of directors
must authorize in advance any transfer of voting shares of our capital stock
that would result in any person, or group acting in concert, becoming a holder
of 2% or more of our voting shares.
In addition, as of March 31, 2004, through our subsidiaries, we owned
approximately 2 million appreciation warrants, representing approximately 15.3%
of our outstanding appreciation warrants. If the average price of our CPOs
reaches specified levels on or prior to December 21, 2004, the appreciation
warrants will be redeemed for CPOs or ADSs at specified appreciation values. See
Item 5 -- "Operating and Financial Review and Prospects -- Liquidity and Capital
Resources -- Our Equity Derivative Financing Transactions" for a description of
the appreciation warrants.
Mexican securities authority regulations provide that our
majority-owned subsidiaries may neither directly or indirectly invest in our
CPOs nor other securities representing our capital stock. The Mexican
securities authority could require any disposition of the CPOs or of other
securities representing our capital stock so owned and/or impose fines on us if
it were to determine that the ownership of our CPOs or of other securities
representing our capital stock by our subsidiaries, in most cases, negatively
affects the interests of our shareholders. Notwithstanding the foregoing, the
exercise of all rights pertaining to our CPOs or to other securities
representing our capital stock in accordance with the instructions of our
subsidiaries does not violate any provisions of our bylaws or the bylaws of our
subsidiaries. The holders of these CPOs or of other securities representing our
capital stock are entitled to exercise the same rights relating to their CPOs
or their other securities representing our capital stock, including all voting
rights, as any other holder of the same series.
101
As of March 31, 2004, we had 263 ADS holders of record in the United
States, holding approximately 55.8% of our outstanding CPOs and 12 ADW holders
of record in the United States, holding approximately 39.4% of our outstanding
appreciation warrants. Since a substantial number of ADSs and ADWs are held in
nominee form, including the nominee of the Depository Trust Company, the number
of beneficial owners of our ADSs and ADWs is substantially greater than the
number of record holders of these securities.
Related Party Transactions
Mr. Bernardo Quintana Isaac, a member of our board of directors, is
chief executive officer and chairman of the board of directors of Grupo ICA,
S.A. de C.V., or Grupo ICA, a large Mexican construction company. In the
ordinary course of business, we extend financing to Grupo ICA for varying
amounts at market rates, as we do for our other customers.
In the past, we have extended loans of varying amounts and interest
rates to our directors and executives. During 2003, the largest aggregate
amount of loans we had outstanding to our directors and members of senior
management was Ps13,138,985. As of March 9, 2004, the amount outstanding was
Ps585,467, with an average interest rate of 1.1% per annum. See "Compensation
of Our Directors and Members of Our Senior Management - Voluntary Employee
Stock Option Plan (VESOP)."
102
Item 8 - Financial Information
---------------------
Consolidated Financial Statements and Other Financial Information
See Item 18-- "Financial Statements" and "Index to Consolidated
Financial Statements."
Legal Proceedings
See Item 4 -- "Information on the Company -- Regulatory Matters and
Legal Proceedings."
Dividends
A declaration of any dividend by CEMEX is made by our shareholders at
a general ordinary meeting. Any dividend declaration is usually based upon the
recommendation of our board of directors. However, the shareholders are not
obligated to approve the board's recommendation. We may only pay dividends from
retained earnings included in financial statements that have been approved by
our shareholders and after all losses have been paid for, a legal reserve equal
to 5% of our paid-in capital has been created and our shareholders have
approved the relevant dividend payment. According to 1999 Mexican tax reforms,
all shareholders, excluding Mexican corporations, that receive a dividend in
cash or in any other form are subject to a withholding tax. See Item 10 --
"Additional Information -- Taxation -- Mexican Tax Considerations." Since we
conduct our operations through our subsidiaries, we have no significant assets
of our own except for our investments in those subsidiaries. Consequently, our
ability to pay dividends to our shareholders is dependent upon our ability to
receive funds from our subsidiaries in the form of dividends, management fees,
or otherwise. Some of our credit agreements and debt instruments and some of
those of our subsidiaries contain provisions restricting our ability, and that
of our subsidiaries, as the case may be, to pay dividends if financial
covenants are not maintained. As of December 31, 2003, we and our subsidiaries
were in compliance with, or had obtained waivers in connection with, those
covenants. See Item 3 -- "Key Information -- Risk Factors -- We have incurred
and will continue to incur debt, which could have an adverse effect on the
price of our CPOs, ADSs, appreciation warrants and ADWs" and "-- Our use of
equity derivative financing may have adverse effects on the market for our
securities and our subsidiaries' securities and may adversely affect our
ability to achieve operating efficiencies as a combined group."
Although our board of directors currently intends to continue to
recommend an annual dividend on the common stock, the recommendation whether to
pay and the amount of those dividends will continue to be based upon, among
other things, earnings, cash flow, capital requirements and our financial
condition and other relevant factors.
Owners of ADSs on the applicable record date will be entitled to
receive any dividends payable in respect of the A shares and the B shares
underlying the CPOs represented by those ADSs. The ADS depositary will fix a
record date for the holders of ADSs in respect of each dividend distribution.
Unless otherwise stated, the ADS depositary has agreed to convert cash
dividends received by it in respect of the A shares and the B shares underlying
the CPOs represented by ADSs from Pesos into Dollars and, after deduction or
after payment of expenses of the ADS depositary, to pay those dividends to
holders of ADSs in Dollars. We cannot assure holders of our ADSs that the ADS
depositary will be able to convert dividends received in Pesos into Dollars.
103
The following table sets forth the amounts of annual cash dividends
paid in Pesos, on a per share basis, and a convenience translation of those
amounts into Dollars based on the CEMEX accounting rate as of December 31,
2003.
Dividends Per Share
----------------------------
Constant Pesos Dollars
-------------- -------
1999...................................... 0.54 0.05
2000...................................... 0.62 0.06
2001...................................... 0.72 0.06
2002...................................... 0.77 0.07
2003...................................... 0.80 0.07
Dividends declared at each year's annual shareholders' meeting are in
respect of dividends for the preceding year. In recent years, our board of
directors has proposed, and our shareholders have approved, dividend proposals,
whereby our shareholders have had a choice between stock dividends or cash
dividends declared in respect of the prior year's results, with the stock
issuable to shareholders who elect the stock dividend over the cash dividend
being issued at a 20% discount from then current market prices. The dividends
declared per share or per CPO in recent years, expressed in constant Pesos as
of December 31, 2003, were as follows: 1999, Ps.54 per share (or Ps1.62 per
CPO); 2000, Ps1.83 per CPO (or Ps0.62 per share); 2001, Ps2.17 per CPO (or
Ps0.72per share); 2002, Ps2.31 per CPO (or Ps0.77 per share); and 2003, Ps2.40
per CPO (or Ps0.80 per share). As a result of dividend elections made by
shareholders, in 1999, Ps318 million in cash was paid and 142 million
additional shares were issued in respect of dividends declared for the 1998
fiscal year; in 2000, Ps312 million in cash was paid and 59 million additional
CPOs were issued in respect of dividends declared for the 1999 fiscal year; in
2001, Ps93 million in cash was paid and 70 million additional CPOs were issued
in respect of dividends declared for the 2000 fiscal year; and in 2002, Ps257
million in cash was paid and 64 million additional CPOs were issued in respect
of dividends declared for the 2001 fiscal year; and in 2003, Ps66.8 million in
cash was paid and 99 million additional CPOs were issued in respect of
dividends declared for the 2002 fiscal year.
At our 2003 annual shareholders' meeting, which was held on April 29,
2004, our shareholders approved a dividend of Ps2.35 per CPO (Ps0.78 per share)
for the 2003 fiscal year. Shareholders will be entitled to receive the dividend
in either stock or cash consistent with our past practices. In order to have
sufficient shares to issue to those shareholders who choose to receive the
dividend in stock, our shareholders approved an increase in the variable part of
our capital stock through the capitalization of retained earnings in an amount
up to Ps4,169,029,880, through the issuance of up to 400 million series A shares
and 200 million series B shares, to be represented by new CPOs. Our shareholders
delegated to our board of directors the determination of the final amount of the
capital increase, which will be determined once the final number of CPOs
required to be issued in connection with the dividend is established and will be
based on the then current market price of our CPO on the Mexican Stock Exchange,
minus the 20% discount at which those CPOs will be issued.
Significant Changes
No significant change has occurred since the date of our consolidated
financial statements included in this annual report.
104
Item 9 - Offer and Listing
-----------------
Market Price Information
Our CPOs and appreciation warrants are listed on the Mexican Stock
Exchange. Our CPOs trade under the symbol "CEMEX.CPO," and our appreciation
warrants trade under the symbol "CMX412E-DC062." As a result of the 1999
exchange offer of CPOs for A shares and B shares, the trading of our A shares
and B shares substantially declined and were last traded on the Mexican Stock
Exchange on December 28, 1999, under the symbols "CEMEX.A" and "CEMEX.B,"
respectively. On September 28, 2001, the A shares and B shares were delisted
from the Mexican Stock Exchange due to the lack of trading volume. Our ADSs,
each of which represents five CPOs, and our ADWs, each of which represents five
appreciation warrants, are listed on the NYSE. Our ADSs trade under the symbol
"CX" and our ADWs trade under the symbol "CX.WSB." Following our November 2001
exchange offer of new appreciation warrants and new ADWs for our old
appreciation warrants and old ADWs, the trading of our old appreciation
warrants and old ADWs substantially declined and formally ceased upon their
expiration on December 13, 2002. The following table sets forth, for the
periods indicated, the reported highest and lowest market quotations in nominal
Pesos for CPOs, old appreciation warrants and new appreciation warrants on the
Mexican Stock Exchange and the high and low sales prices in Dollars for ADSs,
old ADWs and new ADWs on the NYSE.
Old New
Calendar appreciation appreciation
Period A Shares(1) B Shares(1) CPOs(1) ADSs(2) warrants(3) Old ADWs(4) warrants(5) New ADWs(6)
Yearly High Low High Low High Low High Low High Low High Low High Low High Low
Ps Ps Ps Ps Ps Ps U.S.$ U.S.$ Ps Ps U.S.$ U.S.$
1999....... 16.60 5.97 16.77 6.63 53.10 17.90 28.13 19.25 8.26 5.00 4.13 2.56 -- -- -- --
2000....... -- -- -- -- 53.80 32.50 28.75 17.19 8.50 2.00 4.75 1.00 -- -- -- --
2001....... -- -- -- -- 51.65 34.50 28.30 17.63 4.85 2.00 2.85 1.00 -- -- -- --
Ps Ps U.S.$ U.S.$
2002....... -- -- -- -- 61.82 39.10 33.00 19.25 6.00 3.00 3.88 0.01 8.50 3.00 4.60 1.22
2003....... -- -- -- -- 59.50 35.65 26.64 16.31 -- -- -- -- 7.00 2.50 3.20 0.95
Quarterly
2002
First
quarter... -- -- -- -- 55.01 43.90 30.37 24.00 6.00 3.00 2.50 1.00 7.60 3.80 4.40 2.35
Second
quarter... -- -- -- -- 61.82 51.50 33.00 25.70 5.00 5.00 3.88 2.52 8.50 6.50 4.60 3.30
Third
quarter... -- -- -- -- 53.80 40.25 27.27 19.71 4.60 4.50 2.60 0.20 6.50 3.00 3.30 1.35
Fourth
quarter... -- -- -- -- 48.64 39.10 24.07 19.25 0.25 0.01 4.20 3.00 2.05 1.22
2003
First
quarter... -- -- -- -- 48.66 35.65 23.35 16.31 -- -- -- -- 4.00 2.50 1.80 0.95
Second
quarter... -- -- -- -- 48.58 37.62 23.10 17.44 -- -- -- -- 3.80 2.50 1.65 1.00
Third
quarter... -- -- -- -- 57.70 46.20 26.12 22.46 -- -- -- -- 5.30 3.10 2.25 1.35
Fourth
quarter... -- -- -- -- 59.50 51.49 26.64 23.02 -- -- -- -- 7.00 4.90 3.20 2.05
Monthly
2003-2004
October... -- -- -- -- 56.60 51.49 25.72 23.02 -- -- -- -- 6.00 4.90 2.30 2.20
November.. -- -- -- -- 58.00 52.21 25.75 24.02 -- -- -- -- 6.98 5.10 2.70 2.05
December.. -- -- -- -- 59.50 54.52 26.64 24.20 -- -- -- -- 7.00 6.50 3.20 2.65
January(7) -- -- -- -- 65.00 58.30 29.28 26.20 -- -- -- -- 7.70 6.80 3.50 2.80
February.. -- -- -- -- 65.49 62.00 29.96 28.07 -- -- -- -- 8.50 7.20 3.75 3.20
March..... -- -- -- -- 66.50 60.00 29.82 27.20 -- -- -- -- 9.40 8.52 3.60 2.90
April..... -- -- -- -- 70.50 64.50 31.35 28.45 -- -- -- -- 11.00 9.50 4.10 3.50
______________
Source: Based on data of the Mexican Stock Exchange and the NYSE.
(1) As of December 31, 2003, approximately 96.5% of our outstanding share
capital was represented by CPOs.
(2) The ADSs began trading on the NYSE on September 15, 1999.
(3) The old appreciation warrants began trading on the Mexican Stock Exchange
on December 13, 1999 and expired on December 13, 2002.
(4) The old ADWs began trading on the NYSE on December 13, 1999 and expired on
December 13, 2002.
(5) The new appreciation warrants began trading on the Mexican Stock Exchange
on December 24, 2001.
(6) The new ADWs were initially listed for trading on the NYSE on December 24,
2001, but were not actually traded until January 4, 2002.
(7) In January 2004, we purchased 90,018,042 appreciation warrants (including
appreciation warrants represented by ADWs) through a modified "Dutch
Auction" cash tender offer we launched in November 2003, which allowed
holders to tender their appreciation warrants and ADWs at a price in Pesos
not greater than Ps8.10 per appreciation warrant (Ps40.50 per ADW) nor less
than Ps5.10 per appreciation warrant (Ps25.50 per ADW), as specified by
them. Pursuant to the terms of the offer, which expired on January 26,
2004, we purchased such appreciation warrants and ADWs on a pro rata basis
(except for odd lot tenders, which were purchased on a priority basis) at a
final purchase price of Ps8.10 per appreciation warrant (Ps40.50 per ADW).
All appreciation warrants and ADWs not accepted because of proration were
promptly returned. Following the completion of the offer, approximately
11,668,132 new appreciation warrants (including appreciation warrants
represented by ADWs), which expire on December 21, 2004, were held by
persons other than CEMEX and its subsidiaries.
On April 30, 2004, the last reported closing price for CPOs on the
Mexican Stock Exchange was Ps66.84 per CPO and the last reported closing price
for ADSs on the NYSE was U.S.$29.45 per ADS. On April 30, 2004, the last
reported closing price for appreciation warrants on the Mexican Stock Exchange
was Ps11.00 per appreciation warrant and the last reported closing price for
ADWs on the NYSE was U.S.$3.75 per ADW.
105
Item 10 - Additional Information
----------------------
Articles of Association and By-laws
General
Pursuant to the requirements of Mexican corporation law, our articles
of association and by-laws, or estatutos sociales, have been registered with
the Mercantile Section of the Public Register of Property and Commerce in
Monterrey, Mexico, under the entry number 21 since June 11, 1920. We are a
holding company engaged, through our operating subsidiaries, primarily in the
production, distribution, marketing and sale of cement, ready-mix concrete and
clinker. Our objectives and purposes can be found in article 2 of our by-laws.
We are a global cement manufacturer, with operations in North, Central and
South America, Europe, the Caribbean, Asia and Africa. We plan to continue
focusing on the production and sale of cement and ready-mix concrete, as we
believe that this strategic focus has enabled us to grow our existing
businesses and to expand our operations internationally.
We have two series of common stock, the series A common stock, with no
par value, or A shares, which can only be owned by Mexican nationals, and the
series B common stock, with no par value, or the B shares, which can be owned
by both Mexican and non-Mexican nationals. Our by-laws state that the A shares
may not be held by non-Mexican persons, groups, units or associations that are
foreign or have participation by foreign governments or their agencies. Our
by-laws also state that the A shares shall at all times account for a minimum
of 64% of our total outstanding voting stock. Other than as described herein,
holders of the A shares and the B shares have the same rights and obligations.
In 1994, we changed from a fixed capital corporation to a variable
capital corporation in accordance with Mexican corporation law and effected a
three-for-one split of all our outstanding capital stock. As a result, we
changed our corporate name from CEMEX, S.A. to CEMEX, S.A. de C.V., established
a fixed capital account and a variable capital account and issued one share of
variable capital stock of the same series for each eight shares of fixed
capital stock held by any shareholder, after giving effect to the stock split.
Each of our fixed and variable capital accounts are comprised of A
shares and B shares. Under Mexican law and our by-laws, any holder of shares
representing variable capital is entitled to have those shares redeemed at that
holder's option for a price equal to the lower of:
o 95% of the market value of those shares based on the weighted
average trading price of our CPOs on the Mexican Stock Exchange
during the latest period of 30 trading days preceding the date
on which the exercise of the redemption option is effective, for
a period not to exceed six months; and
o the book value of those shares at the end of the fiscal year
immediately prior to the effective date of the redemption option
exercise by that shareholder as set forth in our annual
financial statements approved at the ordinary meeting of
shareholders.
If the period used in calculating the quoted share price as described
above consists of less than 30 trading days, the number of days when shares
were actually traded will be used. If shares have not been traded during this
period, the redemption price will be the book value of those shares as
described above. If a shareholder exercises its redemption option during the
first three quarters of a fiscal year, that exercise is effective at the end of
that fiscal year, but if a shareholder exercises its redemption option during
the fourth quarter, that exercise is effective at the end of the next
succeeding fiscal year. The redemption price is payable as of the day following
the annual ordinary meeting of shareholders at which the relevant annual
financial statements were approved.
Shareholder authorization is required to increase or decrease either
the fixed capital account or the variable capital account. Shareholder
authorization to increase or decrease the fixed capital account must be
obtained at an extraordinary meeting of shareholders. Shareholder authorization
to increase or decrease the variable capital account must be obtained at an
ordinary general meeting of shareholders.
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On September 15, 1999, we effected a further stock split. For every
one of our shares of any series we issued two series A shares and one series B
share. Concurrently with this stock split, we also consummated an exchange
offer to exchange new CPOs and new ADSs representing the new CPOs for our then
existing A shares, B shares and ADSs and converted our then existing CPOs into
the new CPOs. As of December 31, 2003, approximately 96.5% of our outstanding
share capital was represented by CPOs, a portion of which is represented by
ADSs.
As of December 31, 2003, our capital stock consisted of 5,921,739,375
issued shares. As of December 31, 2003, series A shares represented 66.6% of
our capital stock, or 3,947,826,250 shares, of which 3,547,614,432 shares were
subscribed and paid, 287,097,712 shares were treasury shares and 113,114,106
shares were issued pursuant to our employee stock option plans and subscribed
to by Banamex as trustee thereunder, but had not yet been paid. These shares
have been and will continue to be gradually paid upon exercise of the
corresponding stock options. As of December 31, 2003, series B shares
represented 33.4% of our capital stock, or 1,973,913,125 shares, of which
1,773,807,216 shares were subscribed and paid, 143,548,856 shares were treasury
shares and 56,557,053 shares were issued pursuant to our employee stock option
plans and subscribed to by Banamex as trustee thereunder, but had not yet been
paid. These shares have been and will continue to be gradually paid upon
exercise of the corresponding stock options. Of the total of our A shares and B
shares outstanding as of December 31, 2003, 3,267,000,000 shares corresponded
to the fixed portion of our capital stock and 2,654,739,375 shares corresponded
to the variable portion of our capital stock.
At the 2003 annual shareholders' meeting held on April 29, 2004, in
connection with their approval of a dividend for the 2003 fiscal year, our
shareholders approved an increase in the variable part of our capital stock
through the capitalization of retained earnings in an amount up to
Ps4,169,029,880, through the issuance of up to 400 million series A shares and
200 million series B shares, to be represented by new CPOs. The final amount
of the capital increase will be determined by our board of directors once the
final number of CPOs required to be issued in connection with the dividend is
established and will be based on the then current market price of our CPO on
the Mexican Stock Exchange, minus the 20% discount at which those CPOs will be
issued. See Item 8 - "Financial Information - Dividends" above. In addition,
at the 2003 annual shareholders' meeting, our shareholders approved the
cancellation of our 287,097,712 series A treasury shares and 143,548,856
series B treasury shares outstanding as of December 31, 2003, as described in
the preceding paragraph.
As of June 1, 2001, the Mexican securities law (Ley de Mercado de
Valores) was amended to increase the protection granted to minority
shareholders of Mexican listed companies and to commence bringing corporate
governance procedures of Mexican listed companies in line with international
standards.
On February 6, 2002, the Mexican securities authority (Comision
Nacional Bancaria y de Valores) issued an official communication numbered
DGA-13813138, authorizing the amendment of our by-laws to incorporate
additional provisions to comply with the new provisions of the Mexican
securities law. Following approval from our shareholders at our 2002 annual
shareholders meeting, we amended and restated our by-laws to incorporate these
additional provisions, which consist of, among other things, protective
measures to prevent share acquisitions, hostile takeovers, and direct or
indirect changes of control. As a result of the amendment and restatement of
our by-laws, the expiration of our corporate term of existence was extended
from 2019 to 2100.
On March 19, 2003, the Mexican securities authority issued new
regulations designed to (i) further implement minority rights granted to
shareholders by the Mexican securities law and (ii) simplify and comprise in a
single document provisions relating to securities offerings and periodic
reports by Mexican listed companies.
On April 24, 2003, our shareholders approved changes to our by-laws,
incorporating additional provisions and removing some restrictions. The changes
were as follows:
o The restriction that prohibits our subsidiaries from acquiring
shares in companies that own our shares was amended to remove a
condition that our subsidiaries have knowledge of such
ownership.
o The limitation on our variable capital was removed. Formerly,
our variable capital was limited to ten times our minimum fixed
capital, which is currently set at Ps36.3 million.
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o Increases and decreases in our variable capital now require the
notarization of the minutes of the ordinary general
shareholders' meeting that authorize such increase or decrease,
as well as the filing of these minutes with the Mexican National
Securities Registry (Registro Nacional de Valores), except when
such increase or decrease results from (i) shareholders
exercising their redemption rights or (ii) stock repurchases.
o Amendments were made to the calculation of the redemption price
for our variable capital shares, which is described above.
o Approval by the board of directors is now required for
transactions by us or any of our subsidiaries involving: (i)
transactions not in the ordinary course of business with third
parties related to us or to any of our subsidiaries, (ii)
purchases or sales of assets having a value equal to or
exceeding 10% or more of our total consolidated assets, (iii)
the granting of security interests in an amount exceeding 30% of
our total consolidated assets, and (iv) any other transaction
that exceeds 1% of our total consolidated assets.
o The cancellation of registration of our shares in the Securities
Section of the Mexican National Securities Registry now involves
an amended procedure, which is described below under "Repurchase
Obligation." In addition, any amendments to the article
containing these provisions no longer require the consent of the
Mexican securities authority and 95% approval by shareholders
entitled to vote.
Changes in Capital Stock and Preemptive Rights
Our by-laws allow for a decrease or increase in our capital stock if
it is approved by our shareholders at a shareholders' meeting. Additional
shares of our capital stock, having no voting rights or limited voting rights,
are authorized by our by-laws and may be issued upon the approval of our
shareholders at a shareholders' meeting, with the prior approval of the Mexican
securities authority.
Our by-laws provide that shareholders have preemptive rights in
proportion to the number of shares of our capital stock they hold, before any
increase in the number of outstanding A shares, B shares, or any other existing
series of shares, as the case may be, except in the case of shares previously
acquired by us or if the shareholders waive their preemptive rights, in the
context of a public offer, as set forth in the Mexican Securities law.
Preemptive rights give shareholders the right, upon any issuance of shares by
us, to purchase a sufficient number of shares to maintain their existing
ownership percentages. Preemptive rights must be exercised within the period
and under the conditions established for that purpose by the shareholders, and
our by-laws and applicable law provide that this period must be 15 days
following the publication of the notice of the capital increase in the
Periodico Oficial del Estado. With the prior approval of the Mexican securities
authority, an extraordinary shareholders' meeting may approve the issuance of
our stock in connection with a public offering, without the application of the
preemptive rights described above. At that meeting, holders of our stock must
waive preemptive rights by the affirmative vote of 50% of the capital stock,
and the resolution duly adopted in this manner will be effective for all
shareholders. If holders of at least 25% of our capital stock vote against the
resolution, the issuance without the application of preemptive rights may not
be effected. The Mexican securities authority may only approve the issuance if
we maintain policies that protect the rights of minority shareholders. Any
shareholder voting against the relevant resolution will have the right to have
its shares placed in the public offering together with our shares and at the
same market price.
Pursuant to our by-laws, significant acquisitions of shares of our
capital stock and changes of control of CEMEX require prior approval from our
board of directors. Our board of directors must authorize in advance any
transfer of voting shares of our capital stock that would result in any person
or group becoming a holder of 2% of more of our shares. If our board of
directors denies that authorization, it must designate an alternative buyer for
those shares, at a price equal to the price quoted on the Mexican Stock
Exchange. Any acquisition of shares of our capital stock representing 20% or
more of our capital stock by a person or group of persons requires prior
approval from our board of directors and, in the event approval is granted, the
acquiror has an obligation to make a public offer to purchase all of the
outstanding shares of that class of capital stock being purchased. In the event
the requirements described above for significant acquisitions of shares of our
capital stock are not met, the persons acquiring such shares will not be
entitled to any corporate rights with respect to such shares, such shares will
not be
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taken into account for purposes of determining a quorum for shareholder meetings
and we will not record such persons as holders of such shares in our shareholder
ledger.
Our by-laws require the stock certificates representing shares of our
capital stock to make reference to the provisions in our by-laws relating to the
prior approval of the board of directors for significant share transfers and the
requirements for recording share transfers in our shareholder ledger. In
addition, shareholders are responsible for informing us whenever their
shareholdings exceed 5%, 10%, 15% and 20% of the outstanding shares of a
particular class of our capital stock. We are required to maintain a shareholder
ledger that records the names, nationality and domicile of all significant
shareholders, and any shareholder that meets or exceeds these thresholds must be
recorded in this ledger if such shareholder is to be recognized or represented
at any shareholders' meeting. If a shareholder fails to inform us of its
shareholdings reaching a threshold as described above, we will not record the
transactions that cause such threshold to be met or exceeded in our shareholder
ledger, and such transaction will have no legal effect and will not be binding
on us.
Repurchase Obligation
In accordance with Mexican securities authority regulations, our
majority shareholders are obligated to make a public offer for the purchase of
stock to the minority shareholders if the listing of our stock with the Mexican
Stock Exchange is canceled, either by resolution of CEMEX or by an order of the
Mexican securities authority. The price at which the stock must be purchased by
the majority shareholders is the higher of:
o the weighted average price per share based on the weighted
average trading price of our CPOs on the Mexican Stock Exchange
during the latest period of 30 trading days preceding the date
of the offer, for a period not to exceed six months; or
o the book value per share, as reflected in the last quarterly
report filed with the Mexican securities authority and the
Mexican Stock Exchange.
Five business days prior to the commencement of the offering, our
board of directors must make a determination with respect to the fairness of
the offer, taking into account the interests of the minority shareholders and
disclose its opinion, which must refer to the justifications of the offer
price; if the board of directors is precluded from making such determination as
a result of a conflict of interest, the resolution of the board of directors
must be based upon a fairness opinion issued by an expert selected by the audit
committee in which emphasis must be placed on minority rights.
Following the expiration of this offer, if the majority shareholders
do not acquire 100% of the paid-in share capital, such shareholders must place
in a trust set up for that purpose for a six-month period an amount equal to
that required to repurchase the remaining shares held by investors who did not
participate in the offer. The majority shareholders are not obligated to make
the repurchase if shareholders representing 95% of our share capital waive that
right, and the amount offered for the shares is less than 300,000 UDIs
(Unidades de Inversion), which are investment units in Mexico that reflect
inflation variations. If these conditions are met, we must create a trust as
described above and provide electronic notice to the Mexican Stock Exchange.
For purposes of these provisions, majority shareholders are shareholders that
own a majority of our shares, have voting power sufficient to control decisions
at general shareholder meetings, or that may elect a majority of our board of
directors.
Shareholders' Meetings and Voting Rights
Shareholders' meetings may be called by:
o our board of directors or statutory auditors;
o shareholders representing at least 10% of the then outstanding
shares of our capital stock by requesting our board of directors
or the statutory auditors to call a meeting;
o any shareholder if no meeting has been held for two consecutive
years or when the matters referred to in Article 181 of the
General Law of Commercial Companies (Ley General de Sociedades
Mercantiles) have not been dealt with; or
109
o a Mexican court in the event our board of directors or the
statutory auditors do not comply with the valid request of the
shareholders indicated above.
Notice of shareholders' meetings must be published in the official
gazette for the State of Nuevo Leon, Mexico or any major newspaper published and
distributed in the City of Monterrey, Nuevo Leon, Mexico. The notice must be
published at least 15 days prior to the date of any shareholders' meeting.
Consistent with Mexican law, our by-laws further require that all information
and documents relating to the shareholders meeting be available to shareholders
from the date the notice of the meeting is published.
General shareholders' meetings can be ordinary or extraordinary. At
every general shareholders' meeting, each holder of A shares and B shares is
entitled to one vote per share. Shareholders may vote by proxy duly appointed
in writing. Under the CPO trust agreement, holders of CPOs who are not Mexican
nationals cannot exercise voting rights corresponding to the A shares
represented by their CPOs.
An annual general ordinary shareholders' meeting must be held during
the first four months after the end of each of our fiscal years to consider the
approval of a report of our board of directors regarding our performance and
our financial statements for the preceding fiscal year and to determine the
allocation of the profits for the preceding year. At the annual general
shareholders' meeting, any shareholder or group of shareholders representing
10% or more of our outstanding voting stock has the right to appoint one
regular and one alternate director in addition to the directors elected by the
majority and the right to appoint a statutory auditor. The alternate director
appointed by the minority holders may only substitute for the director
appointed by that minority.
A general extraordinary shareholders' meeting may be called at any
time to deal with any of the matters specified by Article 182 of the General
Law of Commercial Companies, which include, among other things:
o extending our corporate existence;
o our early dissolution;
o increasing or reducing our fixed capital stock;
o changing our corporate purpose;
o changing our country of incorporation;
o changing our form of organization;
o a proposed merger;
o issuing preferred shares;
o redeeming our own shares;
o any amendment to our by-laws; and
o any other matter for which a special quorum is required by law
or by our by-laws.
The above-mentioned matters may only be dealt with at extraordinary
shareholders' meetings.
In order to vote at a meeting of shareholders, shareholders must
appear on the list that Indeval, the Mexican securities depositary, and the
Indeval participants holding shares on behalf of the shareholders, prepare
prior to the meeting or must deposit prior to that meeting the certificates
representing their shares at our offices or in a Mexican credit institution or
brokerage house, or foreign bank approved by our board of directors to serve
this function. The certificate of deposit with respect to the share
certificates must be presented to our company secretary at least 48 hours
before a meeting of shareholders. Our company secretary verifies that the
person in whose favor any certificate of deposit was issued is named in our
share registry and issues an admission pass authorizing that person's
attendance at the meeting of shareholders.
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Our by-laws provide that a shareholder may only be represented by
proxy in a shareholders' meeting with a duly completed form provided by us
authorizing the proxy's presence. In addition, our by-laws require that the
secretary acting at the shareholders' meeting publicly affirm the compliance by
all proxies with this requirement.
A shareholders' resolution is required to take action on any matter
presented at a shareholders' meeting. At an ordinary meeting of shareholders,
the affirmative vote of the holders of a majority of the shares present at the
meeting is required to adopt a shareholders' resolution. At an extraordinary
meeting of shareholders, the affirmative vote of at least 50% of the capital
stock is required to adopt a shareholders' resolution, except that when
amending Article 22 of our by-laws (which specifies the list of persons who are
not eligible to be appointed as a director or a statutory auditor) the
affirmative vote of at least 75% of the voting stock is needed. Our by-laws
also require the approval of 75% of the voting shares of our capital stock to
amend provisions in our by-laws relating to the prior approval of the board of
directors for share transfers and the requirements for recording share
transfers in our corporate ledger.
The quorum for a first ordinary meeting of shareholders is 50% of our
outstanding and fully paid shares, and for the second ordinary meeting of
shareholders is any number of our outstanding and fully paid shares. The quorum
for the first extraordinary shareholders meeting is 75% of our outstanding and
fully paid shares, and for the second extraordinary shareholders meeting the
quorum is 50% of our outstanding and fully paid shares.
Rights of Minority Shareholders
Our by-laws provide that holders of at least 10% of our capital stock
are entitled to demand the postponement of the voting on any resolution of
which they deem they have not been adequately informed.
Under Mexican law, holders of at least 20% of our outstanding capital
stock entitled to vote on a particular matter may seek to have any shareholder
action with respect to that matter set aside, by filing a complaint with a
court of law within 15 days after the close of the meeting at which that action
was taken and showing that the challenged action violates Mexican law or our
by-laws. Relief under these provisions is only available to holders who were
entitled to vote on, or whose rights as shareholders were adversely affected
by, the challenged shareholder action and whose shares were not represented
when the action was taken or, if represented, voted against it.
Under Mexican law, an action for civil liabilities against directors
may be initiated by a shareholders' resolution. In the event shareholders
decide to bring an action of this type, the persons against whom that action is
brought will immediately cease to be directors. Additionally, shareholders
representing not less than 15% of the outstanding shares may directly exercise
that action against the directors; provided that:
o those shareholders shall not have voted against exercising such
action at the relevant shareholders' meeting; and
o the claim covers all of the damage alleged to have been caused
to CEMEX and not merely the damage suffered by the plaintiffs.
Any recovery of damage with respect to these actions will be for the
benefit of CEMEX and not that of the shareholders bringing the action.
Registration and Transfer
Our common stock is evidenced by share certificates in registered form
with registered dividend coupons attached. Our shareholders may hold their
shares in the form of physical certificates or through institutions that have
accounts with Indeval. Accounts may be maintained at Indeval by brokers, banks
and other entities approved by the Mexican securities authority. We maintain a
stock registry, and, in accordance with Mexican law, only those holders listed
in the stock registry and those holding certificates issued by Indeval and by
Indeval participants indicating ownership are recognized as our shareholders.
111
Redemption
Our capital stock is subject to redemption upon approval of our
shareholders at an extraordinary shareholders' meeting.
Share Repurchases
If our shareholders decide at a general shareholders' meeting that we
should do so, we may purchase our outstanding shares for cancellation. We may
also repurchase our equity securities on the Mexican Stock Exchange at the then
prevailing market prices in accordance with the Mexican securities law. If we
intend to repurchase shares representing more than 1% of our outstanding shares
at a single trading session, we must inform the public of such intention at
least ten minutes before submitting our bid. If we intend to repurchase shares
representing 3% or more of our outstanding shares during a period of twenty
trading days, we would be required to conduct a public tender offer for such
shares. We must conduct share repurchases through the person or persons
approved by our board of directors, through a single broker dealer during the
relevant trading session without submitting bids during the first and the last
30 minutes of each trading session and we must inform the Mexican Stock
Exchange of the results of any share repurchase no later than the business day
following any such share repurchase.
Directors' and Shareholders' Conflict of Interest
Under Mexican law, any shareholder that has a conflict of interest
with CEMEX with respect to any transaction is obligated to disclose such
conflict and is prohibited from voting on that transaction. A shareholder who
violates this prohibition may be liable for damages if the relevant transaction
would not have been approved without that shareholder's vote.
Under Mexican law, any director who has a conflict of interest with
CEMEX in any transaction must disclose that fact to the other directors and is
prohibited from voting on that transaction. Any director who violates this
prohibition will be liable for damages. Additionally, our directors and
statutory auditors may not represent shareholders in the shareholders'
meetings.
Withdrawal Rights
Whenever our shareholders approve a change of corporate purpose,
change of nationality or transformation from one form of corporate organization
to another, Mexican law provides that any shareholder entitled to vote on that
change that has voted against it may withdraw from CEMEX and receive the amount
calculated as specified by Mexican law attributable to its shares, provided
that it exercises that right within 15 days following the adjournment of the
meeting at which the change was approved. For further details on the
calculation of the withdrawal right, see "- General."
Dividends
At the annual ordinary general meeting of shareholders, our board of
directors submits our financial statements together with a report on them by
our board of directors and the statutory auditors, to our shareholders for
approval. The holders of our shares, once they have approved the financial
statements, determine the allocation of our net income, after provision for
income taxes, legal reserve and statutory employee profit sharing payments, for
the preceding year. All shares of our capital stock outstanding and fully paid
at the time a dividend or other distribution is declared are entitled to share
equally in that dividend or other distribution.
Liquidation Rights
In the event we are liquidated, the surplus assets remaining after
payment of all our creditors will be divided among our shareholders in
proportion to the respective shares held by them. The liquidator may, with the
approval of our shareholders, distribute the surplus assets in kind among our
shareholders, sell the surplus assets and divide the proceeds among our
shareholders or put the surplus assets to any other uses agreed to by a
majority of our shareholders voting at an extraordinary shareholders' meeting.
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Material Contracts
On March 30, 2004, CEMEX Espana, with Sandworth Plaza Holding B.V.,
Cemex Caracas Investments B.V., Cemex Caracas II Investments B.V., Cemex Manila
Investments B.V. and Cemex Egyptian Investments, B.V., as guarantors, entered
into a Term and Revolving Facilities Agreement with Banco Bilbao Vizcaya
Argentaria, S.A. and Societe Generale, as mandated lead arrangers, relating to
three credit facilities with an aggregate amount of (euro)250,000,000 and
(Y)19,308,000,000. The first facility is a five-year multi-currency term loan
facility with a variable interest rate; the second facility is a 364-day
multi-currency revolving credit facility; and the third facility is a five-year
Yen-denominated term loan facility with a fixed interest rate. The proceeds of
these facilities will be used to prepay CEMEX Espana's outstanding revolving
credit facility and for general corporate purposes.
On October 15, 2003, New Sunward Holding B.V. entered into a U.S.$1.15
billion multi-tranche Term Loan Agreement. The indebtedness incurred under the
agreement is guaranteed by CEMEX, S.A. de C.V., CEMEX Mexico, S.A. de C.V. and
Empresas Tolteca de Mexico, S.A. de C.V and is composed of three different
tranches. The first tranche is a two-year Euro denominated loan in the amount
of (euro)256,365,000. The second tranche is a three-year Dollar denominated
loan in the amount of U.S.$550,000,000. The third tranche is a three-year Yen
denominated loan in the amount of (Y)32,688,000,000. The terms of the second
and third tranches can be extended for an additional period of six months,
subject to certain conditions. The proceeds were used to repurchase U.S.$650
million of preferred equity and to refinance other outstanding debt.
On June 23, 2003, CEMEX Espana Finance LLC, as issuer, CEMEX Espana,
Sandworth Plaza Holding B.V., Cemex Caracas Investments B.V., Cemex Caracas II
Investments B.V., Cemex Manila Investments B.V. and Cemex Egyptian Investments
B.V., as guarantors, and several institutional purchasers, entered into a Note
Purchase Agreement in connection with a private placement by CEMEX Espana
Finance, LLC. CEMEX Espana Finance, LLC issued to the institutional purchasers
U.S.$103,000,000 aggregate principal amount of 4.77% Senior Notes due 2010,
U.S.$96,000,000 aggregate principal amount of 5.36% Senior Notes due 2013 and
U.S.$201,000,000 aggregate principal amount of 5.51% Senior Notes due 2015. The
proceeds of the private placement were used to repay debt.
On August 8, 2003, in connection with an increase in the amount
available under our U.S. commercial paper program from U.S.$275 million to
U.S.$400 million, we entered into a First Amended and Restated Reimbursement
and Credit Agreement and a related Depositary Agreement with several lenders.
Under the First Amended and Restated Reimbursement and Credit Agreement, the
issuing bank agreed to issue an irrevocable direct-pay letter of credit in the
amount of U.S.$400 million to provide credit support for the commercial paper
program, and the lenders committed to make loans to us in the event of certain
market disruptions of up to the same amount. In addition, under the First
Amended and Restated Reimbursement and Credit Agreement we obtained a U.S.$200
million standby letter of credit facility for the issuance of standby letters
of credit in support of certain of our and any of our subsidiaries'
obligations, including in support of contingent liabilities arising in
connection with forward sale contracts, leases, insurance contracts and
arrangements, service contracts, equipment contracts, financing transactions
and other payment obligations. The total amount available under the U.S.
commercial paper program, the letters of credit and any loans under the First
Amended and Restated Reimbursement and Credit Agreement cannot exceed U.S.$400
million. CEMEX Mexico and Empresas Tolteca de Mexico, two of our Mexican
subsidiaries, are guarantors of our obligations under the First Amended and
Restated Reimbursement and Credit Agreement.
On July 11, 2002, we entered into an Agreement and Plan of Merger with
Puerto Rican Cement Company, Inc., or PRCC, pursuant to which we acquired,
through a tender offer and subsequent merger, 100% of the outstanding shares of
PRCC. The aggregate value of the transaction was approximately U.S.$180.2
million, not including the amount of net debt assumed of approximately
U.S.$100.8 million.
On October 29, 2001, CEMEX Espana signed a three-year revolving credit
facility arranged by Banco Bilbao Vizcaya Argentaria, S.A., Salomon Brothers
International Limited, and Deutsche Bank AG as mandated lead arrangers. The
facility amounts to (euro)800 million. The proceeds of the facility must be
used for general corporate purposes. As of December 31, 2003, the total
commitment under this credit facility was reduced by CEMEX Espana to (euro)500
million, and during February 2004 it was further reduced to (euro)300 million.
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On March 15, 2001, CEMEX, Inc., as issuer, CEMEX Espana, as parent
guarantor and Sandworth Plaza Holding B.V., Cemex Caracas Investments B.V.,
Cemex Caribe Investments B.V., Cemex Manila Investments B.V., Valcem
International B.V., as subsidiary guarantors, and several institutional
purchasers, entered into a Note and Guarantee Agreement in connection with the
private placement and issuance by CEMEX, Inc. of U.S.$315,000,000 aggregate
principal amount of Series A 7.66% Guaranteed Senior Notes due 2006,
(euro)50,000,000 aggregate principal amount of Series B 6.89% Guaranteed Senior
Notes due 2006 and U.S.$396,000,000 aggregate principal amount of Series C
7.91% Guaranteed Senior Notes due 2008 to the institutional purchasers. The
proceeds of the private placement were used to repay debt.
Exchange Controls
See Item 3-- "Key Information-- Mexican Peso Exchange Rates."
Taxation
Mexican Tax Considerations
General
The following is a summary of certain Mexican federal income tax
considerations relating to the ownership and disposition of our CPOs or ADSs,
and the ownership and disposition, mandatory redemption and maturity of the
appreciation warrants or ADWs.
This summary is based on Mexican income tax law that is in effect on
the date of this annual report, which is subject to change. This summary is
limited to non-residents of Mexico, as defined below, who own our CPOs, ADSs,
appreciation warrants or ADWs. This summary does not address all aspects of
Mexican income tax law. Holders are urged to consult their tax counsel as to
the tax consequences that the purchase, ownership, disposition, mandatory
redemption or redemption at maturity of the appreciation warrants or the ADWs,
or the purchase, ownership and disposition of our CPOs or ADSs, may have.
For purposes of Mexican taxation, an individual is a resident of
Mexico if he or she has established his or her home in Mexico. If the
individual also has a home in another country, he or she will be considered a
resident of Mexico if his or her center of vital interests is in Mexico. Under
Mexican law, an individual's center of vital interests is in Mexico if:
1. more than the 50% of the individual's total income in the relevant
year comes from Mexican sources; or
2. the individual's main center of professional activities is in
Mexico.
A legal entity is a resident of Mexico if it is organized under the
laws of Mexico or if it maintains the principal administration of its business
or the effective location of its management in Mexico. Under Mexican law, a
legal entity maintains the principal administration of its business in Mexico
if:
1. the meetings of shareholders or of the board of directors are held
in Mexico;
2. the individuals responsible for day-to-day decisions, control,
direction or management of the legal entity are residents in Mexico for tax
purposes or have their offices in Mexico;
3. the legal entity's management or control is carried out through an
office in Mexico, or
4. the accounting records are in Mexico.
A Mexican citizen is presumed to be a resident of Mexico for tax
purposes unless such person or entity can demonstrate otherwise. If a legal
entity or an individual is deemed to have a permanent establishment in Mexico
114
for tax purposes, such individual or entity shall be required to pay taxes in
Mexico on income attributable to such permanent establishment, in accordance
with relevant tax provisions.
Individuals or legal entities that cease to be residents of Mexico
must notify the tax authorities within 15 business days before their change of
residency.
A non-resident of Mexico is a legal entity or individual that does not
satisfy the requirements to be considered a resident of Mexico for Mexican
federal income tax purposes. The term U.S. Shareholder shall have the same
meaning ascribed below under the section "-- U.S. Federal Income Tax
Considerations."
Taxation of Dividends
Dividends, either in cash or in any other form, paid to non-residents
of Mexico with respect to A shares or B shares represented by the CPOs (or in
the case of holders who hold CPOs represented by ADSs), will not be subject to
withholding tax in Mexico.
Disposition of CPOs or ADSs
Gains on the sale or disposition of ADSs by a holder who is a
non-resident of Mexico will not be subject to Mexican taxation.
Gains on the sale or disposition of CPOs by a holder who is a
non-resident of Mexico generally will be exempt from Mexican taxation, provided
that such sale or disposition is executed on the Mexican Stock Exchange.
This exemption is not applicable to protected or registered
transactions, even though The Comision Nacional Banacaria y de Valores, the
Mexican National Banking and Securities Commission, views these protected or
registered transactions as if they were executed on the Mexican Stock Exchange.
Additionally, the exemption is not applicable to the sale or disposition of
CPOs through a public offer, where the offerees are not allowed to accept more
competitive offers to those received before or within the public offer, and
would be subject to a penalty were they to accept such offers.
If the exemption is not applicable, the non-resident of Mexico will be
subject to a 5% withholding tax on the gross proceeds. As an alternative to the
5% withholding tax on the gross proceeds, the non-resident of Mexico may elect
a 20% withholding tax on the gain upon the sale or disposition of the CPOs,
provided that the applicable rules and regulations promulgated under Mexican
law are followed.
Notwithstanding the above, under the Convention Between the United
States and Mexico for Avoidance of Double Taxation and Prevention of Fiscal
Evasion with Respect to Income Taxes, and a Protocol thereto, the U.S.-Mexico
Income Tax Treaty, a U.S. Shareholder who owns less than 25% of our stock and
is otherwise eligible for benefits under such tax treaty will not be subject to
Mexican tax on any gain derived from the disposition of ADSs or CPOs. In the
case of non-residents of Mexico, other than U.S. Shareholders, gains derived
from the disposition of ADSs or CPOs may also be exempt, in whole or in part,
from Mexican taxation under a treaty to which Mexico is a party.
