Filed
with the Securities and Exchange Commission on January 8,
2007
Registration
No.
333-138239
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
Amendment
No. 2
to
FORM
F-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
GRUPO
SIMEC, S.A.B. de C.V.
(Exact
name of Registrant as specified in its charter)
GROUP
SIMEC
(Translation
of Registrant’s name into English)
United
Mexican States
|
3312
|
None
|
(State
or other jurisdiction of
|
(Primary
Standard Industrial
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Classification
Code Number)
|
Identification
No.)
|
Calzada
Lazaro Cardenas 601
Colonia
La Nogalera, Guadalajara,
Jalisco,
Mexico 44440
(5233)
1057-5757
(Address
and telephone number of Registrant’s principal executive office)
Republic
Engineered Products
3770
Embassy Parkway
Akron,
Ohio 44333-8367
(800)
232-7157
(Name,
address and telephone number of agent for service)
|
|
|
|
Copies
to:
|
|
Marc
M. Rossell, Esq.
|
|
Michael
L. Fitzgerald, Esq.
|
Walter
G. Van Dorn, Jr., Esq.
|
|
Taisa
Markus, Esq.
|
Thacher
Proffitt & Wood
LLP
|
|
Milbank,
Tweed, Hadley & McCloy
LLP
|
Two
World Financial Center
|
|
One
Chase Manhattan Plaza
|
New
York, New York 10281
|
|
New
York, New York 10005
|
(212)
912-7400
|
|
(212)
530-5000
|
Approximate
date of commencement of proposed sale of the securities to the
public:
As soon
as practicable after this Registration Statement becomes effective.
If
any of
the securities being registered on this form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box.
o
If
this
Form is filed to register additional securities for an offering pursuant
to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the
same
offering.
o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the
same
offering.
o
Title
of each class of securities to be registered
|
Amount
to be registered
(2)
|
Proposed
maximum aggregate offering price per common share
(2)
|
Proposed
maximum aggregate offering price
(3)
|
Amount
of registration fee
(4)
|
Series
B shares, without par value
(1)
|
60,000,000
|
$4.455
|
$267,300,000
|
$28,601.10
|
(1)
|
American
depositary shares evidenced by American depositary receipts issuable
upon
deposit of the series B shares registered hereby will be registered
under
a separate registration statement on Form F-6. Each such American
depositary share will represent three series B
shares.
|
(2)
|
Includes
common shares that the underwriters may purchase to cover over-allotments,
if any, and common shares that are to be offered outside the United
States
but that may be resold in the United States in transaction requiring
registration under the Securities Act of
1933.
|
(3)
|
Estimated
solely for the purposes of calculating the registration fee in
accordance
with Rule 457(c)
under the Securities Act of 1933 and calculated on the basis of
the
average of the high and the low prices of the common shares as
represented
by
American depositary shares
on
the American Stock Exchange on January 4,
2007.
|
(4)
|
$26,750
was previously paid.
|
______________________________
The
Registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the Registrant shall file
a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a),
may determine.
SUBJECT
TO COMPLETION,
DATED
, 2007
PROSPECTUS
Grupo
Simec, S.A.B. de C.V.
●
SERIES
B
COMMON SHARES
The
information in this prospectus is not complete and may be changed.
We may
not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus
is
not an offer to sell these securities and it is not soliciting
an offer to
buy these securities in any jurisdiction where the offer or sale
is not
permitted.
|
____________
We
are
selling ● series B shares in the form of American depositary shares, or ADSs, in
an international offering. Concurrently, we are selling ● series B shares in an
offering in Mexico. Each ADS represents the right to receive three series
B
shares. The ADSs will be evidenced by American depositary receipts, or ADRs.
The
ADSs offered in the international offering may be delivered in the form of
series B shares. The offering price and underwriting discounts and commissions
in the international offering and the offering in Mexico will be substantially
equivalent. We have granted the underwriters an option to purchase up to
●
additional ADSs and the Mexican underwriters an option to purchase up to
●
additional series B shares, in each case, to cover over-allotments.
The
ADSs
are listed on the American Stock Exchange under the symbol “SIM”, and the series
B shares are listed on the Mexican Stock Exchange under the symbol “SIMEC.B”. On
January 4, 2007, the last reported sales price of the ADSs on the American
Stock
Exchange was $13.31 per ADS, and the last reported sales price of the series
B
shares on the Mexican Stock Exchange was Ps. 48.62 per series B
share.