Deposits of CPOs in exchange for ADSs and withdrawals of CPOs in
exchange for ADSs will not give rise to any Mexican tax or transfer duties.
Commissions paid in brokerage transactions for the sale of CPOs on the
Mexican Stock Exchange are subject to a value-added tax of 15%.
Estate and Gift Taxes
There are no Mexican inheritance, gift, succession or value-added
taxes applicable to the ownership, transfer, exchange or disposition of ADSs or
CPOs by holders that are non-residents of Mexico, although gratuitous transfers
of CPOs may, in some circumstances, cause a Mexican federal tax to be imposed
upon a recipient (who is a
115
Mexican resident). There are no Mexican stamp, issue, registration or
similar taxes or duties payable by holders of ADSs or CPOs.
Disposition of appreciation warrants or ADWs
Because the appreciation warrants have been registered for trading on
the Mexican Stock Exchange, gains on the sale or other disposition of
appreciation warrants by non-residents of Mexico will, under the Mexican Income
Tax Law, generally be subject to a 25% withholding tax on the gross sale price.
Alternative to the 25% withholding tax, the seller, resident of a qualifying
country, including, among others, the United States, who appoints a
representative in Mexico for income tax purposes related to the sale may elect
to pay Mexican federal income tax at a rate of 34% of the gain on the sale,
provided that certain conditions are met.
A foreign holder residing in a country with which Mexico has entered
into a treaty for the avoidance of double taxation may not be subject to
Mexican withholding taxes if such foreign holder provides evidence he is
subjest to tax in his own country.
We urge you to consult your tax advisor to determine the particular
tax consequences in your case.
Gains on the sale or disposition of ADWs by a holder who is a
non-resident of Mexico will not be subject to Mexican tax.
Mandatory redemption, maturity and purchase of appreciation warrants or ADWs
The Mexican tax consequences applicable to the disposition of
appreciation warrants or ADWs explained in the previous section, will be also
applicable to the mandatory redemption, maturity and purchase of appreciation
warrants or ADWs.
U.S. Federal Income Tax Considerations
General
The following is a summary of the material U.S. federal income tax
consequences relating to the ownership and disposition of our CPOs and ADSs,
including CPOs or ADSs received upon mandatory redemption or redemption at
maturity of our appreciation warrants or ADWs, and the ownership, disposition,
mandatory redemption, redemption at maturity of and lapse of appreciation
warrants or ADWs.
This summary is based on provisions of the U.S. Internal Revenue Code
of 1986, as amended (the "Code"), U.S. Treasury regulations promulgated under
the Code, and administrative rulings, and judicial interpretations of the Code,
all as in effect on the date of this annual report and all of which are subject
to change, possibly retroactively. This summary is limited to U.S. Shareholders
(as defined below) who hold our ADSs, CPOs, appreciation warrants, or ADWs, as
the case may be, as capital assets. This summary does not discuss all aspects
of U.S. federal income taxation which may be important to an investor in light
of its individual circumstances, for example, an investor subject to special
tax rules (e.g., banks, thrifts, real estate investment trusts, regulated
investment companies, insurance companies, dealers in securities or currencies,
expatriates, tax-exempt investors, or holders whose functional currency is not
the Dollar or U.S. Shareholders who hold a CPO or an ADS, or appreciation
warrants or an ADW as a position in a "straddle," as part of a "synthetic
security" or "hedge," as part of a "conversion transaction" or other integrated
investment, or as other than a capital asset). In addition, this summary does
not address any aspect of state, local or foreign taxation.
For purposes of this summary, a "U.S. Shareholder" means a beneficial
owner of CPOs, ADSs, appreciation warrants, or ADWs who is for U.S. Federal
income tax purposes:
o an individual who is a citizen or resident of the United States
for U.S. Federal income tax purposes;
116
o a corporation, or other entity taxable as a corporation that is
created or organized in the United States or under the laws of
the United States or any state thereof (including the District
of Columbia);
o an estate the income of which is includible in gross income for
U.S. Federal income tax purposes regardless of its source; or
o a trust if a court within the United States is able to exercise
primary supervision over the administration of such trust and
one or more United States persons have the authority to control
all substantial decisions of such trust.
If a partnership (including any entity treated as a partnership for
U.S. Federal income tax purposes) is the beneficial owner of CPOs, ADSs,
appreciation warrants, or ADWs, the U.S. Federal income tax treatment of a
partner in such partnership will generally depend upon the status of the
partner and the activities of the partnership.
Ownership of CPOs or ADSs in general
In general, for U.S. Federal income tax purposes, U.S. Shareholders
who own ADSs will be treated as the beneficial owners of the CPOs represented
by those ADSs, and each CPO will represent a beneficial interest in two A
shares and one B share.
Taxation of dividends with respect to CPOs and ADSs
Distributions of cash or property with respect to the A shares or B
shares represented by CPOs, including CPOs represented by ADSs, generally will
be includible in the gross income of a U.S. Shareholder as foreign source
dividend income on the date the distributions are received by the CPO trustee
or successor thereof, to the extent paid out of our current or accumulated
earnings and profits, as determined under U.S. Federal income tax principles.
These dividends will not be eligible for the dividends-received deduction
allowed to corporate U.S. Shareholders. To the extent, if any, that the amount
of any distribution by us exceeds our current and accumulated earnings and
profits as determined under U.S. Federal income tax principles, it will be
treated first as a tax-free return of the U.S. Shareholder's adjusted tax basis
in the CPOs or ADSs and thereafter as capital gain.
Dividends paid in Pesos, including the amount of Mexican withholding
tax thereon, will be includible in the income of a U.S. Shareholder in a Dollar
amount calculated by reference to the exchange rate in effect the day the Pesos
are received by the CPO trustee or successor thereof whether or not they are
converted into Dollars on that day. Generally, any gain or loss resulting from
currency exchange fluctuations during the period from the date the dividend
payment is includible in income to the date such payment is converted into U.S.
Dollars will be treated as ordinary income or loss. Such gain or loss will
generally be income from sources within the United States for foreign tax
credit limitation purposes.
A U.S. Shareholder may elect to deduct in computing its taxable income
or, subject to specific complex limitations on foreign tax credits generally,
credit against its U.S. Federal income tax liability, Mexican withholding tax
at the rate applicable to such shareholder. For purposes of calculating the
U.S. foreign tax credit, dividends paid by us generally will constitute foreign
source "passive income," or in the case of some U.S. Shareholders, "financial
services income." U.S. Shareholders should consult their tax advisors regarding
the availability of, and limitations on, any such foreign tax credit.
Taxation of capital gains on disposition of CPOs or ADSs
The sale or exchange of CPOs or ADSs will result in the recognition of
gain or loss by a U.S. Shareholder for U.S. Federal income tax purposes in an
amount equal to the difference between the amount realized and the U.S.
Shareholder's tax basis therein. That gain or loss recognized by a U.S.
Shareholder will be long-term capital gain or loss if the U.S. Shareholder's
holding period for the CPOs or ADSs exceeds one year at the time of disposition.
Gain from the sale or exchange of the CPOs or ADSs usually will be treated as
U.S. source for foreign tax credit purposes; losses will generally be allocated
against U.S. source income. Deposits and withdrawals of CPOs by U.S.
117
Shareholders in exchange for ADSs will not result in the realization of gain or
loss for U.S. Federal income tax purposes.
Ownership, disposition, mandatory redemption and maturity of appreciation
warrants or ADWs
In general, for U.S. Federal income tax purposes, a U.S. Shareholder
will be treated as the beneficial owner of the appreciation warrants
represented by the ADWs.
A U.S. Shareholder generally will recognize gain or loss on the sale
or exchange of appreciation warrants or ADWs measured by the difference between
the amount realized and the tax basis of the appreciation warrants or ADWs, as
applicable. Any gain or loss generally will be capital gain or loss and will be
long-term capital gain or loss if the U.S. Shareholder's holding period of the
appreciation warrants or ADWs exceeds one year at the time of the sale or
exchange.
A U.S. Shareholder generally should not recognize taxable income on
receipt of CPOs or ADSs upon the mandatory redemption or maturity of the
appreciation warrants or ADWs, except to the extent cash is received in lieu of
a fractional CPO or ADS. Such U.S. Shareholder's tax basis in the CPOs or ADSs
so acquired should be equal to the tax basis of the appreciation warrants or
ADWs redeemed, as applicable, less the portion of such tax basis, if any,
allocable to any fractional CPO or ADS for which cash is received. The holding
period of the CPOs and ADSs so acquired generally should include the holding
period of the appreciation warrants or ADWs redeemed therefor. The use of the
word "should" in this paragraph is intended to convey that the likelihood that
the receipt of CPOs or ADWs will be tax-free to participating U.S. Shareholders
is stronger than "more likely than not" but less than the degree of certainty
typically associated with a "will" opinion.
There can be no assurance that the U.S. Internal Revenue Service, or
IRS, will not take, and a court would not sustain the IRS in taking, the
position that the receipt of CPOs or ADSs upon a mandatory redemption or
maturity of appreciation warrants or ADWs results in the recognition of taxable
gain or loss. If a U.S. Shareholder is required to recognize gain or loss upon
a mandatory redemption or maturity of the appreciation warrants or ADWs, the
determination of the amount of gain or loss is uncertain, and such U.S.
Shareholder should consult its tax advisor for such determination.
A U.S. Shareholder who receives cash, including cash in lieu of
acquiring a fractional CPO or ADS upon the mandatory redemption or maturity of
the appreciation warrants or ADWs, generally will recognize gain or loss in an
amount equal to the difference between the amount of cash received and the U.S.
Shareholder's allocable tax basis in the fractional interest for which cash was
received. Any gain or loss generally will be capital gain or loss and will be
long-term if the U.S. Shareholder's holding period of the appreciation warrants
or ADWs exceeds one year at the time of the receipt of cash.
If the U.S. Shareholder's appreciation warrants or ADWs have not been
previously redeemed and expire on the maturity date without payment, the U.S.
Shareholder will recognize a loss equal to the amount of the basis of the
appreciation warrants or ADWs, as applicable. Such expiration will be deemed a
sale or exchange as of the maturity date and the loss, if any, will be
considered a loss from the sale or exchange of property which has the same
character as would the CPOs or ADSs if acquired by the U.S. Shareholder. Any
loss upon the expiration of the appreciation warrants or ADWs will be long-term
if the U.S. Shareholder's holding period of the appreciation warrants or ADWs
exceeds one year at the time of expiration.
Adjustments to the Strike Price
Certain adjustments to the strike price of the appreciation warrants
or ADWs may result in a deemed distribution taxable to U.S. Shareholders of
appreciation warrants or ADWs pursuant to Section 305 of the Code if the
Adjustments have the effect of increasing the U.S. Shareholder's proportionate
interest in the earnings and profits or assets of CEMEX. U.S. Shareholders
should consult their tax advisors with respect to the potential application of
Section 305 of the Code.
118
Recent Tax Legislation
The Jobs and Growth Tax Relief Reconciliation Act of 2003, or the Act,
which was enacted on May 28, 2003, reduced the maximum rate of tax imposed on
certain dividends received by U.S. Shareholders that are individuals to 15
percent (5 percent for individuals in the lower tax brackets and 0 percent for
these taxpayers in 2008), or the Reduced Rate. The Reduced Rate applies to
dividends received after December 31, 2002 and before January 1, 2009. In order
for dividends paid by a foreign corporation to be eligible for the Reduced
Rate, the foreign corporation must be a "qualified foreign corporation" within
the meaning of the Act. We believe that we are a "qualified foreign
corporation" within the meaning of the Act because we are eligible for the
benefits of the comprehensive income tax treaty between Mexico and the United
States which the IRS has determined is satisfactory for purposes of the Reduced
Rate and which includes an exchange of information program. There can be no
assurance, however, that we will continue to be considered a "qualified foreign
corporation" and that our dividends will continue to be eligible for the
Reduced Rate.
The Act also reduced the top individual tax rate on adjusted net
capital gains for sales and exchanges of capital assets on or after May 6, 2003
and before January 1, 2009 from 20 percent (10 percent for individuals in the
lower tax brackets) to 15 percent (5 percent for individuals in the lower tax
brackets and 0 percent for these taxpayers in 2008).
United States Backup Withholding and Information Reporting
A U.S. Shareholder may, under certain circumstances, be subject to
information reporting with respect to some payments to that U.S. Shareholder
such as dividends or the proceeds of a sale or other disposition of the CPOs,
appreciation warrants, ADSs or ADWs. Backup withholding also may apply to
amounts paid to such holder unless such holder (i) is a corporation or comes
within certain exempt categories, and demonstrates this fact when so required,
or (ii) provides a correct taxpayer identification number and otherwise
complies with applicable requirements of the backup withholding rules. Any
amount withheld under these rules will be creditable against the U.S.
Shareholder's Federal income tax liability.
Documents on Display
We are subject to the informational requirements of the Securities
Exchange Act of 1934 and, in accordance with these requirements, file reports
and information statements and other information with the Securities and
Exchange Commission. These reports and information statements and other
information filed by us with the Securities and Exchange Commission can be
inspected and copied at the Public Reference Section of the Securities and
Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
119
Item 11 - Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
See Item 5 -- "Operating and Financial Review and Prospects --
Derivatives and Other Hedging Instruments."
Item 12 - Description of Securities Other than Equity Securities
------------------------------------------------------
Not applicable.
120
PART II
Item 13 - Defaults, Dividend Arrearages and Delinquencies
-----------------------------------------------
None.
Item 14 - Material Modifications to the Rights of Security Holders and
Use of Proceeds
-----------------------------------------------------------
None.
Item 15 - Controls and Procedures
-----------------------
CEMEX, S.A. de C.V.
-------------------
Disclosure Controls and Procedures. The Chief Executive Officer and
Executive Vice President of Planning and Finance of CEMEX, S.A. de C.V.
("CEMEX") have evaluated the effectiveness of CEMEX's disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of
December 31, 2003. Based on such evaluation, such officers have concluded that
CEMEX's disclosure controls and procedures are effective in alerting them on a
timely basis to material information relating to CEMEX (including its
consolidated subsidiaries) required to be included in CEMEX's reports filed or
submitted under the Exchange Act.
CEMEX Mexico, S.A. de C.V.
--------------------------
Disclosure Controls and Procedures. The Chief Executive Officer and
Executive Vice President of Planning and Finance of CEMEX Mexico, S.A. de C.V.
("CEMEX Mexico") have evaluated the effectiveness of CEMEX Mexico's disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of December 31, 2003. Based on such
evaluation, such officers have concluded that CEMEX Mexico's disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to CEMEX Mexico (including its consolidated
subsidiaries) required to be included in CEMEX Mexico's reports filed or
submitted under the Exchange Act.
Empresas Tolteca de Mexico, S.A. de C.V.
----------------------------------------
Disclosure Controls and Procedures. The Chief Executive Officer and
Executive Vice President of Planning and Finance of Empresas Tolteca de Mexico,
S.A. de C.V. ("Empresas Tolteca") have evaluated the effectiveness of Empresas
Tolteca's disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2003. Based
on such evaluation, such officers have concluded that Empresas Tolteca's
disclosure controls and procedures are effective in alerting them on a timely
basis to material information relating to Empresas Tolteca (including its
consolidated subsidiaries) required to be included in Empresas Tolteca's
reports filed or submitted under the Exchange Act.
Item 16A - Audit Committee Financial Expert
--------------------------------
Our board of directors has determined that it has an "audit committee
financial expert" (as defined in Item 16A of Form 20-F) serving on its audit
committee. Mr. Jose Manuel Rincon Gallardo meets the requisite qualifications.
Item 16B - Code of Ethics
--------------
We have adopted a written code of ethics that applies to all of our
employees, including our principal executive officer, principal financial
officer and principal accounting officer.
121
You may request a copy of our code of ethics, at no cost, by writing
to or telephoning us as follows:
CEMEX, S.A. de C.V.
Av. Ricardo Margain Zozaya #325
Colonia del Valle Campestre
Garza Garcia, Nuevo Leon, Mexico 66265.
Attn: Luis Hernandez or Daniel Azcona
Telephone: (011-5281) 8888-8888
Item 16C - Principal Accountant Fees and Services
--------------------------------------
Audit Fees: KPMG Cardenas Dosal, S.C. in Mexico and KPMG firms
worldwide charged us approximately Ps45.6 million in fiscal year 2003 in
connection with the professional services rendered for the audit of our annual
financial statements and services normally provided by them relating to
statutory and regulatory filings or engagements. In fiscal year 2002, KPMG
Cardenas Dosal, S.C. in Mexico and KPMG firms worldwide billed us approximately
Ps52.0 million for these services.
Audit-Related Fees: KPMG Cardenas Dosal, S.C. in Mexico and KPMG firms
worldwide billed us approximately Ps5.8 million in fiscal year 2003 for
assurance and related services reasonably related to the performance of our
audit. In fiscal year 2002, KPMG Cardenas Dosal, S.C. in Mexico and KPMG firms
worldwide charged us approximately Ps16.0 million for audit-related services.
These fees relate maimly to technical accounting support and guidance provided
by KPMG in connection with the implementation of newly issued accounting
standards.
Tax Fees: KPMG Cardenas Dosal, S.C. in Mexico and KPMG firms worldwide
charged us approximately Ps29.8 million in fiscal year 2003 for tax compliance,
tax advice and tax planning. KPMG Cardenas Dosal, S.C. in Mexico and KPMG firms
worldwide billed us approximately Ps73.6 million for tax-related services in
fiscal year 2002.
All Other Fees: KPMG Cardenas Dosal, S.C. in Mexico and KPMG firms
worldwide billed us Ps6.7 million in fiscal year 2003 for products and services
other than those comprising audit fees, audit-related fees and tax fees. In
fiscal year 2002, KPMG Cardenas Dosal, S.C. in Mexico and KPMG firms worldwide
charged us Ps11.6 million for products and services in this category. These
fees relate mainly to services provided by KPMG to us with respect to our due
diligence activities around the world.
Audit Committee Pre-approval Policies and Procedures
Our audit committee is responsible, among other things, for the
appointment, compensation and oversight of our external auditors. To assure the
independence of our independent auditors, our audit committee pre-approves
annually a catalog of specific audit and non-audit services in the categories
Audit Services, Audit-Related Services, Tax-Related Services, and Other
Services that may be performed by our auditors, as well as the budgeted fee
levels for each of these categories. All other permitted services must receive
a specific approval from our audit committee. Our external auditor periodically
provides a report to our audit committee in order for our audit committee to
review the services that our external auditor is providing, as well as the
status and cost of those services.
During 2003, none of the services provided to us by our external
auditors were approved by our audit committee pursuant to the de minimis
exception to the pre-approval requirement provided by paragraph (c)(7)(i)(C) of
Rule 2-01 of Regulation S-X.
122
PART III
Item 17 - Financial Statements
--------------------
Not applicable.
Item 18 - Financial Statements
--------------------
See pages F-1 through F-74, incorporated herein by reference.
Item 19 - Exhibits
---------
1.1 Amended and Restated By-laws of CEMEX, S.A. de C.V.(a)
2.1 Form of Trust Agreement between CEMEX, S.A. de C.V., as founder of the
trust, and Banco Nacional de Mexico, S.A. regarding the CPOs(b)
2.2 Amendment Agreement, dated as of November 21, 2002, amending the Trust
Agreement between CEMEX, S.A. de C.V., as founder of the trust, and
Banco Nacional de Mexico, S.A. regarding the CPOs(b)
2.3 Form of CPO Certificate(b)
2.4 Form of Second Amended and Restated Deposit Agreement (A and B share
CPOs), dated as of August 10, 1999, among CEMEX, S.A. de C.V.,
Citibank, N.A. and holders and beneficial owners of American Depositary
Shares(b)
2.5 Form of American Depositary Receipt (included in Exhibit 2.3)
evidencing American Depositary Shares. (b)
2.6 Form of Certificate for shares of Series A Common Stock of CEMEX, S.A.
de C.V. (b)
2.7 Form of Certificate for shares of Series B Common Stock of CEMEX, S.A.
de C.V. (b)
2.8 Form of appreciation warrant deed. (b)
2.9 Form of CPO Purchasing and Disbursing Agreement. (c)
2.10 Form of appreciation warrant certificate. (c)
2.11 Form of Warrant Deposit Agreement among CEMEX, S.A. de C.V., Depositary
and holders and beneficial owners of American Depositary Warrants. (c)
2.12 Form of American Depositary Warrant Receipt (included in Exhibit 2.10).
(c)
4.1 Note and Guarantee Agreement dated as of March 15, 2001, by and among
CEMEX, Inc., as issuer, Valenciana, as parent guarantor and Sandworth
Plaza Holding B.V., Cemex Caracas Investments B.V., Cemex Caribe
Investments B.V., Cemex Manila Investments B.V., Valcem International
B.V., as subsidiary guarantors, and the several purchasers named
therein, in connection with the offering and issuance by CEMEX, Inc. of
U.S.$315,000,000 aggregate principal amount of Series A Guaranteed
Senior Notes due 2006,(euro)50,000,000 aggregate principal amount of
Series B Guaranteed Senior Notes due 2006 and U.S.$396,000,000
aggregate principal amount of Series C Guaranteed Senior Notes due
2008. (d)
4.2 Credit facility dated as of October 29, 2001, by and among Compania
Valenciana de Cementos Portland, S.A., as borrower, Banco Bilbao
Vizcaya Argentaria, S.A., Salomon Brothers International Limited, and
Deutsche Bank AG as mandated lead arrangers and the several banks and
other financial institutions named therein, as lenders, for an
aggregate amount of(euro)800 million. (e)
4.3 Agreement and Plan of Merger, dated as of June 11, 2002, among CEMEX,
S.A. de C.V., Tricem Acquisition, Corp. and the Puerto Rican Cement
Company, Inc. (f)
4.4 ABN AMRO Special Corporate Services B.V. Forward Contract, dated as of
December 13, 2002. (g)
4.5 Citibank, N.A. Forward Contract, dated as of December 13, 2002. (g)
4.6 Credit Suisse First Boston International Forward Contract, dated as of
December 13, 2002. (g)
4.7 Deutsche Bank AG, London Branch, Forward Contract, dated as of December
13, 2002. (g)
4.8 ING Bank, N.V. Forward Contract, dated as of December 13, 2002. (g)
4.9 JPMorgan Chase Bank Forward Contract, dated as of December 13, 2002.
(g)
4.10 Societe Generale Forward Contract, dated as of December 13, 2002. (g)
4.11 Note Purchase Agreement dated June 23, 2003, by and among CEMEX Espana
Finance, LLC, as issuer, CEMEX Espana, Sandworth Plaza Holding B.V.,
Cemex Caracas Investments B.V., Cemex Caracas II Investments B.V.,
Cemex Manila Investments B.V. and Cemex Egyptian Investments B.V., as
guarantors, and several institutional purchasers named therein, in
connection with the issuance by CEMEX Espana Finance, LLC of U.S.$103
million aggregate principal amount of Senior Notes due 2010, U.S.$96
million aggregate principal amount of Senior Notes due 2013, U.S.$201
million aggregate principal amount of Senior Notes due 2015. (h)
123
4.12 First Amended and Restated Reimbursement and Credit Agreement dated as
of August 8, 2003, by and among, CEMEX, S.A. de C.V., as Issuer, CEMEX
Mexico, S.A. de C.V. and Empresas Tolteca de Mexico, S.A. de C.V., as
Guarantors, Barclays Bank PLC, New York Branch, as Issuing Bank,
Documentation Agent and Administrative Agent, the several lenders party
thereto and Barclays Capital, The Investment Banking Division of
Barclays Bank PLC, as Joint Arranger and Banc of America Securities
LLC, as Joint Arranger and Syndication Agent., for an aggregate
principal amount of U.S.$400,000,000. (h)
4.13 $1,150,000,000 Term Loan Agreement, dated October 15, 2003, by and
among New Sunward Holding B.V. as borrower, CEMEX, S.A. de C.V., CEMEX
Mexico, S.A. de C.V. and Empresas Tolteca de Mexico, S.A. de C.V. as
guarantors, and the several lenders named therein. (h)
4.14 Early Termination Amendment to ABN AMRO Special Corporate Services B.V.
Forward Contract, dated as of October 15, 2003. (h)
4.15 Early Termination Amendment to Citibank, N.A. Forward Contract, dated
as of October 15, 2003. (h)
4.16 Early Termination Amendment to Credit Suisse First Boston International
Forward Contract, dated as of October 15, 2003. (h)
4.17 Early Termination Amendment to Deutsche Bank AG, London Branch, Forward
Contract, dated as of October 15, 2003. (h)
4.18 Early Termination Amendment to ING Bank, N.V. Forward Contract, dated
as of October 15, 2003. (h)
4.19 Early Termination Amendment to JPMorgan Chase Bank Forward Contract,
dated as of October 15, 2003.(h)
4.20 Early Termination Amendment to Societe Generale Forward Contract, dated
as of October 15, 2003. (h)
4.21 Term and Revolving Facilities Agreement, dated as of March 30, 2004, by
and among CEMEX Espana, as borrower, Sandworth Plaza Holding B.V.,
Cemex Caracas Investments B.V., Cemex Caracas II Investments B.V.,
Cemex Manila Investments B.V. and Cemex Egyptian Investments, B.V., as
guarantors, Banco Bilbao Vizcaya Argentaria, S.A. and Societe Generale,
as mandated lead arrangers, and the several banks and other financial
institutions named therein, as lenders, for an aggregate amount
of(euro)250,000,000 and (Y)19,308,000,000. (h)
8.1 List of subsidiaries of CEMEX, S.A. de C.V. (h)
12.1 Certification of the Principal Executive Officer of CEMEX, S.A. de C.V.
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (h)
12.2 Certification of the Principal Financial Officer of CEMEX, S.A. de C.V.
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (h)
12.3 Certification of the Principal Executive Officer of CEMEX Mexico, S.A.
de C.V. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (h)
12.4 Certification of the Principal Financial Officer of CEMEX Mexico, S.A.
de C.V. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (h)
12.5 Certification of the Principal Executive Officer of Empresas Tolteca de
Mexico, S.A. de C.V. pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. (h)
12.6 Certification of the Principal Financial Officer of Empresas Tolteca de
Mexico, S.A. de C.V. pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. (h)
13.1 Certification of the Principal Executive and Financial Officers of
CEMEX, S.A. de C.V. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (h)
13.2 Certification of Principal Executive and Financial Officers of CEMEX
Mexico, S.A. de C.V. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (h)
13.3 Certification of Principal Executive and Financial Officers of Empresas
Tolteca de Mexico, S.A. de C.V. pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (h)
14.1 Consent of KPMG Cardenas Dosal, S.C. to the incorporation by reference
into the effective registration statements of CEMEX, S.A. de C.V. under
the Securities Act of 1933 of their report with respect to the
consolidated financial statements of CEMEX, S.A. de C.V., which appears
in this Annual Report on Form 20-F. (h)
_______________
(a) Incorporated by reference to Post-Effective Amendment No. 4 to the
Registration Statement on Form F-3 of CEMEX, S.A. de C.V. (Registration
No. 333-11382), filed with the Securities and Exchange Commission on
August 27, 2003.
(b) Incorporated by reference to the Registration Statement on Form F-4 of
CEMEX, S.A. de C.V. (Registration No. 333-10682), filed with the
Securities and Exchange Commission on August 10, 1999.
(c) Incorporated by reference to Amendment No. 2 to the Registration
Statement on Form F-4 of CEMEX, S.A. de C.V. (Registration No.
333-13956), filed with the Securities and Exchange Commission on November
19, 2001.
124
(d) Incorporated by reference to Amendment No. 1 to the annual report on Form
20-F/A of CEMEX, S.A. de C.V. filed with the Securities and Exchange
Commission on November 19, 2001.
(e) Incorporated by reference to the annual report on Form 20-F of CEMEX,
S.A. de C.V. filed with the Securities and Exchange Commission on April
8, 2002.
(f) Incorporated by reference to the Tender Offer Statement on Schedule TO of
Tricem Acquisition, Corp. and CEMEX, S.A. de C.V. filed with the
Securities and Exchange Commission on July 1, 2002.
(g) Incorporated by reference to the annual report on Form 20-F of CEMEX,
S.A. de C.V. filed with the Securities and Exchange Commission on April
8, 2003.
(h) Filed herewith.
125
SIGNATURES
CEMEX, S.A. de C.V. hereby certifies that it meets all of the
requirements for filing on Form 20-F and that it has duly caused and authorized
the undersigned to sign this annual report on its behalf.
CEMEX, S.A. de C.V.
By: /s/ Lorenzo H. Zambrano
------------------------------
Name: Lorenzo H. Zambrano
Title: Chief Executive Officer
Date: May 11, 2004
SIGNATURES
CEMEX Mexico, S.A. de C.V. hereby certifies that it meets all of the
requirements for filing on Form 20-F and that it has duly caused and authorized
the undersigned to sign this annual report on its behalf.
CEMEX Mexico, S.A. de C.V.
By: /s/ Lorenzo H. Zambrano
------------------------------
Name: Lorenzo H. Zambrano
Title: Chief Executive Officer
Date: May 11, 2004
SIGNATURES
Empresas Tolteca de Mexico, S.A. de C.V. hereby certifies that it meets
all of the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.
Empresas Tolteca de Mexico, S.A. de C.V.
By: /s/ Lorenzo H. Zambrano
---------------------------------
Name: Lorenzo H. Zambrano
Title: Chief Executive Officer
Date: May 11, 2004
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
----
CEMEX, S.A. de C.V. and subsidiaries:
Independent Auditors' Report--KPMG Cardenas Dosal, S.C..................... F-2
Audited consolidated balance sheets as of December 31, 2002 and 2003....... F-3
Audited consolidated statements of income for the years ended December 31,
2001, 2002 and 2003...................................................... F-4
Audited statements of changes in stockholders' equity for the years ended
December 31, 2001, 2002 and 2003......................................... F-5
Audited consolidated statements of changes in financial position for
the years ended December 31, 2001, 2002 and 2003......................... F-6
Notes to the audited consolidated financial statements..................... F-7
SCHEDULES
Independent Auditors' Report on Schedules - KPMG Cardenas Dosal, S.C....... S-1
Schedule I - Parent company financials only................................ S-2
Schedule II - Valuation and qualifying accounts............................ S-11
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CEMEX, S.A. de C.V.:
We have audited the consolidated balance sheets of CEMEX, S.A. de C.V. and
subsidiaries as of December 31, 2002 and 2003, and the related consolidated
statements of income, changes in stockholders' equity and changes in financial
position for each of the years ended December 31, 2001, 2002 and 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America and Mexico. Those standards require
that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatements and that
are prepared in accordance to accounting principles generally accepted in
Mexico. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based upon our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of CEMEX, S.A. de C.V. and subsidiaries at December 31, 2002 and
2003, and the consolidated results of their operations, the changes in their
stockholders' equity and the changes in their financial position for each of
the years ended December 31, 2001, 2002 and 2003, in accordance with
accounting principles generally accepted in Mexico.
Accounting principles generally accepted in Mexico vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Application of accounting principles generally accepted in the United
States of America would have affected results of operations for each of the
years ended December 31, 2001, 2002 and 2003, and stockholders' equity as of
December 31, 2002 and 2003, to the extent summarized in note 23 to the
consolidated financial statements.
KPMG Cardenas Dosal, S.C.
/s/ Leandro Castillo Parada
--------------------------------
Leandro Castillo Parada
Monterrey, N.L., Mexico
January 15, 2004, except for note 23,
which is as of March 31, 2004
F-2
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Balance Sheets
(Millions of constant Mexican pesos as of December 31, 2003)
December 31,
------------------------------
Assets 2002 2003
--------------- --------------
Current Assets
Cash and investments (note 3)................................................. Ps 4,142.0 3,275.1
Trade accounts receivable, less allowance for doubtful accounts (note 4)...... 4,597.4 5,277.6
Other receivables (note 5).................................................... 4,634.2 4,543.4
Inventories (note 6).......................................................... 8,105.5 6,683.1
Other current assets (note 7)................................................. 915.9 749.5
--------------- --------------
Total current assets...................................................... 22,395.0 20,528.7
--------------- --------------
Investments and Noncurrent Receivables (note 8)
Investments in affiliated companies........................................... 6,419.2 6,917.6
Other noncurrent accounts receivable.......................................... 1,715.6 2,069.9
--------------- --------------
Total investments and noncurrent receivables.............................. 8,134.8 8,987.5
--------------- --------------
Properties, Machinery and Equipment (note 9)
Land and buildings ........................................................... 50,479.7 52,071.8
Machinery and equipment ...................................................... 139,512.6 149,380.0
Accumulated depreciation ..................................................... (91,925.6) (99,625.6)
Construction in progress...................................................... 4,730.2 2,317.1
--------------- --------------
Net properties, machinery and equipment................................... 102,796.9 104,143.3
--------------- --------------
Intangible Assets and Deferred Charges (note 10)................................. 49,423.6 46,357.9
--------------- --------------
Total Assets.............................................................. Ps 182,750.3 180,017.4
--------------- --------------
Liabilities and Stockholders' Equity
Current Liabilities
Bank loans (note 11).......................................................... Ps 4,958.3 2,479.4
Notes payable (note 11)....................................................... 3,560.0 2,986.6
Current maturities of long-term debt (note 11) ............................... 7,461.6 9,471.8
Trade accounts payable........................................................ 4,681.1 5,489.4
Other accounts payable and accrued expenses (note 5).......................... 13,218.6 11,374.6
--------------- --------------
Total current liabilities ................................................ 33,879.6 31,801.8
--------------- --------------
Long-Term Debt (note 11)
Bank loans ................................................................... 28,387.2 27,935.3
Notes payable ................................................................ 29,238.0 32,530.5
Current maturities of long-term debt ......................................... (7,461.6) (9,471.8)
--------------- --------------
Total long-term debt ..................................................... 50,163.6 50,994.0
--------------- --------------
Other Noncurrent Liabilities
Pension and other postretirement benefits (note 13)........................... - 625.1
Deferred income taxes (note 17)............................................... 12,504.6 11,841.6
Other noncurrent liabilities (note 12)........................................ 6,481.2 8,703.4
--------------- --------------
Total other noncurrent liabilities ....................................... 18,985.8 21,170.1
--------------- --------------
Total Liabilities......................................................... 103,029.0 103,965.9
--------------- --------------
Stockholders' Equity (note 14)
Majority interest:
Common stock-historical cost basis.......................................... 55.5 59.1
Common stock-accumulated inflation adjustments ............................. 3,435.9 3,436.1
Additional paid-in capital.................................................. 32,093.1 36,219.3
Deficit in equity restatement .............................................. (66,082.6) (69,125.6)
Cumulative initial deferred income tax effects (note 2K).................... (5,741.9) (5,741.9)
Retained earnings .......................................................... 96,153.9 98,157.8
Net income.................................................................. 5,966.9 7,067.4
--------------- --------------
Total majority interest .................................................. 65,880.8 70,072.2
Minority interest (note 14E).................................................. 13,840.5 5,979.3
--------------- --------------
Total stockholders' equity ............................................... 79,721.3 76,051.5
--------------- --------------
Total Liabilities and Stockholders' Equity................................ Ps 182,750.3 180,017.4
--------------- --------------
See accompanying notes to consolidated financial statements.
F-3
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Statements of Income
(Millions of constant Mexican pesos as of December 31, 2003, except for earnings per share)
Years ended December 31,
------------------------------------------
2001 2002 2003
------------- -------------- -------------
Net sales............................................................... Ps 76,572.1 75,042.0 80,527.7
Cost of sales........................................................... (43,070.5) (41,924.5) (46,421.7)
------------- -------------- -------------
Gross profit......................................................... 33,501.6 33,117.5 34,106.0
------------- -------------- -------------
Operating expenses:
Administrative .................................................... (8,735.3) (9,433.7) (8,926.0)
Selling............................................................ (6,480.2) (8,654.9) (8,823.4)
------------- -------------- -------------
Total operating expenses......................................... (15,215.5) (18,088.6) (17,749.4)
------------- -------------- -------------
Operating income..................................................... 18,286.1 15,028.9 16,356.6
------------- -------------- -------------
Comprehensive financing result:
Financial expense.................................................. (4,554.0) (3,813.7) (4,278.5)
Financial income................................................... 450.5 511.6 187.6
Results from valuation and liquidation of financial instruments.... 2,208.9 (3,629.7) (669.6)
Foreign exchange result, net....................................... 1,701.1 (884.2) (1,928.7)
Monetary position result........................................... 3,120.8 4,038.6 3,683.0
------------- -------------- -------------
Net comprehensive financing result............................... 2,927.3 (3,777.4) (3,006.2)
------------- -------------- -------------
------------- -------------- -------------
Other expense, net (notes 9 and 10 ).................................... (4,611.6) (4,464.6) (5,133.8)
------------- -------------- -------------
Income before income taxes, employees' statutory profit sharing and
equity in income of affiliates..................................... 16,601.8 6,786.9 8,216.6
------------- -------------- -------------
Income tax and business assets tax, net (note 17)...................... (1,845.0) (628.9) (1,007.2)
Employees' statutory profit sharing (note 17)........................... (261.2) (118.1) (191.0)
------------- -------------- -------------
Total income tax, business assets tax and employees' statutory profit
sharing........................................................... (2,106.2) (747.0) (1,198.2)
------------- -------------- -------------
Income before equity in income of affiliates ........................... 14,495.6 6,039.9 7,018.4
Equity in income of affiliates ......................................... 226.7 352.1 390.8
------------- -------------- -------------
Consolidated net income.............................................. 14,722.3 6,392.0 7,409.2
Minority interest net income......................................... 1,695.7 425.1 341.8
------------- -------------- -------------
Majority interest net income......................................... Ps 13,026.6 5,966.9 7,067.4
------------- -------------- -------------
Basic earnings per share (see notes 2A and 20)...................... Ps 3.05 1.33 1.49
Diluted earnings per share (see notes 2A and 20)..................... Ps 3.03 1.33 1.46
------------- -------------- -------------
See accompanying notes to consolidated financial statements.
F-4
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
Statements of Changes in Stockholders' Equity
(Millions of constant Mexican pesos as of December 31, 2003)
Cumulative
initial
Additional Deficit in deferred Total Total
Common paid-in equity income tax Retained majority Minority stockholders'
Stock capital restatement effects earnings interest interest equity
----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000.........Ps 3,486.8 25,687.9 (54,007.7) (5,741.9) 90,892.2 60,317.3 27,541.7 87,859.0
Dividends (Ps0.72 pesos per share).... 2.6 3,012.7 - - (3,369.1) (353.8) - (353.8)
Issuance of common stock (note 15A) .. 0.1 115.3 - - - 115.4 - 115.4
Share repurchase program (note 14A) .. (0.2) - - - (245.4) (245.6) - (245.6)
Restatement of investments and
other transactions relating to
minority interest .................. - - - - - - (7,389.1) (7,389.1)
Investment by subsidiaries (note 8) .. - - 66.1 - - 66.1 - 66.1
Comprehensive net income (loss)
(note 14G) ......................... - - (4,612.5) - 13,026.6 8,414.1 1,695.7 10,109.8
-----------------------------------------------------------------------------------------
Balances at December 31, 2001......... 3,489.3 28,815.9 (58,554.1) (5,741.9) 100,304.3 68,313.5 21,848.3 90,161.8
Dividends (Ps0.77 pesos per share) ... 2.3 3,201.5 - - (3,750.1) (546.3) - (546.3)
Issuance of common stock (note 15A) .. 0.1 75.7 - - - 75.8 - 75.8
Share repurchase program (note 14A) .. (0.3) - - - (400.3) (400.6) - (400.6)
Restatement of investments and
other transactions relating to
minority interest .................. - - - - - - (8,432.9) (8,432.9)
Investment by subsidiaries (note 8) .. - - 255.8 - - 255.8 - 255.8
Comprehensive net income (loss)
(note 14G).......................... - - (7,784.3) 5,966.9 (1,817.4) 425.1 (1,392.3)
-----------------------------------------------------------------------------------------
Balances at December 31, 2002......... 3,491.4 32,093.1 (66,082.6) (5,741.9) 102,120.8 65,880.8 13,840.5 79,721.3
Dividends (Ps0.80 pesos per share) ... 3.4 3,696.6 - - (3,963.0) (263.0) - (263.0)
Issuance of common stock (note 15A) .. 0.1 42.9 - - - 43.0 - 43.0
Share repurchase program (note 14A)... 0.3 386.7 - - - 387.0 - 387.0
Restatement of investments and
other transactions relating to
minority interest .................. - - - - - - (8,203.0) (8,203.0)
Investment by subsidiaries (note 8) .. - - (2,719.3) - - (2,719.3) - (2,719.3)
Comprehensive net income (loss)
(note 14G) ......................... - - (323.7) - 7,067.4 6,743.7 341.8 7,085.5
-----------------------------------------------------------------------------------------
Balances at December 31, 2003.........Ps 3,495.2 36,219.3 (69,125.6) (5,741.9) 105,225.2 70,072.2 5,979.3 76,051.5
----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Statements of Changes in Financial Position
(Millions of constant Mexican pesos as of December 31, 2003)
Years ended December 31,
----------------------------------------------
2001 2002 2003
-------------- --------------- ---------------
Operating activities
Majority interest net income .................................... Ps 13,026.6 5,966.9 7,067.4
Charges to operations which did not require resources:
Depreciation of properties, machinery and equipment............ 5,951.7 5,989.3 6,462.7
Amortization of deferred charges and credits, net.............. 2,816.1 2,787.1 2,808.4
Impairment of properties and intangible assets................. - 102.9 1,181.3
Pensions, and other postretirement benefits.................... 348.9 228.1 462.4
Deferred income tax charged to results......................... 235.7 (455.2) (438.3)
Equity in income of affiliates................................. (226.7) (352.1) (390.8)
Minority interest.............................................. 1,695.7 425.1 341.8
------------ --------------- ---------------
Resources provided by operating activities.................. 23,848.0 14,692.1 17,494.9
------------ --------------- ---------------
Changes in working capital, excluding acquisition effects:
Trade accounts receivable, net................................ 846.2 2,458.7 (632.3)
Other accounts receivable and other assets.................... (2,504.8) 1,191.5 254.3
Inventories................................................... 639.6 (363.4) 1,532.8
Trade accounts payable........................................ (1,215.6) 582.9 800.0
Other accounts payable and accrued expenses................... 4,491.3 518.4 (1,846.1)
------------ --------------- ---------------
Net change in working capital............................... 2,256.7 4,388.1 108.7
------------ --------------- ---------------
Net resources provided by operating activities.............. 26,104.7 19,080.2 17,603.6
------------ --------------- ---------------
Financing activities
Proceeds from bank loans (repayments), net....................... (9,502.8) 2,877.7 (3,058.0)
Notes payable, net, excluding foreign exchange effect............ 4,268.8 (341.9) 1,214.2
Investment by subsidiaries....................................... (253.2) (5.0) (22.5)
Dividends paid................................................... (3,369.1) (3,750.1) (3,963.0)
Issuance of common stock from reinvestment of dividends.......... 3,015.3 3,203.8 3,700.0
Issuance of common stock under stock option programs............. 115.4 75.8 43.0
Repurchase of preferred stock by subsidiaries.................... (7,276.1) (4,631.2) (7,343.3)
(Acquisition) disposal of common stock under repurchase program. (245.6) (400.6) 387.0
Other financing activities, net.................................. (2,391.4) 3,383.5 3,523.3
------------ --------------- ---------------
Resources (used in) provided by financing activities....... (15,638.7) 412.0 (5,519.3)
------------ --------------- ---------------
Investing activities
Properties, machinery and equipment, net......................... (5,649.0) (4,862.8) (4,427.0)
Acquisition of subsidiaries and affiliates....................... (2,224.3) (3,022.3) (916.3)
Disposal of assets............................................... 808.9 615.4 157.3
Minority interest................................................ (112.9) (3,270.4) (859.7)
Deferred charges................................................. (4,486.2) (2,130.7) (568.6)
Other investments and monetary foreign currency effect........... 2,396.5 (7,417.3) (6,336.9)
------------ --------------- ---------------
Resources used in investing activities...................... (9,267.0) (20,088.1) (12,951.2)
------------ --------------- ---------------
Increase (decrease) in cash and investments 1,199.0 (595.9) (866.9)
Cash and investments at beginning of year................... 3,538.9 4,737.9 4,142.0
------------ --------------- ---------------
Cash and investments at end of year......................... Ps 4,737.9 4,142.0 3,275.1
------------ --------------- ---------------
See accompanying notes to consolidated financial statements.
F-6
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
1. DESCRIPTION OF BUSINESS
CEMEX, S.A. de C.V. ("CEMEX" or the "Company") is a Mexican holding company
(parent) of entities whose main activities are oriented to the construction
industry, through the production and marketing of cement and ready-mix
concrete.
2. SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION AND DISCLOSURE
The accompanying financial statements have been prepared in accordance with
Generally Accepted Accounting Principles in Mexico ("Mexican GAAP"), which
recognize the effects of inflation on the financial information.
When reference is made to "pesos" or "Ps", it means Mexican pesos. When
reference is made to "dollars" or "U.S.$", it means currency of the United
States of America. Except when specific references are made to "U.S. dollar
millions" and "earnings per share", the amounts in these notes are stated in
millions of constant Mexican pesos as of the balance sheet date.
When reference is made to "CPO" or "CPOs" it means the Ordinary Participation
Certificates of CEMEX. Each CPO represents the participation in two series "A"
shares and one series "B" share of the common stock. References to "ADS" or
"ADSs" refer to American Depositary Shares, listed on the New York Stock
Exchange ("NYSE"). Each ADS represents 5 CPOs.
Certain amounts reported in the consolidated financial statements and the
notes thereto as of December 31, 2001 and 2002 have been reclassified to
conform the 2003 presentation. In addition, partially during 2001, in 2002,
and 2003, the expenses related to the Company's products distribution were
classified as selling expenses in the income statement. During 2001, a portion
of such expenses was recognized as part of cost of sales for an approximate
amount of Ps1,724.3. This reclassification has no effect in operating income,
net income and/or earnings per share for the year ended December 31, 2001, if
the mentioned expenses had been recognized consistently with the 2002 and 2003
classification.
B) PRESENTATION OF COMPARATIVE FINANCIAL STATEMENTS
The restatement factors applied to the financial statements of prior periods
were calculated based upon the weighted average inflation and the fluctuation
in the exchange rate of each country in which the Company operates relative to
the Mexican peso.
2001 to 2002 2002 to 2003
----------------- -----------------
Restatement factor using weighted average inflation.................... 1.0916 1.1049
Restatement factor using Mexican inflation............................. 1.0559 1.0387
----------------- -----------------
Common stock and additional paid-in capital are restated by Mexican inflation.
The weighted average inflation factor is used for all other restatement
adjustments to stockholders' equity.
C) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include those of CEMEX and the
subsidiary companies in which the Company holds more than 50% of their common
stock and/or has control. All significant balances and transactions between
related parties have been eliminated in consolidation.
F-7
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
As of December 31, 2003, the main operating subsidiaries, ordered by holding
company, and the percentage of equity interest directly held by their
immediate holding company, are as follows:
Subsidiary Country % Equity Interest
-------------------------------------------------------------------------------------------------
CEMEX Mexico, S. A. de C.V.........................1 Mexico 100.0
CEMEX Espana, S.A................................2 Spain 99.5
CEMEX Venezuela, S.A.C.A....................... Venezuela 75.7
CEMEX, Inc.....................................3 United States 100.0
CEMEX (Costa Rica), S.A........................4 Costa Rica 98.4
Assiut Cement Company.......................... Egypt 95.8
CEMEX Colombia, S.A. ..........................5 Colombia 98.2
Cemento Bayano, S.A. .......................... Panama 99.2
Cementos Nacionales, S.A....................... Dominican Republic 99.9
Puerto Rican Cement Company, Inc............... Puerto Rico 100.0
CEMEX Asia Holdings Ltd........................6 Singapore 92.3
Solid Cement Corporation.....................7 Philippines 94.6
APO Cement Corporation.......................7 Philippines 92.2
CEMEX (Thailand) Co. Ltd.....................8 Thailand 100.0
-------------------------------------------------------------------------------------------------
1. CEMEX Mexico, S.A. de C.V. ("CEMEX Mexico") holds 100% of the shares of
Empresas Tolteca de Mexico, S.A. de C.V. ("ETM") and Centro Distribuidor
de Cemento, S.A. de C.V. ("Cedice"). Through Cedice, CEMEX Mexico
indirectly holds CEMEX Espana, S.A. and subsidiaries.
2. In June 2002, Compania Valenciana de Cementos Portland, S.A.
("Valenciana") changed its legal name to CEMEX Espana, S.A. ("CEMEX
Espana").
3. CEMEX, Inc. was created as a result the merger between Southdown, Inc.
and CEMEX USA, Inc. (see note 8A).
4. In July 2003, Cementos del Pacifico, S.A. changed its legal name to CEMEX
(Costa Rica), S.A.
5. In August 2002, Cementos Diamante, S.A. changed its legal name to CEMEX
Colombia, S.A. The 98.2% equity interest includes the Company's ownership
of 99.3% of the total ordinary shares.
6. Effective July 2002, as a result of a shares exchange transaction (see
note 8A), for accounting purposes, the Company's equity interest in CEMEX
Asia Holdings Ltd. ("CAH") increased to 92.25%.
7. Represents the Company's equity interest held through CAH. The direct
equity interest of CAH in Solid and APO Cement Corporation is 70% and
99.9%, respectively. On December 23, 2002, Rizal was merged with Solid,
its direct parent, where the surviving corporation was Solid.
8. In July 2002, Saraburi Cement Company Ltd. changed its legal name to
CEMEX (Thailand) Co. Ltd.
D) FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION OF FOREIGN CURRENCY
FINANCIAL STATEMENTS
Transactions denominated in foreign currencies are recorded at the exchange
rates prevalent on the dates of their execution. Monetary assets and
liabilities denominated in foreign currencies are adjusted into pesos at the
exchange rates prevailing at the balance sheet date. The resulting foreign
exchange fluctuations are recognized in earnings, except for the exchange
fluctuations arising from foreign currency indebtedness directly related to
the acquisition of foreign entities and the fluctuations associated with
related parties balances denominated in foreign currency that are of a
long-term investment nature, which are recorded against stockholders' equity,
as part of the foreign currency translation adjustment of foreign
subsidiaries.
The financial statements of foreign subsidiaries are restated for inflation in
their functional currency based on the subsidiary country's inflation rate and
subsequently translated by using the foreign exchange rate at the end of the
reporting period for balance sheet and income statement accounts. The peso to
U.S. dollar exchange rate used by CEMEX is an average of the free market rates
available to settle its foreign currency transactions.
F-8
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
E) CASH AND INVESTMENTS (note 3)
Investments include fixed-income securities with original maturities of three
months or less, as well as marketable securities readily convertible into
cash.
Investments in fixed-income securities are recorded at cost plus accrued
interest. Investments in marketable securities are recorded at market value.
Gains or losses resulting from changes in market values, accrued interest and
the effects of inflation are included in the income statements as part of the
Comprehensive Financing Result.
F) INVENTORIES AND COST OF SALES (note 6)
Inventories are recognized at the lower of replacement cost or market value.
Replacement cost is based upon the latest purchase price or production cost.
Cost of sales reflects replacement cost of inventories at the time of sale,
expressed in constant pesos as of the balance sheet date.
G) INVESTMENTS AND NONCURRENT RECEIVABLES (note 8)
Investments in affiliated companies are accounted for by the equity method,
when the Company holds between 10% and 50% of the issuer's capital stock, and
does not have effective control. Under the equity method, after acquisition,
the investment's original cost is adjusted for the proportional interest of
the holding company in the affiliate's equity and earnings, considering the
effects of inflation.
H) PROPERTIES, MACHINERY AND EQUIPMENT (note 9)
Properties, machinery and equipment are presented at their restated value,
using the inflation index of the assets' origin country and the variation in
the foreign exchange rate between the country of origin currency and the
functional currency. These assets are depreciated using the straight-line
method over their estimated useful lives, which fluctuate from 50 years for
administrative buildings to between 10 to 35 years for industrial buildings,
machinery and equipment. Properties, machinery and equipment are subject to
periodic impairment valuations (see note 2U).
The Comprehensive Financing Results, arising from indebtedness incurred during
the construction or installation period of fixed assets, is capitalized as
part of the carrying value of such assets.
I) INTANGIBLE ASSETS, DEFERRED CHARGES AND AMORTIZATION (note 10)
Effective January 1, 2003, in accordance with new Bulletin C-8, Intangible
Assets, intangible assets acquired as well as costs incurred in the
development stages of intangible assets are capitalized when associated future
benefits are identified and the control on such benefits is demonstrated.
Expenditures not meeting these requirements are charged to earnings as
incurred. Intangible assets are presented at their restated value and are
classified as having a definite life, which are amortized over the benefited
periods, and as having an indefinite life, which are not amortized since it
cannot be accurately established the period in which the benefits associated
with such intangibles will terminate. Amortization of intangible assets,
except for goodwill, is calculated using the straight-line method.
Intangible assets acquired in a business combination are separately accounted
for at fair value as of the acquisition date, unless such value cannot be
reasonably estimated, in which case, such assets are included as part of
goodwill, an intangible asset of indefinite life, which is nevertheless
amortized in accordance with Bulletin B-8, Consolidated and Combined Financial
Statements and Valuation of Permanent Investments in Shares. The Company
amortizes goodwill under the present worth or sinking fund method, which is
intended to provide a better matching of goodwill amortization with the
revenues generated from the acquired companies. Goodwill generated before 1992
is amortized over a maximum of 40 years, while goodwill generated since 1992,
is amortized over a maximum period of 20 years. Preoperative expenses and
other deferred charges previously recognized under former Bulletin C-8 will
continue to be amortized in their original period. Intangible assets are
subject to periodic impairment evaluations (see note 2U). The adoption of new
Bulletin C-8 only implied grouping intangible assets in the categories
indicated above (see note 10).
Direct costs incurred in debt issuances are capitalized and amortized as part
of the effective interest rate of each transaction over its maturity. These
costs include discounts on debt issuance, bank fees, fees paid to attorneys,
agents, printers and consultants. Likewise, costs incurred in the development
stage of computer software for internal use are capitalized and amortized to
operating results over the estimated useful life of the software, which is
approximately 4 years.
F-9
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
J) PENSIONS AND OTHER POSTRETIREMENT BENEFITS (note 13)
The costs related to benefits to which employees are entitled by pension plans
and other postretirement benefits, including seniority premiums, legally or by
Company grant, are recognized in the operating results as services are
rendered, based on actuarial estimations of the benefits' present value. The
amortization of prior service cost (transition asset) and of changes in
assumptions and adjustments based on experience, is recognized over the
employee's estimated active service life. As part of the established pension
plans, in some cases, certain irrevocable trust funds have been created to
cover future benefit payments under these plans. The actuarial assumptions
upon which the Company's employee benefit liabilities are determined consider
the use of real rates (nominal rates discounted by inflation). Other
postretirement benefits, including severance benefits, are recognized as an
expense in the year in which they are paid. In some circumstances, however,
provisions have been made for these benefits.
K) INCOME TAX ("IT"), BUSINESS ASSETS TAX ("BAT"), EMPLOYEES' STATUTORY PROFIT
SHARING ("ESPS") AND DEFERRED INCOME TAXES (note 17)
The IT, BAT and ESPS on the income statement, include amounts incurred during
the period and the effects of deferred IT and ESPS. Consolidated deferred IT
represents the summarization of the effect determined in each subsidiary for
by the assets and liabilities method, by applying the enacted statutory income
tax rate to the total temporary differences resulting from comparing the book
and taxable values of assets and liabilities, considering when available, and
subject to a recoverability analysis, tax loss carryforwards as well as other
recoverable taxes and tax credits. The effect of deferred ESPS is recognized
for those temporary differences, which are of a non-recurring nature, arising
from the reconciliation of the net income of the period and the taxable income
of the period for ESPS. The effect of a change in the statutory tax rate is
recognized in the income statement for the period in which the change occurs
and is officially declared.
The cumulative initial effect, arising from the adoption of the asset and
liability method, was recognized on January 1, 2000 in stockholders' equity
under the caption "Cumulative initial deferred income tax effects".
Consolidated balances of assets and liabilities and their corresponding
taxable amounts substantially differ from those of the Parent Company. The
cumulative initial deferred income tax effects presented in the statement of
changes in stockholders equity correspond to the consolidated entity. The
difference between the Parent Company's accumulated initial deferred IT
effects and the consolidated equivalent effects is included under the caption
"Deficit in equity restatement".
L) MONETARY POSITION RESULT
The monetary position result, which represents the gain or loss from holding
monetary assets and liabilities in inflationary environments, is calculated by
applying the inflation rate of the country of each subsidiary to its net
monetary position (difference between monetary assets and liabilities).
M) DEFICIT IN EQUITY RESTATEMENT (note 14)
The deficit in equity restatement includes: (i) the accumulated effect from
holding non-monetary assets; (ii) the currency translation effects from
foreign subsidiaries' financial statements, net of exchange fluctuations
arising from foreign currency indebtedness directly related with the
acquisition of foreign subsidiaries and foreign currency related parties
balances that are of a long-term investment nature (see notes 2D and 14D); and
(iii) valuation and liquidation effects of certain derivative financial
instruments that qualify as hedge instruments, which are recorded temporarily
or permanently in stockholders' equity (see note 2N).
N) DERIVATIVE FINANCIAL INSTRUMENTS (notes 11 and 16)
In compliance with the controls and procedures established by the financial
risk managers, CEMEX uses derivative financial instruments, in order to reduce
risks associated with changes in interest rates and foreign exchange rates of
debt agreements, as a vehicle to reduce financing costs (see note 11) and as
an alternative source of financing (see note 16). The Company also uses
derivative financial instruments as hedges of: (i) forecasted transactions,
(ii) the net assets in foreign subsidiaries and (iii) the executive stock
option programs. These instruments have been negotiated with institutions with
significant financial capacity; therefore, the Company considers the risk of
non-compliance of the obligations agreed to by such counterparties to be
minimal. Some of these instruments have been designated as hedges of raw
materials costs as well as debt or equity instruments. In other cases,
although some derivatives complement the Company's financial strategy, such
derivatives have not been designated as hedge instruments because accounting
hedge requirements were not met.
F-10
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
Effective January 1, 2001, in accordance with Bulletin C-2, Financial
Instruments, the Company recognizes all derivative financial instruments as
assets or liabilities in the balance sheet at their estimated fair value and
recognizes the changes in such values in the income statement for the period
in which they occur.
The exceptions to the rule, as they refer to the Company are the following:
a) Beginning in 2002, changes in the estimated fair value of interest rate
swaps to exchange floating rate for fixed rate, designated as accounting
hedges of variations in interest rates of contracted debt, as well as
those instruments negotiated to hedge the interest rate at which certain
forecasted debt is expected to be contracted or renegotiated, are
recognized temporarily in stockholders' equity (see note 14G) and
reclassified to earnings, in the case of the forecasted debt, once the
related debt is recognized in the balance sheet and its related
financial expense is accrued. Until December 31, 2001, the effects of
similar derivative instruments were recognized in earnings based on cash
flows, as part of the interest expense of the related debt.
b) The changes in the estimated fair value of foreign currency forwards,
designated as hedges of the Company's net investments in foreign
subsidiaries, are recorded in stockholders' equity, as part of the
foreign currency translation result (see notes 2D and 14D). The
accumulated effect on stockholder's equity will be reversed through the
income statement upon disposition of the foreign investment.
c) The results derived from equity forward contracts on the Company's own
shares, as well as from other equity derivative instruments (such as the
appreciation warrants), are recognized in stockholders' equity upon
settlement. Beginning in 2001, changes in the estimated fair value of
those equity forward contracts that cover the executive stock option
programs are recorded through the income statement, as part of the costs
related to such programs. See notes 15 and 16.
For balance sheet presentation purposes, a portion of the assets or
liabilities resulting from the estimated fair value recognition of Cross
Currency Swaps ("CCS"), is reclassified as part of the carrying amount of the
underlying debt instruments, thereby reflecting the cash flows expected to be
received or paid upon liquidation of such instruments. CCS are negotiated to
change the profile of interest rate and currency of existing debt, required to
present the indebtedness as if it had been originally negotiated in the
exchanged interest rates and currencies. The non-reclassified portion,
resulting from the difference between the forward exchange rates and those in
effect as of the balance sheet date, is recognized as other assets or other
liabilities, both short and long term, depending on the maturity of the
contracts.
The periodic cash flows generated by interest rate swaps and CCS are
recognized as financial expense, and the effective interest rate of the
related debt is adjusted. For all other derivative instruments, cash flows are
recognized within the same item where the effects of the primary instrument
subject to the accounting or economic hedge relationship are classified. In
the case of derivatives not associated with an identified exposure, related
cash flows are recognized in earnings as part of the results from valuation
and liquidation of financial instruments. Premiums paid on derivative
instruments designated as hedges are deferred and amortized over the life of
the instrument or immediately upon settlement. In other cases, premiums are
recognized in earnings when paid or received.
The estimated fair value represents the amount at which a financial asset
could be bought or sold, or a financial liability could be extinguished,
between willing parties in an arm's length transaction. Occasionally, there is
a reference market that provides the estimated fair value; in the absence of a
market, such value is determined by the net present value of projected cash
flows or through mathematical valuation models. The estimated fair values of
derivative instruments, used for recognition and disclosure purposes in the
financial statements and their notes, are supported by the confirmations of
these values received from the financial counterparties.
O) REVENUE RECOGNITION
Revenue is recorded upon shipment of cement and ready-mix concrete to
customers and they assume the risk of loss. Income from activities other than
the Company's main line of business is recognized when the revenue has been
realized and there is no condition or uncertainty implying a reversal thereof.
F-11
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
P) CONTINGENCIES AND COMMITMENTS
Obligations or losses, related to contingencies, are recognized as liabilities
in the balance sheet when present obligations exist as a result of past
events, and it is probable that the effects will materialize and can be
reasonably quantified. Otherwise, a qualitative disclosure is included in the
notes to the financial statements. The effects of long-term commitments
established with third parties, such as supply contracts with suppliers or
clients, are recognized in the financial statements on the incurred or accrued
basis, depending on the substance of the agreements. Relevant commitments are
disclosed in the notes to the financial statements. The Company does not
recognize contingent revenues, income or assets.
Q) COMPREHENSIVE NET INCOME (LOSS) (note 14G)
The Company presents the comprehensive net income (loss) and its components as
a single item in the statement of changes in stockholders' equity.
Comprehensive net income (loss) represents the change in stockholders' equity
during a period for transactions and other events not representing
contributions, reductions or distributions of capital.
R) USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities at the
financial statements date, as well as the reported amounts of revenues and
expenses during the period. Actual results could differ from these estimates.
S) CONCENTRATION OF CREDIT RISK
The Company sells its products primarily to distributors in the construction
industry, with no specific geographic concentration within the countries in
which the Company operates. No single customer accounted for a significant
amount of the Company's sales in 2001, 2002 and 2003, and there were no
significant accounts receivable from a single customer for the same periods.
In addition, there is no significant concentration of a specific supplier
relating to the purchase of raw materials.
T) OTHER INCOME AND EXPENSE
Other income and expense, in the statements of income, consists primarily of
goodwill amortization, anti-dumping duties, results from the sales of fixed
assets, impairment charges of long-lived assets, results from the early
extinguishment of debt and, in 2001, the costs related to the restructuring of
the executive stock option programs (see note 15).
U) IMPAIRMENT OF LONG LIVED ASSETS (notes 9 and 10)
The Company periodically evaluates its machinery and equipment and the
balances of goodwill and other investments to establish if factors such as the
occurrence of significant adverse events, changes in the environment in which
the business operates and changes in expectations with respect to operating
results for each cash generating unit, business unit or affiliated entity,
indicate that the book value may not be recovered, in which case an impairment
loss is recorded in the income statement for the period when such
determination is made, resulting from the excess of carrying amount over the
net present value of estimated cash flows related to such assets.
V) ASSET RETIREMENT OBLIGATIONS (note 12)
Effective January 1, 2003, in accordance with new Bulletin C-9, Liabilities,
Accruals, Contingent Assets and Liabilities, and Commitments, the Company
recognizes unavoidable obligations, wheter legal or assumed, to restore the
site or the environment when assets are removed at the end of their useful
lives. These obligations represent the net present value of expected cash
flows to be incurred in the restoration process and are initially recognized
against the related assets' book value. The additional asset is depreciated to
operating results during its remaining useful life, while the increase of the
liability, by the passage of time, is charged to results of the period.
Adjustments to the obligation for changes in the estimated cash flows or the
estimated disbursement period, are made against fixed assets and depreciation
is modified prospectively.
F-12
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
As of the effective date, the Company had already created liabilities for the
known obligations. However, an analysis was performed with respect to each
subsidiary in order to identify additional possible existing obligations to
calculate them, if any, and to recognize appropriate liabilities in the
accounting record. Asset retirement obligations in the case of CEMEX, are
related primarily to the future costs of demolition, cleaning and
reforestation derived from commitments, both legal and assumed, that are
incurred at the end of an operation. Sites where raw materials are extracted,
maritime terminals and other production sites, must be left in certain
conditions. As of December 31, 2003, the identification phase was almost
completed and the valuation and registration process is expected to be
completed in the first half of 2004. For those obligations identified and
quantified, effective January 1, 2003, a remediation liability was recorded
for approximately Ps505.7, against fixed assets of Ps365.3, deferred IT assets
of Ps54.6 and an initial cumulative effect of Ps85.8. The initial cumulative
effect was recorded in stockholders' equity as an element of the comprehensive
net income. During 2003, the depreciation of the additional fixed assets and
the revaluation of liabilities from the passing of time generated an expense
in the results, net of deferred IT, of approximately Ps33.2.
W) EXECUTIVE STOCK OPTION PROGRAMS (note 15)
The Company recognizes the cost associated with executive stock options
programs by means of the intrinsic value method, for those programs in which,
as of the grant date, the exercise price at which the underlying shares will
be exercised is not known. This is because the exercise price is growing
(variable) over the life of the options. Through the intrinsic value method,
the changes in the appreciation of options represented by the difference
between the market price of the CPO and the exercise price of the option is
recognized as, cost in the Company's income statement, within the
comprehensive financing result. The Company does not recognize the cost for
those programs in which the exercise price is equal to the CPO price at the
grant date and such exercise price remains fixed for the life of the option.
3. CASH AND INVESTMENTS
Consolidated cash and investments as of December 31, 2002 and 2003 consists
of:
2002 2003
--------------- -------------
Cash and bank accounts.................................. Ps 1,944.7 1,663.3
Fixed-income securities................................. 2,196.3 1,287.1
Investments in marketable securities.................... 1.0 324.7
------------- ------------
Ps 4,142.0 3,275.1
------------- ------------
4. TRADE ACCOUNTS RECEIVABLE
The Company evaluates each of its customers' credit and risk profiles in order
to establish the required allowance for doubtful accounts. Trade accounts
receivable as of December 31, 2002 and 2003 include allowances for doubtful
accounts of Ps528.7 and Ps632.1, respectively.
The Company has established sales of trade accounts receivable programs with
financial institutions ("securitization programs"). These programs were
negotiated in Mexico during 2002, in the United States during 2001 and in
Spain in 2000. Through the securitization programs, the Company effectively
surrenders control, risks and the benefits associated to the accounts
receivable sold; therefore, the amount of receivables sold is recorded as a
sale of financial assets and the balances are removed from the balance sheet
at the moment of sale, except for the amounts that the counterparties have not
paid, which are reclassified to other accounts receivable (see note 5). The
balances of receivables sold pursuant the securitization programs as of
December 31, 2002 and 2003 were Ps5,575.2 (U.S.$496 million) and Ps6,124.9
(U.S.$544.9 million), respectively. The accounts receivable qualifying for
sale do not include amounts over certain days past due or concentrations over
certain limit to any one customer, according to the terms of the programs.
Expenses incurred under these programs, related to the discount granted to the
acquirers of the accounts receivable, are recognized in the income statements
and were approximately Ps91.8 (U.S. $8.2 million) in 2001, Ps119.9 (U.S.$10.7
million) in 2002 and Ps106.9 (U.S.$9.5 million) in 2003.
F-13
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
5. OTHER ACCOUNTS RECEIVABLE AND OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Other accounts receivable as of December 31, 2002 and 2003 consist of:
2002 2003
--------------- --------------
Non-trade receivables........................................................... Ps 1,240.1 1,589.4
Prepayments and receivables from valuation of derivative instruments (notes 11
and 16)....................................................................... 1,442.2 489.8
Interest and notes receivable................................................... 992.5 1,001.7
Advances for travel expenses and loans to employees............................. 418.8 306.9
Other refundable taxes.......................................................... 540.6 1,155.6
-------------- -------------
Ps 4,634.2 4,543.4
-------------- -------------
Non-trade receivables primarily consist of accounts receivable from the sale
of assets. Prepayments and valuation of derivative financial instruments at
December 31, 2002 included advanced payments toward the final price of forward
contracts for Ps1,093.0. The forward contracts were settled in October 2003
(see note 16A). Interest and notes receivable included Ps963.8 (U.S.$85.7
million) at December 31, 2002 and Ps962.8 (U.S.$85.7 million) at December 31,
2003, arising from securitization programs (see note 4). Other refundable
taxes included Ps302.6 at December 31, 2002 corresponding to a final
resolution related to a business assets tax lawsuit, the payment of which was
received in 2003 and Ps872.4 at December 31, 2003 for tax advances.
Other accounts payable and accrued expenses as of December 31, 2002 and 2003
consist of:
2002 2003
--------------- ---------------
Other accounts payable and accrued expenses..................................... Ps 3,294.4 2,492.5
Interest payable................................................................ 1,096.3 673.1
Tax payable..................................................................... 1,279.3 3,000.2
Dividends payable............................................................... 66.5 89.9
Provisions...................................................................... 2,617.2 2,951.3
Advances from customers......................................................... 778.3 861.4
Accounts payable from valuation of derivative instruments (notes 11 and 16)..... 4,086.6 1,306.2
-------------- -------------
Ps 13,218.6 11,374.6
-------------- -------------
Short-term provisions primarily consist of: (i) remunerations and other
personnel benefits accrued at the balance sheet date; (ii) accruals for
insurance payments and (iii) accruals related to the portion of legal
assessments to be settled in the short-term, such as the case of dumping fees
and environmental resolutions (see notes 21C and 21G). Commonly, these amounts
are revolving in nature and are to be settled and replaced by similar amounts
within the next 12 months.
6. INVENTORIES
Inventories as of December 31, 2002 and 2003 are summarized as follows:
2002 2003
--------------- --------------
Finished goods................................................................ Ps 1,604.3 1,381.7
Work-in-process............................................................... 1,721.4 1,808.7
Raw materials................................................................. 689.3 552.5
Supplies and spare parts...................................................... 3,480.9 2,384.8
Advances to suppliers......................................................... 377.7 240.1
Inventory in transit.......................................................... 231.9 315.3
-------------- -------------
Ps 8,105.5 6,683.1
-------------- -------------
F-14
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
7. OTHER CURRENT ASSETS
Other current assets as of December 31, 2002 and 2003 consist of:
2002 2003
-------------- --------------
Advanced payments............................................................. Ps 515.7 353.9
Non-cement related assets..................................................... 400.2 395.6
-------------- -------------
Ps 915.9 749.5
-------------- -------------
Non-cement related assets are stated at their estimated realizable value and
primarily consist of (i) non-cement related assets acquired in business
combinations, (ii) various assets held for sale received from customers as
payment of trade receivables, and (iii) real estate held for sale.
8. INVESTMENTS AND NONCURRENT RECEIVABLES
A) INVESTMENTS IN SUBSIDIARIES AND AFFILIATED COMPANIES
Investments in affiliated companies as of December 31, 2002 and 2003 are
summarized as follows:
2002 2003
--------------- ---------------
Book value at acquisition date................................................ Ps 3,595.5 3,905.5
Equity in income and other changes in stockholders' equity.................... 2,823.7 3,012.1
-------------- --------------
Ps 6,419.2 6,917.6
-------------- --------------
Investments held by subsidiaries in CEMEX shares, amounting to Ps7,201.3
(144,870,296 CPOs and 1,793,725 appreciation warrants) at December 2002 and
Ps9,238.1 (153,594,177 CPOs and 30,709,083 appreciation warrants) at December
2003, are offset against majority interest stockholders' equity in the
accompanying financial statements.
The Company's principal acquisitions and divestitures during 2002 and 2003 are
the following:
I. During 2003, for a combined price of approximately U.S.$99.7 million
(Ps1,120.6), CEMEX, Inc. acquired Mineral Resource Technologies, Inc.
("MRT"), and a cement plant and quarry with an annual production
capacity of 560 thousand tons located in Dixon, Illinois, United States.
The operating results of MRT and the Dixon plant are included in the
consolidated financial statements since the acquisition date. The
acquisition of MRT, a distributor of minerals used in manufacturing of
ready-mix concrete, occurred in August and that of the Dixon plant
occurred in September.
II. On July 30, 2002, through a public tender offer, a subsidiary of the
Company acquired 100% of the outstanding shares of Puerto Rican Cement
Company, Inc. ("PRCC"), a Puerto Rican cement producer, for
approximately U.S.$180.2 million (U.S.$35 dollars per share). As of
December 31, 2002, the consolidated financial statements include the
balance sheet of PRCC and the results of operations as of and for the
five-month period ended December 31, 2002.
III. On July 12, 2002, a subsidiary of CEMEX acquired 1,508,794 shares of
CEMEX Asia Holdings Ltd. ("CAH"). Of this total, 25,429 shares were
acquired for cash of approximately U.S.$2.3 million, while 1,483,365
shares were acquired through a forward exchange contract requiring
delivery of 28,195,213 CEMEX CPOs in four equal quarterly transactions
beginning in March 2003. In April 2003, CEMEX and its counterparties
modified the original settlement date regarding 1,398,602 CAH shares,
which will be acquired in four equal quarterly transactions beginning on
March 31, 2004. In 2003, through the original agreements, 84,763 CAH
shares were acquired in exchange for 1,683,822 CEMEX CPOs, with an
approximate value of U.S.$7.8 million (Ps87.7). For accounting purposes,
the 1,483,365 CAH shares are considered the Company's property and were
consolidated beginning on July 12, 2002, when the Company recognized an
account payable for U.S.$140 million, equivalent to the price of
28,195,213 CPOs on the date of the exchange agreements, which at the
closing of 2003, has decreased to approximately U.S.$132.0 million
(Ps1,483.7). The consolidation of the CAH shares was deemed appropriate
since a price to the physical exchange of shares was fixed, it is a firm
commitment and the CAH shareholders relinquished their risk of ownership
of the shares. Subject to the culmination of the exchange in 2004, the
Company's share in CAH increased from 77.4% to 92.3%.
CAH was created during 1999 by CEMEX and institutional investors in Asia
to jointly invest in the region. CAH is the holder of the 25.5% of the
common stock of PT Semen Gresik, Tbk. ("Gresik"), an Indonesian cement
company, as well as the operations of CEMEX in the Philippines and
Thailand.
F-15
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
IV. In July 2002, a Company subsidiary acquired the 30% remaining economic
interest of Solid from third parties for approximately U.S.$95 million.
Prior to this purchase, CEMEX already had a 70% economic interest in
Solid through CAH. As a result of this acquisition and the increase in
CAH's equity interest, the approximate indirect economic interest of
CEMEX in Solid increased from 54.2% to 94.6%.
V. During 2002, CEMEX, Inc. sold aggregate quarries and other equipment for
approximately U.S.$49 million. CEMEX, Inc. was formed in 2001, as a
result of the merger of Southdown, Inc., acquired in November 2000, for
approximately U.S.$2,628.3 million (Ps29,542.1) and CEMEX USA, Inc.
Certain condensed financial information of the companies acquired during 2002
and 2003, and that was consolidated in the Company's financial statements in
the year of acquisition is presented below:
2002 2003
----------------------------------- ------------------
PRCC Others Dixon and MRT
---------------- --------------- ------------------
Total assets............................................ Ps 4,179.4 239.1 1,225.2
Total liabilities....................................... 3,862.2 28.2 112.4
Stockholders' equity.................................... 317.2 210.9 1,112.8
---------------- --------------- ------------------
Sales................................................... Ps 708.5 2.4 186.0
Operating income (loss)................................. 27.8 (6.3) 11.5
Net income (loss)....................................... 27.7 (77.7) 11.4
---------------- --------------- ------------------
As of December 31, 2002 and 2003, the consolidated investments in affiliated
companies are as follows:
% Equity
Activity Country interest 2002 2003
---------- ----------- ----------- ----------- -----------
PT Semen Gresik, Tbk........................... Cement Indonesia 25.5 Ps 2,668.8 2,747.9
Control Administrativo Mexicano, S.A. de C.V... Cement Mexico 49.0 1,812.5 1,965.3
Trinidad Cement Limited........................ Cement Trinidad 20.0 340.2 321.0
Cementos Bio Bio, S.A.......................... Cement Chile 11.9 332.0 412.5
Cancem, S.A. de C.V............................ Cement Mexico 10.0 174.9 199.8
Lehigh White Cement Company.................... Cement U.S. 24.5 141.9 119.9
Societe des Ciments Antillais.................. Cement Antilles 26.1 119.9 160.8
Caribbean Cement Company Limited............... Cement Jamaica 5.0 78.3 102.6
Others......................................... - - - 750.7 887.8
----------- -----------
Ps 6,419.2 6,917.6
----------- -----------
During 2003, Gresik encountered problems created by the management of its
subsidiary PT Semen Padang ("Padang"), which obstructed the ownership rights
of Gresik, by not acknowledging Padang's new management team designated by
Gresik at May's 2003 stockholders' meeting, which assumed its duties in
September 2003 by court order, and by not providing financial information for
consolidation purposes. The consolidated financial statements of Gresik, at
December 31, 2002 included unaudited information of Padang. The external
auditors of Gresik, who were also auditors of Padang abstained from giving an
opinion since Padang represents around 16% of the combined net assets. In
December 2003, Gresik designated new auditors to review the 2002 consolidated
financial statements, a process estimated to be completed during the first
half of 2004. These problems persist and relate to the 1998 agreements between
the Indonesian government and CEMEX, which led CEMEX to invest in Indonesia,
and are the agreements through which the government would sell its majority
interest in Gresik and its subsidiaries to CEMEX. The sale has not yet
occurred primarily due to the opposition of Padang, who has the support of the
provincial administration of West Sumatra. Padang has argued that the sale by
the government of Padang to Gresik in 1995 is invalid because the necessary
approvals were not obtained. As a result of this, in December 2003, CEMEX
filed before the International Center for the Settlement of Investments
Disputes, a panel of the World Bank in Washington, D.C., a request for
arbitrage against the Indonesian Republic and its government.
The legal issues described above can take several years; in the meantime,
because the status of the investment is uncertain, the Company cannot
determine whether the investment in Gresik has become impaired. Based on the
information derived from the procedures described above, should the investment
become impaired, CEMEX will apply the rules indicated by the accounting
principles. As of December 31, 2003, CEMEX used the best information available
in order to valuate and update the investment in Gresik.
F-16
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
B) NONCURRENT ACCOUNTS RECEIVABLE
Consolidated amounts include assets for the valuation of derivative
instruments (see notes 11 and 16) of Ps802.5 in 2002 and Ps1,135.2 in 2003.
Furthermore, they include investments in private funds, recorded at fair value
for U.S.$8.6 million (Ps96.7) in 2002 and U.S.$16.1 million (Ps181.0) in 2003.
During 2003, approximately U.S.$7.3 million (Ps82.1) were contributed to these
funds.
During 2001, CEMEX sold for approximately U.S.$162.4 million, an investment
that was held in its long-term investments portfolio. The sale generated a
non-recurrent gain of approximately U.S.$131 million (Ps1,472.4) recognized in
2001 as part of the Comprehensive Financing Result. Of this gain,
approximately Ps877.4 corresponded to the reversal of unrealized valuation
gains previously recorded in stockholders equity.
9. PROPERTIES, MACHINERY AND EQUIPMENT
In December 2003, based on the periodic impairment analysis (see note 2U), a
loss of approximately Ps236.5 was recognized in earnings within other
expenses, related to the write-off of the book value of a group of assets in
Mexico. In 1999, as the assets were no longer in operation, they were adjusted
to their then estimated realizable value, and depreciation was suspended. The
approximate effect of having suspended the depreciation in 2001 and 2002 was
Ps42.2 and Ps40.8, respectively.
During 2003, an impairment loss of approximately Ps62.9 was recognized in
earnings within other expenses, arising from the book value's write-off of
cement terminals in the Asian region that are out of service.
10. INTANGIBLE ASSETS AND DEFERRED CHARGES
At December 31, 2002 and 2003, consolidated intangible assets of definite and
indefinite life as well as the deferred charges are summarized as follows:
2002 2003
--------------- --------------
Intangible of indefinite useful life:
Goodwill..................................................................... Ps 48,141.4 47,242.6
Accumulated amortization...................................................... (4,314.4) (5,050.9)
--------------- --------------
43,827.0 42,191.7
--------------- --------------
Intangible of definite useful life:
Cost of internally developed software......................................... 3,113.7 3,035.7
Additional minimum liability (note13)......................................... 662.9 1,108.2
Accumulated amortization...................................................... (891.7) (1,421.0)
--------------- --------------
2,884.9 2,722.9
--------------- --------------
Deferred Charges:
Prepaid pension costs (note 13)............................................... 426.4 387.8
Deferred financing costs...................................................... 1,148.9 583.3
Deferred income taxes (note 17B).............................................. 2,572.6 2,143.0
Others........................................................................ 4,728.0 3,235.5
Accumulated amortization ..................................................... (6,164.2) (4,906.3)
--------------- --------------
2,711.7 1,443.3
--------------- --------------
Ps 49,423.6 46,357.9
--------------- --------------
As a result of the periodic impairment evaluations (see note 2U), the Company
recognized in earnings within other expenses, impairment losses of goodwill
for approximately Ps102.9 in 2002 and Ps881.9 in 2003. Such losses consist of
those related to the Company's information technology business unit, which
were Ps102.9 in 2002 and Ps157.4 in 2003 and those related to the business
units in the Asian region in 2003 were Ps724.5.
The amortization expenses of intangible assets and deferred charges were
Ps2,816.1 in 2001, Ps2,787.1 in 2002 and Ps2,808.4 in 2003, of which, 75%, 65%
and 69% were recognized in other expenses, respectively. The difference in
each year was recognized within operating expenses.
F-17
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
11. SHORT-TERM AND LONG-TERM BANK LOANS AND NOTES PAYABLE
As of December 31, 2002 and 2003, short-term and long-term consolidated debt,
by type of financing and currency, as well as the interest rates, which
include the effects of the related derivative financial instruments, are
summarized as follows:
Weighted Relation Amount %
As of December 31, 2002 Original effective Carrying with subject to subject to
rate rate amount derivatives(1) derivatives derivatives
----------- ----------- ----------- ------------- ----------- -------------
Short-term bank loans
Lines of credit in Mexico...................... Variable 6.6% 3,407.7 IRS, CCS 3,407.7 100.0%
Lines of credit in foreign countries........... Variable 2.6% 1,550.6 - - -
----------- ----------- -------------
4,958.3 3,407.7 68.7%
Short-term notes payable
Mexican commercial paper programs.............. Variable 3.2% 1,938.2 CCS 1,657.3 85.5%
Foreign commercial paper programs.............. Variable 3.2% 1,495.5 - - -
Other notes payable............................ Variable 3.7% 126.3 - - -
----------- ----------- -------------
3,560.0 1,657.3 46.6%
-----------
8,518.3
Current maturities............................. 7,461.6
-----------
15,979.9
-----------
Long-term bank loans
Syndicated, 2003 to 2007....................... Variable 2.3% 10,173.5 - - -
Syndicated, 2003 to 2005....................... Fixed 4.1% 9,175.1 IRS 9,175.1 100.0%
Bank loans, 2003 to 2007....................... Variable 2.6% 8,749.7 - - -
Bank loans, 2003 to 2009....................... Fixed 6.5% 288.9 - - -
----------- ----------- -------------
9,175.1 32.3%
28,387.2
Long-term notes payable
Euro medium-term notes, 2003 to 2009........... Fixed 6.2% 8,326.3 CCS 4,966.2 59.6%
Medium-term notes, 2003 to 2009................ Variable 2.2% 8,203.8 CCS 6,961.6 84.9%
Medium-term notes, 2003 to 2008................ Fixed 4.0% 11,589.8 CCS 2,636.3 22.8%
Other notes, 2003 to 2006...................... Variable 2.5% 58.3 - - -
Other notes, 2003 to 2009...................... Fixed 4.2% 1,059.8 - - -
----------- ----------- -------------
14,564.1 49.8%
29,238.0
-----------
57,625.2
Current maturities............................. (7,461.6)
-----------
50,163.6
-----------
Debt by currency 2 Total debt Short-term Effective rate Long-term Effective rate
----------- ----------- ------------- ----------- -------------
Dollars...........................................45,465.5 7,277.5 3.1% 38,188.0 5.0%
Japanese yen......................................14,209.1 6,938.7 3.2% 7,270.4 2.5%
Euros..............................................3,293.6 655.8 3.7% 2,637.8 4.0%
Mexican pesos......................................2,403.0 745.8 8.8% 1,657.2 9.3%
Egyptian pounds.................................... 759.5 353.0 11.0% 406.5 11.0%
Other currencies................................... 12.8 9.1 8.7% 3.7 8.7%
----------- ----------- -----------
66,143.5 15,979.9 50,163.6
----------- ----------- -----------
1 IRS or Interest Rate Swaps are instruments used to exchange interest rates
(see note 11A). CCS or Cross Currency Swaps are instruments to exchange both
interest rates and currencies (see note 11B).
2 Includes the effects for currency exchanges related to the CCS.
F-18
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
Weighted Relation Amount %
As of December 31, 2003 Original effective Carrying with subject to subject to
rate rate amount derivatives(1) derivatives derivatives
----------- ----------- ----------- ------------- ----------- -------------
Short-term bank loans
Lines of credit in Mexico...................... Variable 2.1% 737.4 - - -
Lines of credit in foreign countries........... Variable 1.0% 1,742.0 - - -
----------- ----------- ------------
2,479.4 - -
Short-term notes payable
Mexican commercial paper program .............. Variable 6.3% 1,889.9 CCS 1,889.9 100.0%
Foreign commercial paper program............... Variable 2.6% 1,067.7 - - -
Other notes payable............................ Variable 7.4% 29.0 - - -
----------- ----------- ------------
2,986.6 1,889.9 63.3%
-----------
5,466.0
Current maturities............................. 9,471.8
-----------
14,937.8
-----------
Long-term bank loans
Syndicated loans, 2004 to 2007................. Variable 2.2% 11,854.4 CCS 1,278.5 10.8%
Syndicated loans, 2004 to 2006................. Fixed 7.4% 6,182.0 IRS 6,182.0 100.0%
Bank loans, 2004 to 2007....................... Variable 1.8% 7,362.5 - - -
Bank loans, 2004 to 2006....................... Fixed 7.4% 2,536.4 IRS 2,387.9 94.2%
----------- ----------- ------------
27,935.3 9,848.4 35.3%
Long-term notes payable
Euro medium-term notes, 2004 to 2009........... Fixed 8.0% 3,644.3 CCS 751.0 20.6%
Medium-term notes, 2004 to 2007................ Variable 3.0% 7,338.7 CCS 6,478.7 88.3%
Medium-term notes, 2004 to 2015................ Fixed 5.8% 18,482.7 CCS 5,862.1 31.7%
Other notes, 2004 to 2010...................... Variable 2.1% 2,639.5 - - -
Other notes, 2004 to 2009...................... Fixed 6.6% 425.3 IRS 422.1 99.3%
----------- ----------- ------------
32,530.5 13,513.9 41.5%
-----------
60,465.8
Current maturities............................. (9,471.8)
-----------
50,994.0
-----------
Effective
Debt by currency 2 Total debt Short-term Effective rate Long-term rate
----------- ----------- ---------------- ----------- ------------
Dollars...........................................44,817.2 4,977.2 4.4% 39,840.0 5.5%
Japanese yen.......................................9,011.6 4,518.0 0.6% 4,493.6 1.2%
Euros.............................................11,712.8 5,263.2 2.8% 6,449.6 3.4%
Mexican pesos...................................... 236.7 96.4 7.3% 140.3 7.3%
Egyptian pounds.................................... 108.0 72.3 11.3% 35.7 10.9%
Other currencies................................... 45.5 10.7 11.5% 34.8 12.6%
----------- ----------- -----------
65,931.8 14,937.8 50,994.0
----------- ----------- -----------
1 IRS or Interest Rate Swaps are instruments used to exchange interest rates
(see note 11A). CCS or Cross Currency Swaps are instruments to exchange both
interest rates and currencies (see note 11B).
2 Includes the effects for currency exchanges related to the CCS.
F-19
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
The most representative exchange rates with respect to the financial debt are
as follows:
2002 2003
----------------- ----------------
Mexican pesos per dollar.................................................. 10.38 11.24
Japanese yen per dollar................................................... 118.80 107.39
Euros per dollar.......................................................... 0.9519 0.7948
----------------- ----------------
The maturities of long-term debt as of December 31, 2003 are as follows:
2003
-----------------
2005............................................................................................ Ps 11,447.3
2006............................................................................................ 20,977.0
2007............................................................................................ 2,577.9
2008............................................................................................ 8,122.3
2009 and thereafter............................................................................. 7,869.5
-----------------
Ps 50,994.0
-----------------
In the consolidated balance sheet at December 31, 2002 and 2003, there were
short-term debt transactions amounting to U.S.$450 million (Ps5,058) and
U.S.$395 million (Ps4,439.8), that were classified as long-term debt due to
the Company's ability and intention to refinance such indebtedness with
available amounts from the committed long-term lines of credit.
At December 31, 2003, the Company and its subsidiaries have the following
lines of credit, both committed and subject to the banks' availability, at
annual interest rates ranging from 0.6% to 13.5%, depending on the negotiated
currency:
Line of credit Available
---------------- -----------------
European commercial paper (U.S.$600 million)............................... Ps 6,744.0 6,125.8
US commercial paper (U.S.$400 million)..................................... 4,496.0 3,315.8
Mexican commercial paper (Ps4,000 million)................................. 4,000.0 2,150.0
Other lines of credit in foreign subsidiaries.............................. 19,885.1 8,549.3
Other lines of credit from banks .......................................... 8,552.2 5,517.0
---------------- -----------------
Ps 43,677.3 25,657.9
---------------- -----------------
On October 15, 2003, a Dutch subsidiary, holding of CEMEX Spain, negotiated a
multi-currency credit facility for an equivalent at that date of U.S.$1,150
million. Funds were obtained as follows: Euro 256.4 million maturing in two
years and U.S.$550 million and yen 32,688 million maturing in three years.
Such amounts were used primarily to repay a revolving credit facility of
U.S.$400 million, and for the early redemption in 2003 of the preferred
stock's remaining balance of U.S.$650 million related to the purchase of
Southdown and which matured on various dates in 2004 (see note 14E).
In April 2002, the Company completed a tender offer for the early redemption
of U.S.$300 million of its 12.7% notes, due 2006, pursuant to which U.S.$208.4
million was redeemed. Expenses related to the offer and the premiums paid to
the holders of the notes as a result of the early redemption, which amounted
to approximately U.S.$54 million (Ps619.3) were recognized in earnings during
2002 within other expenses. As of December 31, 2002 and 2003, the outstanding
balance of these notes is U.S. $91.6 million (Ps1029.6).
As of December 31, 2002 and 2003, in order to: (i) hedge contractual cash
flows of certain financial debt with floating rates or exchange floating for
fixed interest rates of a portion of debt (see note 11A), and (ii) reduce the
financial cost of debt originally contracted in dollars or pesos (see note
11B), the Company has negotiated derivative financial instruments related to
short-term and long-term debt, which are described below:
F-20
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
A) Interest Rate Swaps Contracts
As of December 31, 2002 and 2003, the terms of the interest rate swaps ("IRS")
related to short-term and long-term financial debt is summarized as follows:
(U.S. dollars millions) Notional Debt Maturity CEMEX CEMEX Effective Estimated
Related debt amount currency date receives* pays rate fair value
----------------------------- -------------- ------------- ----------- ----------- ----------- ---------- ---------------
IRS in 2002
Short-term debt
Bank loans.................... U.S.$ 306 Dollar Jul 2007 LIBOR+60 5.5% 3.1% U.S.$ (24.4)
Long-term debt
Bank loans................... 300 Dollar Jul 2007 LIBOR 4.1% 5.3% (20.1)
Syndicated loans............. 500 Dollar Aug 2007 LIBOR 4.2% 5.5% (28.0)
-------------- --------------
800 (48.1)
-------------- --------------
U.S.$1,106 U.S.$ (72.5)
------------- ----------------
IRS in 2003
Long-term debt
Syndicated loans.............. U.S.$ 550 Dollar Mar 2008 LIBOR 6.5% 7.4% (70.3)
Bank loans.................... 250 Dollar Mar 2008 LIBOR 5.4% 7.3% (33.4)
------------- ----------------
800 (103.7)
Not assigned 1
Long term debt................ 1,050 Dollar Feb 2009 LIBOR 3.5% 2.3% (124.4)
-------------- ---------------
U.S.$1,850 U.S.$(228.1)
-------------- ---------------
* LIBOR ("L") represents the London Interbank Offering Rate, used in the market for debt denominated in U.S. dollars.