____________
Investing
in the ADSs and series B shares involves risks. See “Risk Factors” beginning
on
page 16.
____________
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a criminal
offense.
________________
|
Per
series B share
|
Per
ADS
|
Total
|
Public
Offering Price
|
Ps.
|
$
|
$
|
Underwriting
Discount
|
Ps.
|
$
|
$
|
Proceeds
to Grupo Simec, S.A.B. de C.V.
(before
expenses)
|
Ps.
|
$
|
$
|
|
|
|
|
The
underwriters expect to deliver the ADSs and series B shares to purchasers
on or
about ●, 2007.
____________
C
itigroup
Co-Manager
Morgan
Stanley
●,
2007
You
should rely only on the information contained in this prospectus. We have
not,
and the underwriters have not, authorized anyone to provide you with different
information. If anyone provides you with different information, you should
not
rely on it. We are not making an offer of these securities in any state where
the offer is not permitted. The information in this prospectus is accurate
only
as of the date of this prospectus.
___________
TABLE
OF CONTENTS
PRESENTATION
OF FINANCIAL AND OTHER INFORMATION
Grupo
Simec, S.A.B. de C.V. is a corporation (
sociedad
anónima bursatil de capital variable
)
organized under the laws of the United Mexican States. Prior to October 24,
2006, our name was Grupo Simec, S.A. de C.V. (
sociedad
anónima de capital variable
).
Our
name change resulted from the recent amendment to our by-laws incorporating
the
provisions required by the Mexican Securities Market Law.
We
publish our financial statements in Mexican pesos and pursuant to accounting
principles generally accepted in Mexico (“Mexican GAAP”), which differ in
certain respects from accounting principles generally accepted in the United
States (“U.S. GAAP”). Note 19 to our audited consolidated financial statements
for the years ended December 31, 2005, 2004 and 2003 and Note 16 to our
unaudited condensed consolidated financial statements for the six-month period
ended June 30, 2006 provide a summary of the principal differences between
Mexican GAAP and U.S. GAAP as they relate to our business, along with a
reconciliation to U.S. GAAP of net income and stockholders’ equity, and
statements of changes in stockholders’ equity and, for the unaudited condensed
consolidated financial statements, of cash flows under U.S. GAAP.
Our
audited financial statements and all other financial information contained
herein with respect to the years ended December 31, 2005, 2004 and 2003 are
presented in constant pesos with purchasing power as of June 30, 2006, unless
otherwise noted. Our unaudited condensed consolidated interim financial
statements for the six-month period ended June 30, 2006, which include
comparative unaudited financial information for the six-month period ended
June
30, 2005, and all other financial information presented herein with respect
to
the six-month periods ended June 30, 2006 and 2005 are presented in constant
pesos with purchasing power as of June 30, 2006.
We
have
announced our unaudited results of operations for the nine months ended
September 30, 2006. For a description of these unaudited results, see
Exhibit I beginning on page I-1. Since we have presented the unaudited
financial information set forth in Exhibit I in pesos of constant
purchasing power as of September 30, 2006, it is not directly comparable to
the financial information presented elsewhere in this prospectus, which unless
otherwise stated, we have presented in pesos of constant purchasing power
as of
June 30, 2006. The financial information presented elsewhere in this
prospectus stated in pesos of constant purchasing power as of June 30, 2006
would require the application of a restatement factor of 1.018 for such
financial information to be comparable with the unaudited financial information
presented in Exhibit I. We do not believe that the application of such
factor represents a material change in the purchasing power of the Mexican
peso
during this period.
In
August
2004, we and our subsidiary, Compañía Siderúrgica de California, S.A. de C.V.
acquired certain of the Mexican assets of Industrias Ferricas del Norte,
S.A.
(Corporación Sidenor of Spain or “Grupo Sidenor”). These assets consisted of
steel production facilities in Apizaco and Cholula (the “Atlax Acquisition”).
The purchase price of these assets was approximately U.S.$120 million. Our
consolidated financial statements reflect the Atlax Acquisition as of August
1,
2004. We consummated the Atlax Acquisition on August 9, 2004. We have not
included separate financial information relating to the Atlax Acquisition
in
this prospectus.