1 These instruments have optionality.
As of December 31, 2002 and 2003, the interest rate swaps presented above were
designated as accounting hedges of contractual cash flows (interest payments)
of the related floating rate debt. Therefore, changes in the estimated fair
value of these instruments were recognized in stockholders' equity (see note
2N), except for interest rate swaps for a notional amount of U.S.$1,050
million in 2003, which are part of the financial strategy of CEMEX, however,
do not meet the accounting hedge criteria, consequently, changes in the
estimated fair value were recognized in earnings within the comprehensive
financing result.
As of December 31, 2003, the notional amount of interest rate swaps increased
by U.S.$744 million as compared to 2002. This increase was primarily due to
interest rate swaps for a notional amount of U.S.$1,850 million, negotiated in
2003 upon the maturity or early settlement of interest rate options
("swaptions"), forward rate agreements ("FRAs") and floor and cap options.
This increase was partially offset by the settlement during the year of
interest rate swaps held at the close of 2002 for a notional amount of
U.S.$1,106 million. Such contracts were no longer useful since new contracts
were negotiated in 2003 and there were changes in the interest rates mix of
the financial debt portfolio resulting from new fixed rate borrowings and the
repayment of floating rate debt. As of December 31, 2003, of the approximate
loss in the estimated fair value of the interest rate swaps of U.S.$228.1
million (Ps2,563.8), losses of approximately U.S.$126 million (Ps1,416.2),
correspond to the estimated fair value of that swaptions, FRAs and the floor
and cap options had upon expiration or settlement. These losses were
recognized in earnings between origination and their termination. As of
December 31, 2002, changes in the estimated fair value resulted in losses of
approximately U.S.$72.5 million and were recognized in stockholders' equity.
During 2002 and 2003, due to changes in the interest rates mix of the
financial debt portfolio, interest rate swaps were settled in agreement with
the financial counterparties for notional amounts of U.S.$2,583 million and
U.S.$1,106 million, respectively. These settlements resulted in gains of
U.S.$14.2 million (Ps162.9) in 2002 and losses of U.S.$41.9 million (Ps471) in
2003, corresponding to the contracts estimated fair value on the settlement
date, which were recognized in earnings of each period.
F-21
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
As of December 31, 2002 and 2003, the description of other interest rate
derivatives, is as follows:
U.S. dollars millions 2002 2003
------------------------------- -------------------------------
Other interest rate derivatives Notional Estimated Notional Estimated
Amount fair value Amount fair value
------------- -------------- ------------- --------------
Interest rate options (swaptions)................... 1,000 (140.9) 200 (24.9)
Forward rate agreements (FRAs) ..................... 650 (61.2) - -
Other rates derivatives............................. 711 (96.5) - -
------------- ------------- ------------- ------------
2,361 (298.6) 200 (24.9)
------------- ------------- ------------- ------------
As of December 31, 2002 and 2003, there were call options to exchange floating
for fixed interest rates (swaptions). These options have maturities in October
2004 and grant the counterparties the option to elect, at maturity of the
options, to negotiate interest rate swaps and receive from CEMEX fixed rates
and pay variable rates for a five-year period. Alternatively, the
counterparties may elect to request net cash settlements. During 2003, through
the physical settlement of swaptions for a notional amount of U.S.$800
million, new interest rate swaps were negotiated. Furthermore, during 2003,
the Company sold and later settled options for a notional amount of U.S.$400
million, resulting in a net gain of approximately U.S.$1.1 million (Ps12.4).
In 2001, 2002 and 2003, for the sale of swaptions, CEMEX received premiums for
approximately U.S.$12.2 million (Ps139.9), U.S.$57.6 million (Ps660.6) and
U.S.$25.0 million (Ps281.0), respectively. Premiums received as well as
changes in the estimated fair value of the options, which represented losses
of approximately U.S.$30.1 million (Ps345.2) and U.S.$110.9 million
(Ps1,271.9) in 2001 and 2002, respectively, and gains of approximately
U.S.$1.6 million (Ps18.0) in 2003, were recognized in earnings of each period.
In addition, in 2001, 2002 and 2003, losses of approximately U.S.$3.4 million
(Ps39), U.S.$92.3 million (Ps1,058.6) and U.S.$23.9 million (Ps268.6),
respectively, were recognized in earnings as a result of the settlement or
termination of the swaption contracts.
As of December 31, 2002, the Company held forward rate agreements ("FRAs") for
a notional amount of U.S.$650 million, negotiated in 2001 to fix the interest
rate of future debt issuances, not negotiated due to market conditions. These
instruments were designated at the end of 2002 as accounting hedges of the
interest rates of debt issuances negotiated in 2003. These contracts expired
in 2003 and new interest rate swaps were negotiated. At maturity, an
approximate loss of U.S.$37.6 million (Ps422.6) was recognized in
stockholders' equity and is being amortized to the financial expenses as part
of the effective interest rate of the related debt. The changes in the
estimated fair value of these contracts represented losses of approximately
U.S.$27.5 million (Ps304.2) in 2001 and U.S.$33.7 million (Ps386.5) in 2002,
and were recognized in earnings, except for a loss of U.S.$42.4 million
(Ps476.6) in 2002, which was recognized in stockholders' equity, corresponding
to the change in valuation after these contracts were designated as accounting
hedges.
As of December 31, 2002, the Company held floor and cap options for a notional
amount of U.S.$711 million, with maturity in March 2008. These options were
settled in May 2003, through the negotiation of interest rate swaps. These
options were structured as part of an interest rate swap for the same notional
amount that was settled in 2002. The changes in the estimated fair value of
the floor and cap options until settlement, represented losses of
approximately U.S.$41.3 million (Ps456.8) in 2001, U.S.$55.2 million (Ps632.9)
in 2002 and U.S.$0.1 million (Ps1.5) in 2003. These losses were recognized in
earnings of each period.
B) Cross Currency Swap Contracts and Other Currency Instruments
As of December 31, 2002 and 2003, there were Cross Currency Swaps ("CCS"),
through which the Company exchanges the originally contracted interest rates
and currencies on notional amounts of related short-term and long-term debt.
During the life of the contracts, the cash flows related to the exchange of
interest rates under the CCS, match, in interest payment dates and conditions,
those of the underlying debt.
If there is no early settlement, at maturity of the contracts and the
underlying debt, the Company and the counterparty will exchange notional
amounts, so the Company will receive the cash flow in the currency of the
underlying debt necessary to cover its primary obligation, and will pay the
notional amount in the exchanged currency of the CCS. As a result, the
original financial risk profile related to interest rates and foreign exchange
variations of the underlying debt has been effectively exchanged.
F-22
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
As of December 31, 2002 and 2003, the terms of the CCS is summarized as
follows:
Currencies Interest Rates
-----------------------------------------------------
(Amounts in millions) Maturity Notional Original Amount in CEMEX CEMEX Effective Estimated
Related Debt date amount amount new currency receives* pays* rate fair value
-------------------------- --------------- ------------- --------- ----------- ------------- --------- -------- ------------
CCS in 2002
Mexican peso to dollar
Short term notes........... Jan 03-Jun 03 U.S.$ 144.7 Ps1,500 U.S.$ 145 TIIE+5 bps L+29 bps 2.25% U.S.$ (9.6)
Dollar to Yen
Short term notes........... Jun 03-Jun 05 179.5 U.S.$180 Yen 20,459 L+183 bps 3.16% 3.16% 6.1
------------- ------------
324.2 (3.5)
Mexican peso to dollar
Medium term notes.......... Nov 04-Dec 08 230.3 Ps2,465 U.S.$230 TIIE+54 bps L+101 bps 2.86% 16.0
Mexican peso to dollar
Medium term notes.......... Apr 05-Apr 07 377.1 Ps4,225 U.S.$377 10.93% L+26 bps 1.34% 51.8
Mexican peso to Yen
Medium term notes.......... Jun 05-Jan 06 311.8 Ps3,058 Yen 27,308 11.76% 2.55% 3.78% 83.4
Dollar to Yen
Euro-medium term notes..... Jul 2003 500.0 U.S.$500 Yen 51,442 8.75% 3.14% 3.14% 93.7
------------- ------------
1,419.2 244.9
------------- ------------
U.S.$1,743.4 U.S.$241.4
------------- ------------
CCS in 2003
Mexican peso to dollar
Short term notes........... Jan 2004 U.S.$ 168.1 Ps 1,900 U.S.$ 168 N/A N/A 6.3% U.S.$ 0.8
------------- ------------
Mexican peso to dollar
Medium term notes.......... Nov 04-Dec 07 468.9 Ps6,104 U.S.$ 469 TIIE+62 bps L+121bps 2.7% 74.4
Mexican peso to dollar
Medium term notes.......... Apr 05-Apr 07 233.3 Ps3,369 U.S.$ 233 12.4% L+99 bps 1.9% 103.0
Mexican peso to dollar
Medium term notes Mar 06-Dec 08 377.8 Ps3,888 U.S.$ 378 8.6% 4.6% 3.8% 0.2
Mexican peso to dollar
Medium term notes.......... Oct 2007 79.9 Ps800 U.S.$ 80 Cetes+145 bps 4.3% 4.3% (8.9)
Dollar to Yen
Medium term notes.......... Jun 05-Jun 06 66.8 U.S.$ 67 Yen 1,904 L+27 bps 1.9% 9.3% 93.2
Mexican peso to Yen
Euro-medium term notes..... Jun 05-Jan 06 51.8 Ps1,574 Yen 6,008 8.8% 2.6% 1.3% (0.7)
------------- ------------
1,278.5 261.2
------------- ------------
U.S.$1,446.6 U.S.$262.0
------------- ------------
* LIBOR ("L") represents the London Interbank Offering Rate, used in the
market for debt denominated in U.S. dollars. TIIE represents the Interbank
Offering Rate in Mexico and CETES are public debt instruments issued by
the Mexican government. At December 31, 2003, the LIBOR rate was 1.12%,
the TIIE rate was 6.29% and the CETES yield was 6.04%.
F-23
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
The periodic cash flows underlying the CCS arising from the exchange of
interest rates are determined over the notional amounts in the exchanged
currency. The CCS have not been designated as accounting hedges; therefore,
changes in their estimated fair values are recognized through the income
statement. As mentioned in note 2N, a portion of the assets and liabilities
resulting from the estimated fair value recognition of the CCS have been
offset for presentation purposes, in order to reflect the cash flows that the
Company expects to receive or pay upon settlement of these financial
instruments. Through this presentation, the book value of the financial
indebtedness directly related to the CCS is presented as if it had been
effectively negotiated in the exchanged currencies instead of in the
originally negotiated currencies. Assuming an early liquidation of the CCS,
the related financial liabilities and their corresponding interest expense,
would be established in the rates and currencies originally contracted
beginning as of the settlement date.
As of December 31, 2002 and 2003, related to the estimated fair value of the
CCS, the Company recognized net assets of U.S.$241.4 million (Ps2,713.3) and
U.S.$262.0 million (Ps2,944.9), respectively. Of these amounts, U.S.$194.2
million (Ps2,182.8) in 2002 and U.S.$364.5 million (Ps4,097.0) in 2003 relates
to a prepayment made to yen and dollar denominated obligations under the CCS.
This is presented by decreasing the carrying amount of the related debt, while
a gain of U.S.$47.2 million (Ps530.5) in 2002 and a loss of U.S.$102.5 million
(Ps1,152.1) in 2003, represents the net assets and the net liabilities ,
respectively, arising from the CCS' estimated fair value without prepayment
effects.
In accordance with the presentation guidelines applied by the Company to the
assets or liabilities related to the CCS (see note 2N) of net liabilities and
net assets without prepayments in 2002 and 2003 described above, losses
directly related to variations in exchange rates between the origination of
the CCS and the balance sheet date of approximately U.S.$20.0 million
(Ps224.8) in 2002 and U.S.$171.9 million (Ps1,932.2) in 2003, are presented as
part of the related debt carrying amount. Likewise, gains of approximately
U.S.$25.9 million (Ps291.1) in 2002 and U.S.$12.2 million (Ps137.1) in 2003,
corresponding to the periodic cash flows exchange for interest rates, were
presented as an adjustment of the related financing interest payable. The
remaining net assets of U.S.$41.3 (Ps464.2) in 2002 and U.S.$57.2 million
(Ps642.9) in 2003, were presented in the consolidated balance sheet within
short-term and long-term other assets or other liabilities, as applicable.
For the years ended December 31, 2001, 2002 and 2003, the changes in the
estimated fair value of the CCS, excluding the effects of prepayments in 2002
and 2003, resulted in a gain of approximately U.S.$191.6 million (Ps2,119.1)
in 2001 and losses of approximately U.S.$192.2 million (Ps2,204.3) and
U.S.$149.7 million (Ps1,682.6) in 2002 and 2003, respectively. These results
were recognized in earnings of the respective period.
Additionally, as of December 31, 2002, the Company held other currency
instruments with a notional amount of U.S.$104.5 million, related to financial
debt expected to be negotiated in the near future. These contracts matured in
2003 and a loss of approximately U.S.$3.6 million (Ps40.5) was recognized in
earnings. In 2002, these contracts had an estimated fair value loss of
approximately U.S.$6.8 million (Ps78.0), which was recognized in the income
statement.
The estimated fair value of derivative instruments used for the exchange of
interest rates and/or currencies fluctuate over time and will be determined by
future interest rates and currency prices. These values should be viewed in
relation to the fair values of the underlying transactions and as part of the
overall Company's exposure to fluctuations in interest rates and foreign
exchange rates. The notional amounts of derivative instruments do not
necessarily represent amounts exchanged by the parties, and consequently,
there is no direct measure of the Company's exposure to the use of these
derivatives. The amounts exchanged in cash are determined based on the basis
of the notional amounts and other terms included in the derivative financial
instruments.
F-24
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
C) Guaranteed Debt
As of December 31, 2002 and 2003, CEMEX Mexico, S.A. de C.V. and Empresas
Tolteca de Mexico, S.A. de C.V. jointly, fully and unconditionally guarantee
indebtedness of the Company for an aggregate amount of U.S.$2,339 million
(Ps26,290.4) and U.S.$3,145 million (Ps35,349.8), respectively. The combined
summarized financial information of these guarantors as of December 31, 2001,
2002 and 2003 is as follows:
2002 2003
----------------- ------------------
Assets............................................... Ps 125,984.6 140,393.0
Liabilities.......................................... 60,082.5 64,503.2
Stockholders' equity................................. 65,902.1 75,889.8
----------------- ------------------
2001
-----------------
Net sales........................................... Ps 24,975.5 24,035.2 24,408.5
Operating income..................................... 1,786.2 3,762.6 2,778.2
Net income........................................... 11,444.1 479.7 6,035.9
----------------- ----------------- ------------------
Certain debt contracts guaranteed by the Company and/or some of its
subsidiaries contain restrictive covenants limiting sale of assets,
maintenance of controlling interest on certain subsidiaries, limiting liens
and requiring compliance with financial ratios. The Company obtains waivers
prior to the occurrence of events of default.
12. OTHER NON-CURRENT LIABILITIES
Other non-current liabilities as of December 31, 2002 and 2003 are summarized
as follows:
2002 2003
-------------- -------------
Accounts payable from valuation of derivative instruments (notes 11 and 16)....... Ps 3,608.9 4,919.0
Accruals for legal assessments and other responsibilities......................... 1,482.2 1,592.3
Asset retirement obligations and other environmental liabilities.................. 296.6 889.0
Other liabilities and deferred credits............................................ 1,093.5 1,303.1
-------------- -------------
Ps 6,481.2 8,703.4
-------------- -------------
Accounts payable from derivative financial instruments represent the
accumulated valuation losses resulting from the estimated fair value
recognition of these instruments (see notes 11 and 16). Accruals for legal
assessments and other responsibilities (see note 21), refer to the best
estimation of cash flows for with respect to legal claims where the Company is
determined to be responsible and which are expected to be settled in a period
greater than twelve months. During 2003, the balance of this caption increased
primarily as a result of the increase of Ps265.0 in the dumping duties
provision, partially offset by the decrease of Ps154.9 in the accruals for
responsibilities. Asset retirement obligations and other environmental
liabilities include the future estimated costs, mainly from the demolition,
cleaning and reforestation of production sites at the end of their operation
(see note 2V). The increase in this item is related to the quantification of
asset retirement obligations. The expected average period to settle these
obligations is greater than 15 years.
13. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
As of December 31, 2001, 2002 and 2003, the net periodic cost of pension plans
and other postretirement benefits (see note 2J), was Ps348.9, Ps228.1 and
Ps462.4, respectively, and is described as follows:
Pensions Other benefits*
------------------------------- --------------------------------
Components of net periodic cost: 2001 2002 2003 2001 2002 2003
------- ------- ------- -------- -------- --------
Service cost................................... Ps 344.3 274.7 287.5 14.8 28.5 31.3
Interest cost.................................. 281.2 269.2 284.8 38.5 43.2 45.4
Actuarial return on plan assets................ (383.3) (399.3) (335.0) (1.2) (0.7) (0.7)
Amortization of prior service cost, changes in
assumptions and experience adjustments.......... 53.3 47.6 131.2 1.3 13.7 15.1
Results from extinguishment of obligations..... - (47.3) 2.8 - (1.5) -
------- ------- ------- -------- -------- --------
Ps 295.5 144.9 371.3 53.4 83.2 91.1
------- ------- ------- -------- -------- --------
F-25
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
As of December 31, 2002 and 2003, the reconciliation of the actuarial value of
pension plans and other postretirement benefit obligations, as well as the
funded status (see note 2J), are presented as follows:
Pensions Other benefits*
----------------------- -----------------------
2002 2003 2002 2003
--------- --------- --------- ----------
Change in benefit obligation:
Projected benefit obligation ("PBO") at beginning of year........ Ps 5,041.3 5,680.8 726.1 902.2
Service cost..................................................... 274.7 287.5 28.5 31.3
Interest cost.................................................... 269.2 284.8 43.2 45.4
Actuarial result and amendments.................................. 138.0 659.5 78.4 (90.2)
Acquisitions..................................................... 388.5 - 50.7 -
Initial valuation of other postretirement benefits............... - - 11.9 27.7
Foreign exchange fluctuations and inflation adjustments.......... 52.5 (106.3) 17.1 (47.2)
Extinguishment of obligations.................................... (174.6) 1.9 (1.5) 2.2
Benefits paid.................................................... (308.8) (430.2) (52.2) (68.6)
--------- --------- --------- ----------
Projected benefit obligation ("PBO") at end of year.............. 5,680.8 6,378.0 902.2 802.8
--------- --------- --------- ----------
Change in plan assets:
Fair value of plan assets at beginning of year................... 5,253.8 5,045.5 17.6 17.8
Real return on plan assets....................................... (311.4) 812.9 0.8 2.1
Acquisitions..................................................... 323.5 - - -
Foreign exchange fluctuations and inflation adjustments.......... 75.6 (210.4) - (1.7)
Employer contributions........................................... 69.8 125.9 42.2 15.9
Extinguishment of obligations.................................... (196.3) - - -
Benefits paid from the funds..................................... (169.5) (265.3) (42.8) -
--------- --------- --------- ----------
Fair value of plan assets at end of year......................... 5,045.5 5,508.6 17.8 34.1
--------- --------- --------- ----------
Amounts recognized in the balance sheets consist of:
Funded status.................................................... 635.3 869.4 884.4 768.7
Prior service cost............................................... (714.9) (1,402.4) (149.8) (108.8)
Net actuarial results............................................ (1,632.4) (955.4) (111.9) (42.4)
--------- --------- --------- ----------
Accrued benefit liability (prepayment)......................... (1,712.0) (1,488.4) 622.7 617.5
Additional minimum liability................................... 659.5 1,100.6 3.4 7.6
--------- --------- --------- ----------
Net liability (prepayment) recognized ....................... Ps (1,052.5) (387.8) 626.1 625.1
--------- --------- --------- ----------
* The cost and the actuarial value of postretirement benefits, include the
cost and obligations of postretirement benefits other than pensions, such as
seniority premiums granted by law, as well as health care and life insurance
benefits that the Company grants to retirees.
For presentation purposes in the balance sheet as of December 31, 2002, the
net liability of Ps626.1 for other postretirement benefits (see above table),
is presented as offsetting the net prepayment for pensions of Ps1,052.5. This
resulted in a net final prepayment of Ps426.4, which is reported within other
deferred charges (see note 10). At December 31, 2003, the net liability for
other postretirement benefits and the net prepayment for pensions are not
offset in the balance sheet.
As of December 31, 2002 and 2003, the combined actual benefit obligation
("ABO") of pensions and other postretirement benefits, equivalent to the PBO
not considering salaries increases, amounted to Ps5,086.6 and Ps5,944.2,
respectively, of which the vested portion was Ps1,291.2 in 2002 and Ps2,008.9
in 2003.
An additional minimum liability (excess of the net actual liability over the
net projected liability) is recognized in those cases when the ABO less the
plan assets (net actual liability) is lower than the net projected liability.
At December 31, 2002 and 2003, a minimum liability and an intangible asset
were recognized for Ps662.9 and Ps1,108.2, respectively.
Prior service cost and actuarial results are amortized over the estimated
service life of the employees under plan benefits. At December 31, 2003,
average estimated service life for pension plans is 15 years and for other
postretirement benefits is 13 years.
F-26
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
As of December 31, 2002 and 2003, the consolidated assets of the pension plans
and other postretirement benefits are valued at their estimated fair value and
are integrated as follows:
2002 2003
---------------- -----------------
Fixed-income securities.................................................... Ps 2,585.6 2,472.0
Marketable securities...................................................... 1,965.3 2,383.3
Private funds and other investments........................................ 512.4 687.4
---------------- -----------------
Ps 5,063.3 5,542.7
---------------- -----------------
CEMEX applies real rates (nominal rates discounted for inflation) in the
actuarial assumptions used to determine postretirement benefit liabilities.
The most significant assumptions used in the determination of the net periodic
cost were:
2001 2002 2003
------------ ------------- -------------
Range of discount rates used to reflect the obligations' present value.. 3.5 % - 7.1% 3.0% - 7.0% 4.5% - 8.0%
Weighted average rate of return on plan assets.......................... 8% 7.8% 7.8%
------------ ------------- -------------
During 2003, the Company's units in Mexico implemented a voluntary early
retirement program, through which, the retirement age was decreased by five
years and all employees meeting the new requirements were given the option to
retire. This program ended in May 2003 and resulted in the early retirement of
230 employees and the increase of Ps568.9 in the projected benefit obligation
and the non-amortized prior service cost of pensions and other postretirement
benefits.
During 2002, the subsidiary of CEMEX in Spain, in agreement with its
employees, changed the structure of most of its defined benefit plans,
replacing them with defined contribution plans. In connection to this change,
the subsidiary contributed on behalf of its employees covered by the new
plans, assets for an amount equivalent to the obligation value as of the date
of the exchange. These assets were already restricted within the previous
plans. At December 31, 2002, the effects of writing off the PBO and the
non-amortized items, net of the assets contributed, are displayed on the
tables relating to the net periodic cost and the reconciliation of the
actuarial value of pensions and other postretirement benefits.
14. STOCKHOLDERS' EQUITY
A) COMMON STOCK
The Company's common stock as of December 31, 2002 and 2003 is as follows:
2002 2003
--------------------------------- ---------------------------------
Series A (1) Series B (2) Series A (1) Series B (2)
-------------- -------------- -------------- --------------
Subscribed and paid shares......................... 3,331,300,154 1,665,650,077 3,547,614,432 1,773,807,216
Treasury shares (3)................................ 166,400,476 83,200,238 287,097,712 143,548,856
Unissued shares authorized for Stock Option Plans.. 116,526,096 58,263,048 113,114,106 56,557,053
-------------- -------------- -------------- --------------
3,614,226,726 1,807,113,363 3,947,826,250 1,973,913,125
-------------- -------------- -------------- --------------
(1) Series "A" or Mexican shares must represent at least 64% of capital
stock.
(2) Series "B" or free subscription shares must represent at most
36% of capital stock.
(3) In 2003, includes the shares issued by the stockholders' meeting of April
24, 2003 that were not subscribed, and in 2002, includes the shares
acquired under the share repurchase program and those shares authorized by
the stockholders' meeting of April 25, 2002 that were not subscribed.
Of the total number of shares, 3,267,000,000 in 2002 and 2003 correspond to
the fixed portion, and 2,154,340,089 in 2002 and 2,654,739,375 in 2003
correspond to the variable portion.
On April 25, 2002, the annual stockholders' meeting approved: (i) a reserve
for share repurchases of up to Ps5,000.0 (nominal amount), under which, at
December 31, 2002, shares equivalent to 7,609,200 CPOs were repurchased,
representing a reduction in the repurchase reserve of Ps400.2; (ii) an
increase in the variable common stock through the capitalization of retained
earnings of up to Ps3,213.1 (nominal amount), issuing shares as a stock
dividend, equivalent to up to 140,000,000 CPOs, at a subscription price of
Ps46.336 (nominal amount) per CPO, or instead, stockholders could have chosen
to receive Ps2.00 (nominal amount) in cash for each CPO. As a result, shares
equivalent to 64,408,962 CPOs were subscribed and paid, representing an
increase in common stock of Ps2.3 and in additional paid-in capital of
Ps3,201.5. An approximate cash payment through December 31 2002 was made for
Ps256.9; and (iii) the cancellation of 169,206,112 Series "A" shares and
84,603,056 Series "B" shares that were held in the Company's treasury.
F-27
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
On April 24, 2003, the annual stockholders' meeting approved: (i) a reserve
for share repurchases of up to Ps6,000.0 (nominal amount); (ii) an increase in
the variable common stock through the capitalization of retained earnings of
up to Ps3,664.4 (nominal amount), issuing up to 750,000,000 shares as a stock
dividend, equivalent to up to 250,000,000 CPOs, at a subscription price of
Ps36.449 (nominal) per CPO or, instead, stockholders could have chosen to
receive Ps2.20 (nominal amount) in cash for each CPO. As a result, shares
equivalent to 98,841,944 CPOs were subscribed and paid, representing an
increase in common stock of Ps3.40 and in additional paid-in capital of
Ps3,696.6, assuming a theoretical value of Ps0.0333 per CPO, while an
approximate cash payment through December 31, 2003 was made for Ps66.8; and
(iii) the cancellation of the shares held in the Company's treasury.
B) RETAINED EARNINGS
Retained earnings as of December 31, 2003, include Ps82,240.2 of earnings
generated by subsidiaries and affiliated companies that are not available to
be paid as dividends by CEMEX until these entities distribute such amounts to
CEMEX. Additionally, retained earnings include a share repurchase reserve in
the amount of Ps6,585.0. Net income for the year is subject to a 5% allocation
toward a legal reserve until such reserve equals one fifth of the common
stock. As of December 31, 2003, the legal reserve amounted to Ps1,370.6.
Earnings distributed as dividends, in excess of tax earnings, will be subject
to a tax payment at a 33% rate, consequently, only 67% of retained earnings
may be distributed to the shareholders.
C) EFFECTS OF INFLATION
The effects of inflation on majority interest stockholders' equity as of
December 31, 2003 are as follows:
Historical Inflation
cost adjustment Total
-------------- ---------------- ---------------
Common stock............................................... Ps 59.1 3,436.1 3,495.2
Additional paid-in capital................................. 21,003.8 15,215.5 36,219.3
Deficit in equity restatement.............................. - (69,125.6) (69,125.6)
Cumulative initial deferred income tax effects............. (4,697.9) (1,044.0) (5,741.9)
Retained earnings.......................................... 51,773.3 46,384.5 98,157.8
Net income................................................. Ps 6,596.4 471.0 7,067.4
------------- --------------- --------------
D) FOREIGN CURRENCY TRANSLATION
The foreign currency translation results recorded in stockholders' equity are
summarized as follows:
Years ended December 31, 2001 2002 2003
-------------- ---------------- ---------------
Foreign currency translation adjustment...................... Ps (2,694.3) 7,038.4 5,169.2
Foreign exchange gain (loss) (1) ............................ 830.1 (2,847.0) (1,564.2)
-------------- ---------------- ---------------
Ps (1,864.2) 4,191.4 3,605.0
-------------- ---------------- ---------------
(1) Foreign exchange results from the financing corresponding to the acquisitions of foreign subsidiaries.
The foreign currency translation adjustment includes foreign exchange results
of financing related to acquisitions of foreign subsidiaries made by the
Company's subsidiary in Spain of Ps(49.5) in 2001, Ps167.3 in 2002 and Ps59.4
in 2003.
E) PREFERRED STOCK
In October 2003, CEMEX repurchased the remaining balance of preferred stock of
U.S.$650 million (Ps7,306.0), which was to mature in February and August 2004.
The preferred stock was issued in November 2000 by a Dutch subsidiary for
U.S.$1,500 million with an original maturity in May 2002 and was related to
the financing of CEMEX Inc.'s (formerly Southdown, Inc.) acquisition. During
2001 and 2002, CEMEX repurchased preferred stock for U.S.$600 million and
U.S.$250 million, respectively, and in 2002 the maturity of the remaining
balance was extended, with U.S.$195 million due in February 2004 and U.S.$455
million due in August 2004. The preferred stock was mandatorily redeemable
upon maturity and granted its holders 10% of the subsidiary's voting rights,
and the right to receive a guaranteed variable preferred dividend, and the
option, in certain circumstances, to subscribe for additional preferred stock
or common shares for up to 51% of the subsidiary's voting rights. Until its
liquidation, this transaction was included as minority interest. Preferred
dividends declared for approximately U.S.$76 million (Ps860.2) in 2001,
U.S.$23.2 million (Ps259.7) in 2002 and U.S.$12.5 million (Ps144.6) in 2003,
were recognized as minority interest in the consolidated income statements.
F-28
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
A subsidiary of CEMEX in Spain issued, during 1998, capital securities for
U.S.$250 million with an annual dividend rate of 9.66%. In April 2002, through
a tender offer, U.S.$184 million of capital securities were redeemed. The
amount paid to the holders in excess of the nominal amount of the capital
securities pursuant the early redemption of approximately U.S.$20 million
(Ps224.8) was recorded against stockholders' equity. The balance outstanding
as of December 31, 2002 and 2003 was U.S.$66 million (Ps741.8) in both years.
The Company has an option to repurchase the remaining securities in November
2004 or on any subsequent dividend payment date. Additionally, the holders
have the right to sell them to the Company in May 2005. This transaction is
recorded as minority interest. Preferred dividends declared on the capital
securities during 2001, 2002 and 2003 of approximately U.S.$24.2 million
(Ps271.4), U.S.$11.9 million (Ps132.6) and U.S.$6.4 million (Ps73.4),
respectively, were recognized as minority interest in the consolidated income
statements.
F) OTHER EQUITY TRANSACTIONS
Through an announcement dated on November 17, 2003, the Company launched a
public offer to purchase up to 90,018,042 appreciation warrants ("warrants")
traded on the Mexican Stock Exchange ("MSE"), including those warrants
represented by American Depository Warrants ("ADWs"), each ADW representing
five warrants, traded on the New York Stock Exchange ("NYSE"), which represent
approximately 86.73% of the total outstanding warrants and include the
approximately 34.9 million warrants owned by or controlled by CEMEX and its
subsidiaries. The Company issued two additional announcements on December 11
and 23, which established specific procedures with respect to such offer. The
offer expires on January 26, 2004, unless the Company extends the period. The
holders of warrants and ADWs wishing to participate in the offer must specify
the price at which they would tender their warrants or ADWs, within the range
of established prices from 5.10 pesos per warrant (equivalent to 25.50 pesos
per ADW) to 8.10 pesos per warrant (equivalent to 40.50 pesos per ADW).
At the end of the offer period, the single price at which CEMEX will purchase
the warrants and ADWs is to be determined, depending on the prices at which
warrants and ADWs are tendered, which will be ordered starting from the lowest
price per warrant offered until a single purchase price is reached that would
enable CEMEX to purchase 90,018,042 warrants, or such lesser number of
warrants as are validly tendered in the offer. If more than 90,018,042
warrants are validly tendered in the offer, CEMEX will acquire the warrants
and ADWs a "pro rata" basis, in most cases. Assuming that the total number of
warrants subject to the offer was repurchased, the remaining 13,772,903
warrants will remain outstanding and will mature in December 2004.
The warrants and ADWs subject to the offer were originally issued in December
1999 by means of a public offer on the MSE and the NYSE, in which 105 million
warrants and ADWs with December 2002 maturity were sold. In December 2001, in
a simultaneous and voluntary public purchase and sale offer for the warrants
and exchange offer for the ADWs, outstanding as of the offer date, under a one
for one exchange ratio, 103,790,945 new warrants and ADWs with maturity in
December 2004 were issued. The warrants and ADWs that were not exchanged in
2001 expired in December 2002. The warrants permit the holders to benefit from
future increases in the CEMEX CPO's market price above the strike price, which
at December 31, 2003 was approximately U.S.$5.45 per CPO (U.S.$27.23 per ADS).
The benefit, should any exist, will be paid in CPOs. Until September 2003, the
CPOs and ADSs required to cover future exercises of the new warrants, as well
as the old warrants, were held in equity forward contracts with financial
institutions. These forward contracts were settled in October 2003 as a result
of a simultaneous secondary equity offering on the MSE and the NYSE, made by
the Company and the banks holding the shares (see note 16A).
In addition, in December 2003, through the payment of U.S.$75.9 million
(Ps853.1), CEMEX executed the option that it retained and repurchased the
assets related to a financial transaction through which, in December 1995, the
Company transferred financial assets to a trust, while simultaneously,
investors contributed U.S.$123.5 million in exchange for notes representing a
beneficial interest in the trust. During the life of the transaction and until
maturity in 2007, periodic repurchases of the financial assets underlying in
the trust were stipulated. Therefore, as of December 31, 2002, the outstanding
balance of this transaction was approximately U.S.$90.6 million (Ps1,038.9).
Moreover, during the life of the transaction, the Company maintained an option
to reacquire the related financial assets at different dates. The cost of
retaining this option was recognized in earnings as part of the financial
expense for approximately U.S.$13.8 million (Ps152.6) in 2001, U.S.$13.2
million (Ps151.2) in 2002 and U.S.$14.5 million (Ps163.0) in 2003. Until its
settlement in December 2003, this transaction was included as part of the
minority interest in stockholders' equity.
F-29
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
G) COMPREHENSIVE NET INCOME (LOSS)
The main items included in the comprehensive net income (loss) items for the
years ended December 31, 2001, 2002 and 2003, are as follows:
2001 2002 2003
-------------- ------------- -------------
Majority interest net income....................................... Ps 13,026.6 5,966.9 7,067.4
Deficit in equity restatement:
Effects from holding non-monetary assets.......................... (2,445.9) (10,431.8) (3,432.9)
Foreign currency translation adjustment........................... (2,694.3) 7,038.4 5,169.2
Capitalized foreign exchange result (note 14D) ................... 830.1 (2,847.0) (1,564.2)
Additional minimum liability...................................... 230.3 - -
Valuation of investments available for sale (note 8B)............. (877.4) - -
Hedge derivative instruments (notes 11 and 16).................... - (2,398.7) 458.7
Deferred income tax of the year charged directly to stockholders'
equity (note 17)................................................ 26.2 858.9 (215.3)
Equity instruments' early redemption results...................... - (229.4) (653.4)
Cumulative initial effects of asset retirement obligations........ - - (85.8)
Inflation effect on equity 1...................................... 318.5 225.3 -
-------------- ------------- -------------
Total comprehensive income (loss) items......................... (4,612.5) (7,784.3) (323.7)
-------------- ------------- -------------
Majority comprehensive net income (loss)........................ 8,414.1 (1,817.4) 6,743.7
Minority interest............................................... 1,695.7 425.1 341.8
-------------- ------------- -------------
Consolidated comprehensive net income (loss).................... Ps 10,109.8 (1,392.3) 7,085.5
-------------- ------------- -------------
1 Relates to the adjustment resulting from the use of the weighted average
inflation index for the restatement of stockholders' equity and the use of
the index of inflation in Mexico to restate common stock and additional
paid-in capital (see note 2B).
15. EXECUTIVE STOCK OPTION PROGRAMS
The information relating to stock option programs, presented in terms of
equivalent CPOs and considering the effect of the options exchange program
described below, are summarized as follows:
Fixed program Special program Variable Voluntary
Options (A) (B) program (C) Programs (D)
---------------- ---------------- ---------------- ----------------
As of December 31, 2001.................... 8,695,396 - 88,937,805 20,215,960
Changes in 2002:
Granted.................................... - 4,963,775 16,949,800 2,120,395
Exercised.................................. (2,119,871) - (7,294,781) (6,287,050)
---------------- ---------------- ---------------- ----------------
As of December 31, 2002................... 6,575,525 4,963,775 98,592,824 16,049,305
Changes in 2003:
Granted.................................... - 2,682,985 22,346,738 38,583,989
Cancelled.................................. (533,608) - (22,799) (9,700,280)
Exercised.................................. (1,352,582) (17,500) - (38,884,926)
---------------- ---------------- ---------------- ----------------
As of December 31, 2003.................... 4,689,335 7,629,260 120,916,763 6,048,088
---------------- ---------------- ---------------- ----------------
Exercise Prices:
Options exercised during the year*......... Ps25.43 U.S.$4.52 - U.S.$3.45
Options outstanding at year-end*........... Ps29.33 U.S.$4.62 U.S.$5.02 U.S.$4.14
Remaining average life..................... 3.7 years 8.5 years 9.1 years 1.8 years
Options completed vested................... 92.8% 23.8% 73.6% 100.0%
---------------- ---------------- ---------------- ----------------
* Weighted average exercise price per CPO.
F-30
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
A) Fixed Program
Through October 31, 2001, CEMEX granted stock options annually to its
executives for the acquisition of CPOs under a stock option program ("fixed
program"), which was replaced through a voluntary exchange program (see
"variable program" below). The outstanding options correspond to the
executives that did not participate in the exchange program. Under the fixed
program, which was initiated in 1995, eligible executives received stock
option rights with fixed exercise prices denominated in pesos, equivalent to
the market price of the CPO at the grant date and life of 10 years. Exercise
prices reflect technical antidilution adjustments for stock dividends. The
executives' option rights vest up to 25% annually during the first four years
after having been granted. As of December 31, 2002 and 2003, the new CPOs
generated an additional-paid in capital of Ps75.7 and Ps42.9, respectively,
and increased the number of outstanding shares.
B) Special program
As a result of the acquisition of CEMEX, Inc. (formerly Southdown), a stock
option program to purchase CEMEX ADSs ("special program") was established for
CEMEX, Inc.'s executives. The options granted have a fixed exercise price in
dollars, equivalent to the market price of the ADS as of the grant date, and
have a 10-year tenure. The executives' option rights vest up to 25% annually
during the first four years after having been granted. The options exercises
are hedged using shares currently owned by subsidiaries, potentially
increasing stockholders' equity and the number of shares outstanding. The
amounts of this ADS' programs are presented in terms of equivalent CPOs.
C) Variable program
In November 2001, through a voluntary option exchange program, CEMEX invited
executives to exchange their existing options under the fixed program for new
options issued under a new annual stock option program with exercise prices
denominated in U.S. dollars increasing annually during the option's life
("variable program"), reflecting the funding cost in the market and with a 10
year tenure. The participating executives which exchanged 57,448,219 options,
resigned their rights to subscribe CPOs, in exchange for cash equivalent to
the intrinsic value for each executive at the exchange date and the issuance
of new options, equivalent in number to the time value of their redeemed
options, as determined by the appropriate valuation model, which resulted in
the issuance in 2001 of 88,937,805 options under the variable program. Except
for the options issued through the exchange, where 50% of the option's
exercise rights were vested immediately, with an additional 25% annual vesting
over the next two anniversaries, for subsequent option grants, executives'
option rights may be exercised up to 25% annually during the first four years
after having been granted. During 2001, by means of the exchange program, a
compensatory cost of approximately Ps729.1 was recognized in other expenses,
net.
D) Voluntary programs
As of December 31, 2003, there were 3,927,693 options with an approximate
exercise price of U.S.$3.31 per CPO, out of 36,468,375 options with a 5
year-tenure, sold to executives during 1998 and 1999. The exercise price is
denominated in dollars and increases annually to reflect the funding cost in
the market. In 2003, 300,937 options were exercised, while 9,700,280 options
expired and were canceled.
As of December 31, 2003, there are 2,120,395 options with an approximate
exercise price of U.S.$5.68 per CPO, which were sold to executives in April
and May 2002. As of December 31, 2003, no exercises had occurred. From the
sale of the options, a premium of approximately U.S.$1.5 million (Ps16.9) was
received. The exercise price of the options is denominated in dollars and
increases annually to reflect the funding cost in the market.
In September 2003 were exercised 38,583,989 options, sold to executives in
January 2003 in exchange for an approximate premium of U.S.$9.7 million
(Ps101.5). The options, which had an increasing U.S. dollar exercise price of
approximately U.S.$3.58 per CPO, equal to the CPO market price at the date of
sale, and a five-year term, contained a mandatory exercise condition in case
the market CPO price reached certain level, situation occurred in 2003.
According to agreed conditions, the executives' gain was paid in form of CPOs,
which have a sale restriction for two years after exercise.
E) Options hedging activities
The potential exercise of options under the variable and voluntary programs
require the Company to have availability of the CPOs or ADSs underlying in the
options; therefore, the Company has negotiated equity forward contracts in its
own stock (see note 16A), in order to guarantee that shares would be available
at prices equivalent to those established in the options, without the
necessity of issuing new CPOs into the market; therefore, these programs do
not increase the number of shares outstanding and consequently do not result
in dilution of the basic earnings per share.
F-31
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
Beginning in 2001, CEMEX recognizes the appreciation of the options under the
variable and voluntary programs, resulting from the difference between the
CPO's market price and the exercise prices established in the options, as an
expense in the income statement, which for the years ended December 31, 2001,
2002 and 2003 was U.S.$14.7 million (Ps163.2), U.S.$5.0 million (Ps57.3) and
U.S.$45.3 million (Ps509.2), respectively. Likewise, CEMEX recognizes through
earnings the changes in the estimated fair value of equity forward contracts
designated as hedges of these plans (see note 16A), which resulted in a gain
of approximately U.S.$28.7 million (Ps317.4), a loss of approximately
U.S.$47.1 million (Ps540.2) and a gain of approximately U.S.$28 million
(Ps314.7) as of December 31, 2001, 2002 and 2003, respectively.
16. DERIVATIVE FINANCIAL INSTRUMENTS
As of December 31, 2002 and 2003, the Company's derivative financial
instruments, other than those related to financial debt (see note 11), are
summarized as follows:
2002 2003
---------------------------------- ----------------------------------
U.S. dollars millions Notional Estimated fair Notional Estimated fair
amount value amount value
------------- ---------------- -------------- ----------------
A) Equity forward contracts................. 1,445.1 (90.6) 1,085.0 16.4
B) Foreign exchange instruments ............ 1,325.7 (201.4) 1,445.9 (191.6)
C) Derivatives related to energy projects... 177.0 (0.5) 174.5 (7.4)
------------- ---------------- -------------- ----------------
Upon liquidation and at CEMEX's option, the equity forward contracts allow for
physical or net cash settlement of the estimated fair value. The effects at
settlement are recognized in the income statement or as part of stockholders'
equity, according to their characteristics and use. At maturity, if these
forward contracts are not settled or replaced, or if the Company defaults on
the agreements established with the financial counterparties, such
counterparties may sell the shares underlying the contracts. If any such sale
were to occur, it may have an adverse effect on CEMEX and/or its subsidiaries'
stock market price, may reduce the amount of dividends and other distributions
that the Company receive from its subsidiaries, and/or may create minority
interest affecting the ability to operate the Company.
A) On October 26, 2003, through a secondary equity offering agreed to by the
Company, launched simultaneously on the MSE and the NYSE, financial
institutions offered 29.325 million ADSs (25.5 million ADSs in the offer
plus an optional amount of 3,825 million ADSs in case of over allotments)
held through forward contracts. The acquirerors purchased all ADSs
including the optional amount, resulting in the sale of 23.325 million
ADSs (116.6 million CPOs) and 30 million CPOs (6 million ADSs), at a price
of U.S.$23.15 per ADSs and Ps52.07 per CPO, respectively. Of the total
sale proceeds of approximately U.S.$660 million (Ps7,418.4), net of the
offering expenses, the financial institutions kept approximately U.S.$538
million (Ps6,047.1) as payment for the liquidation of the related forward
contracts, while approximately U.S.$122 million (Ps1,371.3) was reimbursed
to CEMEX. This transaction did not increase the number of shares
outstanding.
As of December 31, 2002, CEMEX held forward contracts for a notional
amount of U.S.$461.1 million. The maturity of these contracts was extended
until December 2003 and covered 24,008,392 ADSs (120,041,960 CPOs) and
33.8 million shares of the Company's subsidiary in Spain. In October 2003,
these forwards were settled through a secondary equity offering (see
preceding paragraph) that resulted in the write-off of accrued prepayments
toward the forwards final price of U.S.$101.7 million (Ps1,143.5),
recognized as part of other accounts receivable and a net gain in
stockholders' equity of approximately U.S.$19.5 million (Ps219.2). These
contracts were negotiated in 1999 to hedge future exercises under the 105
million warrants program, which CEMEX is currently seeking to acquire
through a tender offer (see note 14F). The shares underlying these
forwards contracts were sold by CEMEX during 1999 for approximately
U.S.$905.7 million, and the Company simultaneously prepaid approximately
U.S.$439.9 million toward the forwards' final price. In December 2002, as
a result of the forwards' net cash settlement that was required in order
to renegotiate and extend their maturity until December 2003, a loss of
approximately U.S.$98.3 million (Ps1,104.9) was recognized. The loss arose
from changes in the underlying shares market value. The prepayments made
toward the forwards final price of approximately U.S.$193.6 million,
recognized as short-term accounts receivable as of December 31, 2002 (see
note 5), decreased to approximately U.S.$95.3 million (Ps1,071.2). From
execution of the contracts until their settlement, due to the prepayment
made in 1999 and the withholding of the economic and voting rights on the
Spanish subsidiary's shares underlying the contracts, such shares were
considered property of CEMEX. As of December 31, 2002, the estimated fair
value of the contracts presented a gain of approximately U.S.$69.1
million.
F-32
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
As of December 31, 2002 and 2003, there are forward contracts with
different maturities until October 2006, for notional amounts of
U.S.$436.1 million and U.S.$789.3 million, respectively, covering
16,005,620 ADSs in 2002 and 29,314,561 ADSs in 2003, that are designated
to hedge the future exercise of the options granted under the executive
programs (see note 15). Starting in 2001, changes in the estimated fair
value of these contracts have been recognized in the balance sheet against
the income statement, as a complement of the costs generated by the option
programs. As of December 31, 2002 and 2003, the estimated fair value of
these contracts was a loss of approximately U.S.$47.0 million (Ps539) and
a gain of approximately U.S.$28.0 million (Ps314.7), respectively.
As of December 31, 2002 and 2003, there are forward contracts for notional
amounts of U.S.$95.5 million and U.S.$122.9 million, respectively, that
were to mature in August and September 2003, whose maturity was extended
until August and September 2004. These contracts covering 21,510,500 CPOs
in 2002 and 23,622,500 CPOs in 2003, were negotiated to hedge the purchase
of CAH shares through the exchange for CEMEX CPOs. They were originally
scheduled to be liquidated during 2003 but were extended to 2004 (see note
8A). The effects to be generated upon settlement of the forward contracts
will be recognized as an adjustment to stockholders' equity. The estimated
fair value is not periodically recorded. As of December 31, 2002 and 2003,
the estimated fair value of these contracts was a loss of approximately
U.S.$2.1 million (Ps23.6) and a gain of approximately U.S.$1.8 million
(Ps20.2), respectively.
Additionally, as of December 31, 2002 and 2003, there are forward
contracts for notional amounts of U.S.$452.4 million and U.S.$172.8
million, respectively, with different maturities until February 2006,
covering a total of 15,316,818 ADSs in 2002 and 5,268,939 ADSs in 2003.
These contracts are considered as equity instruments; therefore, changes
in the estimated fair value is not periodically recognized. All effects
resulting from these contracts will be recognized at maturity as an
adjustment to stockholders' equity. As of December 31, 2002 and 2003, the
estimated fair value of these contracts reflected losses of approximately
U.S.$110.6 million and U.S.$27.1 million, respectively. In addition, as of
December 31, 2002, the Company had a third party equity forward contract
for a notional amount of U.S.$7.1 million and an estimated fair value loss
of approximately U.S.$0.1 million (Ps1.1). This contract was settled in
cash during 2003 without any material effect.
As mentioned in note 14F, the Company has the intention to repurchase
86.73% of its appreciation warrants. Depending on the results of the
offer, expiring on January 26, 2004, at least approximately 13.8 million
warrants with maturity in December 2004 would remain outstanding. The
forwards on the Company's own shares not assigned at the end of 2003 will
be used to cover the potential exercises of warrants until expiration.
They will also be used for new stock option grants to executives.
B) In order to hedge financial risks associated with variations in foreign
exchange rates, CEMEX has negotiated foreign exchange forward contracts
for notional amounts of U.S.$1,266.0 million and U.S.$559.3 million, at
December 31, 2002 and 2003, respectively, with different maturities until
March 2005. These contracts have been designated as hedges of the
Company's net investment in foreign subsidiaries. The estimated fair value
of these instruments is recorded in stockholders' equity as part of the
foreign currency translation effect (see note 14D). In addition, as of
December 2002 and 2003, there are foreign exchange options for notional
amounts of U.S.$59.7 million and U.S.$886.6 million, respectively, with
different maturities until June 2005. For the sale of the options, CEMEX
received premiums of approximately U.S.$4.0 million in 2002 and U.S.$62.8
in 2003. The estimated fair value losses of U.S.$44.4 million (Ps509.2) in
2002 and U.S.$57.2 million (Ps642.9) in 2003 were recognized in earnings.
C) As of December 31, 2002 and 2003, CEMEX had an interest rate swap maturing
in May 2017, for notional amounts of U.S.$177 million and U.S.$162.1
million, respectively. The swap was negotiated to exchange floating for
fixed interest rates in connection with agreements entered into by the
Company for the acquisition of electric energy for a 20-year period (see
note 21F). During the life of the swap and based on its notional amount,
CEMEX will pay LIBOR rate and will receive a 7.53% fixed rate until May
2017. In addition, during 2001, the Company sold a floor option for
notional amounts of U.S.$177 million in 2002 and U.S.$174.5 million in
2003, related to the interest rate swap contract. Pursuant to this
contract, until 2017, CEMEX will pay the difference between the 7.53%
fixed rate and the LIBOR rate. For the sale of this option the Company
received a premium of approximately U.S.$22 million (Ps247.3). As of
December 31, 2002 and 2003, the combined fair value of the swap and the
floor option, recognized in earnings represented losses of approximately
U.S.$0.5 million and U.S.$7.4 million, respectively. The notional amount
of both contracts is not aggregated, considering that there is only one
notional amount with exposure to changes in interest rates and the effects
of one instrument, are proportionally inverse to the changes in the other
one.
F-33
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
The estimated fair values of derivative financial instruments fluctuate over
time and are based on estimated settlement costs or quoted market prices.
These values should be viewed in relation to the fair values of the underlying
instruments or transactions and as part of the Company's overall exposure to
fluctuations in foreign exchange rates, interest rates and prices of shares.
The notional amounts of derivative instruments do not necessarily represent
amounts exchanged by the parties and, therefore, are not a direct measure of
the Company's exposure through its use of derivatives. The amounts exchanged
are determined on the basis of the notional amounts and other terms included
in the derivative instruments.
17. INCOME TAX (IT), BUSINESS ASSETS TAX (BAT), EMPLOYEES' STATUTORY PROFIT
SHARING (ESPS) AND DEFERRED INCOME TAXES
The income tax law in Mexico provides that companies must pay either IT or BAT
depending on which amount is greater with respect to their Mexican operations.
Both taxes recognize the effects of inflation, though in a manner different
from Mexican GAAP. ESPS is calculated on similar basis as IT without
recognizing the effects of inflation.
A) IT, BAT AND ESPS
The Company and its Mexican subsidiaries generate IT or BAT on a consolidated
basis; therefore, the amounts of these items included in the accompanying
financial statements, with respect to the Mexican subsidiaries, represent the
consolidated result of these taxes. For ESPS purposes, the amount presented is
the sum of the individual results of each company. Beginning in 1999, the
determination of the consolidated IT for the Mexican companies, considers a
maximum of 60% of the taxable income or loss of each of the subsidiaries. In
addition, commencing in 1999, the taxable income of those subsidiaries that
have tax loss carryforwards generated before 1999 will be considered by the
holding according to equity ownership. Beginning in 2002, in the determination
of consolidated IT, 60% of the taxable result of the controlling entity should
be considered, unless such entity obtains taxable income, in which case 100%
should be considered, until the restated balance of the individual tax loss
carryforwards before 2001 are amortized. Beginning in 2002, a new IT law
became effective in Mexico, establishing that the IT rate will be decreased by
1% each year, beginning in 2003 until it reaches 32% in 2005.
The IT expense presented in the income statements is summarized as follows:
2001 2002 2003
------------- ------------- ------------
Current income tax................................................ Ps (1,476.7) (1,000.0) (1,515.4)
Deferred IT....................................................... (221.1) 434.8 508.2
Effects of inflation (note 2B).................................... (147.2) (63.7) -
------------- ------------- ------------
Ps (1,845.0) (628.9) (1,007.2)
------------- ------------- ------------
As of December 2001, 2002 and 2003, the total consolidated IT includes
expenses of Ps1,525.3, Ps860.4 and Ps1,396.8, respectively, from foreign
subsidiaries, and expense of Ps319.7 in 2001 and revenues of (Ps231.5) in 2002
and (Ps389.6) in 2003 from Mexican subsidiaries.
For its operations in Mexico, CEMEX has accumulated IT loss carryforwards
which, restated for inflation, can be amortized against taxable income in the
succeeding ten years according to Income Tax Law. The Company and its
subsidiaries in Mexico must generate taxable income to preserve the benefit of
the tax loss carryforwards generated beginning in 1999.
The tax loss carryforwards at December 31, 2003 are as follows:
Year in which tax loss occurred Amount of Year of
carryforwards expiration
---------------- -----------------
1995....................................................................... Ps 1,776.6 2005
2000....................................................................... 420.7 2010
2001....................................................................... 3,265.7 2011
2002....................................................................... 3,752.4 2012
2003....................................................................... 872.2 2013
----------------
Ps 10,087.6
----------------
F-34
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
The BAT Law establishes a 1.8% tax levy on assets, restated for inflation in
the case of inventory and fixed assets, and deducting certain liabilities. BAT
levied in excess of IT for the period may be recovered, restated for
inflation, in any of the succeeding ten years, provided that the IT incurred
exceeds BAT in such period.
The recoverable BAT as of December 31, 2003 is as follows:
Year in which BAT exceeded IT Amount of Year of
carryforwards expiration
---------------- ----------------
1997....................................................................... Ps 162.4 2007
----------------
B) DEFERRED IT AND ESPS (see note 2K)
The deferred IT result in the income statement, represents the difference, in
nominal pesos, between the beginning of year balance and the year-end balance
of the deferred tax assets or liabilities. The tax effects of the main
temporary differences that generate the consolidated deferred tax assets and
liabilities are presented below:
2002 2003
----------------- ----------------
Deferred tax assets:
Tax loss carryforwards and other tax credits................................. Ps 4,807.2 6,167.1
Accounts payable and accrued expenses........................................ 268.6 111.7
Trade accounts receivable.................................................... 26.5 8.5
Properties, plant and equipment.............................................. (42.3) (3,107.6)
Others....................................................................... 77.2 22.1
--------------------------------------
Total deferred tax assets.................................................. 5,137.2 3,201.8
Less - Valuation allowance................................................. (2,564.6) (1,058.8)
--------------------------------------
Net deferred tax assets.................................................. 2,572.6 2,143.0
--------------------------------------
Deferred tax liabilities:
Tax loss carryforwards and other tax credits................................. 6,796.5 6,906.3
Accounts payable and accrued expenses........................................ 4,706.4 1,924.7
Trade accounts receivable.................................................... 94.9 85.3
Properties, plant and equipment.............................................. (19,237.1) (16,815.6)
Inventories.................................................................. (1,355.9) (892.6)
Others....................................................................... (1,012.5) (433.6)
--------------------------------------
Total deferred tax liabilities............................................. (10,007.7) (9,225.5)
Less - Valuation allowance................................................. (2,496.9) (2,616.1)
--------------------------------------
Net deferred tax liabilities............................................. (12,504.6) (11,841.6)
--------------------------------------
Net deferred tax position (liability)........................................ (9,932.0) (9,698.6)
Less - Deferred IT of acquired subsidiaries at the acquisition date........ (4,468.5) (4,528.0)
--------------------------------------
Total effect of deferred IT in stockholders' equity at end of year........... (5,463.5) (5,170.6)
Total effect of deferred IT in stockholders' equity at beginning of year .... (6,757.2) (5,463.5)
--------------------------------------
Change deferred IT for the period....................................... Ps 1,293.7 292.9
--------------------------------------
The breakdown of the change in consolidated deferred income tax for the period
is as follows:
2001 2002 2003
-------------- ------------- -------------
Deferred income tax charged (credited) to the income statement.... Ps (221.1) 434.8 508.2
Deferred income tax applied directly to stockholders' equity...... 26.2 858.9 (215.3)
-------------- ------------- -------------
Deferred IT income (expense) for the period.................. Ps (194.9) 1,293.7 292.9
-------------- ------------- -------------
Bulletin D-4 states that all items whose effects are recorded directly in
stockholders' equity should be recognized net of their deferred income tax
effects. Bulletin D-4 does not allow the offsetting of deferred tax assets and
liabilities relating to different tax jurisdictions.
F-35
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
The Company's management considers that sufficient taxable income will be
generated as to realize the tax benefits associated with the deferred income
tax assets, and the tax loss carryforwards, prior to their expiration. In the
event that present conditions change, and it is determined that future
operations would not generate enough taxable income, or that tax strategies
are no longer viable, the valuation allowance would be increased against the
income statement.
Temporary differences between the net income of the period and taxable income
for ESPS, generated an expense of Ps14.6 in 2001, an income of Ps20.4 in 2002
and an expense of Ps69.9 in 2003, reflected in the income statement.
C) EFFECTIVE TAX RATE
The effects of inflation are recognized differently for income tax and for
accounting purposes. These situation, as well as other differences between the
book and the income tax basis, arising from the several income tax rates and
laws in each of the countries in which CEMEX operates, give rise to permanent
differences between the approximate statutory tax rate and the effective tax
rate presented in the consolidated income statement, as follows:
For the years ended December 31, 2001 2002 2003
---------- ---------- ---------
% % %
Approximated consolidated statutory tax rate.............................. 35.0 35.0 34.0
Additional deductions and other deductible items...................... (1.8) (6.6) (15.8)
Expenses and other non-deductible items............................... 0.8 1.0 1.2
Non-taxable sale of marketable securities and fixed assets............ - (10.2) -
Difference between book and tax inflation............................. (15.8) (5.6) (0.3)
Minimum taxes......................................................... 0.2 - -
Depreciation.......................................................... (0.6) - -
Others (1)............................................................ (6.7) (4.3) (6.8)
---------- ---------- --------
Effective consolidated tax rate .......................................... 11.1 9.3 12.3
---------- ---------- --------
(1) Includes the effects of the different IT rates in the countries where
CEMEX operates, and the difference between the 2003 rate in Mexico of 34%
and those in effect in 2004 of 33% and in 2005 and thereafter of 32%.
18. FOREIGN CURRENCY POSITION
The peso to dollar exchange rate as of December 31, 2001, 2002 and 2003 was
Ps9.17, Ps10.38 and Ps11.24 pesos per dollar, respectively. As of January 15,
2004, the exchange rate was Ps10.85 pesos per dollar.
As of December 31, 2003, the principal balances denominated in foreign
currencies, as well as non-monetary assets in Mexico of foreign origin, are
presented as follows:
U.S. dollars millions Mexico Foreign Total
---------------- ----------------- ----------------
Current assets......................................... 16.7 1,899.1 1,915.8
Noncurrent assets...................................... 917.1 (1) 10,182.1 11,099.2
---------------- ----------------- ----------------
Total assets......................................... 933.8 12,081.2 13,015.0
---------------- ----------------- ----------------
Current liabilities.................................... 736.4 1,795.7 2,532.1
Long-term liabilities.................................. 1,834.4 4,057.4 5,891.8
---------------- ----------------- ----------------
Total liabilities.................................... 2,570.8 5,853.1 8,423.9
---------------- ----------------- ----------------
(1) Non-monetary assets in Mexico of foreign origin.
Additionally, transactions of the Company's Mexican operations denominated in
foreign currencies during 2001, 2002 and 2003, are summarized as follows:
U.S. dollars millions 2001 2002 2003
---------------- ----------------- ----------------
Export sales........................................... 83.2 72.1 57.1
Import purchases....................................... 41.8 92.5 90.5
Financial income....................................... 105.1 11.1 7.5
Financial expense...................................... 302.1 275.6 389.0
---------------- ----------------- ----------------
F-36
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
19. GEOGRAPHIC SEGMENT DATA
The Company operates principally in the construction industry segment through
the production and marketing of cement and ready-mix concrete. The following
tables present, in accordance with the information analyzed for
decision-making by management, selected condensed financial information of the
Company's main business units for the years ended December 31, 2001, 2002 and
2003:
Net Sales Operating Income
----------- -- ------------ -- ------------ ------------ -- ------------ -- -------------
2001 2002 2003 2001 2002 2003
----------- ------------ ------------ ------------ ------------ -------------
Mexico................ Ps 29,659.5 28,477.9 29,544.9 11,854.1 10,875.3 11,378.5
Spain................. 8,724.4 11,283.0 13,653.1 2,124.8 2,631.5 2,981.0
United States......... 22,233.5 20,073.4 19,469.1 3,539.2 3,093.7 2,300.4
Venezuela............. 5,139.1 3,482.0 3,584.4 1,713.0 1,127.2 1,195.3
Colombia.............. 2,391.1 2,224.2 2,483.0 1,014.2 927.7 1,032.2
Caribbean and Central
America............... 4,899.9 5,748.5 6,668.0 742.3 1,081.5 1,179.6
Philippines........... 1,494.5 1,496.3 1,507.4 142.8 (72.4) (142.0)
Egypt................. 1,547.0 1,718.7 1,513.8 381.4 221.8 334.5
Others................ 9,241.3 8,688.0 9,424.9 (3,225.7) (4,857.4) (3,902.9)
----------- ------------ ------------ ------------ ------------ -------------
85,330.3 83,192.0 87,848.6 18,286.1 15,028.9 16,356.6
Eliminations.......... (8,758.2) (8,150.0) (7,320.9) - - -
----------- ------------ ------------ ------------ ------------ -------------
Consolidated.......... Ps 76,572.1 75,042.0 80,527.7 18,286.1 15,028.9 16,356.6
----------- ------------ ------------ ------------ ------------ -------------
In order to present integrally the operations of each geographic area, net
sales between geographic areas are presented under the caption "eliminations".
Depreciation and Amortization
-------------------------------------------
2001 2002 2003
----------- ------------ ------------
Mexico................ Ps 1,889.8 1,779.7 1,645.0
Spain................. 873.3 1,125.1 1,368.8
United States......... 2,437.0 1,932.2 2,013.4
Venezuela............. 725.1 580.6 635.2
Colombia.............. 557.5 531.5 830.1
Caribbean and Central
America............... 414.7 443.4 602.3
Philippines........... 394.6 465.6 444.3
Egypt................. 524.9 486.5 354.4
Others................ 950.9 1,431.8 1,377.6
----------- ------------ ------------
Consolidated.......... Ps 8,767.8 8,776.4 9,271.1
----------- ------------ ------------
For purposes of the table above, goodwill amortization reported by holding
companies has been allocated to the business geographic segment that
originated such goodwill amounts. Therefore, this information is not directly
comparable with the information of the individual entities, which are
comprised in each segment. Additionally, in the Company's consolidated income
statement, goodwill amortization is recognized as part of other expenses, net.
F-37
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
Total assets and investment in fixed assets by geographic segment are
summarized as follows:
Total Assets Investment in Fixed Assets (2)
------------------------------------- ----------------------------------
2002 2003 2002 2003
---------------- ---------------- -------------- ---------------
Mexico....................................Ps 62,996.2 55,814.0 1,074.5 1,254.9
Spain..................................... 24,071.6 35,185.8 691.2 664.8
United Status............................. 49,405.6 46,776.2 1,130.1 1,107.8
Venezuela................................. 8,681.8 8,687.8 152.7 123.4
Colombia.................................. 6,651.7 7,554.5 58.3 68.3
Caribbean and Central America............. 11,785.4 12,155.4 323.0 683.4
Philippines............................... 9,356.0 7,869.5 136.5 19.1
Other Asian............................... 4,040.0 4,289.0 119.4 20.0
Egypt..................................... 6,313.8 4,149.9 305.1 161.6
Others (1)................................ 79,186.2 73,960.1 683.5 397.0
---------------- ---------------- -------------- ---------------
262,488.3 256,442.2 4,674.3 4,500.3
Eliminations.............................. (79,738.0) (76,424.8) - -
---------------- ---------------- -------------- ---------------
Consolidated..............................Ps 182,750.3 180,017.4 4,674.3 4,500.3
---------------- ---------------- -------------- ---------------
(1) Includes, in addition to trade maritime operating assets and other assets, related party balances of the Parent
Company of Ps37,466.3 and Ps35,331.8 in 2002 and 2003, respectively, which are eliminated in consolidation.
(2) Corresponds to fixed assets investments not considering the effects of inflation. As a result, this balance differs
from the amount presented as investing activities in the Statement of Changes in the Financial Position in
"Properties, machinery and equipment, net", which considers the inflation effects in accordance with Bulletin B-10.
As of December 31, 2002 and 2003, of the consolidated financial debt amounting
to Ps66,143.5 and Ps65,931.8, respectively, approximately 57% in 2002 and 35%
in 2003 is in the Parent Company, 24% and 14% in United States, 12% and 16% in
Spain and 7% and 35% in other countries, respectively. Of the 35% of other
countries in 2003, 57% is in a Dutch subsidiary, and is guaranteed by the
Mexican operations and the Parent. The other 31% is in financial companies in
the United States, and is guaranteed by the Spanish operations.
20. EARNINGS PER SHARE
Basic earnings per share are calculated by dividing majority interest net
income for the year by the weighted average number of common shares
outstanding during the year. Diluted earnings per share reflects on the
weighted average number of common shares outstanding, the effects of any
transaction carried out by the Company which have a potentially dilutive
effect on such number of shares.
The weighted-average number of shares utilized in the earnings per share
("EPS") calculation is as follows:
Majority
Basic number of Diluted number of interest net Basic Diluted
shares shares income EPS EPS
---------------- ----------------- ------------- -------- --------
December 31, 2001..................... 4,264,724,371 4,299,689,171 Ps 13,026.6 Ps 3.05 Ps 3.03
December 31, 2002..................... 4,487,527,392 4,496,213,613 5,966.9 1.33 1.33
December 31, 2003........................ 4,728,201,229 4,837,194,188 7,067.4 1.49 1.46
---------------- ----------------- ------------- -------- --------
The difference between the basic and diluted average number of shares in 2001,
2002 and 2003 is attributable to the additional shares to be issued under the
Company's fixed executive stock option program (see note 15). In addition,
beginning in 2003, the Company includes the dilutive effect on the basic
number of shares resulting from the equity forward contracts in the Company's
own stock, determined under the inverse treasury method.
F-38
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
21. CONTINGENCIES AND COMMITMENTS
A) GUARANTEES
As of December 31, 2002 and 2003, CEMEX, S.A. de C.V. has signed as guarantor
of loans made to certain subsidiaries for approximately U.S.$55.2 million and
U.S.$1,322 million, respectively. As of the same dates, the Company and
certain subsidiaries have guaranteed the risks associated with certain
financial transactions, assuming contingent obligations under standby letters
of credit, issued by financial institutions for a total of U.S.$175.0 million
and U.S.$55 million, respectively.
B) TAX ASSESSMENTS
As of December 31, 2003, the Company and some of its subsidiaries in Mexico
have been notified of several tax assessments determined by the Mexican tax
authorities, related to different tax periods. These tax assessments are for
an amount of approximately Ps4,884.9. The tax assessments result primarily
from: (i) Recalculation of the inflationary tax deduction, since the tax
authorities claim that "Advance Payments to Suppliers" and "Guaranty Deposits"
are not by their nature credits; (ii) disallowed restatement of tax loss
carryforwards in the same period in which they occurred; (iii) disallowed
determination of tax loss carryforwards and; (iv) disallowed reduction of BAT
by the controlling entity on the grounds that the creditable amount should be
in proportion to the equity interest it has over the controlled entities. The
companies involved are using available defense actions granted by law in order
to cancel the tax claims.
As of December 31, 2003, the Philippine Bureau of Internal Revenue ("BIR")
assessed APO Cement Corp. ("APO") for deficiency in the payment of income tax.
The assessment covers the taxable years of 1998 through 2001 with deficiency
tax amounting to Philippine Pesos 741.1 million (approximately U.S.$13.3
million). The assessment disallows APO's income tax holiday related income.
APO contested BIR's findings with the Court of Tax Appeal ("CTA"). In a
separate case, the BIR finalized its determinations with respect to fiscal
year 1999 of Solid and APO. Both companies will continue to submit relevant
evidence to the BIR to contest these assessments. APO intends to contest these
assessments with the CTA in case the BIR issues a final collection letter.
Additionally, Solid's 1998 tax year and APO's 1997 and 1998 tax years are
under preliminary review for deficiency in the payment of taxes. Finalization
of the assessment was held in abeyance by the BIR as APO and Solid continue to
present evidence to dispute their findings. The Company intends to contest any
and all assessments if they arise.
C) ANTI-DUMPING DUTIES
In 1990, the United States Department of Commerce ("DOC") imposed an
anti-dumping duty order on imports of gray Portland cement and clinker from
Mexico. As a result, certain subsidiaries of the Company, as importers of
record, have been subject to payment of anti-dumping duty deposits, estimated
on imports of gray Portland cement and clinker from Mexico since April 1990.
The order is likely to continue for an indefinite period, until the United
States of America ("United States") government determines, taking into
consideration the World Trade Organization new rules, that conditions for
imposing the order no longer exist; the cancellation or suspension of the
order would follow. In the last quarter of 2000, the United States government
continued the order, a resolution that will prevail until it makes a new
review. During December 2001, the United States government through the
International Trade Commission denied the Company's request to initiate a new
review.
As of December 31, 2003, the Company has accrued a liability of U.S.$132.9
million, including accrued interest, for the difference between the amount of
anti-dumping duties paid on imports and the latest findings by the DOC in its
administrative reviews for all periods under review.
As of December 31, 2003, the Company is in the thirteenth administrative
review period by the DOC and expects a preliminary resolution in the second
half of 2004. The DOC published, during September 2003, the final resolution
with respect to the twelfth administrative review period. With respect to the
first five review periods, the DOC has issued a final resolution of the
anti-dumping duties. Referring to the remaining review periods, the final
resolutions are suspended until all the procedures before the North America
Free Trade Agreement Panel are concluded. As a result, the final amounts may
be different from those liabilities recorded in the accompanying consolidated
financial statements. The Company and its subsidiaries have defended their
position in this matter and will continue to do so through available means in
order to determine the actual dumping margins within each period of the
administration reviews carried out by the DOC.
F-39
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
During 2001, the Ministry of Finance ("MOF") of Taiwan by the claim of five
Taiwanese cement producers, initiated a formal antidumping investigation
involving imported gray Portland cement and clinker from the Philippines and
South Korea. APO, Rizal and Solid are among the cement producers under
investigation and have received their anti-dumping questionnaires from the
International Trade Commission under the Ministry of Economic Affairs
("ITC-MOEA") Rizal and Solid replied to the ITC-MOEA by confirming that they
have not been exporting cement or clinker during the review period.
Furthermore, APO contested the allegation of "injury" in the anti-dumping
proceedings before the ITC-MOEA. At the end of the same year ITC-MOEA informed
the petitioners and the respondent producers about the results of the
preliminary investigation and determined that there are reasonable indicators
that the Taiwanese industry has incurred material damage due to imports of
cement and clinker from South Korea and the Philippines that allegedly is sold
in Taiwan at a price below market price. In order to comply with regulations
of anti-dumping duties in Taiwan, the ITC-MOEA transferred this investigation
to the MOF. In November 2001, APO received supplemental questionnaires by the
MOF. The answer to these questionnaires was presented by APO during November
and December 2001.
In January 2002, the MOF notified the petitioners and respondent producers, on
a preliminary resolution, of findings that there might be dumping and that the
investigation would continue, without imposing any anti-dumping duty. In June
2002, the ITC-MOEA informed the petitioners and repondent producers of its
resolution that the imports from South Korea and the Philippines had caused
material damage to the Taiwanese industry. In July 2002, the MOF gave notice
of a cement and clinker import duty, from imports of South Korea and the
Philippines, beginning on July 19, 2002. The imposed tariff was 42% on imports
from APO, Rizal and Solid (Rizal and Solid merged in December 2002). In
September 2002, those entities appealed the anti-dumping duty before the
Taipei High Administrative Council. At December 31, 2003, the appeal remains
pending.
D) LEASES
CEMEX has entered into various non-cancelable operating leases, primarily for
operating facilities, cement storage and distribution facilities and certain
transportation and other equipment, under which annual rental payments are
required plus the payment of certain operating expenses. Future minimum rental
payments due under such leases are as follows:
Year ending December 31, U.S. dollars millions
-------------------------------------------------------------------------------------------------- --------------------
2004............................................................................................... 65.3
2005............................................................................................... 62.3
2006............................................................................................... 47.3
2007............................................................................................... 41.0
2008............................................................................................... 40.8
2009 and thereafter................................................................................ 86.1
--------------------
342.8
--------------------
Rental expense for the years ended December 31, 2001, 2002, and 2003 was
approximately U.S.$67 million, U.S.$57 million and U.S.$56 million,
respectively.
E) PLEDGE ASSETS
As of December 31, 2002 and 2003 there are liabilities amounting to U.S.$80.8
million and U.S.$27.1 million, respectively, secured by properties, machinery
and equipment.
F) COMMITMENTS
As of December 31, 2002 and 2003, the Company has future commitments for the
purchase of raw materials for an approximate amount of U.S.$86.4 million and
U.S.$113.0 million, respectively.
During 1999, CEMEX entered into agreements with an international partnership
which will build and operate an electrical energy generating plant. The
agreements establish that when the plant begins operations, CEMEX will
purchase, starting in 2003, all the energy generated by the plant for a term
of no less than 20 years. As part of the agreements, CEMEX has committed to
supply the electrical energy plant with all fuel necessary for its operations,
a commitment that has been hedged through a 20-year agreement entered into by
the Company with Petroleos Mexicanos. By means of this transaction, CEMEX
expects to have significant decreases in its electrical energy costs, and the
supply is expected to be sufficient to cover approximately 80% of the
electrical energy needs of CEMEX in Mexico. CEMEX is not required to make any
capital investment in the project. At December 31, 2003, the plant is in the
proofing stage and has not sold any output to CEMEX. Electricity purchases are
expected to begin in the first quarter of 2004.
F-40
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
In March 2002, the distribution contract in Taiwan that CEMEX had with
Universe Company since March 31, 2000, was terminated. As a result, for the
year ended December 31, 2002, CEMEX recognized an approximate loss of
U.S.$17.3 million (Ps198.4) within other expenses, net.
G) OTHER CONTINGENCIES
At December 31 2003, CEMEX, Inc., has accrued liabilities specifically
relating to environmental matters in the aggregate amount of U.S.$32.4
million. The environmental matters relate to: a) in the past, in accordance
with industry practice, disposing of various materials, which might be
categorized as hazardous substances or wastes, and b) the cleanup of sites
used or operated by the Company, including discontinued operations, in regard
to the disposal of hazardous substances or wastes, either individually or
jointly with other parties. Most of the proceedings are in the preliminary
stage, and a final resolution might take several years. For purposes of
recording the provision, the subsidiary considers that it is probable that a
liability has been incurred and the amount of the liability is reasonably
estimable, whether or not claims have been asserted, and without giving effect
to any possible future recoveries. Based on information developed to date, the
subsidiary does not believe it will be required to spend significant sums on
these matters in excess of the amounts previously recorded. Until all
environmental studies, investigations, remediation work, and negotiations with
or litigation against potential sources of recovery have been completed,
however, the ultimate cost that might be incurred to resolve these
environmental issues cannot be assured.
In December 2002, an ex-maritime broker for Puerto Rican Cement Company, Inc.
("PRCC"), the main subsidiary of CEMEX in Puerto Rico, filed a lawsuit in
Puerto Rico against CEMEX, PRCC and other individuals not affiliated with
CEMEX, including Puerto Rican authorities. The plaintiff contends that the
defendants conspired to break antitrust laws so that one of the defendants,
who is not a CEMEX related party, could have control of the maritime broker
market in Port of Ponce, Puerto Rico. The plaintiff has asked for relief in
the amount of approximately U.S.$18 million. In October 2003, the legal
authorities in Puerto Rico ruled against the plaintiff.
In May 2001, a subsidiary of the Company in Colombia received a civil
liability suit from 42 transporters, alleging that this subsidiary is
responsible for alleged damages caused by the alleged breach of provision of
raw materials contracts. The plaintiffs have asked for relief in the amount of
U.S.$45.8 million. The Company filed a timely defense response. This
proceeding is in a preliminary stage. Typically, proceedings of this nature
take several years before a final resolution is reached.
In May 1999, several companies filed a lawsuit against two subsidiaries of the
Company based in Colombia, alleging that the Ibague plants were causing
capacity production damage to their lands due to the pollution they generate.
The plaintiffs demand a relief in the amount of U.S.$8.8 million. This
proceeding is in its final stage. As of December 31, 2003, the Company had not
been formally notified of any resolution.
22. NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the Mexican Institute of Public Accountants issued Bulletin C-12,
"Financial Instruments with Characteristics of Liabilities, Equity, or Both",
which is effective beginning January 1, 2004, however, earlier application is
permitted. Bulletin C-12 condenses the guidelines included in other bulletins
related to the issuance of complex financial instruments, and complements the
criteria to achieve a comprehensive resolution of general problems. As a
result, Bulletin C-12 defines the basic differences between liabilities and
equity; establishes rules for the initial classification and valuation of the
liability and equity components of combined financial instruments, and
establishes rules for disclosure of combined financial instruments. Under
Bulletin C-12, financial instruments should be classified as liabilities or
equity at the beginning of the year of adoption, without determining any
cumulative effect through earnings in the year of adoption. Prior years
comparative financial information should not be restated.
The Company estimates that the adoption of this Bulletin will have no
significant impact on its financial position or operating results, except for
the reclassification of preferred stock for U.S.$66 million (Ps741.8) (see
note 14E), which as of December 31, 2003 is recognized within minority
interest in stockholders' equity, and that according to the new Bulletin's
rules, should be considered as a liability.
F-41
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
23. DIFFERENCES BETWEEN MEXICAN AND UNITED STATES ACCOUNTING PRINCIPLES
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Mexico (Mexican GAAP), which
differ in certain significant respects from those applicable in the United
States (U.S. GAAP).
The Mexican GAAP consolidated financial statements include the effects of
inflation as provided for under Bulletin B-10 and Bulletin B-15, whereas
financial statements prepared under U.S. GAAP are presented on a historical
cost basis. The reconciliation to U.S. GAAP includes (i) a reconciling item
for the reversal of the effect of applying Bulletin B-15 for the restatement
to constant pesos for the years ended December 31, 2001 and 2002, and (ii) a
reconciling item to reflect the difference in the carrying value of machinery
and equipment of foreign origin and related depreciation between the
methodology set forth by Bulletin B-10 (integrated document) and the amounts
that would be determined by using the historical cost/constant currency
method. As described below, these provisions of inflation accounting under
Mexican GAAP do not meet the requirements of Rule 3-20 of Regulation S-X of
the Securities and Exchange Commission. The reconciliation does not include
the reversal of other Mexican GAAP inflation accounting adjustments as these
adjustments represent a comprehensive measure of the effects of price level
changes in the inflationary Mexican economy and, as such, is considered a more
meaningful presentation than historical cost-based financial reporting for
both Mexican and U.S. accounting purposes. The other principal differences
between Mexican GAAP and U.S. GAAP for the years ended December 31, 2001, 2002
and 2003, and their effect on consolidated net income and earnings per share,
are presented below:
Years ended December 31,
-----------------------------------------
2001 2002 2003
--------------------------- -------------
Net income reported under Mexican GAAP...................................... Ps 13,026.6 5,966.9 7,067.4
Inflation adjustment (*).................................................... (1,181.2) (357.5) -
--------------------------- -------------
Net income reported under Mexican GAAP after inflation adjustment........... 11,845.4 5,609.4 7,067.4
Approximate additional U.S. GAAP adjustments:
1. Amortization of goodwill (see 23(a))........................................ (549.4) 1,729.4 1,946.4
2. Deferred income taxes (see 23(b))........................................... (285.9) 2,316.8 (61.8)
3. Deferred employees' statutory profit sharing (see 23(b)).................... (190.8) (194.4) 89.3
4. Other employee benefits (see 23(c))......................................... (9.7) (31.8) 86.4
5. Capitalized interest (see 23(d))............................................ 15.1 (40.0) (45.7)
6. Minority interest (see 23(e)):
a) Financing transactions................................................... 303.6 (167.0) (175.0)
b) Effect of U.S. GAAP adjustments.......................................... 135.3 33.6 (24.4)
7. Hedge accounting (see 23(l))................................................ 633.3 (2,555.3) (826.7)
8. Depreciation (see 23(f)).................................................... (18.1) 13.1 48.8
9. Accruals for contingencies (see 23(g))...................................... (9.6) 7.6 (108.9)
10. Equity in net income of affiliated companies (see 23(h)).................... 0.6 11.9 (9.7)
11. Inflation adjustment of fixed assets (see 23(i))............................ (481.3) (377.2) (262.0)
12. Temporary equity from forward contracts (see 23(j))......................... (461.6) (538.0) 740.5
13. Derivative instruments and equity forward contracts in CEMEX's stock (see
23(l) and 23(m))......................................................... 32.3 - 415.0
14. Other U.S. GAAP adjustments (see 23(k))..................................... (410.6) (494.3) (257.1)
15. Monetary effect of U.S. GAAP adjustments.................................... 495.0 542.4 291.9
--------------------------- -------------
Approximate U.S. GAAP adjustments before cumulative effect of accounting (801.8) 256.8 1,847.0
change...................................................................
--------------------------- -------------
Approximate net income under U.S. GAAP before cumulative effect of 11,043.6 5,866.2 8,914.4
accounting change........................................................
Cumulative effect of accounting change (see 23(k) and 23(m))................ - - (640.7)
--------------------------- -------------
Approximate net income under U.S. GAAP after cumulative effect of Ps 11,043.6 5,866.2 8,273.7
accounting change........................................................
--------------------------- -------------
Basic EPS under U.S. GAAP before cumulative effect of accounting change......... Ps 2.60 1.31 1.89
Diluted EPS under U.S. GAAP before cumulative effect of accounting change....... 2.53 1.31 1.84
--------------------------- -------------
Basic EPS under U.S. GAAP after cumulative effect of accounting change.......... Ps 2.60 1.31 1.75
Diluted EPS under U.S. GAAP after cumulative effect of accounting change........ 2.53 1.31 1.71
--------------------------- -------------
F-42
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
At December 31, 2002 and 2003, the other principal differences between Mexican GAAP and U.S. GAAP, and their effect on
consolidated stockholders' equity, with an explanation of the adjustments, are presented below:
At December 31,
-------------------------
2002 2003
----------- -------------
Total stockholders' equity reported under Mexican GAAP....................................... Ps 79,721.3 76,051.5
Inflation adjustment (*)..................................................................... (4,776.6) -
----------- -------------
Total stockholders' equity reported under Mexican GAAP after inflation adjustment............ 74,944.7 76,051.5
Approximate additional U.S. GAAP adjustments:
1. Goodwill, net (see 23(a)).................................................................... (1,938.1) 1,261.8
2. Deferred income taxes (see 23(b))............................................................ (888.6) 768.2
3. Deferred employees' statutory profit sharing (see 23(b))..................................... (3,314.2) (3,008.1)
4. Other employee benefits (see 23(c)).......................................................... (328.3) (175.8)
5. Capitalized interest (see 23(d))............................................................. (480.5) (523.5)
6. Minority interest--effect of financing transactions (see 23(e))............................... (976.7) (741.8)
7. Minority interest--U.S. GAAP presentation (see 23(e))......................................... (13,115.5) (5,419.1)
8. Depreciation (see 23(f))..................................................................... (208.1) (55.1)
9. Accruals for contingencies (see 23(g))....................................................... 120.9 31.4
10. Investment in net assets of affiliated companies (see 23(h))................................. (218.2) (249.9)
11. Inflation adjustment for machinery and equipment (see 23(i))................................. 6,354.9 3,770.6
12. Temporary equity from forward contracts (see 23(j)).......................................... (5,878.5) -
13. Derivative instruments and equity forward contracts in CEMEX's stock (see 23(l) and 23(m))... - 397.0
14. Other U.S. GAAP adjustments (see 23(k))...................................................... (377.4) (458.5)
----------- -------------
Approximate U.S. GAAP adjustments before cumulative effect of accounting change.............. (21,248.3) (4,402.8)
----------- -------------
Approximate stockholders' equity under U.S. GAAP before cumulative effect of accounting 53,696.4 71,648.7
change.....................................................................................
Cumulative effect of accounting change (see 23 k and m) - (527.5)
----------- -------------
Approximate stockholders' equity under U.S. GAAP after cumulative effect of accounting change Ps 53,696.4 71,121.2
----------- -------------
(*) Adjustment that reverses the restatement of prior periods into constant pesos as of December 31, 2003, using the
CEMEX weighted average inflation factor (see note 2B), and restates such prior periods into constant pesos as of
December 31, 2003 using the Mexican-only inflation factor, in order to comply with current requirements of
Regulation S-X. The Mexican and U.S. GAAP prior periods amounts included throughout note 23, were restated using
the Mexican inflation index, with the exception of those amounts of prior periods that are also disclosed in notes
1 to 22, which were not restated in note 23 using the Mexican inflation in order to have more straightforward
cross-references between note 23 and the Mexican GAAP notes.
Net income and stockholders' equity reconciliations to U.S. GAAP for the year
ended December 31, 2003 have been prepared on a basis that is substantially
consistent with the accounting principles applied in our Annual Report on Form
20-F for the year ended December 31, 2002, except for the adoption of SFAS 143
Accounting for Asset Retirement Obligations ("SFAS 143") and SFAS 150
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity ("SFAS 150"), as of and for the year ended December 31,
2003 (see notes 23(k) and 23(m)). The term "SFAS" as used herein refers to
Statements of Financial Accounting Standards.
(a) Goodwill
Goodwill represents the difference between the purchase price and the
estimated fair value of the acquired entity at the acquisition date. CEMEX's
goodwill recognized under Mexican GAAP has been adjusted for U.S. GAAP
purposes for (i) the effect on goodwill for the U.S. GAAP adjustments as of
the dates the subsidiaries were acquired; (ii) until December 31, 2001, for
the difference between amortization of goodwill as determined under sinking
fund method over 20 to 40 years for Mexican GAAP purposes (see note 2(I)) and
the straight-line method over 40 years for U.S. GAAP purposes. Beginning
January 1, 2002, SFAS 142, Goodwill and Other Intangible Assets, eliminates
the amortization of goodwill under U.S. GAAP (see note 23(s)) and (iii) the
difference between goodwill amounts carried in the reporting unit's functional
currency, restated by the inflation factor of the reporting unit's country and
then translated into Mexican pesos at the exchange rates prevailing at the
reporting date, under U.S. GAAP, against goodwill amounts carried in the
currencies of the reporting units' holding companies, translated into pesos
and then restated using the Mexican inflation index under Mexican GAAP.
In the condensed income statement under U.S. GAAP for the year ended December
31, 2001 presented in note 23(o), amortization of goodwill is reflected as an
operating expense versus other expense under Mexican GAAP.
F-43
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
For purposes of reconciliation to U.S. GAAP, CEMEX adopted in 2002, SFAS 142
and SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(see note 23(s)). As a result of this adoption, effective January 1, 2002,
amortization ceased for goodwill under U.S. GAAP; therefore, beginning in
2002, goodwill amortization recorded under Mexican GAAP is adjusted for
purposes of the reconciliation of net income and stockholders' equity to U.S.
GAAP.
CEMEX assesses goodwill for impairment annually unless events occur that
require more frequent reviews. Discounted cash flow analyses are used to
assess goodwill impairment (see note 23(s)). If an assessment indicates
impairment, the impaired asset is written down to its fair market value based
on the best information available. Estimated fair market value is generally
measured using estimated discounted future cash flows. Considerable management
judgment is necessary to estimate discounted future cash flows. Assumptions
used for these cash flows are consistent with internal forecasts.
(b) Deferred Income Taxes ("IT") and Employees' Statutory Profit Sharing
("ESPS")
For U.S. GAAP purposes, CEMEX accounts for income taxes utilizing SFAS 109,
Accounting for Income Taxes ("SFAS 109"), which requires the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the future tax
consequences of "temporary differences", which result from applying the
enacted statutory tax rates applicable in future years to differences between
the financial statement carrying amounts and the tax basis of existing assets
and liabilities and operating loss carryforwards. The deferred income tax
charged or credited to operations is determined by the difference between the
beginning and the year-end balance of the deferred tax assets or liabilities,
and is recognized in nominal pesos. The effect on deferred taxes of a change
in tax rates is recognized in income in the period that includes the enactment
date.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred
tax liabilities under U.S. GAAP at December 31, 2002 and 2003 are presented below:
2002 2003
------------ -----------
Deferred tax assets:
Net operating loss and assets tax carryforwards........................................ Ps 7,222.1 13,073.4
Trade accounts receivable.............................................................. 114.2 93.8
Investment in affiliated companies..................................................... 303.0 -
Accounts payable and accrued expenses.................................................. 4,467.2 1,705.8
Other.................................................................................. 626.4 22.1
------------ -----------
Total gross deferred tax assets........................................................ 12,732.9 14,895.1
Less valuation allowance............................................................... 1,071.8 3,674.9
------------ -----------
Total deferred tax assets under U.S. GAAP............................................ 11,661.1 11,220.2
------------ -----------
Deferred tax liabilities:
Property, plant and equipment.......................................................... 21,853.6 21,303.7
Inventories............................................................................ 1,273.6 892.6
Other.................................................................................. 903.9 (19.2)
------------ -----------
Total deferred tax liability under U.S. GAAP......................................... 24,031.1 22,177.1
------------ -----------
Net deferred tax liability under U.S. GAAP............................................. 12,370.0 10,956.9
Deferred tax recognized under Mexican GAAP (see note 17B).............................. 5,463.5 5,170.6
------------ -----------
Excess of liability under U.S. GAAP over that recognized under Mexican GAAP............ 6,906.5 5,786.3
Less--U.S. GAAP deferred income taxes of acquired subsidiaries at date of acquisition... 6,345.2 6,554.5
Inflation adjustment (note 2B)......................................................... 327.3 -
------------ -----------
Net adjustment to stockholders' equity under U.S. GAAP................................. Ps 888.6 768.2
------------ -----------
Management considers that there is existing evidence that, in the future, the
Company will generate sufficient taxable income to realize the tax benefits
associated with the deferred tax assets, and the tax loss carryforwards, prior
to their expiration. In the event that present conditions change, and it is
determined that future operations would not generate enough taxable income, or
that tax strategies are no longer viable, the deferred tax assets' valuation
allowance would be increased by a charge to income.
F-44
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
CEMEX records a valuation allowance for the estimated amount of the
recoverable tax on assets which may not be realized due to the expiration of
tax loss carryforwards. Through its continual evaluation of the effects of tax
strategies, among other economic factors, during 2002 and 2003 CEMEX increased
the valuation allowance by approximately Ps483.6 and Ps2,603.1, respectively.
Under Mexican GAAP, CEMEX determines deferred income tax through the asset and
liability method (see notes 2K and 17B), in a manner similar to U.S. GAAP.
Nonetheless, there are specific differences as compared to the calculation
under SFAS 109, resulting in adjustments in the reconciliation to U.S. GAAP.
These differences arise from: (i) the recognition of the accumulated initial
effect of the asset and liability method as of January 1, 2000, which was
recorded directly to stockholders' equity and therefore, does not consider the
provisions of APB Opinion 16 for the deferred tax consequences in business
combinations made before January 1, 2000; (ii) the effects of deferred tax on
the reconciling items between Mexican and U.S. GAAP, and (iii) for the year
ended December 31, 2001, some inflationary adjustments to Mexican GAAP
recorded in the foreign subsidiaries for consolidation purposes which were
treated as permanent differences. For Mexican GAAP presentation purposes,
deferred tax assets and liabilities are long-term items.
CEMEX has recorded a deferred tax liability for U.S. GAAP purposes, related to
ESPS in Mexico, under the asset and liability method at the statutory rate of
10%. The principal effects of temporary differences that give rise to
significant portions of the deferred ESPS liabilities at December 31, 2002 and
2003 are presented below:
At December 31,
-----------------------------
2002 2003
------------- -------------
Deferred assets:
Employee benefits............................................................... Ps 49.4 25.9
Trade accounts receivable....................................................... 15.0 22.3
Other........................................................................... 55.6 104.7
------------- -------------
Gross deferred assets under U.S. GAAP.............................................. 120.0 152.9
------------- -------------
Deferred liabilities:
Property, plant and equipment................................................... 3,008.8 2,920.3
Inventories..................................................................... 148.2 111.5
Other........................................................................... 277.2 129.2
------------- -------------
Gross deferred liabilities under U.S. GAAP......................................... 3,434.2 3,161.0
------------- -------------
Net deferred liabilities under U.S. GAAP........................................... Ps 3,314.2 3,008.1
------------- -------------
In the condensed financial information presented under U.S. GAAP in note
23(o), ESPS expense, both current and deferred, is included in the
determination of operating income. For Mexican GAAP presentation, ESPS
expense, both current and deferred, is considered as a separate line item
equivalent to income tax.