In
July
2005, we and our controlling shareholder, Industrias CH, S.A.B. de C.V.
(“Industrias CH”), acquired 100% of the stock of PAV Republic, Inc.
(“Republic”), a producer of special bar quality (“SBQ”) steel in the United
States. We acquired 50.2% of Republic’s stock through our majority owned
subsidiary, SimRep Corporation (“SimRep”), and Industrias CH purchased the
remaining 49.8% through its minority ownership interest in SimRep.
We
have
included in this prospectus the audited consolidated financial statements
of
Republic for the year ended December 31, 2004 and for the period from
January 1, 2005 through July 22, 2005 prepared in accordance with U.S.
GAAP. We also have included in this prospectus unaudited pro forma condensed
combined statements of income reflecting our and Republic’s combined accounts on
a pro forma basis for the year ended December 31, 2005 and for the six-month
period ended June 30, 2005. These pro forma financial statements are unaudited
and may not be indicative of the results of operations that we actually would
have achieved had we acquired Republic at the beginning of the periods presented
and do not purport to be indicative of future results. We have prepared these
unaudited pro forma condensed combined statements of income in accordance
with
Mexican GAAP, which differs in certain respects from U.S. GAAP and included
a
reconciliation to U.S. GAAP net income.
Certain
market data and other statistical information used throughout this prospectus
are based on third party sources, and other data is based on estimates, which
are derived from our review of internal surveys, as well as independent
sources. Although we believe that these sources are reliable, we have not
independently verified the information and cannot guarantee its accuracy
or
completeness.
References
in this prospectus to “dollars”, “U.S. dollars”, “$” or “U.S.$” are to the
lawful currency of the United States. References in this prospectus to “pesos”,
“Pesos” or “Ps.” are to the lawful currency of Mexico. References to “tons” in
this prospectus refer to metric tons; a metric ton equals 1,000 kilograms
or
2,204 pounds. We publish our financial statements in Pesos.
The
terms
“special bar quality steel” or “SBQ steel” refer to steel that is hot rolled or
cold finished round square and hexagonal steel bars that generally contain
higher proportions of alloys than lower quality grades of steel. SBQ steel
is
produced with precise chemical specifications and generally is made to order
following client specifications.
This
prospectus contains translations of certain peso amounts to U.S. dollars
at
specified rates solely for your convenience. These translations do not mean
that
the peso amounts actually represent such dollar amounts or could be converted
into U.S. dollars at the rate indicated. Unless otherwise indicated, we have
translated these U.S. dollar amounts from pesos at the exchange rate of Ps.
11.3973 per U.S.$1.00, the interbank transactions rate in effect on June
30,
2006. On
January
3, 2007, the interbank transactions rate for the Peso was Ps. 10.765 per
U.S.$1.00.
The
following table sets forth, for the periods indicated, the high, low, average
and period-end, free-market exchange rate expressed in pesos per U.S. dollar.
The average annual rates presented in the following table were calculated
by
using the average of the exchange rates on the last day of each month during
the
relevant period. The data provided in this table is based on noon buying
rates
published by the Federal Reserve Bank of New York for cable transfers in
Mexican
pesos. We have not restated the rates in constant currency units. All amounts
are stated in pesos. We make no representation that the Mexican peso amounts
referred to in this prospectus could have been or could be converted into
U.S.
dollars at any particular rate or at all.
Exchange
Rates
Year
Ended December 31
|
|
High
|
|
Low
|
|
Average
(1)
|
|
Period
End
|
2002
|
|
10.43
|
|
9.00
|
|
9.66
|
|
10.43
|
2003
|
|
11.41
|
|
10.11
|
|
10.79
|
|
11.24
|
2004
|
|
11.64
|
|
10.81
|
|
11.29
|
|
11.15
|
2005
|
|
11.41
|
|
10.41
|
|
10.89
|
|
10.63
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
2006
|
|
11.18
|
|
10.87
|
|
10.98
|
|
10.92
|
August
2006
|
|
11.02
|
|
10.74
|
|
10.87
|
|
10.91
|
September
2006
|
|
11.10
|
|
10.84
|
|
10.99
|
|
10.98
|
October
2006
|
|
11.06
|
|
10.71
|
|
10.89
|
|
10.77
|
November
2006
|
|
11.05
|
|
10.75
|
|
10.91
|
|
11.01
|
December
2006
|
|
10.99
|
|
10.77
|
|
10.85
|
|
10.80
|
(1)
Average
of month-end or period-end rates or daily rates, as applicable.