Under Mexican GAAP, CEMEX recognizes deferred ESPS for those temporary
differences arising from the reconciliation of net income of the period and
the taxable income for ESPS. In the reconciliation of net income to U.S. GAAP,
deferred ESPS expense of Ps14.6 in 2001, income of Ps20.4 in 2002 and expense
of Ps69.9 in 2003, determined under Mexican GAAP, were reversed.
(c) Other Employee Benefits
Vacations
Beginning in 2003, CEMEX recognizes vacation expense under Mexican GAAP during
the period the employees earn it, consistently with SFAS 43, Accounting for
Compensated Absences. For the years ended December 31, 2001 and 2002, in some
business units of CEMEX, vacation expense was recorded for purposes of Mexican
GAAP when taken rather than during the period the employees earn it;
therefore, a reconciling item was determined for U.S. GAAP purposes
representing expense of approximately Ps1.8 in 2001, expense of Ps5.7 in 2002
and expense of Ps1.2 in 2003. The amount of expense recognized during 2003
under U.S. GAAP represents the difference between the estimated accrual made
under U.S. GAAP through December 31, 2002 and the accumulated initial effect
from the accounting change under Mexican GAAP, which was recognized as of
January 1, 2003 directly to stockholders' equity for Mexican GAAP purposes.
F-45
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
Severance
Under Mexican GAAP, severance payments, which are not part of a business
restructuring nor a substitution for pension benefits, are recognized in
earnings in the period in which they are paid. Under U.S. GAAP,
post-employment benefits for former or inactive employees, excluding
retirement benefits, are accounted for under the provisions of SFAS 112,
Employers' Accounting for Postemployment Benefits, which requires an entity to
accrue the cost of certain benefits, including severance payments, over an
employee's service life. For the years ended December 31, 2001, 2002 and 2003,
severance provisions recorded for U.S. GAAP purposes resulted in expenses of
Ps7.9, Ps26.1 and income of Ps87.6, respectively, with an accrual of Ps269.6
and Ps175.8 at December 31, 2002 and 2003, respectively. The decrease in the
accrual for severance payments during 2003 results from the voluntary early
retirement program described in note 13. Severance payments relating to any
specific event or restructuring are excluded from the SFAS 112 calculation.
Pension and other benefits
CEMEX accounts for employee pension benefits based on the net present value of
the obligations determined by independent actuaries (see notes 2J and 13), in
a manner similar to SFAS 87, Employers' Accounting for Pensions, under U.S.
GAAP and, therefore, no reconciling item is necessary.
In addition, as a result of the acquisition of CEMEX, Inc. (formerly Southdown
(see note 8A)) in 2000 and Puerto Rican Cement Company, Inc. ("PRCC") in 2002,
CEMEX assumed a package of employee benefits, which include pension,
retirement savings plan, supplemental executive retirement plan and health and
life insurance benefits. The benefit obligation and the net pension cost
arising from CEMEX, Inc.'s and PRCC's employee benefit plans, have been
recorded under Mexican GAAP and are included in the consolidated information
with respect to CEMEX's pension plans, seniority premium and other
postretirement benefits (see note 13).
Most of CEMEX's health care benefits are self-insured and administered on cost
plus fee arrangements with major insurance companies or provided through
health maintenance organizations. CEMEX also provides life insurance benefits
to its active and retired employees. Generally, life insurance benefits for
retired employees are reduced over a number of years from the date of
retirement to a minimum level.
(d) Capitalized Interest
Under Mexican GAAP, CEMEX capitalizes interest on property, machinery and
equipment under construction, which is comprehensively measured in order to
include the following effects from the debt incurred to finance the
construction project: (i) the interest cost, plus (ii) any foreign currency
fluctuations, and less (iii) the related monetary position result. Under U.S.
GAAP, only interest is considered an additional cost of constructed assets to
be capitalized and depreciated over the lives of the related assets. The U.S.
GAAP reconciliation removes the foreign currency gain or loss and the monetary
position result capitalized for Mexican GAAP derived from borrowings
denominated in foreign currency.
(e) Minority Interest
Financing Transactions
For U.S. GAAP presentation purposes (see note 23(o)), the preferred stock
described in note 14E for a notional amount of U.S.$650 million at December
31, 2002, which was repurchased during 2003, is presented as a separate
component of mezzanine items, which are those included between the liabilities
and the equity items on the balance sheet. Under Mexican GAAP, this
transaction was presented as part of the minority interest within
stockholders' equity. Preferred dividends paid in 2001 and 2002 were
recognized as part of the minority interest in the consolidated income
statements under both Mexican and U.S. GAAP, while the preferred dividends
paid in 2003 were classified as interest expense under U.S. GAAP as a result
of the adoption of SFAS 150, see note 23(m).
For U.S. GAAP presentation purposes (see note 23(o)), capital securities
described in note 14E for a notional amount of U.S.$66 million (Ps741.8) at
December 31, 2002 and 2003, are presented as a separate component of mezzanine
items at December 31, 2002 and, as a result of the adoption of SFAS 150, as a
separate component within liabilities at December 31, 2003 (see note 23(m)).
Under Mexican GAAP this transaction was presented as part of the minority
interest within stockholders' equity at both December 31, 2002 and 2003.
Capital securities dividends paid in 2001 and 2002 were recorded as part of
the minority interest in the consolidated income statements under both Mexican
and U.S. GAAP, while the capital securities dividends paid in 2003 were
classified as interest expense under U.S. GAAP as a result of the adoption of
SFAS 150 (see note 23(m)).
F-46
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
As described in note 14F, during 2003, CEMEX settled a financing transaction
entered into in 1995, under which, at December 31, 2002, CEMEX had an
outstanding obligation of U.S.$90.6 million (Ps1,038.9). For U.S. GAAP
purposes the amount outstanding under this arrangement was treated as debt.
Under Mexican GAAP, until its liquidation, this transaction was treated as
minority interest. CEMEX's cost of retaining its option to reacquire the
contributed assets during the years ended December 31, 2001, 2002 and 2003 was
recorded as interest expense in the consolidated income statements under both
Mexican and U.S. GAAP.
U.S. GAAP adjustments on minority interest
Under Mexican GAAP, the minority interest in consolidated subsidiaries is
presented as a separate component within stockholders' equity. Under U.S.
GAAP, minority interest is classified as a separate component between total
liabilities and stockholders' equity (see note 23(o)). At December 31, 2002
and 2003, the amount presented in the reconciliation of stockholders' equity
to U.S. GAAP includes the reclassification previously mentioned, as well as
the share on minority interest of the adjustments to U.S. GAAP determined in
the consolidated subsidiaries.
(f) Depreciation
A subsidiary of CEMEX in Colombia records depreciation expense utilizing the
sinking fund method. This methodology for depreciation was in place before
CEMEX acquired the subsidiary in 1997. For Mexican GAAP purposes, CEMEX has
maintained this accounting practice due to tax consequences in Colombia
arising from a change in methodology and the immateriality of the effects in
CEMEX's consolidated results. For U.S. GAAP purposes, depreciation is
calculated on a straight-line basis over the estimated useful lives of the
assets. As a result, for the years ended December 31, 2001, 2002 and 2003,
expense of Ps44.5 and income of Ps13.1 and Ps48.8, respectively, have been
reflected in the reconciliation of net income to U.S. GAAP.
Additionally, as a result of the application of APB 16 in the acquisition of
Solid (formerly Rizal), one of CEMEX's subsidiaries in the Philippines, for
U.S. GAAP purposes, CEMEX reduced the value of its fixed assets by Ps215.7 in
2001, net of depreciation, corresponding to the portion of the appraisal
value, determined at the acquisition date, related to the minority owners. The
change in the appraised fixed assets amount resulted in a decrease in
depreciation expense under U.S. GAAP of Ps26.4 for the year ended December 31,
2001. As mentioned in note 8A, during July 2002, CEMEX acquired the remaining
30% economic interest in Solid from the minority shareholders. As a result, in
2002, the adjustment made to the appraised fixed assets amount was reversed
against minority interest, given that the reversed amount is part of the
proportional net assets' fair value assigned to the 30% economic interest
acquired. There is no further effect on earnings under U.S. GAAP.
(g) Accruals for Contingencies
For Mexican GAAP purposes, CEMEX has recorded accruals for contingent items
related primarily to guarantees given and other responsibilities that do not
meet the accrual criteria of SFAS 5, Accounting for Contingencies, under U.S.
GAAP, since the likelihood of a loss occurring is considered to be possible
but not probable. Accordingly, the accruals under Mexican GAAP were reversed
for U.S. GAAP purposes.
With respect to the contingencies described in note 21, for which an accrual
has not been provided under Mexican GAAP at December 31, 2002 and 2003, CEMEX
considers that such contingencies do not meet the accrual criteria for both,
Mexican GAAP and U.S. GAAP.
(h) Affiliated Companies
CEMEX has adjusted its investment and equity method in affiliated companies
(see note 8A), for CEMEX's share of the approximate U.S. GAAP adjustments
applicable to these affiliates.
(i) Inflation Adjustment of Machinery and Equipment
For purposes of the reconciliation to U.S. GAAP, fixed assets of foreign
origin are restated by applying the inflation rate of the country that holds
the assets, regardless of the assets' origin countries, instead of using the
Mexican GAAP methodology, under which fixed assets of foreign origin are
restated by applying a factor that considers the inflation of the asset's
origin country, not the inflation of the country that holds the asset, and the
fluctuation of the functional currency (currency of the country that holds the
asset) against the currency of the asset's origin country. Depreciation
expense is based upon the revised amounts.
F-47
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
(j) Temporary Equity from Forward Contracts
As mentioned in notes 14F and 16A, during 1999, CEMEX entered into equity
forward contracts with respect to its ADSs with an original maturity in
December 2002, in connection with its appreciation warrants. In December 2002,
prior to their expiration, CEMEX renegotiated the extension of the forward
contracts until December 2003 and recognized a loss of approximately U.S$98.3
million (Ps1,104.8), which was charged to stockholders' equity under Mexican
GAAP, representing the difference between the cash redemption amount of the
forward contracts and the market value of the underlying shares at the date of
the agreements. Such loss was deducted by the counterparties from the
prepayments made by CEMEX toward the forward contracts' final price. These
contracts were settled during October 2003 in connection with a secondary
equity offering (see note 16A), resulting in a gain of approximately U.S.$19.5
million (Ps219.2), which was recognized in stockholders' equity under Mexican
GAAP. According to EITF 00-19, Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock, forward
contracts involving a company's own stock that will be physically settled by
delivering cash should be initially measured at fair value and recorded in
permanent equity, and an amount equivalent to the cash redemption at the date
of reporting, should be reclassified to temporary equity, which is to be
considered as a mezzanine item for balance sheet presentation under U.S. GAAP.
As a result, for purposes of reconciliation to U.S. GAAP, CEMEX presents a
reduction to its stockholders' equity under Mexican GAAP of approximately
Ps5,878.5 (U.S.$523.0) at December 31, 2002, which represents the cash
obligation plus the advanced payments made by CEMEX under the forward
contracts at the reporting date and is presented as a mezzanine item
(temporary equity) for purposes of the condensed balance sheets under U.S.
GAAP in note 23(o). Under Mexican GAAP, until their settlement, the shares
underlying the contracts were treated as permanent equity.
For Mexican GAAP purposes, since origination, these forward contracts had been
treated as equity transactions and, therefore, gains or losses were recognized
upon settlement or extension as an adjustment to stockholders' equity. During
the life of the contracts, the difference between the original proceeds of the
CPOs sale and the forward price that was periodically paid to the
counterparties was treated as a prepayment toward the forward contracts' final
price and presented as accounts receivable. Such amounts prepaid and
considered as accounts receivable were also treated as preferred dividends in
the net income reconciliation to U.S. GAAP, in a manner similar to a
mandatorily redeemable preferred stock, representing an expense of
approximately Ps461.6 in 2001, expense of Ps538.0 in 2002 and income of
Ps740.5 in 2003. The amount of income in 2003 includes a net gain of U.S.$19.5
million from the secondary equity offering, income of U.S.$101.7 million from
the reversal of prepayments accrued until settlement that were recognized as
preferred dividends during the life of the contracts and that were not
realized as a result of the offering and settlement; and an expense of
U.S.$6.4 million of prepayments made in 2003 treated as preferred dividends.
The loss of US$98.3 million and the gain of U.S.$19.5 million recognized in
stockholders' equity under Mexican GAAP in 2002 and 2003, respectively, were
not reclassified through net income in the reconciliation to U.S. GAAP, since
such amounts were periodically charged to earnings under U.S. GAAP as part of
the preferred dividends.
(k) Other U.S. GAAP Adjustments
Capitalization of costs of computer software development under U.S.
GAAP--Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, requires that certain direct
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software and
that costs related to the preliminary project stage and the
post-implementation/operations stage (as defined in SOP 98-1) in an
internal-use computer software development project be expensed as incurred.
The estimated average useful lives period to amortize these capitalized costs
is between 3 and 5 years.
For the years ended December 31, 2001, 2002 and 2003, the effect of
capitalizing these costs in the reconciliation of net income to U.S. GAAP, net
of amortization, led to expenses of Ps228.6, Ps203.6 and Ps347.5,
respectively, with a net effect of income in the stockholders' equity
reconciliation to U.S. GAAP at December 31, 2002 and 2003 of Ps272.6 and
Ps25.4, respectively. Beginning in 2001, in connection with CEMEX's decision
to significantly enhance and/or replace, on a worldwide basis, all of its
critical software systems under an effort denominated "CEMEX Way", for
accounting purposes under Mexican GAAP, CEMEX implemented the policy of
capitalizing the costs associated with developing and implementing
internal-use software (see note 10) resulting in a capitalization under
Mexican GAAP for the years ended December 31, 2001, 2002 and 2003 of
Ps1,462.2, Ps1,737.6 and Ps1,410.4, net of amortization. As a result, in the
reconciliation of net income to U.S. GAAP for the years ended December 31,
2001, 2002 and 2003, the reconciling item refers exclusively to the
amortization of the capitalized amount under U.S. GAAP until December 2000.
F-48
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
Deferred charges--Capitalized costs, net of accumulated amortization, that did
not qualify for deferral under U.S. GAAP were reversed through earnings under
U.S. GAAP in the period incurred, resulting in expense of Ps182.0 in 2001,
expense of Ps290.7 in 2002 and income of Ps90.4 in 2003. During 2003, all
amounts capitalized under Mexican GAAP also met the requirements for
capitalization under U.S. GAAP. Accordingly, the reconciliation of net income
to U.S. GAAP for the year ended December 31, 2003 only includes amounts
amortized in Mexican GAAP during the year and which were expensed in prior
years under U.S. GAAP. The net effect in the reconciliation of stockholders'
equity to U.S. GAAP was a decrease of Ps650.0 and Ps484.0 at December 31, 2002
and 2003, respectively. Mexican GAAP allowed the deferral of these items.
Asset Retirement Obligations and Other Environmental Costs--Effective January
1, 2003, SFAS 143, Accounting for Asset Retirement Obligations ("SFAS 143"),
requires entities to record the fair value of an asset retirement obligation
as a liability in the period in which incur a legal obligation associated with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development, and/or normal use of the assets. Such liability
would be recorded against an asset that is depreciated over the life of the
long-lived asset. Subsequent to the initial measurement, the obligation will
be adjusted at the end of each period to reflect the passage of time and
changes in the estimated future cash flows underlying the obligation. Also
effective January 1, 2003, Mexican GAAP's Bulletin C-9 established basically
the same requirement as SFAS 143. The difference between Mexican GAAP and U.S.
GAAP on this item relates to the recognition of the cumulative initial effect
from adoption, which under SFAS 143 was recognized in earnings after net
income, while under Mexican GAAP it was recognized in stockholders' equity.
Accordingly, the reconciling item presented in the reconciliation of net
income to U.S. GAAP includes the reclassification of the cumulative effect
from adoption from stockholders' equity under Mexican GAAP to net income under
U.S. GAAP (see notes 2V and 12).
As mentioned in note 2V, during 2003, a remediation liability was recorded in
the amount of approximately Ps505.7, against fixed assets of Ps365.3, deferred
IT assets of Ps54.6 and an initial cumulative effect of Ps85.8, recorded in
stockholders' equity under Mexican GAAP and in earnings under U.S. GAAP.
In addition, environmental expenditures related to current operations are
expensed or capitalized, as appropriate. Other than those contingencies
disclosed in note 21G, CEMEX is not currently facing other material
contingencies, which might result in the recognition of an environmental
remediation liability.
Monetary position result--Monetary position result of the U.S. GAAP
adjustments is determined by (i) applying the annual inflation factor to the
net monetary position of the U.S. GAAP adjustments at the beginning of the
period, plus (ii) the monetary position effect of the adjustments during the
period, determined in accordance with the weighted average inflation factor
for the period.
Reclassifications--Non-cement related assets under Mexican GAAP (see note 7)
of Ps400.2 and Ps395.6, as of December 31, 2002 and 2003, respectively, were
reclassified to long-term assets for purposes of the condensed financial
information under U.S. GAAP in note 23(o). These assets are stated at their
estimated fair value. Estimated costs to sell these assets are not
significant.
(l) Financial Instruments
Derivative Financial Instruments (see notes 2N, 11 and 16)
Under U.S. GAAP, all derivative instruments (including derivative instruments
embedded in other contracts) should be recognized in the balance sheet as
assets or liabilities at their fair values and changes in fair value are
recognized immediately in earnings, unless the derivatives qualify as hedges
of future cash flows, in which case the effective portion of such changes in
fair value is recorded temporarily in equity, and then recognized in earnings
along with the related effects of the hedged items. Any ineffective portion of
a hedge is reported in earnings as it occurs. Mexican GAAP, through Bulletin
C-2 (see note 2N), establishes a methodology similar to that of U.S. GAAP
(SFAS 133). The differences between SFAS 133 and Bulletin C-2 relate to the
rules for hedge accounting. SFAS 133 provides specific rules for hedge
accounting, while under Bulletin C-2, hedge accounting is based solely on
CEMEX's intention and designation, providing that the underlying hedged asset
or liability is already recognized in the balance sheet. Bulletin C-2 does not
provide guidance for hedging forecasted transactions, for cash flow hedges,
for derivative instruments by an entity in its own equity and, for hedges of
an entity's net investment in its foreign subsidiaries. Accordingly, such
instruments have been accounted for by CEMEX in accordance with SFAS 133 or
with other U.S. GAAP accounting pronouncements, as appropriate. Fair value
hedges, as defined by SFAS 133, are precluded by Mexican GAAP since it is not
permitted to record primary hedged instruments at fair value.
F-49
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
At December 31, 2002 and 2003, the differences in derivative instruments'
hedge accounting between Mexican and U.S. GAAP, as they relate to CEMEX, led
to certain adjustments in the reconciliations of stockholders' equity and net
income to U.S. GAAP, as well as reclassifications in the condensed financial
information under U.S. GAAP in note 23(o), which are explained as follows:
o During 2001, the estimated fair value of those interest rate swaps
designated as hedges of underlying debt transactions under Mexican GAAP was
not recognized in the balance sheet pursuant to the hedge designation (see
note 2N). Beginning in 2002, CEMEX applied under Mexican GAAP the accounting
provisions of cash flow hedges, in a manner equivalent to the rules set
forth in SFAS 133. As a result, after fulfilling the hedging documentation
requirements and effectiveness tests, beginning as of the designation date,
the estimated fair value of the hedging instruments and changes therein have
been recognized in the balance sheet against the deficit in equity
restatement within stockholders' equity, which is equivalent in Mexico to
other comprehensive income, as defined under U.S. GAAP (see note 14G). For
the years ended December 31, 2002 and 2003, changes in the estimated fair
value of interest rate derivatives, other than those designated as cash flow
hedges, were recorded through earnings under Mexican GAAP (see note 11),
consistently with U.S. GAAP. For the year ended December 31, 2001, changes
in fair value of interest rate swaps, not designated as accounting hedges
under SFAS 133, resulted in income of approximately Ps32.3 (U.S.$3.2
million) in the reconciliation of net income to U.S. GAAP.
o As discussed in note 11B, as of December 31, 2002 and 2003, related to the
estimated fair value of Cross Currency Swaps ("CCS"), CEMEX recognized net
assets of U.S.$241.4 million (Ps2,713.3) and U.S.$262.0 million (Ps2,944.9),
respectively. Under U.S. GAAP, these amounts do not qualify for net
presentation and thus have been presented as gross amounts for purposes of
the condensed financial information under U.S. GAAP presented in note 23(o).
As a result, under U.S. GAAP at December 31, 2002, in respect to the portion
of the estimated fair value attributable to changes in the exchange rates,
short-term and long-term debt increased U.S.$174.2 million (Ps1,997.8),
including prepayments, against current and non-current assets; while in
respect of the portion of the estimated fair value attributable to accrued
interest, current liabilities increased U.S.$25.9 million (Ps297.0) against
current assets. At December 31, 2003, in respect to the portion of the
estimated fair value attributable to changes in the exchange rates,
short-term and long-term debt increased U.S.$192.6 million (Ps2,164.8),
including prepayments, against current and non-current assets; while in
respect of the portion of the estimated fair value attributable to accrued
interest, current liabilities increased U.S.$12.2 million (Ps137.1) against
current assets.
See note 23(m) for changes in accounting principles regarding CEMEX's equity
forward contracts in its own shares resulting from the adoption of SFAS 150.
All other derivative instruments, with the exception of those described above
and the equity forwards described in notes 23(j) and 23(m), entered into by
CEMEX and disclosed in notes 11 and 16, were accounted under Mexican GAAP
consistently with the provisions of U.S. GAAP.
For all hedging relationships for accounting purposes, CEMEX formally
documents the hedging relationship and its risk-management objective and
strategy for undertaking the hedge, the hedging instrument, the item, the
nature of the risk being hedged, how the hedging instrument's effectiveness in
offsetting the hedged risk will be assessed, and a description of the method
of measuring ineffectiveness. This process includes linking all derivatives
that are designated as cash-flow or foreign-currency hedges to specific assets
and liabilities on the balance sheet or to specific firm commitments or
forecasted transactions. As of December 31, 2002 and 2003, CEMEX has not
designated any derivative instrument as a fair value hedge for accounting
purposes under both Mexican GAAP and U.S. GAAP. CEMEX also formally assesses,
both at the hedge's origination and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in cash flows of hedged items. When it is determined that a
derivative is not highly effective as a hedge or that it has ceased to be a
highly effective hedge, CEMEX discontinues hedge accounting prospectively.
Fair Value of Financial Instruments
The carrying amount of cash, trade accounts receivable, other accounts
receivable, trade accounts payable, other accounts payable and accrued
expenses and short-term debt, approximates fair value because of the
short-term maturity of these financial assets and liabilities.
Marketable securities and long-term investments are accounted for at fair
value, which is based on quoted market prices for these or similar
instruments.
F-50
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
The carrying value of CEMEX's long-term debt and the related fair value based
on quoted market prices for the same or similar instruments or on current
rates offered to CEMEX for debt of the same remaining maturities (or
determined by discounting future cash flows using borrowing rates currently
available to CEMEX) at December 31, 2003 is summarized as follows:
At December 31, 2003 Carrying amount Estimated fair
value
------------------ -----------------
Bank loans...................................................................Ps 27,935.3 30,295.5
Notes payable................................................................ 32,530.5 34,075.6
------------------ -----------------
As discussed in notes 2D and 14D, CEMEX has designated certain debt as hedges
of its investment in foreign subsidiaries and, for Mexican GAAP purposes,
records foreign exchange fluctuations on such debt in stockholders' equity.
For purposes of the U.S. GAAP net income reconciliation, income of Ps633.3 in
2001, expense of Ps2,555.3 in 2002 and expense of Ps826.7 in 2003, were
recognized as foreign exchange results since the related debt did not meet the
conditions of SFAS 52 for hedge accounting purposes, given that the currencies
involved do not move in tandem.
(m) Financial Instruments with Characteristics of both Liabilities and Equity
In May 2003, the FASB issued SFAS 150, which requires an issuer to classify
financial instruments as liabilities (or assets under certain circumstances)
when they meet the following criteria: (i) a financial instrument issued in
the form of shares that is mandatorily redeemable, through the unconditional
obligation of transferring its assets at a specified or determinable date (or
dates) or upon an event that is certain to occur; (ii) a financial instrument,
other than an outstanding share, that, at origination, embodies an obligation
to repurchase the issuer's equity shares, or is indexed to such an obligation,
and that requires or may require the issuer to settle the obligation by
transferring assets (for example, a forward purchase contract or written put
option on the issuer's equity shares that is to be physically settled or net
cash settled); and (iii) a financial instrument that embodies an unconditional
obligation, which the issuer must or may settle by issuing a variable number
of its equity shares if, at origination, the monetary value of the obligation
is based solely or predominantly in a fixed monetary amount known at
origination, if variations are based on something other than the fair value of
the issuer's equity shares, or if variations are inversely related to changes
in the fair value of the issuer's equity shares. SFAS 150 is effective for all
transactions entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June
15, 2003.
Under SFAS 150, mandatorily redeemable instruments must be classified as a
liability and initially measured at fair value against equity. Equity forward
contracts that require physical settlement by repurchase of a fixed number of
the issuer's equity shares in exchange for cash are measured initially at the
fair value of the shares at origination, adjusted for any consideration or
unstated rights or privileges, against equity. Subsequently, those instruments
should be measured at the net present value of the amount to be paid at
settlement, accruing interest cost using the rate implicit at origination.
Other instruments within the scope of SFAS 150 shall be initially measured at
fair value with subsequent changes in fair value recognized in earnings as
interest expense. SFAS 150 has been required to be implemented by reporting
the cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement. Restatement is
not permitted.
Mandatorily Redeemable Instruments
As described in note 14E and 23(e), CEMEX held capital securities for the
outstanding amount of U.S.$66 million (Ps741.8) at both December 31, 2002 and
2003. The capital securities are a mandatorily redeemable financial
instrument. As of December 31, 2002, before SFAS 150 was implemented, for
purposes of the reconciliation of stockholders' equity to U.S. GAAP and the
condensed financial information under U.S. GAAP in note 23(o), the outstanding
amount was removed from minority interest under Mexican GAAP and presented as
a separate component of mezzanine items. For the years ended December 31, 2001
and 2002, capital securities dividends were recognized in the income statement
within minority interest for both Mexican GAAP and U.S. GAAP. As a result of
the adoption of SFAS 150, for purposes of the reconciliation of stockholders'
equity to U.S. GAAP as of December 31, 2003, capital securities were
recognized at their outstanding amount (equivalent to fair value) as a
separate component within liabilities, see note 23(o), for approximately
Ps741.8 (U.S.$66 million) against minority interest, which is considered a
component of consolidated stockholders' equity under Mexican GAAP. In the
condensed financial information under U.S. GAAP in note 23(o) for the year
ended December 31, 2003, capital securities dividends in the income statement
were reclassified from minority interest under Mexican GAAP to a separate item
of interest expense under U.S. GAAP (see note 14E).
F-51
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
Equity Forward Contracts in CEMEX's own Shares
As described in notes 15 and 16A, as of December 31, 2002 and 2003, CEMEX held
equity forward contracts negotiated to hedge future exercises under its stock
option programs, for notional amounts of U.S.$436.1 million and U.S.$789.3
million, respectively. Since January 1, 2001, under Mexican GAAP, these
forward contracts, which can be physically or net cash settled at CEMEX's
option, have been recognized at their fair market value as assets or
liabilities in the balance sheet and changes in fair value have been recorded
in earnings for the years ended December 31, 2001, 2002 and 2003. The
accounting treatment given to these contracts since 2001 is consistent with
SFAS 150 and, therefore, with respect to these forwards, no reconciling
adjustments are required pursuant to the implementation of the Statement.
In addition, CEMEX held other equity forward contracts (see note 16A), which
can be physically or net cash settled at CEMEX's option and which are
considered as equity transactions for both Mexican GAAP and U.S. GAAP.
Accordingly, until December 31, 2002, the effects of these contracts were
recognized upon settlement as an adjustment to stockholders' equity and no
periodic recognition was made. As of December 31, 2002 and 2003, the notional
amounts of these forward contracts were U.S.$547.9 million and U.S.$295.7
million, respectively. Under SFAS 150, these instruments should be initially
recognized at their fair market value as assets or liabilities in the balance
sheet and subsequent changes in fair value recorded in earnings, with the
cumulative effect of adoption recognized as an adjustment to net income. CEMEX
adopted SFAS 150 as of June 30, 2003 and, as a result, for purposes of the
reconciliations of stockholders' equity and net income to U.S. GAAP as of and
for the year ended December 31, 2003, a net liability of approximately
U.S.$11.6 million (Ps130.4) was recognized against the cumulative effect from
the change in accounting principle, which represented an expense of
approximately U.S.$49.1 million (Ps551.3) and, a gain related to changes in
fair value for the period from June 30, 2003 to December 31, 2003 amounting to
approximately U.S.$36.9 million (Ps415.0).
There are no other instruments subject to SFAS 150 other than those previously
described.
(n) Supplemental Debt Information
At December 31, 2002 and 2003, due to CEMEX's ability and its intention to
refinance short-term debt with the available amounts of the committed
long-term lines of credit, U.S.$450 million (Ps5,058) and U.S.$395 million
(Ps4,439.8), respectively, were reclassified from short-term debt to long-term
debt under Mexican GAAP (see note 11). For purposes of the condensed balance
sheets under U.S. GAAP in note 23(o), this reclassification was reversed given
that under U.S. GAAP, the reclassification is precluded when the long-term
agreements contain "Material Adverse Events" clauses, which in the case of
CEMEX are customary covenants.
(o) Condensed Financial Information under U.S. GAAP
The following table presents consolidated condensed income statements for the
years ended December 31, 2001, 2002 and 2003, prepared under U.S. GAAP, and
includes all differences described in this note as well as certain other
reclassifications required for purposes of U.S. GAAP:
Years ended December 31,
------------------------------------------
Statements of income 2001 2002 2003
------------- ------------- --------------
Net sales..................................................................Ps 69,031.4 69,882.0 79,748.5
Gross profit............................................................... 29,135.4 30,180.1 33,265.2
Operating income........................................................... 11,034.4 11,295.0 13,606.5
Comprehensive financial result............................................. 3,409.3 (6,131.4) (2,835.8)
Other expenses, net........................................................ (648.8) (996.1) (1,122.7)
Income tax (including deferred)............................................ (1,935.2) 1,641.0 (1,111.4)
Equity in income of affiliates............................................. 334.4 472.1 535.7
------------- ------------- --------------
Consolidated net income.................................................... 12,194.1 6,280.6 9,072.3
Minority interest net income............................................... 1,150.5 414.4 157.9
------------- ------------- --------------
Majority interest net income before cumulative effect of accounting change. 11,043.6 5,866.2 8,914.4
Cumulative effect of accounting change..................................... - - (640.7)
------------- ------------- --------------
Majority interest net income...............................................Ps 11,043.6 5,866.2 8,273.7
------------- ------------- --------------
The following table presents consolidated condensed balance sheets at December
31, 2002 and 2003, prepared under U.S. GAAP, including all differences and
reclassifications as compared to Mexican GAAP described in this note 23:
F-52
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
At December 31,
----------------------------------
Balance sheets 2002 2003
----------------------------------
Current assets.................................................................Ps 20,703.7 14,329.3
Investments and non-current assets............................................. 7,849.4 9,501.4
Property, machinery and equipment.............................................. 101,918.4 106,907.9
Deferred charges............................................................... 45,646.2 53,732.4
----------------------------------
Total assets............................................................... 176,117.7 184,471.0
----------------------------------
Current liabilities............................................................ 37,548.0 33,052.6
Long-term debt................................................................. 42,817.6 44,789.8
Shares subject to mandatory redemption:
Putable capital securities (see note 14E).................................. - 741.8
Other non-current liabilities.................................................. 23,061.7 29,346.5
----------------------------------
Total liabilities.......................................................... 103,427.3 107,930.7
----------------------------------
Mezzanine items:
Putable capital securities (see note 14E).................................. 711.6 -
Temporary equity........................................................... 5,878.5 -
Preferred equity (see note 14E)............................................ 7,008.1 -
Minority interest.......................................................... 5,395.8 5,419.1
----------------------------------
Total mezzanine items.................................................. 18,994.0 5,419.1
----------------------------------
Stockholders' equity including cumulative effect of accounting change...... 53,696.4 71,121.2
----------------------------------
Total liabilities and stockholders' equity.................................Ps 176,117.7 184,471.0
----------------------------------
The prior period amounts presented in the tables above were restated to
constant pesos as of December 31, 2003 using the Mexican inflation rate in
order to comply with current requirements of Regulation S-X, instead of the
weighted average inflation factor used by CEMEX under Mexican GAAP (see note
2B).
(p) Supplemental Cash Flow Information Under U.S. GAAP
Under Mexican GAAP, statements of changes in financial position identify the
sources and uses of resources based on the differences between beginning and
ending financial statements in constant pesos. Monetary position results and
unrealized foreign exchange results are treated as cash items in the
determination of resources provided by operations. Under U.S. GAAP (SFAS 95),
statements of cash flows present only cash items and exclude non-cash items.
SFAS 95 does not provide any guidance with respect to inflation-adjusted
financial statements. The differences between Mexican GAAP and U.S. GAAP in
the amounts reported is primarily due to (i) the elimination of inflationary
effects of monetary assets and liabilities from financing and investing
activities against the corresponding monetary position result in operating
activities, (ii) the elimination of foreign exchange results from financing
and investing activities against the corresponding unrealized foreign exchange
result included in operating activities and (iii) the recognition in
operating, financing and investing activities of the U.S. GAAP adjustments.
The following table summarizes the cash flow items as required under SFAS 95
provided by (used in) operating, financing and investing activities for the
years ended December 31, 2001, 2002 and 2003, giving effect to the U.S. GAAP
adjustments, excluding the effects of inflation required by Bulletin B-10 and
Bulletin B-15. The following information is presented in millions of pesos on
a historical peso basis and is not presented in pesos of constant purchasing
power:
Years ended December 31,
----------------------------------------------
2001 2002 2003
--------------- -------------- ---------------
Net cash provided by operating activities........................... Ps 18,786.5 9,526.4 9,771.8
Net cash provided by (used in) financing activities................. (9,250.1) (1,323.7) (4,874.0)
Net cash used in investing activities............................... (8,433.3) (8,380.4) (5,419.4)
--------------- -------------- ---------------
F-53
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
Net cash flow from operating activities reflects cash payments for interest
and income taxes as follows:
Years ended December 31,
----------------------------------------------
2001 2002 2003
--------------- -------------- ---------------
Interest paid....................................................... Ps 3,594.9 3,467.1 4,897.4
Income taxes paid................................................... 559.2 1,350.3 576.2
--------------- -------------- ---------------
Non-cash activities are comprised of the following:
1. Acquisition of fixed assets through capital leases amounting to Ps23.2 in 2001. CEMEX did not acquire assets
through capital leases during 2002 and 2003.
2. Liabilities assumed through the acquisition of businesses (see note 8A) were Ps275.6 in 2001, Ps1,873.7 in 2002 and
Ps137.8 in 2003.
(q) Restatement to Constant Pesos of Prior Years
The following table presents summarized financial information under Mexican
GAAP of the consolidated income statements for the years ended December 31,
2001 and 2002 and balance sheet information as of December 31, 2002, in
constant Mexican pesos as of December 31, 2003, using the Mexican inflation
index:
Years ended December 31,
------------------------------------------
2001 2002
-------------------- --------------------
Sales............................................................... Ps 69,630.1 70,545.9
Gross profit........................................................ 30,464.3 31,133.3
Operating income.................................................... 16,628.1 14,128.4
Majority interest net income........................................ 11,845.5 5,609.4
-------------------- --------------------
At December 31,
2002
--------------------
Current assets...................................................... Ps 21,053.2
Non-current assets.................................................. 150,747.7
Current liabilities................................................. 31,849.9
Non-current liabilities............................................. 65,006.3
Majority interest stockholders' equity.............................. 61,933.5
Minority interest stockholders' equity.............................. 13,011.2
--------------------
(r) Stock Option Programs
For financial reporting under Mexican GAAP, CEMEX accounts for its stock
option programs (see note 15) using a methodology that is consistent with the
rules set forth in APB Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25") under U.S GAAP. According to APB 25, compensation cost
should be determined under the intrinsic cost method, which represents the
difference between the strike price and the market price of the stock at the
reporting date, for all plans that do not meet the following characteristics:
(i) the exercise price established in the option is equal to the quoted market
price of the stock at the measurement date, (ii) the exercise price is fixed
for the option's life, and (iii) the option's exercise is hedged through the
issuance of new shares of common stock. After considering these
characteristics, no compensation cost is recognized for CEMEX's fixed program
(see note 15A), while compensation cost is periodically determined, beginning
in 2001, for CEMEX's variable program (see note 15C) and voluntary programs
(see note 15D) and beginning in 2002, for its special program (see note 15B).
Stock options activity during 2002 and 2003, the balance of options
outstanding at December 31, 2002 and 2003 and other general information
regarding CEMEX's stock option programs is presented in note 15. CEMEX hedges
the availability of CPOs for the potential future exercise of its programs
through equity forward contracts in CEMEX's own stock (see note 16A).
Under U.S. GAAP, SFAS 123, Accounting for Stock-Based Compensation, requires
compensation cost for stock option plans to be determined based on the
options' fair value at the grant date, using a qualified option-pricing model,
and recorded in results of operations during the options' vesting period,
after which no further recognition is required.
F-54
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
Had compensation cost be determined under SFAS 123, based on the fair value of
stock options at the grant date using the Black-Scholes pricing model, CEMEX's
net income would have been reduced to the following pro forma amounts:
For the year ended December 31, 2001 Fixed program Variable Total
program
--------------- ------------- --------------
Net income, as reported (Mexican GAAP)..............................Ps 13,026.6
Cost of options granted according to SFAS 123.................... (300.0) (226.5) (526.5)
Result from voluntary exchange program, net (note 15) 1.......... 245.2 - 245.2
Reversal of cost recognized under APB 25......................... - 162.6 162.6
--------------- ------------- --------------
Approximate net income, pro forma................................... 12,907.9
--------------
Basic earnings per share, as reported...............................Ps 3.05
--------------
Basic earnings per share, pro forma.................................Ps 3.03
--------------
For the year ended December 31, 2002 Special Variable Voluntary Total
program program programs
------------- ------------ ------------ --------------
Net income, as reported (Mexican GAAP).....................Ps 5,966.9
Cost of options granted according to SFAS 123........... (10.3) (175.3) (19.8) (205.4)
Reversal of cost recognized under APB 25................ - - 57.3 57.3
------------- ------------ ------------ --------------
Approximate net income, pro forma.......................... 5,818.8
--------------
Basic earnings per share, as reported......................Ps 1.33
--------------
Basic earnings per share, pro forma........................Ps 1.29
--------------
For the year ended December 31, 2003 Special Variable Voluntary Total
program program programs
------------- ------------ ------------ --------------
Net income, as reported (Mexican GAAP).....................Ps 7,067.4
Cost of options granted according to SFAS 123 2......... (13.7) (173.4) - (187.1)
Reversal of cost recognized under APB 25................ 59.2 366.2 29.4 454.8
------------- ------------ ------------ --------------
Approximate net income, pro forma.......................... 7,335.1
--------------
Basic earnings per share, as reported......................Ps 1.49
--------------
Basic earnings per share, pro forma........................Ps 1.55
--------------
1 The amount of income presented in the pro forma calculations of Ps245.2 in 2001, represents the difference between
the intrinsic value at the exchange date paid to the executives for the repurchase of their options of
approximately Ps729.1, recorded as an expense under Mexican GAAP in 2001, and the expense determined under SFAS 123
of approximately Ps483.9, representing the options unvested fair value at the date of issuance, which was
accelerated as a result of the exchange program. The reason for the reversal in the pro forma calculations, of the
expense recognized under Mexican GAAP, is that such amount had been previously expensed in the pro forma
calculations as part of the cost under SFAS 123 in prior years and as part of the accelerated amortization of the
unrecognized cost discussed above.
2 The cost of the variable program granted in 2003 under the fair value approach (FAS 123) amounting to approximately
Ps214.0 million is not presented, since net income under Mexican GAAP includes the liquidation cost of
approximately Ps696.8 million related to such program, which was fully exercised during the year (see note 15 D).
The assumptions for the Black-Scholes model for the options granted during
each year were as follows:
2001 2002 2003
-------------- -------------- --------------
Expected dividend yield.................................................. 2% 2% 2%
Volatility............................................................... 25% 25% 25%
Range of risk free interest rates........................................ 4.9% - 9.8% 3.6% - 4.8% 3.7% - 4.5%
Weighted average tenure.................................................. 10 years 9.8 years 7 years
-------------- -------------- --------------
F-55
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
(s) Impairment of Long Lived Assets
As mentioned in note 23(a), effective January 1, 2002, CEMEX adopted SFAS 142,
which eliminates the amortization of goodwill and indefinite-lived intangible
assets, and addresses the amortization of intangible assets with finite lives
and impairment testing and recognition for goodwill and intangible assets, and
SFAS 144, which establishes a single model for the impairment of long-lived
assets and broadens the presentation of discontinued operations to include
disposal of an individual business.
As a result of such adoption under U.S. GAAP, CEMEX ceased the amortization of
the goodwill balances determined at December 31, 2001; however, such amounts
remain subject to impairment evaluations. During the first half of 2002, in
connection with SFAS 142's transitional goodwill impairment evaluation, which
required an assessment of whether there was an indication that goodwill was
impaired as of the date of adoption, CEMEX identified its reporting units and
determined the carrying value of each reporting unit as of January 1, 2002, by
assigning the assets and liabilities, including the existing goodwill and
intangible assets to those reporting units. CEMEX also determined the fair
value of each reporting unit and compared it to their related carrying amount.
Fair value of the reporting units exceeded in each case the corresponding
carrying amount and, therefore, no impairment charges resulted from the
transitional evaluation performed on the recorded goodwill as of January 1,
2002. For the years ended December 31, 2002 and 2003, goodwill under Mexican
GAAP continued to be an amortizable intangible asset. Based on the
similarities of the components of the operating segments (cement, ready-mix
concrete, aggregates and other construction materials), CEMEX's geographical
segments under SFAS 131 are also the reporting units under SFAS 142 for
purposes of assessing fair value in determining potential impairment at
transition and in future periods.
Under U.S. GAAP, CEMEX assesses goodwill and indefinite-lived intangibles for
impairment annually unless events occur that require more frequent reviews.
Long-lived assets, including amortizable intangibles, are tested for
impairment if impairment triggers occur. Discounted cash flow analyses are
used to assess the possible impairment of both amortizable and non-amortizable
intangible assets, while undiscounted cash flow analyses are used to assess
long-lived asset impairment. If an assessment indicates impairment, the
impaired asset is written down to its fair value based on the best information
available. The useful lives of amortizable intangibles are evaluated
periodically, and subsequent to impairment reviews, to determine whether
revision is warranted. If cash flows related to a non-amortizable intangible
are not expected to continue for the foreseeable future, a useful life is
assigned. Considerable management judgment is necessary to estimate
undiscounted and discounted future cash flows. Assumptions used for these cash
flows are consistent with internal forecasts and industry practices. For the
years ended December 31, 2002 and 2003, there were no impairment charges under
U.S. GAAP in addition to those described in notes 9 and 10, which were
recorded under Mexican GAAP, as CEMEX's policy for impairment is consistent
with U.S. GAAP.
As of December 31, 2002 and 2003, CEMEX's approximate goodwill by reporting
unit under U.S. GAAP, net of amortization accrued until December 31, 2001, is
summarized as follows:
Inflation and
currency
January 1, Goodwill Impairment fluctuation December 31,
2002 (1) acquired (2) charges (4) 2002
---------------- --------------- --------------- --------------- --------------
United States................ Ps 14,381.0 - - 1,035.8 15,416.8
Mexico....................... 6,282.4 - - - 6,282.4
Spain........................ 6,641.4 - - 2,106.2 8,747.6
Colombia..................... 3,472.3 - - (226.2) 3,246.1
The Philippines.............. 1,092.8 652.3 - 75.1 1,820.2
Dominican Republic........... 345.1 - - 56.1 401.2
Thailand..................... 377.5 - - 37.4 414.9
The Caribbean................ 360.3 - - 34.9 395.2
Venezuela.................... 297.1 - - (24.4) 272.7
Egypt........................ 266.2 - - 18.1 284.3
Costa Rica................... 273.4 - - 13.9 287.3
Other reporting units (5).... 339.6 385.7 (96.7) 99.7 728.3
Affiliates (see note 8A)..... 326.9 217.8 - 8.1 552.8
---------------- --------------- --------------- --------------- --------------
Ps 34,456.0 1,255.8 (96.7) 3,234.7 38,849.8
---------------- --------------- --------------- --------------- --------------
F-56
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
December 31, Goodwill Impairment Inflation and December 31,
currency
fluctuation
2002 acquired (3) charges (4) 2003
---------------- --------------- --------------- --------------- --------------
United States................ Ps 15,416.8 201.8 - 713.0 16,331.6
Mexico....................... 6,282.4 - - (298.2) 5,984.2
Spain........................ 8,747.6 - - 2,003.7 10,751.3
Colombia..................... 3,246.1 - - 457.1 3,703.2
The Philippines.............. 1,820.2 - (539.5) 63.2 1,343.9
Dominican Republic........... 401.2 - - (18.2) 383.0
Thailand..................... 414.9 - - (17.2) 397.7
The Caribbean................ 395.2 - - (56.1) 339.1
Venezuela.................... 272.7 - - (128.8) 143.9
Egypt........................ 284.3 - - (44.1) 240.2
Costa Rica................... 287.3 - - (0.1) 287.2
Other reporting units (5).... 728.3 - (342.4) 1,948.5 2,334.4
Affiliates (see note 8A)..... 552.8 - - (145.6) 407.2
---------------- --------------- --------------- --------------- --------------
Ps 38,849.8 201.8 (881.9) 4,477.2 42,646.9
---------------- --------------- --------------- --------------- --------------
1. This column presents goodwill by reporting unit; net of amortization accrued until December 31, 2001, presented in
constant pesos as of December 31, 2003, using the Mexican inflation rate.