Except
for the period from September through December 1982, during a liquidity crisis,
the Mexican Central Bank has consistently made foreign currency available
to
Mexican private-sector entities (such as us) to meet their foreign currency
obligations. Nevertheless, in the event of renewed shortages of foreign
currency, there can be no assurance that foreign currency would continue
to be
available to private-sector companies or that foreign currency needed by
us to
service foreign currency obligations or to import goods could be purchased
in
the open market without substantial additional cost.
Fluctuations
in the exchange rate between the peso and the U.S. dollar will affect the
U.S.
dollar value of securities traded on the Mexican Stock Exchange, including
the
series B shares and, as a result, will likely affect the market price of
the
ADSs. Such fluctuations will also affect the U.S. dollar conversion by the
depositary of any cash dividends paid in pesos on series B shares represented
by
ADSs.
This
section summarizes selected information contained elsewhere in this prospectus
and is qualified in its entirety by the more detailed information and financial
statements included elsewhere in this prospectus. This prospectus includes
specific terms of the ADSs and the series B shares that we are offering,
as well
as information regarding our business and detailed financial information.
You
should carefully review the entire prospectus, including the risk factors,
the
financial statements and the notes related thereto and the other documents
to
which this prospectus refers, before making an investment
decision.
Unless
the context requires otherwise, when used in this prospectus, the terms “we”,
“our” and “us” refer to Grupo Simec, S.A.B. de C.V., together with its
consolidated subsidiaries.
We
are a
diversified manufacturer, processor and distributor of special bar quality
(“SBQ”) steel and structural steel products with production and commercial
operations in the United States, Mexico and Canada.
We
believe that we are the leading producer of SBQ products in North America,
with
leading market positions in both the United States and Mexico and that we
offer
the broadest SBQ product range in those markets today. We also believe that
we
are the leading producer of structural and light structural steel products
in
Mexico and have an increasing presence in the U.S. market. In the first half
of
2006, almost all of our consolidated sales were in the North American market,
27.9% in Mexico, 71.9% in the United States and Canada. The remaining 0.2%
of
our consolidated sales were exports to other markets outside North America.
Our
SBQ
products are used across a broad range of highly engineered end-user
applications, including axles, hubs and crankshafts for automobiles and light
trucks, machine tools and off-highway equipment. Our structural steel products
are mainly used in the non-residential construction market and other
construction applications.
We
focus
on the Mexican and U.S. specialty steel markets by providing high value added
products and services from our strategically located plants. The quality
of our
products and services, together with the cost advantage generated by our
facility locations has allowed us to develop long standing relationships
with
most of our SBQ clients, which include U.S. and Mexico based automotive and
industrial equipment manufacturers and their suppliers. In addition, our
facilities located in the North West and Central parts of Mexico allow us
to
serve the structural steel and construction markets in those regions and
southwest California with a significant advantage in the cost of freight.
In
Mexico, the United States and Canada, we own and operate ten state of the
art
steel making, processing and/or finishing facilities with a combined annual
crude steel installed production capacity of 3.4 million tons and a combined
annual installed rolling capacity of 2.9 million tons. We operate both mini-mill
and integrated steel making facilities, which gives us the flexibility to
optimize our production and reduce production costs based on the relative
prices
of raw materials (e.g., scrap for our mini-mills and iron ore for our blast
furnace).
In
the
first half of 2006, we had net sales of Ps. 11.9 billion, marginal profit
of Ps.
2.2 billion and net income attributable to majority interest of Ps. 1.3 billion.
In 2005, we had net sales of Ps. 13.0 billion, marginal profit of Ps. 2.6
billion and net income attributable to majority interest of Ps. 1.3
billion.
The
chart
outlines our corporate structure:
Chart
below
(1)
Includes
the following non-operating subsidiaries: Compañía Siderúrgica del Pacífico,
S.A. de C.V. (99.99%), Coordinadora de Servicios Siderúrgicos de Calidad, S.A.
de C.V. (100%), Administradora de Servicios de la Industria Siderúrgica ICH,
S.A. de C.V. (99.99%), Industrias del Acero y del Alambre, S.A. de C.V.
(99.99%), Procesadora Mexicali, S.A. de C.V. (99.99%), Servicios Simec, S.A.
de
C.V. (100%), Sistemas de Transporte de Baja California, S.A. de C.V. (100%),
Operadora de Metales, S.A. de C.V. (100%), Operadora de Servicios Siderúrgicos
de Tlaxcala, S.A. de C.V. (100%), Administradora de Servicios Siderúrgicos de
Tlaxcala, S.A. de C.V. (100%), Operadora de Servicios de la Industria
Siderúrgica ICH, S.A. de C.V. (100%), Arrendadora Simec S.A. de C.V. (100%),
Controladora Simec S.A. de C.V. (100%) and Compañía Siderúrgica de Guadalajara
S.A. de C.V. (100%).
(2)
Our
principal Mexican facilities consist of steel-making facilities in Guadalajara,
Jalisco, Mexicali, Baja California, and Apizaco, Tlaxcala, and a cold finishing
facility in Cholula, Puebla.
(3)
The
remaining 49.8% of SimRep Corporation is owned by our controlling shareholder,
Industrias CH, S.A.B. de C.V.
(4)
SimRep
owns 100% of Republic Engineered Products through its 100% interest in PAV
Republic Inc. Our principal U.S. and Canadian facilities consist of a
steel-making facility in Canton, Ohio, a steel-making and hot-rolling facility
in Lorain, Ohio, a hot-rolling facility in Lackawanna, New York, and cold
finishing facilities in Massillon, Ohio, Gary, Indiana, and Hamilton, Ontario,
Canada.
Our
Competitive Strengths
We
believe the following are our principal competitive strengths:
Leading
SBQ producer in North America.
We
believe we have been the leading market producer and supplier of SBQ steel
in
Mexico since August 2004 and in the United States since July 2005. In 2005,
we
supplied approximately 28% of the Mexican market and 20% of the U.S.
market.
Higher
value-added product mix.
To
maximize operating margins, we focus our production on higher value-added
SBQ
products, which represented 79% of our total sales in the first six months
of
2006.
Long-standing
customer relationships.
Our
SBQ
products are highly engineered and tailored to specific client needs. We
continuously work with our clients on design engineering and new product
development to meet the requirements of their evolving platforms. We believe
that the quality of our products and services allows us to develop long lasting
direct relationships with the largest end-users of SBQ products in North
America, which, we believe, increases switching costs and improves our
competitive position.
Reduced
price volatility.
The
quality requirements of the majority of our SBQ clients and the nature of
our
relationships have allowed us to implement favorable pricing policies that
include annual price revisions and price adjustments based on the price of
key
inputs such as scrap, iron ore, energy, alloys and other key raw materials.
These contribute to maintaining operating margins against raw material price
fluctuations relatively stable.
Competitive
cost structure.
We
believe our cost structure is highly favorable due to our:
·
|
Competitive
cost of raw materials.
We
believe our centralized purchasing strategy and strong financial
position
allow us to obtain favorable terms from our raw materials
suppliers.
|
·
|
Low
freight expenses.
We
believe the strategic location of our facilities allows us to serve
our
SBQ steel and other clients with lower distribution and freight
costs than
most of our competitors.
|
·
|
Relatively
low cost of labor in Mexico.
Our
Mexican operations benefit from the relatively lower cost of labor
in the
Mexican market compared to the United States. In addition, our
Mexican,
U.S. and Canadian operations do not currently have any significant
legacy
liabilities or their associated
costs.
|
·
|
Favorable
labor agreement in the United States.
The
labor agreement in place in our U.S. operations has eliminated
legacy
costs and enhances our ability to maximize workforce flexibility,
allowing
us to reduce production costs.
|
·
|
Lean
operational structure and overhead cost.
We
maintain non-operating costs at low levels by relying on a lean
and cost
efficient overhead structure.
|
State-of-the-art
production facilities.
We
have
recently completed the revamping of our mini-mill steel-making facility in
Canton, Ohio including the installation of a new continuous caster. We believe
that our remaining steel making and processing facilities in Mexico and the
United States are among the most modern and well maintained in North
America.
Extensive
track record of profitable growth.
Over
the
last two years we have significantly increased our installed capacity through
the acquisition of Republic and of plants in Tlaxcala and Cholula, Mexico.