2. For the acquisitions during 2002, no intangible assets were identified and determined other than goodwill. In 2002
(see note 8A), CEMEX acquired: (i) from the minority shareholders the remaining 30% economic interest in Solid for
approximately U.S.$95 million (Ps1,007.5); (ii) through a tender offer and a subsequent merger, a 100% equity
interest in Puerto Rican Cement Company for approximately U.S.$180.2 million (Ps1,911.0); and (iii) for cash and
pursuant to a forward purchase agreement, a 15.1% equity interest in CAH, for approximately U.S.$142.3 million. In
addition, during 2002, CEMEX also made other minor acquisitions for approximately U.S.$60 million.
3. During 2003 (see note 8A), CEMEX acquired a raw materials supplier and a cement plant and quarry in the United
States for a combined purchase price of approximately U.S.$99.7 million (Ps1,120.6).
4. The amounts presented in this column include: (i) the effects on goodwill from foreign exchange fluctuations during
the period between the reporting unit's currencies and the Mexican peso, and (ii) the effect of removing the
restatement into constant pesos as of December 31, 2003 using Mexican inflation, applied to the goodwill balances
at the beginning of the year.
5. Other reporting units are primarily integrated by CEMEX's cement operations in Puerto Rico and Panama, the
ready-mix concrete operations in France and Italy and the reporting unit engaged in software development projects.
The following table reflects the impact that SFAS 142 would have had on net
income and earnings per share under U.S. GAAP for the year ended December 31,
2001, as if adopted in that period:
Year ended December 31, 2001
---------------
Approximate net income under U.S. GAAP, as reported ............................................... Ps 11,043.9
Cease goodwill amortization..................................................................... 2,326.1
---------------
Adjusted net income under U.S. GAAP................................................................ Ps 13,370.0
---------------
Basic U.S. GAAP earnings per share................................................................. Ps 2.60
Cease goodwill amortization..................................................................... 0.54
---------------
Adjusted basic U.S. GAAP earnings per share........................................................ Ps 3.14
---------------
Diluted U.S. GAAP earnings per share............................................................... Ps 2.53
Cease goodwill amortization..................................................................... 0.53
---------------
Adjusted diluted U.S. GAAP earnings per share...................................................... Ps 3.06
---------------
F-57
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
(t) Sale of Accounts Receivable
CEMEX accounts for transfers of receivables under Mexican GAAP consistently
with the rules set forth by SFAS 140, Accounting for Transfers and Surveying
of Financial Assets and Extinguishments of Liabilities. Under SFAS 140,
transactions that meet the criteria for surrender of control are recorded as
sales of receivables and their amounts are removed from the consolidated
balance sheet at the time they are sold (see note 4).
(u) Other Disclosures Under U.S. GAAP
Accounting for Costs Associated with Exit or Disposal Activities
Effective January 1, 2003, CEMEX adopted SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146, which addresses
financial accounting and reporting for costs associated with exit or disposal
activities, basically requires, as a condition to accrue for the costs related
to an exit or disposal activity, including severance payments, that the entity
communicate the plan to all affected employees and that the plan be terminated
in the short-term, otherwise; associated costs should be expensed as incurred.
As of and for the year ended December 31, 2003, CEMEX did not recognize any
such costs related to exit or disposal activities.
Guarantor's Accounting and Disclosure Requirements for Guarantees
Effective January 1, 2003, CEMEX adopted Interpretation 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements 5,
57 and 107 and a rescission of FASB Interpretation 34, which elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The interpretation
also clarifies that a guarantor is required to recognize, at origination of a
guarantee, a liability for the fair value of the obligation undertaken. As of
December 31, 2003, CEMEX has not guaranteed any third parties' obligations;
however, with respect to the electricity supply long-term contract discussed
in note 21F, CEMEX may also be required to purchase the power plant upon the
occurrence of specified material defaults or events, such as failure to
purchase the energy and pay when due, bankruptcy or insolvency, and revocation
of permits necessary to operate the facility. Through December 31, 2003, for
accounting purposes under Mexican and U.S. GAAP, CEMEX has considered this
agreement as a long-term supply agreement and no liability has been created,
based on the contingent characteristics of CEMEX's obligation and given that,
absent a default under the agreement, CEMEX's obligations are limited to the
purchase of energy from, and the supply of fuel to, the plant.
Variable Interest Entities
Effective January 31, 2003, CEMEX adopted Interpretation 46, Consolidation of
Variable Interest Entities, an interpretation of ARB 51 ("FIN 46"). This
interpretation addresses the consolidation by business enterprises of variable
interest entities ("VIEs"), which defined in FIN 46 as those entities in which
the controlling entity or group cannot be identified and/or such entities lack
of sufficient own capital at risk to finance their operations without
requiring additional financing from other entity. Moreover, variable
interests, among other factors, may be represented by operating losses, debt,
contingent obligations or residual risks and may be assumed by means of loans,
guarantees, management contracts, leasing, put options, derivatives, etc. A
primary beneficiary is the entity that assumes the variable interests of a
VIE, or the majority of them in the case of partnerships, directly or jointly
with related parties, and is the entity that should consolidate the VIE. FIN
46 applies to variable interests in entities created or obtained after January
31, 2003. As discussed in the preceding paragraph, CEMEX has an electricity
supply long-term contract (see note 21F), under which, upon the occurrence of
specified material defaults or events, CEMEX may be required to purchase the
power plant. Under U.S. GAAP, after analysis of the provisions of the
agreements, CEMEX does not believe that based solely on the contingent
obligation, it would be considered to be the primary beneficiary of the
partnership's variable interests, and, therefore, as of and for the year ended
December 31, 2003, CEMEX has not consolidated any asset, liability or
operating result of such partnership.
F-58
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
(v) Newly Issued Accounting Pronouncements under U.S. GAAP
In December 2003, FASB issued SFAS 132 (revised), Employers' Disclosures about
Pensions and Other Postretirement Benefits--an amendment of FASB Statements
No. 87, 88, and 106. This Statement revises employers' disclosures about
pension plans and other postretirement benefit plans, retaining the
disclosures required by previous SFAS 132, but requiring entities to provide
additional disclosure describing the types of plan assets, investment
strategy, measurement date(s), plan obligations, cash flows, and components of
net periodic benefit cost recognized during interim periods. The required
information should be provided separately for pension plans and for other
postretirement benefit plans. This Statement does not change the measurement
or recognition methods. The new disclosure requirements are effective for
periods beginning after December 15, 2003.
(w) Recent Developments (unaudited)
During February 2004, eligible employees under the benefits of stock options
plans were invited to participate in a voluntary exchange offer for their
stock options under the variable program (see note 15C). By means of this
offer, participant employees would surrender their current options, granted
from November 2001 until February 2004, in exchange for new options, with a
initial strike price of U.S.$5.05 per CPO and a remaining life of 8.4 years
(weighted average of qualifying options programs) maintaining an increasing
strike price annually at a 7% rate. Any appreciation realized through the
exercise of new options, will be obligatorily invested in CEMEX CPOs that will
be restricted for sale, with monthly partial releases, for a period of five
years if the exercise occurs in 2004, four years in 2005, three years in 2006
and two years from 2007 until the maturity of the options. The new options
will be automatically exercised if at any time during their life, the CPO
price in the market reaches U.S.$7.50, in which case the intrinsic
appreciation between U.S.$7.50 and the option's strike price on that future
date, will be invested in restricted CPOs.
As compensation to the employees for requiring them to invest the appreciation
in CPOs, setting a restriction period for sale and limiting the potential
appreciation of the new options, employees participating in the exchange will
receive annually and until exercise or maturity of the options a payment of
U.S.$ 10 cents per any new option outstanding as of the payment date, growing
annually at a 10% rate, and upon exercise, a 20% discount to market in the
acquisition price of the CPOs. Employees can exchange 100% or elect to
participate with 70% or only 30% of their current options. Employees' current
options that are not exchanged will maintain their existing terms and
conditions. In terms of fair value at the exchange date, using the
Black-Scholes options pricing model, the current options' weighted average
fair value was approximately 15 percent higher than that of the new options.
The exchange period expired on February 13, 2004. As of March 31, 2004, as a
result of the voluntary exchange offer, approximately 122.5 million new
options were issued, while employees surrendered their rights over
approximately 113.9 million current options, which were forfeited. For
accounting purposes under Mexican and U.S. GAAP, CEMEX will account for the
new options under the intrinsic value method through earnings (see notes 2W
and 15), in the same manner the current plans are accounted for, including the
U.S.$ 10 cents per option payment that would be made to exployees. This
exchange is part of CEMEX's strategy, beginning in 2004, to compensate its
eligible employees with restricted stock instead of stock options.
On April 27, 2004, a subsidiary of CEMEX Colombia received notice as a
co-defendant, along with a government agency in charge of urban development in
Bogota, another supplier, and a ready-mix industry association, in an action
brought by a Colombian law firm on "public interest" grounds. The lawsuit
alleges that the use of a certain type of cement-based material in the
construction of roads for the "Transmilenio" public transport system and for
regular traffic resulted in defects that impede the proper functioning of the
"Transmilenio" system and hamper traffic flow. The lawsuit argues that CEMEX
Colombia's subsidiary, the other supplier, and the ready mix-industry
association promoted the use of the material, and seeks damages to pay for the
repair of the defects or, if repair is not possible, the rebuilding of the
defective road sections. The Company is currently evaluating the potential
impact of this matter on our Colombian operations. Because it is very early in
the process, CEMEX cannot estimate the financial implications of an adverse
resolution, but CEMEX believes that it is unlikely to have a material adverse
effect on our results of operations. CEMEX believes that this will be a
protracted matter that may result in additional lawsuits or actions. CEMEX
intends to defend its interests vigorously.
F-59
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
(x) Guaranteed debt
In June 2000, CEMEX concluded the issuance of U.S.$200 million aggregate
principal amount of 9.625% Exchange Notes due 2009 in a registered public
offering in the United States of America in exchange for U.S.$200 million
aggregate principal amount of its then outstanding 9.625% Notes due 2009. The
Exchange Notes are fully and unconditionally guaranteed, on a joint and
several basis, as to payment of principal and interest by two of CEMEX's
Mexican subsidiaries: CEMEX Mexico and ETM (see note 2C). These two companies,
together with their subsidiaries, account for substantially all of the
revenues and operating income of CEMEX's Mexican operations.
As mentioned in note 11C, as of December 31, 2002 and 2003, indebtedness of
CEMEX in an aggregate amount of U.S.$2,339 million (Ps26,290.4) and U.S.$3,145
million (Ps35,349.8), respectively, is fully and unconditionally guaranteed,
on a joint and several basis, by CEMEX Mexico and ETM.
As of December 31, 2002 and 2003, CEMEX owned a 100% equity interest in CEMEX
Mexico, including in 2002, an 0.6% equity interest held by a Mexican trust in
connection with an equity financing transaction due in 2007, which was
terminated during 2003 (see note 14F), and CEMEX Mexico owned a 100% equity
interest in ETM at the end of both years. During October and November 2001,
CEMEX Mexico and ETM carried out individually, a reverse stock split. Through
this operation, stockholders of CEMEX Mexico and ETM were entitled to receive
one new share for each 130 million old shares and one new share for each 20
million old shares, respectively. Pursuant to these transactions, the shares
of any shareholder not meeting the minimum number required for the reverse
stock split, were liquidated and converted into the right to receive a cash
liquidation. As a result, as of December 31, 2001, in the consolidated balance
sheet of CEMEX, an account payable of Ps427.8 million was created in favor of
the old shareholders against CEMEX Mexico and ETM stockholders' equity. During
2002, CEMEX Mexico and ETM paid no material amounts to the old shareholders.
On December 7, 2002, the period granted by Mexican law for the old
shareholders to claim their rights under the reverse stock split expired. As
prescribed by law, the unclaimed amount after the expiration date is
reimbursed to the entity's stockholders' equity and, as a result, the account
payable as of the expiration date was cancelled against stockholders' equity
as of December 31, 2002. In addition, resulting from the reverse stock split,
the equity interest of CEMEX in both subsidiaries increased to 100%.
For purposes of the accompanying condensed consolidated balance sheets, income
statements and statements of changes in financial position under Mexican GAAP,
the first column, "CEMEX," corresponds to the parent company issuer, which has
no material operations other than its investments in subsidiaries and
affiliated companies. The second column, "Combined guarantors", represents the
combined amounts of CEMEX Mexico and ETM on a Parent Company-only basis, after
adjustments and eliminations relating to their combination. The third column,
"Combined non-guarantors", represents the amounts of CEMEX's international
subsidiaries, CEMEX Mexico and ETM non-Guarantor subsidiaries, and other
immaterial Mexican non-guarantor subsidiaries of CEMEX. The fourth column,
"Adjustments and eliminations", includes all the amounts resulting from
consolidation of CEMEX, the Guarantors and the non-guarantor subsidiaries, as
well as the corresponding constant pesos adjustment as of December 31, 2003,
for the years ended December 31, 2001 and 2002 described below. The fifth
column, "CEMEX consolidated", represents CEMEX's consolidated amounts as
reported in the consolidated financial statements. The amounts presented under
the line item "investments in affiliates" for both the balance sheet and the
income statement are accounted for by the equity method.
As mentioned in note 2B, under Mexican GAAP, the financial statements of those
entities with foreign consolidated subsidiaries should be presented in
constant pesos as of the latest balance sheet presented, considering the
inflation of each country in which the entity operates, as well as the changes
in the exchange rate between the functional currency of each country vis-a-vis
the reporting currency (in this case, the Mexican peso). As a result of the
aforementioned, for comparability purposes the condensed financial information
of CEMEX, the "Combined Guarantors" and the "Combined non-guarantors" amounts
have been adjusted to reflect constant pesos as of December 31, 2003, using
the Mexican inflation index. Therefore, the corresponding inflation adjustment
derived from the application of the weighted average inflation factor in the
consolidated amounts is presented within the "Adjustments and eliminations"
column.
F-60
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
The condensed consolidated financial information is as follows:
Condensed consolidated balance sheets:
Adjustments
Combined Combined and CEMEX
As of December 31, 2002 CEMEX guarantors non-guarantors eliminations consolidated
--------------------------------------------- --------------------------------------------------------------------------
Current assets.............................. Ps 21,654.1 10,498.1 59,753.6 (69,510.8) 22,395.0
Investment in affiliates.................... 83,290.4 79,263.6 8,481.9 (164,616.7) 6,419.2
Other non-current assets.................... 17,743.4 510.7 1,380.8 (17,919.3) 1,715.6
Property, machinery and equipment........... 1,754.7 28,603.4 66,129.9 6,308.9 102,796.9
Deferred charges............................ 6,245.1 6,260.9 83,375.3 (46,457.7) 49,423.6
------------- ------------- -------------- ------------- -------------
Total assets............................. 130,687.7 125,136.7 219,121.5 (292,195.6) 182,750.3
------------- ------------- -------------- ------------- -------------
Current liabilities......................... 24,836.1 9,070.4 23,314.8 (23,341.7 33,879.6
Long-term debt.............................. 38,521.8 6.5 15,673.8 (4,038.5) 50,163.6
Other non-current liabilities............... 1,449.0 51,456.2 17,880.7 (51,800.1) 18,985.8
------------- ------------- -------------- ------------- -------------
Total liabilities........................ 64,806.9 60,533.1 56,869.3 (79,180.3) 103,029.0
------------- ------------- -------------- ------------- -------------
Majority interest stockholders' equity...... 65,880.8 64,603.6 147,443.7 (212,047.3) 65,880.8
------------- ------------- -------------- ------------- -------------
Minority interest........................ - - 14,808.5 (968.0) 13,840.5
------------- ------------- -------------- ------------- -------------
Stockholders' equity under Mexican GAAP..... 65,880.8 64,603.6 162,252.2 (213,015.3) 79,721.3
------------- ------------- -------------- ------------- -------------
Total liabilities and stockholders' equity.. Ps 130,687.7 125,136.7 219,121.5 (292,195.6) 182,750.3
------------- ------------- -------------- ------------- -------------
Adjustments
Combined Combined and CEMEX
As of December 31, 2003 CEMEX guarantors non-guarantors eliminations consolidated
--------------------------------------------- ---------------------------------------------------------------------------
Current assets.............................. Ps 1,716.1 6,106.7 74,175.1 (61,469.2) 20,528.7
Investment in affiliates.................... 84,843.5 92,701.7 64,166.4 (234,794.0) 6,917.6
Other non-current assets.................... 35,449.1 463.8 990.4 (34,833.4) 2,069.9
Property, machinery and equipment........... 1,738.5 29,817.8 72,629.0 (42.0) 104,143.3
Deferred charges............................ 5,300.2 5,664.8 89,598.0 (54,205.1) 46,357.9
------------- ------------- -------------- ------------- --------------
Total assets.............................. 129,047.4 134,754.8 301,558.9 (385,343.7) 180,017.4
------------- ------------- -------------- ------------- --------------
Current liabilities......................... 10,820.2 14,273.7 26,751.9 (20,044.0) 31,801.8
Long-term debt.............................. 46,346.2 8.4 33,636.4 (28,997.0) 50,994.0
Other non-current liabilities............... 1,808.8 47,798.1 14,036.1 (42,472.9) 21,170.1
------------- ------------- -------------- ------------- --------------
Total liabilities......................... 58,975.2 62,080.2 74,424.4 (91,513.9) 103,965.9
------------- ------------- -------------- ------------- --------------
Majority interest stockholders' equity...... 70,072.2 72,674.6 163,505.2 (236,179.8) 70,072.2
------------- ------------- -------------- ------------- --------------
Minority interest......................... - - 63,629.3 (57,650.0) 5,979.3
------------- ------------- -------------- ------------- --------------
Stockholders' equity under Mexican GAAP..... 70,072.2 72,674.6 227,134.5 (293,829.8) 76,051.5
------------- ------------- -------------- ------------- --------------
Total liabilities and stockholders' equity.. Ps 129,047.4 134,754.8 301,558.9 (385,343.7) 180,017.4
------------- ------------- -------------- ------------- --------------
F-61
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
Condensed consolidated income statements:
Adjustments
Combined Combined and CEMEX
For the year ended December 31, 2001 CEMEX guarantors non-guarantors eliminations consolidated
----------------------------------------------- --------------------------------------------------------------------------
Sales........................................ Ps - 22,711.2 54,508.1 (647.2) 76,572.1
Operating income............................. (90.1) 1,624.3 6,109.2 10,642.7 18,286.1
Comprehensive financing result............... 33.9 1,457.8 2,658.6 (1,223.0) 2,927.3
Other income (expense), net.................. 109.5 2,084.2 3,381.9 (10,187.2) (4,611.6)
Income tax................................... 1,389.1 606.3 (1,727.9) (2,373.7) (2,106.2)
Equity in income of affiliates............... 11,584.2 2,719.4 370.2 (14,447.1) 226.7
------------- ------------- ------------ -------------- ------------
Consolidated net income...................... 13,026.6 8,492.0 10,792.0 (17,588.3) 14,722.3
------------- ------------- ------------ -------------- ------------
Minority interest......................... - - 1,188.6 507.1 1,695.7
------------- ------------- ------------ -------------- ------------
Majority net income.......................... Ps 13,026.6 8,492.0 9,603.4 (18,095.4) 13,026.6
------------- ------------- ------------ -------------- ------------
Adjustments
Combined Combined and CEMEX
For the year ended December 31, 2002 CEMEX guarantors non-guarantors eliminations consolidated
----------------------------------------------- --------------------------------------------------------------------------
Sales........................................ Ps - 22,595.2 50,717.2 1,729.6 75,042.0
Operating income............................. (110.4) 3,334.0 5,638.1 6,167.2 15,028.9
Comprehensive financing result............... (1,427.1) (6,630.0) (3,801.7) 8,081.4 (3,777.4)
Other income (expense), net.................. 129.5 (341.2) 6,326.6 (10,579.5) (4,464.6)
Income tax................................... 2,294.4 (1,297.5) (1,302.9) (441.0) (747.0)
Equity in income of affiliates............... 5,080.5 1,657.8 (2.4) (6,383.8) 352.1
------------- ------------- ------------ -------------- ------------
Consolidated net income...................... 5,966.9 (3,276.9) 6,857.7 (3,155.7) 6,392.0
------------- ------------- ------------ -------------- ------------
Minority interest.......................... - - 88.1 337.0 425.1
------------- ------------- ------------ -------------- ------------
Majority net income.......................... Ps 5,966.9 (3,276.9) 6,769.6 (3,492.7) 5,966.9
------------- ------------- ------------ -------------- ------------
Adjustments
Combined Combined and CEMEX
For the year ended December 31, 2003 CEMEX guarantors non-guarantors eliminations consolidated
----------------------------------------------- --------------------------------------------------------------------------
Sales........................................ Ps - 24,408.5 57,646.1 (1,526.9) 80,527.7
Operating income............................. (54.8) 3,383.9 349.3 12,678.2 16,356.6
Comprehensive financing result............... (1,769.1) (2,999.4) 1,001.6 760.7 (3,006.2)
Other income (expense), net.................. 5,160.2 (489.1) 3,270.5 (13,075.4) (5,133.8)
Income tax................................... 790.2 376.8 (1,173.6) (1,191.6) (1,198.2)
Equity in income of affiliates............... 2,940.9 3,393.0 193.0 (6,136.1) 390.8
------------- ------------- ------------ -------------- -------------
Consolidated net income...................... 7,067.4 3,665.2 3,640.8 (6,964.2) 7,409.2
------------- ------------- ------------ -------------- -------------
Minority interest......................... - - 20.6 321.2 341.8
------------- ------------- ------------ -------------- -------------
Majority net income.......................... Ps 7,067.4 3,665.2 3,620.2 (7,285.4) 7,067.4
------------- ------------- ------------ -------------- -------------
F-62
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
Condensed consolidated statements of changes in financial position:
Adjustments
Combined Combined and CEMEX
For the year ended December 31, 2001 CEMEX guarantors non-guarantors eliminations consolidated
------------------------------------------------ --------------------------------------------------------------------------
Operating activities:
Majority net income........................... Ps 13,026.6 8,492.0 9,603.4 (18,095.4) 13,026.6
Non-cash items................................ (11,598.8) (1,804.5) 3,194.8 21,029.9 10,821.4
--------------------------------------------------------------------------
Resources provided by operations........... 1,427.8 6,687.5 12,798.2 2,934.5 23,848.0
Net change in working capital................. (7,894.8) 6,186.0 2,298.7 1,666.8 2,256.7
--------------------------------------------------------------------------
Resources provided by operations, net...... (6,467.0) 12,873.5 15,096.9 4,601.3 26,104.7
Financing activities:
Bank loans and notes payable, net............. 1,871.4 (58.1) (15,653.3) 8,606.0 (5,234.0)
Dividends paid................................ (3,369.1) - 9,080.3 (9,080.3) (3,369.1)
Issuance of common stock...................... 3,130.7 - - - 3,130.7
Issuance of preferred stock by subsidiaries... - - (7,038.1) (238.0) (7,276.1)
Others........................................ 382.5 49,084.2 (9,395.4) (42,961.5) (2,890.2)
--------------------------------------------------------------------------
Resources used in financing activities..... 2,015.5 49,026.1 (23,006.5) (43,673.8) (15,638.7)
Investing activities:
Property, machinery and equipment, net........ - (805.5) (4,331.4) 296.8 (4,840.1)
Acquisitions, net of cash acquired............ 42,638.3 (62,623.4) (22,801.0) 40,561.8 (2,224.3)
Dividends received............................ - - - - -
Minority interest............................. - - (102.6) (10.3) (112.9)
Deferred charges and others................... (38,079.8) 723.6 34,699.7 566.8 (2,089.7)
--------------------------------------------------------------------------
Resources used in investing activities..... 4,558.5 (62,705.3) 7,464.7 41,415.1 (9,267.0)
Change in cash and investments............. 107.0 (805.7) (444.9) 2,342.6 1,199.0
Cash and investments initial balance....... 62.8 1,899.1 2,814.6 (1,237.6) 3,538.9
-------------- ------------ -------------- -------------- -------------
Cash and investments ending balance........ Ps 169.8 1,093.4 2,369.7 1,105.0 4,737.9
-------------- ------------ -------------- -------------- -------------
F-63
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
Adjustments
Combined Combined and CEMEX
For the year ended December 31, 2002 CEMEX guarantors non-guarantors eliminations consolidated
------------------------------------------------ --------------------------------------------------------------------------
Operating activities:
Majority net income........................... Ps 5,966.9 (3,276.9) 6,769.6 (3,492.7) 5,966.9
Non-cash items................................ (6,206.7) 1,422.9 20,479.4 (6,970.4) 8,725.2
--------------------------------------------------------------------------
Resources provided by operations........... (239.8) (1,854.0) 27,249.0 (10,463.1) 14,692.1
Net change in working capital................. 1,132.1 5,227.2 (28,178.2) 26,207.0 4,388.1
--------------------------------------------------------------------------
Resources provided by operations, net...... 892.3 3,373.2 (929.2) 15,743.9 19,080.2
Financing activities:
Bank loans and notes payable, net............. 7,582.0 66.3 (5,264.3) 151.8 2,535.8
Dividends paid................................ (3,750.1) (2,255.5) 2.5 2,253.0 (3,750.1)
Issuance of common stock...................... 3,279.6 - 15,063.3 (15,063.3) 3,279.6
Issuance of preferred stock by subsidiaries... - - (4,631.2) - (4,631.2)
Others........................................ 361.0 (178.4) 56,322.5 (53,527.2) 2,977.9
--------------------------------------------------------------------------
Resources used in financing activities..... 7,472.5 (2,367.6) 61,492.8 (66,185.7) 412.0
Investing activities:
Property, machinery and equipment, net........ - (1,104.8) (2,888.1) (254.5) (4,247.4)
Acquisitions, net of cash acquired............ (65,643.7) 11,990.0 584.2 50,047.2 (3,022.3)
Dividends received............................ 2,396.6 - - (2,396.6) -
Minority interest............................. - - (3,270.4) - (3,270.4)
Deferred charges and others................... 55,094.8 (11,076.0) (54,093.3) 526.5 (9,548.0)
--------------------------------------------------------------------------
Resources used in investing activities..... (8,152.3) (190.8) (59,667.6) 47,922.6 (20,088.1)
Change in cash and investments............. 212.5 814.8 896.0 (2,519.2) (595.9)
Cash and investments initial balance....... 169.8 1,093.4 2,369.7 1,105.0 4,737.9
-------------- ------------ -------------- -------------- -------------
Cash and investments ending balance........ Ps 382.3 1,908.2 3,265.7 (1,414.2) 4,142.0
-------------- ------------ -------------- -------------- -------------
F-64
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
Adjustments
Combined Combined and CEMEX
For the year ended December 31, 2003 CEMEX guarantors non-guarantors eliminations consolidated
------------------------------------------------ --------------------------------------------------------------------------
Operating activities:
Majority net income........................... Ps 7,067.4 3,665.2 3,620.2 (7,285.4) 7,067.4
Non-cash items................................ (2,068.5) (1,291.9) 20,020.4 (6,232.5) 10,427.5
--------------------------------------------------------------------------
Resources provided by operations........... 4,998.9 2,373.3 23,640.6 (13,517.9) 17,494.9
Net change in working capital................. 18,112.7 13,871.6 (41,470.6) 9,595.0 108.7
--------------------------------------------------------------------------
Resources provided by operations, net...... 23,111.6 16,244.9 (17,830.0) (3,922.9) 17,603.6
Financing activities:
Bank loans and notes payable, net............. (11,601.9) (221.0) 9,979.2 (0.1) (1,843.8)
Dividends paid................................ (3,963.0) (5,641.0) 139.7 5,501.3 (3,963.0)
Issuance of common stock...................... 3,743.0 - - - 3,743.0
Issuance of preferred stock by subsidiaries... - - (7,343.3) - (7,343.3)
Others........................................ 746.8 (8,390.9) 2,719.5 8,812.4 3,887.8
--------------------------------------------------------------------------
Resources used in financing activities..... (11,075.1) (14,252.9) 5,495.1 14,313.6 (5,519.3)
Investing activities:
Property, machinery and equipment, net........ - (952.2) (3,317.5) - (4,269.7)
Acquisitions, net of cash acquired............ (7,007.2) (1,989.9) 12,786.5 (4,705.7) (916.3)
Dividends received............................ 5,501.3 - - (5,501.3) -
Minority interest............................. - - (859.7) - (859.7)
Deferred charges and others................... (10,804.3) 631.2 6,647.7 (3,380.1) (6,905.5)
--------------------------------------------------------------------------
Resources used in investing activities..... (12,310.2) (2,310.9) 15,257.0 (13,587.1) (12,951.2)
Change in cash and investments............. (273.7) (318.9) 2,922.1 (3,196.4) (866.9)
Cash and investments initial balance....... 382.3 1,908.2 3,265.7 (1,414.2) 4,142.0
-------------- ------------ -------------- -------------- -------------
Cash and investments ending balance........ Ps 108.6 1,589.3 6,187.8 (4,610.6) 3,275.1
-------------- ------------ -------------- -------------- -------------
F-65
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
The tables below present consolidated balance sheets as of December 31, 2002
and 2003, and income statements and statements of changes in financial
position for each of the three-year periods ended December 31, 2003 for the
Guarantors. Such information presents in separate columns each individual
Guarantor on a Parent Company-only basis, consolidation adjustments and
eliminations, and the combined Guarantors. All significant related parties
balances and transactions between the Guarantors have been eliminated in the
"Combined guarantors" column.
The amounts presented in the column "Combined guarantors" are readily
comparable with the information of the Guarantors included in the condensed
consolidated financial information. As previously described, amounts presented
under the line item "Investments in affiliates" for both the balance sheets
and income statements, include the net investment in affiliates accounted for
by the equity method. In addition, the Guarantors' reconciliation of net
income and stockholders' equity to U.S. GAAP are presented below:
Guarantors' Combined Balance Sheets:
December 31, 2002 Guarantors (Parent Company-only)
-----------------------------------------------------------------
Assets CEMEX Mexico ETM Adjustments Combined
and
eliminations guarantors
---------------- -------------- --------------- ---------------
Current Assets
Cash and investments................................. Ps 1,293.3 614.4 0.5 1,908.2
Trade accounts receivable, net....................... 342.0 - - 342.0
Other receivables and other current assets........... 878.4 919.0 (51.6) 1,745.8
Related parties receivables.......................... 3,030.9 4,762.5 (2,889.3) 4,904.1
Inventories.......................................... 1,598.0 - - 1,598.0
---------------- -------------- --------------- ---------------
Total current assets.............................. 7,142.6 6,295.9 (2,940.4) 10,498.1
---------------- -------------- --------------- ---------------
Other Investments
Investments in subsidiaries and affiliates........... 103,746.0 15,244.3 (39,726.7) 79,263.6
Long-term related parties receivables................ 301.1 14,088.4 (14,088.4) 301.1
Other investments.................................... 209.6 - - 209.6
---------------- -------------- --------------- ---------------
Total other investments........................... 104,256.7 29,332.7 (53,815.1) 79,774.3
---------------- -------------- --------------- ---------------
Property, plant and equipment........................ 28,603.4 - - 28,603.4
---------------- -------------- --------------- ---------------
Deferred Charges..................................... 2,118.7 4,230.2 (88.0) 6,260.9
---------------- -------------- --------------- ---------------
Total Assets...................................... Ps 142,121.4 39,858.8 (56,843.5) 125,136.7
---------------- -------------- --------------- ---------------
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt................. Ps 261.5 - - 261.5
Trade accounts payable............................... 406.8 - - 406.8
Other accounts payable and accrued expenses.......... 1,255.1 78.7 (51.2) 1,282.6
Related parties payables............................. 10,008.8 - (2,889.3) 7,119.5
---------------- -------------- --------------- ---------------
Total current liabilities......................... 11,932.2 78.7 (2,940.5) 9,070.4
---------------- -------------- --------------- ---------------
Total long-term debt................................. 6.5 - - 6.5
---------------- -------------- --------------- ---------------
Other Noncurrent Liabilities
Deferred income taxes................................ 7,782.6 - (88.1) 7,694.5
Others............................................... - 53.5 - 53.5
Long-term related parties payables................... 57,796.5 - (14,088.3) 43,708.2
---------------- -------------- --------------- ---------------
Total other noncurrent liabilities................ 65,579.1 53.5 (14,176.4) 51,456.2
---------------- -------------- --------------- ---------------
Total Liabilities................................. 77,517.8 132.2 (17,116.9) 60,533.1
---------------- -------------- --------------- ---------------
Stockholders' equity................................. 67,880.5 41,043.4 (41,043.4) 67,880.5
Net income........................................... (3,276.9) (1,316.8) 1,316.8 (3,276.9)
---------------- -------------- --------------- ---------------
Total stockholders' equity........................ 64,603.6 39,726.6 (39,726.6) 64,603.6
---------------- -------------- --------------- ---------------
Total Liabilities and Stockholders' Equity........ Ps 142,121.4 39,858.8 (56,843.5) 125,136.7
---------------- -------------- --------------- ---------------
F-66
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
Guarantors' Combined Balance Sheets:
December 31, 2003 Guarantors (Parent Company-only)
Adjustments
---------------
and Combined
Assets CEMEX Mexico ETM eliminations guarantors
-------------- -------------- -------------- --------------
Current Assets
Cash and investments.............................. Ps 767.9 821.1 0.3 1,589.3
Trade accounts receivable, net.................... 264.1 - - 264.1
Other receivables and other current assets........ 841.8 101.6 (112.5) 830.9
Related parties receivables....................... 2,028.3 4,498.2 (4,363.8) 2,162.7
Inventories....................................... 1,259.7 - - 1,259.7
--------------------------------------------------------------
Total current assets.......................... 5,161.8 5,420.9 (4,476.0) 6,160.7
--------------------------------------------------------------
Other Investments
Investments in subsidiaries and affiliates........ 111,494.0 15,720.8 (34,513.1) 92,701.7
Long-term related parties receivables............. 241.6 9,331 (9,331.0) 241.6
Other investments................................. 222.2 - - 222.2
--------------------------------------------------------------
Total other investments....................... 111,957.8 25,051.8 (43,844.1) 93,165.5
--------------------------------------------------------------
Property, plant and equipment..................... 29,817.8 - - 29,817.8
--------------------------------------------------------------
Deferred Charges.................................. 1,550.3 4,130.8 (16.3) 5,664.8
--------------------------------------------------------------
Total Assets.................................. Ps 148,487.7 34,603.5 (48,336.4) 134,754.8
--------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt.............. 6.8 - - 6.8
Trade accounts payable............................ 607.6 - - 607.6
Other accounts payable and accrued expenses....... 1,252.1 5.2 (112.0) 1,145.3
Related parties payables.......................... 16,877.8 - (4,363.8) 12,514.0
--------------------------------------------------------------
Total current liabilities..................... 18,744.3 5.2 (4,475.8) 14,273.7
--------------------------------------------------------------
Total long-term debt.............................. 8.4 - - 8.4
--------------------------------------------------------------
Other Noncurrent Liabilities
Deferred income taxes............................. 7,901.3 - (16.5) 7,884.8
Others............................................ 96.9 85.2 - 182.1
Long-term related parties payables................ 49,062.2 - (9,331.0) 39,731.2
--------------------------------------------------------------
Total other noncurrent liabilities............ 57,060.4 85.2 (9,347.5) 47,798.1
--------------------------------------------------------------
Total Liabilities............................. 75,813.1 90.4 (13,823.3) 62,080.2
--------------------------------------------------------------
Stockholders' equity.............................. 69,009.4 33,575.0 (33,575.0) 69,009.4
Net income........................................ 3,665.2 938.1 (938.1) 3,665.2
--------------------------------------------------------------
Total stockholders' equity.................... 72,674.6 34,513.1 (34,513.1) 72,674.6
--------------------------------------------------------------
Total Liabilities and Stockholders' Equity.... Ps 148,487.7 34,603.5 (48,336.4) 134,754.8
--------------------------------------------------------------
F-67
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
Guarantors' Combined Income Statements:
Guarantors (Parent Company-only)
----------------------------------------------------
Adjustments Combined
For the year ended December 31, 2001 CEMEX Mexico ETM and eliminations guarantors
------------ ------- ----------------- ----------
Net sales................................................ Ps 22,711.2 - - 22,711.2
Cost of sales............................................ (7,601.0) - - (7,601.0)
-------------------------------------------------------
Gross profit........................................ 15,110.2 - - 15,110.2
Total operating expenses............................ (13,483.7) (2.2) - (13,485.9)
-------------------------------------------------------
Operating income................................. 1,626.5 (2.2) - 1,624.3
-------------------------------------------------------
Net comprehensive financing result............... 752.8 705.0 - 1,457.8
-------------------------------------------------------
Other income (expense), net.............................. 2,145.0 (60.9) 0.1 2,084.2
-------------------------------------------------------
Income before IT, BAT, ESPS and equity in affiliates..... 4,524.3 641.9 0.1 5,166.3
-------------------------------------------------------
Total IT, BAT and ESPS.............................. 771.9 (165.6) - 606.3
-------------------------------------------------------
Income before equity in income of affiliates........ 5,296.2 476.3 0.1 5,772.6
Equity in income of affiliates................... 3,195.8 1,160.2 (1,636.6) 2,719.4
-------------------------------------------------------
Net income.......................................... Ps 8,492.0 1,636.5 (1,636.5) 8,492.0
-------------------------------------------------------
Guarantors (Parent Company-only)
----------------------------------------------------
Adjustments Combined
For the year ended December 31, 2002 CEMEX Mexico ETM and eliminations guarantors
------------ ------- ----------------- ----------
Net sales................................................ Ps 22,595.2 - - 22,595.2
Cost of sales............................................ (7,757.3) - - (7,757.3)
---------------------------------------------------------
Gross profit........................................ 14,837.9 - - 14,837.9
Total operating expenses............................ (11,503.7) (0.2) - (11,503.9)
---------------------------------------------------------
Operating income................................. 3,334.2 (0.2) - 3,334.0
---------------------------------------------------------
Net comprehensive financing result............... (6,094.2) (535.9) 0.1 (6,630.0)
---------------------------------------------------------
Other income (expense), net.............................. (334.2) (6.9) (0.1) (341.2)
---------------------------------------------------------
Income before IT, BAT, ESPS and equity in affiliates..... (3,094.2) (543.0) - (3,637.2)
---------------------------------------------------------
Total IT, BAT and ESPS.............................. (550.9) (746.6) - (1,297.5)
---------------------------------------------------------
Income before equity in income of affiliates........ (3,645.1) (1,289.6) - (4,934.7)
Equity in income of affiliates................... 368.2 (27.2) 1,316.8 1,657.8
---------------------------------------------------------
Net income.......................................... Ps (3,276.9) (1,316.8) 1,316.8 (3,276.9)
---------------------------------------------------------
Guarantors (Parent Company-only)
----------------------------------------------------
Adjustments Combined
For the year ended December 31, 2003 CEMEX Mexico ETM and eliminations guarantors
------------ ------- ----------------- ----------
Net sales................................................ Ps 24,408.5 - - 24,408.5
Cost of sales............................................ (8,768.2) - - (8,768.2)
-------------------------------------------------------
Gross profit........................................ 15,640.3 - - 15,640.3
Total operating expenses............................ (12,256.0) (0.4) - (12,256.4)
-------------------------------------------------------
Operating income................................. 3,384.3 (0.4) - 3,383.9
-------------------------------------------------------
Net comprehensive financing result............... (4,079.1) 1,079.7 - (2,999.4)
-------------------------------------------------------
Other income (expense), net.............................. (467.6) (21.5) - (489.1)
-------------------------------------------------------
Income before IT, BAT, ESPS and equity in affiliates..... (1,162.4) 1,057.8 - (104.6)
-------------------------------------------------------
Total IT, BAT and ESPS.............................. 448.5 (71.7) - 376.8
-------------------------------------------------------
Income before equity in income of affiliates........ (713.9) 986.1 - 272.2
Equity in income of affiliates................... 4,379.1 (48.0) (938.1) 3,393.0
-------------------------------------------------------
Net income.......................................... Ps 3,665.2 938.1 (938.1) 3,665.2
-------------------------------------------------------
F-68
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
Guarantors' Combined Statements of Changes in Financial Position:
Guarantors (Parent Company-only)
----------------------------------------------------
Adjustments Combined
For the year ended December 31, 2001 CEMEX Mexico ETM and eliminations guarantors
------------ ------- ----------------- ----------
Operating activities
Net income Ps 8,492.0 1,636.5 (1,636.5) 8,492.0
Charges to operations which did not require resources..... (2,479.4) (975.7) 1,650.6 (1,804.5)
Resources provided by operating activities................ 6,012.6 660.8 14.1 6,687.5
Net change in working capital......................... 17,242.8 (11,098.4) 41.6 6,186.0
Net resources provided by operating activities........ 23,255.4 (10,437.6) 55.7 12,873.5
Financing activities
Bank loans and notes payable, net......................... (58.1) 41.5 (41.5) (58.1)
Long-term related parties receivables and payables, net... 40,847.7 8,384.8 - 49,232.5
Other noncurrent assets and liabilities, net.............. (148.3) (114.6) 114.6 (148.3)
Resources used in financing activities.................... 40,641.3 8,311.7 73.1 49,026.1
Investing activities
Property, plant and equipment, net........................ (805.5) - - (805.5)
Investments in subsidiaries and affiliates................ (62,583.3) 74.5 (114.6) (62,623.4)
Deferred charges.......................................... (451.5) 24.2 (13.9) (441.2)
Other investments......................................... (161.4) 1,326.2 - 1,164.8
Resources used in investing activities................ (64,001.7) 1,424.9 (128.5) (62,705.3)
Change in cash and investments........................ (105.0) (701.0) 0.3 (805.7)
Cash and investments initial balance.................. 522.3 1,376.6 0.2 1,899.1
Cash and investments ending balance................... Ps 417.3 675.6 0.5 1,093.4
----------------------------------------------------------------------------------------------------------------------------------
Guarantors (Parent Company-only)
----------------------------------------------------
Adjustments Combined
For the year ended December 31, 2002 CEMEX Mexico ETM and eliminations guarantors
------------ ------- ----------------- ----------
Operating activities
Net income................................................ Ps (3,276.9) (1,316.8) 1,316.8 (3,276.9)
Charges to operations which did not require resources..... 1,611.8 1,127.9 (1,316.8) 1,422.9
Resources provided by operating activities................ (1,665.1) (188.9) - (1,854.0)
Net change in working capital......................... 4,801.6 (26.2) 451.8 5,227.2
Net resources provided by operating activities........ 3,136.5 (215.1) 451.8 3,373.2
Financing activities
Bank loans and notes payable, net......................... 12.8 53.5 - 66.3
Dividends................................................. (2,255.5) - - (2,255.5)
Long-term related parties receivables and payables, net... (53,630.5) - - (53,630.5)
Other noncurrent assets and liabilities, net.............. 53,452.1 - - 53,452.1
Resources used in financing activities.................... (2,421.1) 53.5 - (2,367.6)
Investing activities
Property, plant and equipment, net........................ (1,104.8) - - (1,104.8)
Investments in subsidiaries and affiliates................ (10,774.3) (23.2) 64.6 (10,732.9)
Deferred charges.......................................... (220.7) (17.6) (104.8) (343.1)
Other investments......................................... 12,260.4 141.2 (411.6) 11,990.0
Resources used in investing activities................ 160.6 100.4 (451.8) (190.8)
Change in cash and investments........................ 876.0 (61.2) - 814.8
Cash and investments initial balance.................. 417.3 675.6 0.5 1,093.4
Cash and investments ending balance................... Ps 1,293.3 614.4 0.5 1,908.2
F-69
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
Guarantors' Combined Statements of Changes in Financial Position:
----------------------------------------------------------------------------------------------------------------------------------
Guarantors (Parent Company-only)
----------------------------------------------------
Adjustments Combined
For the year ended December 31, 2003 CEMEX Mexico ETM and eliminations guarantors
------------ ------- ----------------- ----------
Operating activities
Net income................................................ Ps 3,665.2 938.1 (938.1) 3,665.2
Charges to operations which did not require resources..... (3,124.0) 894.0 938.1 (1,291.9)
Resources provided by operating activities................ 541.2 1,832.1 - 2,373.3
Net change in working capital......................... 38,376.8 1,055.8 (25,561.0) 13,871.6
Net resources provided by operating activities........ 38,918.0 2,887.9 (25,561.0) 16,244.9
Financing activities
Bank loans and notes payable, net......................... (252.8) 31.8 - (221.0)
Dividends................................................. (5,641.0) - - (5,641.0)
Long-term related parties receivables and payables, net... (38,743.3) - 30,317.0 (8,426.3)
Other noncurrent assets and liabilities, net.............. 35.4 (6,460.0) 6,460.0 35.4
Resources used in financing activities.................... (44,601.7) (6,428.2) 36,777.0 (14,252.9)
Investing activities
Property, plant and equipment, net........................ (952.2) - - (952.2)
Investments in subsidiaries and affiliates................ 5,479.3 (1,009.0) (6,460.2) (1,989.9)
Deferred charges.......................................... 602.2 - - 602.2
Other investments......................................... 29.0 4,756.0 (4,756.0) 29.0
Resources used in investing activities................ 5,158.3 3,747.0 (11,216.2) (2,310.9)
Change in cash and investments........................ (525.4) 206.7 (0.2) (318.9)
Cash and investments initial balance.................. 1,293.3 614.4 0.5 1,908.2
Cash and investments ending balance................... Ps 767.9 821.1 0.3 1,589.3
----------------------------------------------------------------------------------------------------------------------------------
Guarantors' Combined Statements of Changes in Financial Position:
Guarantors--Cash and investments
At December 31, 2002 and 2003, ETM's temporary investments are primarily
comprised of CEMEX CPOs. In June 2003, CEMEX issued 817,515 CPOs through
dividends to ETM amounting to Ps30.6.
Guarantors--Trade receivables
During December 2002, CEMEX Mexico and one of its subsidiaries established
sales of trade accounts receivables program ("securitization program"). With
this program, these companies effectively transferred control, risks and
benefits related to some of the trade accounts receivable balances. As of
December 31, 2002 and 2003, these balances amounted to Ps1,481.2 and Ps1,618.0
from CEMEX Mexico, respectively, and Ps754.9 and Ps862.9 from its subsidiary,
respectively.
Guarantors--Investment in affiliates
At December 31, 2002 and 2003, of the Guarantors' total investment in
affiliates, which are accounted for under the equity method, Ps79,058.3 and
Ps92,472.2, respectively, correspond to investments in non-guarantors, and
Ps205.3 in 2002 and Ps229.5 in 2003, are related to minority investments in
third parties.
At December 31, 2003, the main Guarantors' investments in non-guarantors are
in CEMEX Concretos, S.A. de C.V and CEMEX Internacional, S.A. de C.V., which
together integrate the ready-mix concrete operations and export trading
activities in Mexico; and CEDICE, which is the parent company of the
international operations of CEMEX.
The investment in affiliates includes an effect of Ps647.5 corresponding to
the cumulative effect of accounting change; see notes 23(k), with respect to
asset retirement obligations, and 23(m) with respect to equity forward
contracts.