As a
result of these acquisitions, organic growth and operational improvements,
we
have increased our installed capacity from 0.7 million tons as of December
31,
2003 to 3.4 million tons of crude steel as of June 30, 2006.
Significant
organic growth opportunities.
Our
liquid steel making capacity exceeds our rolling and finished steel capacity,
which allows us to continue increasing our finished product capacity through
comparatively low levels of capital investments. We intend to pursue this
option
and plan to invest approximately U.S.$250 million in a rolling mill with
an
annual capacity of 600,000 tons in our facilities. We also intend to explore
expanding our liquid steel-making facilities in Lorain, Ohio by bringing
an
existing second blast furnace online at a cost significantly lower than that
of
purchasing a new blast furnace with the same capacity.
Solid
financial position.
We
seek
to maintain a conservative capital structure and prudent leverage levels.
We
currently have no significant financial debt or significant legacy liabilities.
We believe that these factors, combined with our strong cash flow generation,
provide us with the financial flexibility and resources to continue to pursue
growth enhancing initiatives.
Experienced
and committed management team.
Our
management team has extensive experience in, and knowledge of, the North
American steel industry and in evaluating, pursuing and completing both
strategic and organic growth opportunities as well as a track-record of
increasing productivity and reducing costs.
Our
Business Strategy
We
intend
to consolidate further our position as a leading producer, processor and
distributor of SBQ steel in North America and structural steel in Mexico.
We
also intend to expand our overall presence in the steel industry by identifying
and pursuing growth opportunities and value enhancing initiatives. Our strategy
includes:
Further
integrating our operations.
We
intend
to continue the integration of our Mexican, U.S. and Canadian operations
to
capitalize on the commercial and cost related synergies contemplated at the
time
of the Atlax Acquisition in 2004 and the acquisition of Republic in
2005.
Improving
our cost structure.
We
have
substantially reduced our operating cost and non-operating expenses and plan
to
continue to do so by reducing overhead expenses and operating costs through
sharing best practices among our operating facilities and maintaining a
conservative capital structure.
Focusing
on high margin and value-added products.
We
prioritize the production of high margin steel products over volume and
utilization levels. We plan to continue to base our production decisions
on
achieving relatively high margins.
Building
on our strong customer relationships.
We
intend
to strengthen our long-standing customer relationships by maintaining strong
customer service and proactively responding to changing customer
needs.
Pursuing
strategic growth opportunities.
We
have
successfully grown our business by acquiring, integrating and improving under-
performing operations. In addition, we intend to continue in pursuit of
acquisition opportunities that will allow for disciplined growth of our business
and value creation for our shareholders. We also intend to pursue organic
growth
by reinvesting the cash that our operating activities generate to expand
the
capacity and increase the efficiency of our existing facilities.
Risks
Related to Our Business
Our
business is subject to certain risks that could impact our competitive position
and strengths, as well as our ability to execute our business strategy. Many
of
these risks are beyond our control, such as factors affecting the global
demand
for steel products, our exposure to the fluctuations in the cost of raw
materials, our dependence on a limited number of key suppliers of raw materials
and the cyclical nature of the industries and markets that we serve.
Furthermore, these risks include those generally associated with being a
producer of steel products in Mexico, the United States and Canada, including
foreign exchange exposure and political risk. Intense competition from other
steel producers could reduce our market share in the countries where we operate,
and the capital intensive nature of the steel industry. Our dependence on
the
availability of capital resources to continue to modernize and upgrade our
facilities and to expand our operations could affect the implementation of
our
strategy. For additional risks relating to our business and this offering,
see
“Risk Factors” beginning on page 16 of this prospectus.
Issuer
|
Grupo
Simec, S.A.B. de C.V.
|
|
|
Securities
offered
|
●
series B shares in the form of ADSs in an international offering
and ●
series B shares in an offering in Mexico.
|
|
|
Public
offering price per series B share
|
Ps.
●
|
|
|
Public
offering price per ADS
|
$
●
|
|
|
International
offering
|
The
underwriters are offering an aggregate amount of ● series B shares in the
form of ADSs in the United States and other countries outside of
Mexico.
|
|
|
Mexican
offering
|
Simultaneously
with the international offering, the Mexican underwriters are offering
an
aggregate amount of ● series B shares in a public offering in Mexico.
|
|
|
ADSs
|
Each
ADS represents three series B shares. The ADSs will be evidenced
by
American depositary receipts, or ADRs, issued under the deposit
agreement.
ADRs are certificates that evidence ADSs, just as share certificates
evidence a holding of shares in a company. See “Description of American
Depositary Receipts”.
|
|
|
Trading
market for series B shares
|
The
series B shares are listed on the Mexican Stock Exchange under
the symbol
“SIMEC.B”.
|
|
|
Trading
market for ADSs
|
The
ADSs are listed on the American Stock Exchange under the symbol
“SIM”.
|
|
|
Use
of proceeds
|
We
expect to use the net proceeds from the sale of the ADSs and series
B
shares for general corporate purposes, including investments in
fixed
assets aimed at increasing our installed capacity in our core business
as
well as potential acquisitions intended to increase our market
share and
complement our business strategy.
|
|
|
Depositary
|
The
Bank of New York
|
|
|
Expected
offering timetable
|
Expected
pricing date: ● , 2007
Expected
closing date: ● , 2007
|
Settlement
|
Settlement
of the series B shares will be made through the book-entry system
of S.D.
Indeval, S.A. de C.V.,
Institución
para el Depósito de Valores
(“INDEVAL”). Settlement of the ADSs will be made through the book-entry
system of The Depository Trust Company, or DTC.
|
|
|
Lock-up
provision
|
We,
our officers and directors and our principal shareholders have
agreed
that, for a period of 180 days from the date of this prospectus, we
and they will not, without the prior written consent of the representative
of the underwriters, dispose of or hedge any series B shares or
any
securities convertible into or exchangeable for our series B shares.
The
representative of the underwriters, in its sole discretion, may
release
any of the securities subject to these lock-up agreements at any
time
without notice. See “Underwriting”.
|
|
|
Voting
rights
|
Each
series B share will entitle the holder to one vote at any shareholders’
meeting. ADS holders may instruct the depositary how to exercise
the
voting rights of the shares represented by the ADSs. For the benefit
of
ADS holders, we have agreed to notify the depositary of any shareholders’
meetings, and the depositary has agreed to mail notices of these
meetings
to ADS holders and explain the procedures necessary to exercise
voting
rights. See “Description of American Depositary Receipts” and “Description
of Capital Stock” for a discussion of the depositary's role, our agreement
with the depositary and your voting rights.
|
|
|
Dividend
policy
|
We
have not paid dividends in the past and currently do not intend
to pay
dividends in the near future. See “Dividends and Dividend Policy”.
|
|
|
Taxation
|
Under
current Mexican law, dividends paid to holders who are not residents
of
Mexico for tax purposes, and sales of ADSs by ADS holders who are
not
residents of Mexico for tax purposes, are not subject to any Mexican
withholding or other similar tax. See “Taxation” for a discussion of
Mexican tax issues related to payment of dividends and disposition
of the
series B shares or the ADSs.
|
|
|
Risk
Factors
|
Investing
in the ADSs and series B shares involves a high degree of risk.
You should
carefully read and consider the information set forth under the
heading
“Risk Factors” and all other information set forth in this prospectus
before investing in the series B shares or the
ADSs.
|
The
following tables present our summary consolidated financial information for
each
of the periods indicated. This information should be read in conjunction
with,
and is qualified in its entirety by reference to, our financial statements,
including the notes thereto, as well as “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included elsewhere in this
prospectus. Our financial statements are prepared in accordance with Mexican
GAAP, which differs in certain respects from U.S. GAAP. Note 19 to our audited
consolidated financial statements for the years ended December 31, 2005,
2004
and 2003 and Note 16 to our unaudited condensed consolidated financial
statements for the six-month period ended June 30, 2006 provide a summary
of the
principal differences between Mexican GAAP and U.S. GAAP as they relate to
our
business,
along
with a reconciliation to U.S. GAAP of net income and stockholders’ equity, a
statement of changes in stockholders’ equity and, for the unaudited condensed
consolidated financial statements, a statement of cash flows under U.S.
GAAP.