F-70
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
Guarantors--Indebtedness
At December 31, 2002 and 2003, the Guarantors had total indebtedness of
U.S.$24.9 million (Ps268.0) and U.S.$1.3 million (Ps15.2), respectively. At
December 31, 2003, the average interest rate of this indebtedness was
approximately 7.8%. Of the total indebtedness of the Guarantors at December
31, 2003, approximately U.S.$0.6 million (Ps6.8) matures in 2004 and U.S.$0.7
million (Ps8.4) matures in 2005 and thereafter.
Guarantors--Balances and transactions with related parties
Balances with related parties result primarily from (i) the sale and purchase
of cement and clinker to and from affiliates, (ii) the sale and/or acquisition
of subsidiaries' shares within the CEMEX group, (iii) the invoicing of
administrative and other services received or provided from and to affiliated
companies, and (iv) the transfer of funds between the Guarantors, their
respective parents and certain affiliates. The related parties balance detail
is as follows:
Guarantors Assets Liabilities
At December 31, 2002 Short-Term Long-Term Short-Term Long-Term
----------- ---------- ----------- -----------
CEMEX, S.A. de C.V........................................... Ps 1,873.0 - - 34,244.5
CEMEX Central, S.A. de C.V................................... 940.6 - - -
CEMEX Concretos, S.A. de C.V................................. 489.2 - - -
Impra Cafe, S.A. de C.V...................................... 389.3 - - -
Proveedora Mexicana de Materiales, S.A. de C.V............... 234.0 - - -
Servicio CEMEX Mexico, S.A. de C.V. ......................... 226.3 - - -
Poveedora de Fibras Textiles, S.A. de C.V.................... 183.6 - - -
Inversora en Cales, S.A. de C.V.............................. 178.0 - - -
Carbonifera San Patricio, S.A. de C.V........................ 82.5 - - -
Inmobiliaria Rio la Silla, S.A. de C.V....................... 72.1 301.1 - -
Aviacion Comercial de America, S.A. de C.V................... 35.8 - - -
Centro Distribuidor de Cemento, S.A. de C.V.................. - - - 6,607.3
CEMEX International Finance Company.......................... - - 4,843.0 -
Petrocemex, S.A. de C.V...................................... - - 708.4 2,856.4
CEMEX Internacional, S.A. de C.V............................. - - 608.0 -
Turismo CEMEX, S.A. de C.V................................... - - 265.3 -
Neoris de Mexico, S.A. de C.V................................ - - 223.5 -
Mexcement Holdings S.A. de C.V............................... - - 113.2 -
Others....................................................... 199.7 - 358.1 -
Ps 4,904.1 301.1 7,119.5 43,708.2
------------------------------------------------------------------------------------------------------------------------------------
Guarantors Assets Liabilities
At December 31, 2003 Short-Term Long-Term Short-Term Long-Term
----------- ---------- ----------- -----------
CEMEX, S.A. de C.V........................................... Ps 134.1 - - 30,620.1
CEMEX Central, S.A. de C.V................................... 667.5 - - -
CEMEX Concretos, S.A. de C.V................................. 244.7 - - -
Impra Cafe, S.A. de C.V. .................................... 476.4 - - -
CEMEX Trademarks Worldwide................................... - - 4,860.3 -
Servicios CEMEX Mexico, S.A. de C.V. ........................ 258.8 - - -
Poveedora de Fibras Textiles, S.A. de C.V. .................. - - 58.0 -
Inmobiliaria Rio la Silla, S.A. de C.V....................... - 241.6 - -
Centro Distribuidor de Cemento, S.A. de C.V. ................ - - - 6,361.1
CEMEX International Finance Company.......................... - - 3,906.1 -
Petrocemex, S.A. de C.V...................................... - - 1,124.9 2,750.0
CEMEX Internacional, S.A. de C.V............................. - - 608.4 -
Turismo CEMEX, S.A. de C.V.. ................................ - - 255.2 -
Others....................................................... 381.2 - 1,701.1 -
Ps 2,162.7 241.6 12,514.0 39,731.2
------------------------------------------------------------------------------------------------------------------------------------
F-71
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
The principal transactions carried out with affiliated companies are as
follows:
Years ended December 31,
-------------------------------------------------
Guarantors 2001 2002 2003
-------------- ------------- -------------
Net sales......................................................... Ps 3,692.7 3,493.4 3,615.3
Purchases......................................................... (559.9) (1,024.0) (1,309.9)
Selling and administrative expenses .............................. (9,515.8) (7,475.7) (8,172.7)
Financial expense................................................. (6,188.3) (4,440.8) (4,709.3)
Financial income ................................................. 1,113.7 599.2 341.7
Other expense, net ............................................... Ps (72.6) (58.8) 280.2
-------------- ------------- -------------
Net sales--The Guarantors sell cement and clinker to affiliated companies in
arms-length transactions.
Purchases--The Guarantors purchase raw materials from affiliates in
arms-length transactions.
Selling and administrative expenses--CEMEX allocates part of its corporate
expense to the Guarantors, which also incur rental and trademark rights
expenses payable to CEMEX.
Financial income and expense is recorded on receivables from and payables to
affiliated companies as described above. Additionally, the Guarantors receive
financial income on their temporary investment position, invested in the
non-guarantor treasury company.
Guarantors--U.S. GAAP reconciliation of net income and stockholders' equity:
As discussed at the beginning of this note 23, the following reconciliation to
U.S. GAAP does not include the reversal of Mexican GAAP inflation accounting
adjustments, as these adjustments represent a comprehensive measure of the
effects of price level changes in the inflationary Mexican economy, which is
considered a more meaningful presentation than historical cost-based financial
reporting for both Mexican and U.S. accounting purposes. The other principal
differences between Mexican GAAP and U.S. GAAP and the effect on net income
and stockholders' equity are presented below, with an explanation of the
adjustments, as follows:
Years ended December 31,
2001 2002 2003
------ ------ ------
Net income reported under Mexican GAAP........................... Ps 8,492.0 (3,276.9) 3,665.2
Approximate U.S. GAAP adjustments:
1. Amortization of pushdown goodwill (see note A)................ (198.4) - -
2. Deferred income taxes and ESPS (see note B)................... (1,264.9) 2,008.8 (8.0)
3. Other employees' benefits (see note C)........................ (5.0) (14.0) 34.6
4. Inflation adjustment of machinery and equipment (see note D).. (249.4) (190.1) (116.8)
5. Other U.S. GAAP adjustments (see note E)...................... (1,287.5) 314.7 (167.1)
6. Monetary position result (see note F)......................... 231.5 513.4 112.3
Total approximate U.S. GAAP adjustments...................... (2,773.7) 2,632.8 (145.0)
Total approximate net income under U.S. GAAP................. Ps 5,718.3 (644.1) 3,520.2
At December 31,
-------------------------------------
2002 2003
---------------- ----------------
Total stockholders' equity under Mexican GAAP............................. Ps 64,603.6 72,674.6
Approximate U.S. GAAP adjustments:
1. Effect of pushdown of goodwill, net (see note A)...................... 2,018.3 2,029.8
2. Deferred income taxes and ESPS (see note B)........................... (2,281.3) (3,270.9)
3. Other employees' benefits (see note C)................................ (171.1) (100.1)
4. Inflation adjustment for machinery and equipment (see note D).......... 4,088.1 2,162.9
5. Other U.S. GAAP adjustments (see note E).............................. (6,398.8) 551.3
---------------- ----------------
Total approximate U.S. GAAP adjustments.............................. (2,744.8) 1,373.0
---------------- ----------------
Total approximate stockholders' equity under U.S. GAAP............... Ps 61,858.8 74,047.6
---------------- ----------------
F-72
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
Guarantors--Notes to the U.S. GAAP reconciliation:
A. Business Combinations
In 1989 and 1990, through an exchange of its shares with CEMEX, CEMEX Mexico
acquired substantially all its Mexican subsidiaries from CEMEX. The original
excess of the purchase price paid by CEMEX over the fair value of the net
assets of these subsidiaries was Ps7,255.9, of which Ps3,753.1, were recorded
in ETM under Mexican GAAP at the time of the acquisition. The net adjustment
in the Guarantors stockholders' equity reconciliation to U.S. GAAP arising
from this pushed-down goodwill, after eliminating the amounts recorded under
Mexican GAAP, was Ps1,198.0 in 2002 and Ps1,209.6 in 2003.
In addition, during 1995, CEMEX acquired an additional 24.2% equity interest
in TOLMEX, S.A. de C.V. ("TOLMEX"), through a public exchange offer pursuant
to which CEMEX exchanged its own shares for TOLMEX's shares. TOLMEX merged
during 1999 with other Mexican subsidiaries creating CEMEX Mexico. The excess
of the purchase price paid by CEMEX over the fair value of the net assets of
TOLMEX was Ps922.9. The net adjustment in the Guarantors stockholders' equity
reconciliation to U.S. GAAP arising from this pushed-down goodwill was Ps820.3
in 2002 and Ps820.2 in 2003.
Amortization expense related to these pushed-down goodwill amounts was
recognized for purposes of the net income reconciliation to U.S. GAAP through
2001. As mentioned in note 23(a), for purposes of the reconciliation to U.S.
GAAP, CEMEX adopted SFAS 142 and SFAS 144 in 2002. As a result of this
adoption, effective January 1, 2002, amortization ceased for goodwill under
U.S. GAAP and, therefore, beginning in 2002, goodwill amortization recorded
under Mexican GAAP is adjusted for purposes of the reconciliation of net
income and stockholders' equity.
B. Deferred income taxes and Employees' Statutory Profit Sharing
Deferred income taxes adjustment in the stockholders' equity reconciliation to
U.S. GAAP, at December 31, 2002 and 2003, represented income of Ps514.7 and
expense of Ps680.7, respectively. In addition, deferred ESPS adjustment to
U.S. GAAP was an expense of Ps2,796.0 in 2002 and an expense of Ps2,590.2 in
2003.
C. Other employees' benefits
The Guarantors do not accrue for severance payments and until December 31,
2002, did not accrue for vacation expense. These items are recognized when
retirements occur or when vacation was taken. Beginning January 1, 2003, in
accordance with new Mexican GAAP pronouncements, the Guarantors began to
accrue for vacation expense on the basis of services rendered. As a result, at
December 31, 2002, for purposes of the U.S. GAAP reconciliation, a vacation
liability was determined in an amount of Ps30.6, which was cancelled at
December 31, 2003. In addition, the Guarantors recognized, for purposes of the
U.S. GAAP reconciliation, a liability for severance benefits for Ps140.5 in
2002 and Ps100.1 in 2003.
D. Inflation Adjustment of Machinery and Equipment
As previously mentioned in note 23(i), for purposes of the U.S. GAAP
reconciliation, fixed assets of foreign origin were restated using the
inflation factor arising from the Consumer Price Index ("CPI") of each
country, and depreciation is based upon the revised amounts.
E. Other U.S. GAAP adjustments
Deferred charges--For U.S. GAAP purposes, other deferred charges net of
accumulated amortization that did not qualify for deferral under U.S. GAAP
have been charged to expense, with a net effect in the net income
reconciliation to U.S. GAAP of expense of Ps27.3and of Ps279.3 for the years
ended December 31, 2001 and 2002, respectively. The net effect in the
stockholders' equity reconciliation to U.S. GAAP was expenses of Ps513.6 in
2002, from the partial reversal of the adjustment. Mexican GAAP allowed the
deferral of these expenses. This effect has been cancelled in
stockholders' equity because the intangible assets were sold to Cemex
Trademark Worldwide (CTW), an affiliated company, for a total amount of
Ps494.5 in February 2003.
F-73
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican pesos as of December 31, 2003)
Subsidiary companies--The Guarantors have adjusted their investment and their
equity in the earnings of subsidiary companies for the share of the
approximate U.S. GAAP adjustments applicable to these affiliates. The net
effect in the stockholders' equity reconciliation to U.S. GAAP at December 31,
2002 and 2003 was expense of Ps5,885.2 and income of Ps551.3, respectively.
The effect in the net income reconciliation to U.S. GAAP was expense of
Ps1,260.2, income of Ps594.0 and expense of Ps167.1 in 2001, 2002 and 2003,
respectively. From the U.S. GAAP adjustments to subsidiary companies in the
Guarantors' reconciliation of stockholders' equity, expense of Ps2,281.3 in
2002 and expense of Ps3,270.9 in 2003, are related to deferred IT and deferred
ESPS.
F. Monetary position result
Monetary position result of the U.S. GAAP adjustments is determined by (i)
applying the annual inflation factor to the net monetary position of the U.S.
GAAP adjustments at the beginning of the period, plus (ii) the monetary
position effect of the adjustments during the period, determined in accordance
with the CPI inflation factor for the period.
Supplemental Guarantors' Cash Flow Information under U.S. GAAP
The classifications of cash flows under Mexican GAAP and U.S. GAAP are
basically the same in respect of the transactions presented under each
caption. The nature of the differences between Mexican GAAP and U.S. GAAP in
the amounts reported is primarily due to (i) the elimination of inflationary
effects in the variations of monetary assets and liabilities arising from
financing and investing activities, against the corresponding monetary
position result in operating activities, (ii) the elimination of exchange rate
fluctuations resulting from financing and investing activities, against the
corresponding unrealized foreign exchange gain or loss included in operating
activities, and (iii) the recognition in operating, financing and investing
activities of the U.S. GAAP adjustments.
For the Guarantors, the following table summarizes the cash flow items as
required under SFAS 95 provided by (used in) operating, financing and
investing activities for the years ended December 31, 2001, 2002 and 2003,
giving effect to the U.S. GAAP adjustments, excluding the effects of inflation
required by Bulletin B-10 and Bulletin B-15. The following information is
presented, in millions of pesos, on a historical peso basis and it is not
presented in pesos of constant purchasing power:
Years ended December 31,
-------------------------------------------------
2001 2002 2003
-------------- ------------- --------------
Net cash provided by operating activities.......................... Ps (2,336.9) 2,001.4 6,969.9
Net cash provided by (used in) financing activities................ (25.4) 2,418.5 (5,886.0)
Net cash used in investing activities.............................. 2,287.0 (3,555.4) (1,561.2)
-------------- ------------- --------------
Net cash flow from operating activities reflects cash payments for interests
and income taxes as follows:
Years ended December 31,
-------------------------------------------------
2001 2002 2003
-------------- ------------- --------------
Interest paid...................................................... Ps 20.5 263.5 149.7
Income taxes paid.................................................. - - -
-------------- ------------- --------------
Guarantors' non-cash activities are comprised of the following:
During 2001, the Guarantors acquired, from CEMEX, an equity interest in CEDICE
for an amount of Ps37,466.4, which was credited against an account payable
owed by CEMEX to the Guarantors at the end of such year.
Dividends declared to CEMEX amounting to Ps2,171.5 in 2002 and Ps6,460.0 in
2003 were recognized by the Guarantors as accounts payable to CEMEX as of
December 31, 2002 and 2003, respectively.
Contingent liabilities of the Guarantors
As of December 31, 2002 and 2003, CEMEX Mexico and ETM guaranteed debt of
CEMEX in the amount of U.S.$2,339 million and U.S.$3,145 million (see note
11C).
F-74
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
The Board of Directors and Stockholders
CEMEX, S.A. de C.V.:
Under the date of January 15, 2004, we reported on the consolidated balance
sheets of CEMEX, S.A. de C.V. and subsidiaries as of December 31, 2002 and
2003, and the related consolidated statements of income, changes in
stockholders' equity and changes in financial position for each of the years
ended December 31, 2001, 2002 and 2003, which are included in this annual
report on Form 20-F. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedules in the annual report. These financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG Cardenas Dosal, S.C.
/s/ Leandro Castillo Parada
Leandro Castillo Parada
Monterrey, N.L. Mexico
January 15, 2004
S-1
SCHEDULE I
CEMEX, S.A. DE C.V. (PARENT COMPANY ONLY)
Balance Sheets
(Millions of constant Mexican Pesos as of December 31, 2003)
December 31,
----------------- -- ---------------
Assets 2002 2003
----------------- ---------------
Current Assets
Cash and investments.................................................... Ps 382.3 108.6
Other receivables (note 3).............................................. 1,123.9 712.1
Related parties receivables (note 7).................................... 20,147.9 895.4
----------------- ---------------
Total current assets................................................ 21,654.1 1,716.1
----------------- ---------------
Investments and Noncurrent Receivables
Investments in subsidiaries and affiliated companies (note 4) .......... 83,290.4 84,843.5
Other investments....................................................... 84.7 71.7
Other noncurrent accounts receivable.................................... 511.7 940.9
Long-term related parties receivables (note 7).......................... 17,147.0 34,436.5
----------------- ---------------
Total investments and noncurrent receivables........................ 101,033.8 120,292.6
----------------- ---------------
----------------- ---------------
Land and Buildings......................................................... 1,754.7 1,738.5
----------------- ---------------
Deferred Charges (note 5).................................................. 6,245.1 5,300.2
----------------- ---------------
Total Assets........................................................ Ps 130,687.7 129,047.4
================= ===============
Liabilities and Stockholders' Equity
Current Liabilities
Bank loans (note 6).........................................................Ps 6,976.9 730.6
Notes payable (note 6)...................................................... 3,187.9 1,889.9
Current maturities of long-term debt (note 6)............................... 5,625.0 705.0
Other accounts payable and accrued expenses ................................ 2,963.3 2,816.8
Related parties payable (note 7)............................................ 6,083.0 4,677.9
----------------- ----------------
Total current liabilities............................................... 24,836.1 10,820.2
----------------- ----------------
Long-Term Debt (notes 6 and 7)
Long-Term Debt.............................................................. 21,337.9 22,200.1
Long-term related parties payables.......................................... 17,183.9 24,146.1
----------------- ----------------
Total long-term debt.................................................... 38,521.8 46,346.2
Other long-term liabilities............................................. 1,449.0 1,808.8
----------------- ----------------
Total Liabilities.............................................................. 64,806.9 58,975.2
----------------- ----------------
----------------- ----------------
Stockholders' Equity........................................................... 65,880.8 70,072.2
----------------- ----------------
Total Liabilities and Stockholders' Equity..............................Ps 130,687.7 129,047.4
================= ================
See accompanying notes to financial statements.
S-2
SCHEDULE I (continued)
CEMEX, S.A. DE C.V. (PARENT COMPANY ONLY)
Statements of Income
(Millions of constant Mexican Pesos as of December 31, 2003,
except for earnings per share)
Years ended December 31,
--------------- -- -------------- -- ---------------
2001 2002 2003
--------------- -------------- ---------------
Total revenues ..............................................Ps 13,828.0 5,560.4 3,733.4
Administrative expenses......................................... (90.1) (110.4) (54.8)
--------------- -------------- ---------------
Operating income............................................. 13,737.9 5,450.0 3,678.6
--------------- -------------- ---------------
Net comprehensive financing result....................... 33.9 (1,427.1) ( 1,769.1)
Other income (expense), net.................................... (2,134.3) ( 350.4) 4,367.7
--------------- -------------- ---------------
Income before income taxes................................... 11,637.5 3,672.5 6,277.2
Income tax benefit and business assets tax, net (note 8)........ 1,389.1 2,294.4 790.2
--------------- -------------- ---------------
Net income...................................................Ps 13,026.6 5,966.9 7,067.4
=============== ============== ===============
Basic earnings per share.....................................Ps 3.05 1.33 1.49
Diluted earnings per share...................................Ps 3.03 1.33 1.46
=============== ============== ===============
See accompanying notes to financial statements.
S-3
SCHEDULE I (continued)
CEMEX, S.A. DE C.V. (PARENT COMPANY ONLY)
Statements of Changes in Financial Position
(Millions of constant Mexican Pesos as of December 31, 2003)
Years ended December 31,
--------------- --------------- ---------------
2001 2002 2003
--------------- --------------- ---------------
Operating activities
Net income.......................................................... Ps 13,026.6 5,966.9 7,067.4
Charges to operations which did not require resources (note 9)...... (11,598.8) (6,206.7) (2,068.5)
--------------- --------------- ---------------
Resources (used in) provided by operating activities............ 1,427.8 (239.8) 4,998.9
Net change in working capital....................................... (7,894.8) 1,132.1 18,112.7
--------------- --------------- ---------------
Net resources provided by (used in) operating activities....... (6,467.0) 892.3 23,111.6
--------------- --------------- ---------------
Financing activities
Proceeds from bank loans (repayments), net......................... 7,070.0 3,343.2 (9,394.6)
Notes payable...................................................... (5,198.6) 4,238.8 (2,207.3)
Dividends paid..................................................... (3,369.1) (3,750.1) (3,963.0)
Issuance of common stock from reinvestment of dividends............ 3,015.3 3,203.8 3,700.0
Issuance of common stock under stock option plan................... 115.4 75.8 43.0
Acquisition of shares under repurchase program..................... (245.6) (400.6) 387.0
Other financing activities, net.................................... 628.1
761.6 359.8
--------------- --------------- ---------------
Resources provided by financing activities..................... 2,015.5 7,472.5 (11,075.1)
--------------- --------------- ---------------
Investing activities
Long-term related parties receivables, net......................... (38,601.4) 55,069.4 (10,327.3)
Net change in investment in subsidiaries........................... 42,638.3 (65,643.7) (7,007.2)
Dividends received................................................. - 2,396.6 5,501.3
Deferred charges................................................... 1,156.5 (97.8) (47.5)
Other noncurrent accounts receivable............................... (634.9) 123.2 (429.5)
--------------- --------------- ---------------
Resources (used in) provided by investing activities.......... 4,558.5 (8,152.3) (12,310.2)
--------------- --------------- ---------------
Increase (decrease) in cash and investments.................... 107.0 212.5 (273.7)
Cash and investments at beginning of year...................... 62.8 169.8 382.3
--------------- --------------- ---------------
Cash and investments at end of year............................ Ps 169.8 382.3 108.6
=============== =============== ===============
See accompanying notes to financial statements.
S-4
SCHEDULE I (continued)
CEMEX, S.A. DE C.V.
NOTES TO THE PARENT COMPANY ONLY FINANCIAL STATEMENTS
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
1. DESCRIPTION OF BUSINESS
CEMEX, S.A. de C.V. (CEMEX or the Company) is a Mexican holding company (parent)
of entities whose main activities are oriented to the construction industry,
through the production and marketing of cement and ready-mix concrete.
2. SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION AND DISCLOSURE
These financial statements have been prepared in accordance with Generally
Accepted Accounting Principles in Mexico ("Mexican GAAP"), which include the
recognition of the effects of inflation on the financial information.
B) PRESENTATION OF COMPARATIVE FINANCIAL STATEMENTS
The restatement factors for the Parent Company's financial statements of prior
periods were calculated using Mexican inflation.
2001 to 2002 2002 to 2003
----------------- -----------------
Restatement factor using Mexican inflation............................. 1.0559 1.0387
----------------- -----------------
C) CASH AND INVESTMENTS
Investments include fixed-income securities with original maturities of three
months or less, as well as marketable securities easily convertible into cash.
Investments in fixed-income securities are recorded at cost plus accrued
interest. Investments in marketable securities are recorded at market value.
Results from changes in market values, accrued interest and the effects of
inflation are included in earnings as part of the Comprehensive Financing
Result.
D) INVESTMENTS IN SUBSIDIARIES AND AFFILIATED COMPANIES
Investments in common stock representing between 10% and 100% of the issuer's
common stock are accounted for by the equity method. Under the equity method,
after acquisition, the investments original cost are adjusted for the
proportional interest of the holding company in the affiliates equity and
earnings, considering the inflation effects.
E) LAND AND BUILDINGS
Land and buildings are presented at their restated values using the Mexican
inflation index. Depreciation of buildings is provided on the straight-line
method over the estimated useful lives of the assets. The useful lives of
administrative buildings are approximately 50 years.
F) INTANGIBLE ASSETS, DEFERRED CHARGES AND AMORTIZATION (note 5)
Effective January 1, 2003, intangible assets acquired as well as costs
incurred in the development stages of intangible assets are capitalized when
associated future benefits are identified and the control on such benefits is
demonstrated. Other expenditures are charged to earnings as incurred.
Intangible assets are presented at their restated value and are classified as
of definite life, which are amortized over the benefited periods, and as of
indefinite life, which are not amortized since it cannot be accurately
established the period in which the benefits associated with such intangibles
will terminate. Amortization of intangible assets, except for goodwill, is
calculated under the straight-line method.
Intangible assets acquired in a business combination are separately accounted
for at fair value at the acquisition date, unless such value cannot be
reasonably estimated, in which case, are included as part of goodwill, an
intangible asset of indefinite life, which is nevertheless amortized. The
Company amortizes goodwill under the present worth or sinking fund method,
which is intended to provide a better matching of goodwill amortization with
the revenues generated from the acquired companies. Goodwill generated before
1992 is amortized in a maximum of 40 years, while such generated from 1992 to
date, is amortized in a maximum period of 20 years. Deferred charges
previously recognized under former Bulletin C-8 will continue to be amortized
in their original period. Intangible assets are subject to periodic impairment
evaluations. The adoption of new Bulletin C-8 only implied grouping intangible
assets in the categories indicated above.
S-5
SCHEDULE I (continued)
CEMEX, S.A. DE C.V.
NOTES TO THE PARENT COMPANY ONLY FINANCIAL STATEMENTS--(Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
Direct costs incurred in debt issuances are capitalized and amortized as part
of the effective interest rate of each transaction over its maturity. These
costs include discounts on debt issuance, bank fees, fees paid to attorneys,
agents, printers and consultants.
G) MONETARY POSITION RESULT
The monetary position result, which represents the gain or loss from holding
monetary assets and liabilities in inflationary environments, is calculated by
applying the Mexican inflation rate on the Company's net monetary position.
H) DEFICIT IN EQUITY RESTATEMENT
The deficit in equity restatement includes the accumulated effect from holding
non-monetary assets as well as the foreign currency translation effects from
foreign subsidiaries' financial statements.
I) CONTINGENCIES AND COMMITMENTS
Obligations or material losses, related to contingencies and commitments, are
recognized when present obligations exist, as a result of past events, it is
probable that the effects will materialize and there are reasonable elements
for quantification. If there are no reasonable elements for quantification, a
qualitative disclosure is included in the notes to the financial statements.
The Company does not recognize contingent revenues, income or assets.
J) USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities at the
financial statements date and the reported amounts of revenues and expenses
during the reported periods. Actual results could differ from these estimates.
3. OTHER ACCOUNTS RECEIVABLE AND OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Other accounts receivable as of December 31, 2002 and 2003 consist of:
2002 2003
--------------- --------------
Non-trade receivables........................................................... Ps 163.4 282.9
Receivables from valuation of derivative instruments............................ - 110.0
Refundable income tax........................................................... 675.4 8.0
Other refundable taxes.......................................................... 285.1 311.2
--------------- --------------
Ps 1,123.9 712.1
--------------- --------------
Other accounts payable and accrued expenses as of December 31, 2002 and 2003
consist of:
2002 2003
--------------- ---------------
Other accounts payable and accrued expenses..................................... Ps 1,525.5 1,483.2
Interest payable................................................................ 606.1 319.6
Tax payable..................................................................... - 485.6
Dividends payable............................................................... 4.2 4.9
Provisions...................................................................... - 6.9
Accounts payable from valuation of derivative instruments....................... 827.5 516.6
----------- --- ----------- ---
Ps 2,963.3 2,816.8
----------- --- ----------- ---
S-6
SCHEDULE I (continued)
CEMEX, S.A. DE C.V.
NOTES TO THE PARENT COMPANY ONLY FINANCIAL STATEMENTS--(Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
Short-term provisions primarily consist of: (i) accruals for insurance
payments and (ii) accruals related to the portion of legal assessments to be
settled in short-term. Commonly, these amounts are revolving in nature and are
to be settled and replaced by similar amounts within the next 12 months.
4. INVESTMENTS IN SUBSIDIARIES AND AFFILIATED COMPANIES
As of December 31, 2002 and 2003, investments in subsidiaries and affiliated
companies accounted for by the equity method, are summarized as follows:
2002 2003
--------------- --------------
Book value at acquisition date................................................ Ps 66,259.1 64,076.5
Equity in income and other changes in stockholders' equity of subsidiaries and
affiliated companies....................................................... 17,031.3 20,767.0
--------------- --------------
Ps 83,290.4 84,843.5
--------------- --------------
5. INTANGIBLE ASSETS AND DEFERRED CHARGES
At December 31, 2002 and 2003, intangible assets of indefinite life and
deferred charges are summarized as follows:
2002 2003
--------------- --------------
Intangible of indefinite useful life:
Goodwill..................................................................... Ps 2,010.6 1,981.9
Accumulated amortization...................................................... (148.6) (149.8)
--------------- --------------
1,862.0 1,832.1
--------------- --------------
Deferred Charges:
Deferred financing costs...................................................... 761.8 384.7
Deferred income taxes (note 17B).............................................. 3,709.7 3,023.9
Others........................................................................ 1,501.5 415.6
Accumulated amortization ..................................................... (1,589.9) (356.1)
--------------- --------------
4,383.1 3,468.1
--------------- --------------
Ps 6,245.1 5,300.2
--------------- --------------
6. SHORT AND LONG-TERM BANK LOANS AND NOTES PAYABLE
A total of 95.6% and 69.9% of the Parent Company-only short-term debt is
denominated in dollars in 2002 and 2003, respectively.
Of the Parent Company-only long-term debt, approximately 77.0% and 89.0% is
denominated in dollars in 2002 and 2003, respectively; the remaining debt in
2002 is primarily denominated in Mexican pesos.
The maturities of long-term debt as of December 31, 2003 are as follows:
Parent
--------------------
2005...................................................................... 6,564.6
Ps
2006...................................................................... 5,364.0
2007...................................................................... 2,998.4
2008...................................................................... 3,473.3
2009 and thereafter....................................................... 3,799.8
--------------------
Ps 22,200.1
--------------------
In the Parent Company-only balance sheet at December 31, 2003, there were
short-term debt transactions amounting to U.S.$ 395 million ($4,439.8),
classified as long-term debt, due to the Company's ability and the intention
to refinance such indebtedness with the available amounts of the committed
long-term lines of credit.
S-7
SCHEDULE I (continued)
CEMEX, S.A. DE C.V.
NOTES TO THE PARENT COMPANY ONLY FINANCIAL STATEMENTS--(Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
7. BALANCES AND TRANSACTIONS WITH RELATED PARTIES
The main balances receivable and payable with related parties as of December
31, 2002 and 2003 are:
Parent Company 2002
-------------------------------------------------------------------
Assets Liabilities
------------------------------ --------------------------------
Short-Term Long-Term Short-Term Long-Term
------------- ------------ -------------- -------------
CEMEX Mexico, S.A. de C.V...................... Ps 20,048.8 16,764.2 - -
CEMEX International Finance Co................. - - 271.9 11,192.6
CEMEX Trademarks Worldwide Ltd................. - - 156.0 5,991.3
Empresas Tolteca de Mexico, S.A. de C.V........ - - 4,439.3 -
CEMEX Central, S.A. de C.V. .......................... - - 722.3 -
Assiut Cement Company................................. - - 395.1 -
International Investors LLC........................... - 382.8 - -
CEMEX Asia PTE. Ltd................................... - - 73.9 -
Centro Distribuidor de Cemento, S.A. de C.V. ......... - - 16.2 -
Sunbelt Trading, S.A. de C.V. ........................ 45.6 - - -
CEMEX Concretos, S.A. de C.V. ........................ 24.0 - - -
PT CEMEX Indonesia................................... 14.2 - - -
Other................................................ 15.3 - 8.3 -
------------- ------------ -------------- -------------
Ps 20,147.9 17,147.0 6,083.0 17,183.9
------------- ------------ -------------- -------------
Parent Company 2003
-------------------------------------------------------------------
Assets Liabilities
------------------------------ --------------------------------
Short-Term Long-Term Short-Term Long-Term
------------- ------------ -------------- -------------
CEMEX Mexico, S.A. de C.V..........................Ps 745.5 34,236.9 - -
CEMEX International Finance Co........................ - - 39.6 20,119.2
Empresas Tolteca de Mexico, S.A. de C.V............... - - 4,496.4 -
CEMEX Irish Investment Company Limited................ - - 16.9 3,898.6
International Investors LLC........................... 9.7 199.6 - -
Centro Distribuidor de Cemento, S.A. de C.V........... 2.7 - - 128.3
CEMEX Asia PTE. Ltd................................... - - 118.6 -
CEMEX Manila Investments B. V......................... 55.6 - - -
Sunbelt Trading, S.A. ................................ 47.6 - - -
CEMEX Venezuela S.A. de C.V........................... 8.4 - - -
CEMEX Colombia S.A.................................... 6.7 - - -
Latin Asia Investments. Pte Ltd...................... 5.6 - - -
Other................................................ 13.6 - 6.4 -
------------- ------------ -------------- -------------
Ps 895.4 34,436.5 4,677.9 24,146.1
------------- ------------ -------------- -------------
The main transactions carried out during the last three years with related
parties are:
2001 2002 2003
--------------- -------------- ---------------
Rental income.............................................. 302.0 288.1 275.7
Ps
License fees............................................... 1,941.8 191.8 516.8
Financial expense.......................................... (642.4) (834.0) (792.8)
Financial income........................................... 4,958.5 3,232.7 3,067.8
Dividends received......................................... - 2,253.0 5,641.0
--------------- -------------- ---------------
S-8
SCHEDULE I (continued)
CEMEX, S.A. DE C.V.
NOTES TO THE PARENT COMPANY ONLY FINANCIAL STATEMENTS--(Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
8. INCOME TAX (IT), BUSINESS ASSETS TAX (BAT)
In accordance with the effective tax legislation in Mexico, corporations must
pay either income tax ("IT") or business assets tax ("BAT") depending on which
amount is greater for their operations in Mexico. Both taxes recognize the
effects of inflation, though in a manner different from Mexican GAAP.
The IT benefit, presented in the accompanying income statements, is summarized
as follows:
2001 2002 2003
--------------- ------------- -------------
Received from subsidiaries................................. Ps 703.9 967.8 1,337.7
Deferred IT................................................ 685.2 1,326.6 (547.5)
--------------- ------------- -------------
Ps 1,389.1 2,294.4 790.2
--------------- ------------- -------------
Arising from its Mexican subsidiaries, the Company has accumulated IT loss
carry forwards which, restated for inflation, can be amortized against taxable
income in the succeeding ten years according to Income Tax Law:
Year in which tax loss occurred Amount of Year of
carryforwards expiration
---------------- -----------------
1995.................................................................... Ps 1,776.6 2005
2000.................................................................... 420.7 2010
2001.................................................................... 3,265.7 2011
2002.................................................................... 3,752.4 2012
2003.................................................................... 872.2 2013
----------------
Ps 10,087.6
----------------
The Company and its subsidiaries in Mexico must generate taxable income to
preserve the benefit of the tax loss carryforwards generated beginning in
1999.
The BAT Law establishes a 1.8% tax levy on assets, restated for inflation in
the case of inventory and fixed assets, and deducting certain liabilities. BAT
levied in excess of IT for the period may be recovered, restated for
inflation, in any of the succeeding ten years, provided that the IT incurred
exceeds BAT in such period.
The recoverable BAT as of December 31, 2003 is as follows:
Year in which BAT exceeded IT Amount of Year of
carryforwards expiration
------------------- -----------------
1997................................................................... Ps 162.4 2007
9. ITEMS NOT AFFECTING CASH FLOWS
For the years ended December 31, 2001, 2002 and 2003, items charged or
credited to the results of operations, which did not generated the use of
resources, are summarized as follows:
2001 2002 2003
------------- ------------- -------------
Depreciation of properties..........................................Ps 5.2 5.2 5.2
Amortization of deferred charges and credits, net.................... 665.4 195.2 319.7
Deferred income tax credited to results.............................. (685.2) (1,326.6)
547.5
Equity in income of subsidiaries and affiliates...................... (11,584.2) (5,080.5) (2,940.9)
------------- ------------- -------------
Ps (11,598.8) (6,206.7) (2,068.5)
------------- ------------- -------------
S-9
SCHEDULE I (continued)
CEMEX, S.A. DE C.V.
NOTES TO THE PARENT COMPANY ONLY FINANCIAL STATEMENTS--(Continued)
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
10. CONTINGENCIES AND COMMITMENTS
As of December 31, 2002 and 2003, CEMEX has signed as guarantor of loans made
to certain subsidiaries for approximately U.S.$55.2 million and U.S. $ 1,322
million, respectively. As of the same date, the Company and certain
subsidiaries have guaranteed the risks associated with certain financial
transactions, assuming contingent obligations under standby letters of credit,
issued by financial institutions for a total of U.S. $175.0 million and U.S.
$55 million, respectively.
S-10
SCHEDULE II
CEMEX, S.A. DE C.V. AND SUBSIDIARIES
December 31, 2001, 2002 and 2003
(Millions of constant Mexican Pesos as of December 31, 2003)
Valuation and Qualifying Accounts as of December 31, 2001, 2002 and 2003, is a follows:
Description Balance at Charged to Balance at
beginning costs and end of
of period expenses Deductions Others (1) period
------------ ------------ ------------ --------------------------
Year ended December 31, 2001:
Allowance for doubtful accounts........... Ps 521.4 84.0 43.9 (5.7) 555.8
------------ ------------ ------------ ------------ -------------
Year ended December 31, 2002:
Allowance for doubtful accounts........... 555.8 267.4 314.9 20.4 528.7
------------ ------------ ------------ ------------ -------------
Year ended December 31, 2003:
Allowance for doubtful accounts........... 528.7 351.2 281.2 33.4 632.1
------------ ------------ ------------ ------------ -------------
(1) Amounts included in "Others" primarily result from the effects of foreign
currency translation and the inflation adjustment of the initial balance
in the restatement to constant pesos as of the end of the same period.
S-11
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
1.1 Amended and Restated By-laws of CEMEX, S.A. de C.V.(a)
2.1 Form of Trust Agreement between CEMEX, S.A. de C.V., as founder of
the trust, and Banco Nacional de Mexico, S.A. regarding the CPOs.
(b)
2.2 Amendment Agreement, dated as of November 21, 2002, amending the
Trust Agreement between CEMEX, S.A. de C.V., as founder of the
trust, and Banco Nacional de Mexico, S.A. regarding the CPOs. (b)
2.3 Form of CPO Certificate. (b)
2.4 Form of Second Amended and Restated Deposit Agreement (A and B
share CPOs), dated as of August 10, 1999, among CEMEX, S.A. de
C.V., Citibank, N.A. and holders and beneficial owners of American
Depositary Shares. (b)
2.5 Form of American Depositary Receipt (included in Exhibit 2.3)
evidencing American Depositary Shares. (b)
2.6 Form of Certificate for shares of Series A Common Stock of CEMEX,
S.A. de C.V. (b)
2.7 Form of Certificate for shares of Series B Common Stock of CEMEX,
S.A. de C.V. (b)
2.8 Form of appreciation warrant deed. (b)
2.9 Form of CPO Purchasing and Disbursing Agreement. (c)
2.10 Form of appreciation warrant certificate. (c)
2.11 Form of Warrant Deposit Agreement among CEMEX, S.A. de C.V.,
Depositary and holders and beneficial owners of American
Depositary Warrants. (c)
2.12 Form of American Depositary Warrant Receipt (included in Exhibit
2.10). (c)
4.1 Note and Guarantee Agreement dated as of March 15, 2001, by and
among CEMEX, Inc., as issuer, Valenciana, as parent guarantor and
Sandworth Plaza Holding B.V., Cemex Caracas Investments B.V.,
Cemex Caribe Investments B.V., Cemex Manila Investments B.V.,
Valcem International B.V., as subsidiary guarantors, and the
several purchasers named therein, in connection with the offering
and issuance by CEMEX, Inc. of U.S.$315,000,000 aggregate
principal amount of Series A Guaranteed Senior Notes due
2006,(euro)50,000,000 aggregate principal amount of Series B
Guaranteed Senior Notes due 2006 and U.S.$396,000,000 aggregate
principal amount of Series C Guaranteed Senior Notes due 2008. (d)
4.2 Credit facility dated as of October 29, 2001, by and among
Compania Valenciana de Cementos Portland, S.A., as borrower, Banco
Bilbao Vizcaya Argentaria, S.A., Salomon Brothers International
Limited, and Deutsche Bank AG as mandated lead arrangers and the
several banks and other financial institutions named therein, as
lenders, for an aggregate amount of(euro)800 million. (e)
4.3 Agreement and Plan of Merger, dated as of June 11, 2002, among
CEMEX, S.A. de C.V., Tricem Acquisition, Corp. and the Puerto
Rican Cement Company, Inc. (f)
4.4 ABN AMRO Special Corporate Services B.V. Forward Contract, dated
as of December 13, 2002. (g)
4.5 Citibank, N.A. Forward Contract, dated as of December 13, 2002.
(g)
4.6 Credit Suisse First Boston International Forward Contract, dated
as of December 13, 2002. (g)
4.7 Deutsche Bank AG, London Branch, Forward Contract, dated as of
December 13, 2002. (g)
4.8 ING Bank, N.V. Forward Contract, dated as of December 13, 2002.
(g)
4.9 JPMorgan Chase Bank Forward Contract, dated as of December 13,
2002. (g)
4.10 Societe Generale Forward Contract, dated as of December 13, 2002.
(g)
4.11 Note Purchase Agreement dated June 23, 2003, by and among CEMEX
Espana Finance, LLC, as issuer, CEMEX Espana, Sandworth Plaza
Holding B.V., Cemex Caracas Investments B.V., Cemex Caracas II
Investments B.V., Cemex Manila Investments B.V. and Cemex Egyptian
Investments B.V., as guarantors, and several institutional
purchasers named therein, in connection with the issuance by CEMEX
Espana Finance, LLC of U.S.$103 million aggregate principal amount
of Senior Notes due 2010, U.S.$96 million aggregate principal
amount of Senior Notes due 2013, U.S.$201 million aggregate
principal amount of Senior Notes due 2015. (h)
4.12 First Amended and Restated Reimbursement and Credit Agreement
dated as of August 8, 2003, by and among, CEMEX, S.A. de C.V., as
Issuer, CEMEX Mexico, S.A. de C.V. and Empresas Tolteca de Mexico,
S.A. de C.V., as Guarantors, Barclays Bank PLC, New York Branch,
as Issuing Bank, Documentation Agent and Administrative Agent, the
several lenders party thereto and Barclays Capital, The Investment
Banking Division of Barclays Bank PLC, as Joint Arranger and Banc
of America Securities LLC, as Joint Arranger and Syndication
Agent., for an aggregate principal amount of U.S.$400,000,000. (h)
4.13 $1,150,000,000 Term Loan Agreement, dated October 15, 2003, by and
among New Sunward Holding B.V. as borrower, CEMEX, S.A. de C.V.,
CEMEX Mexico, S.A. de C.V. and Empresas Tolteca de Mexico, S.A. de
C.V. as guarantors, and the several lenders named therein. (h)
4.14 Early Termination Amendment to ABN AMRO Special Corporate Services
B.V. Forward Contract, dated as of October 15, 2003. (h)
4.15 Early Termination Amendment to Citibank, N.A. Forward Contract,
dated as of October 15, 2003. (h)
4.16 Early Termination Amendment to Credit Suisse First Boston
International Forward Contract, dated as of October 15, 2003. (h)
4.17 Early Termination Amendment to Deutsche Bank AG, London Branch,
Forward Contract, dated as of October 15, 2003. (h)
4.18 Early Termination Amendment to ING Bank, N.V. Forward Contract,
dated as of October 15, 2003. (h)
4.19 Early Termination Amendment to JPMorgan Chase Bank Forward
Contract, dated as of October 15, 2003.(h)
4.20 Early Termination Amendment to Societe Generale Forward Contract,
dated as of October 15, 2003. (h)
4.21 Term and Revolving Facilities Agreement, dated as of March 30,
2004, by and among CEMEX Espana, as borrower, Sandworth Plaza
Holding B.V., Cemex Caracas Investments B.V., Cemex Caracas II
Investments B.V., Cemex Manila Investments B.V. and Cemex Egyptian
Investments, B.V., as guarantors, Banco Bilbao Vizcaya Argentaria,
S.A. and Societe Generale, as mandated lead arrangers, and the
several banks and other financial institutions named therein, as
lenders, for an aggregate amount of(euro)250,000,000
and(Y)19,308,000,000. (h)
8.1 List of subsidiaries of CEMEX, S.A. de C.V. (h)
12.1 Certification of the Principal Executive Officer of CEMEX, S.A. de
C.V. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(h)
12.2 Certification of the Principal Financial Officer of CEMEX, S.A. de
C.V. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(h)
12.3 Certification of the Principal Executive Officer of CEMEX Mexico,
S.A. de C.V. pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (h)
12.4 Certification of the Principal Financial Officer of CEMEX Mexico,
S.A. de C.V. pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (h)
12.5 Certification of the Principal Executive Officer of Empresas
Tolteca de Mexico, S.A. de C.V. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (h)
12.6 Certification of the Principal Financial Officer of Empresas
Tolteca de Mexico, S.A. de C.V. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (h)
13.1 Certification of the Principal Executive and Financial Officers of
CEMEX, S.A. de C.V. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (h)
13.2 Certification of Principal Executive and Financial Officers of
CEMEX Mexico, S.A. de C.V. pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(h)
13.3 Certification of Principal Executive and Financial Officers of
Empresas Tolteca de Mexico, S.A. de C.V. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (h)
14.1 Consent of KPMG Cardenas Dosal, S.C. to the incorporation by
reference into the effective registration statements of CEMEX,
S.A. de C.V. under the Securities Act of 1933 of their report with
respect to the consolidated financial statements of CEMEX, S.A. de
C.V., which appears in this Annual Report on Form 20-F. (h)
_______________
(a) Incorporated by reference to Post-Effective Amendment No. 4 to the
Registration Statement on Form F-3 of CEMEX, S.A. de C.V. (Registration
No. 333-11382), filed with the Securities and Exchange Commission on
August 27, 2003.
(b) Incorporated by reference to the Registration Statement on Form F-4 of
CEMEX, S.A. de C.V. (Registration No. 333-10682), filed with the
Securities and Exchange Commission on August 10, 1999.
(c) Incorporated by reference to Amendment No. 2 to the Registration
Statement on Form F-4 of CEMEX, S.A. de C.V. (Registration No.
333-13956), filed with the Securities and Exchange Commission on November
19, 2001.
(d) Incorporated by reference to Amendment No. 1 to the annual report on Form
20-F/A of CEMEX, S.A. de C.V. filed with the Securities and Exchange
Commission on November 19, 2001.
(e) Incorporated by reference to the annual report on Form 20-F of CEMEX,
S.A. de C.V. filed with the Securities and Exchange Commission on April
8, 2002.
(f) Incorporated by reference to the Tender Offer Statement on Schedule TO of
Tricem Acquisition, Corp. and CEMEX, S.A. de C.V. filed with the
Securities and Exchange Commission on July 1, 2002.
(g) Incorporated by reference to the annual report on Form 20-F of CEMEX,
S.A. de C.V. filed with the Securities and Exchange Commission on April
8, 2003.
(h) Filed herewith.