Mexican
GAAP provides for the recognition of certain effects of inflation by restating
non-monetary assets and non-monetary liabilities using the Mexican National
Consumer Price Index, restating the components of stockholders’ equity using the
Mexican National Consumer Price Index and recording gains or losses in
purchasing power from holding monetary liabilities or assets. Mexican GAAP
also
requires the restatement of all financial statements to constant Mexican
pesos
as of the date of the most recent balance sheet presented. Our audited financial
statements and all other financial information contained herein with respect
to
the years ended December 31, 2001, 2002, 2003, 2004 and 2005 are accordingly
presented in constant pesos with purchasing power as of June 30, 2006, unless
otherwise noted. Our unaudited condensed interim financial statements for
the
six-month period ended June 30, 2006, which include comparative unaudited
financial information for the six-month period ended June 30, 2005, and all
other financial information presented herein with respect to the six-month
periods ended June 30, 2006 and 2005 are presented in constant pesos with
purchasing power as of June 30, 2006. Our results of operations for the
six-month period ended June 30, 2006 are not necessarily indicative of our
expected results of operations for the year ended December 31, 2006 and should
not be construed as such.
The
financial information includes the consolidation of Republic from July 22,
2005 and the consolidation of the Atlax Acquisition from August 1, 2004.
Period
to period comparison of our results of operations and financial condition
is
made more difficult as a result of the inclusion of financial information
relating to the acquisition of Republic only from July 22, 2005 and of financial
information relating to the Atlax Acquisition only from August 1,
2004.
We
have
derived the selected financial and operating information set forth below
in part
from our consolidated financial statements, which have been reported on by
KPMG
Cárdenas, Dosal, S.C. for the fiscal years ended December 31, 2001, 2002, 2003
and 2004 and by Mancera S.C., a Member Practice of Ernst & Young Global, an
independent registered public accounting firm for the fiscal year ended December
31, 2005. In so doing, Mancera, S.C. has relied on the audited consolidated
financial statements of our subsidiary SimRep and its subsidiaries, reported
on
by
BDO
Hernández Marrón y Cía., S.C., a member firm of BDO International
.
For
unaudited selected consolidated financial information as of September 30,
2006
and for the nine month periods ended September 30, 2005 and 2006, and a
discussion of our unaudited financial results for the nine month periods
ended
September 30, 2005 and 2006, which are presented in pesos of constant
purchasing power as of September 30, 2006, see Exhibit I to this
prospectus. Since the unaudited financial information set forth in
Exhibit I is presented in pesos of constant purchasing power as of
September 30, 2006, it is not directly comparable to the financial
information presented elsewhere in this prospectus,
which
unless otherwise stated, is presented in pesos of constant purchasing power
as
of
June 30,
2005. The financial information presented elsewhere in this prospectus stated
in
pesos of constant purchasing power as of June 30, 2006 would require the
application of a restatement factor of 1.018 for such financial information
to
be comparable with the unaudited financial information presented in
Exhibit I. We do not believe that the application of such factor represents
a material change in the purchasing power of the Mexican peso during this
period.
|
|
Year
Ended December 31,
|
|
Six
Months Ended June 30,
|
|
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2005
(1)
|
|
2005
|
|
2006
|
|
2006
(1)
|
|
|
|
(Millions
of constant
June
30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
(Millions
of constant June 30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
|
|
(except
per share and per ADS data)
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
2,288
|
|
|
2,403
|
|
|
3,047
|
|
|
5,910
|
|
|
12,967
|
|
|
1,138
|
|
|
3,574
|
|
|
11,912
|
|
|
1,045
|
|
Direct
cost of sales
|
|
|
1,536
|
|
|
1,608
|
|
|
2,002
|
|
|
3,435
|
|
|
10,371
|
|
|
910
|
|
|
2,327
|
|
|
9,682
|
|
|
849
|
|
Marginal
profit
|
|
|
752
|
|
|
795
|
|
|
1,045
|
|
|
2,475
|
|
|
2,596
|
|
|
228
|
|
|
1,247
|
|
|
2,230
|
|
|
196
|
|
Indirect
manufacturing, selling, general and administrative
expenses
|
|
|
376
|
|
|
327
|
|
|
308
|
|
|
371
|
|
|
692
|
|
|
61
|
|
|
244
|
|
|
462
|
|
|
41
|
|
Depreciation
and amortization
|
|
|
160
|
|
|
177
|
|
|
199
|
|
|
222
|
|
|
326
|
|
|
29
|
|
|
131
|
|
|
202
|
|
|
18
|
|
Operating
income
|
|
|
216
|
|
|
291
|
|
|
538
|
|
|
1,882
|
|
|
1,578
|
|
|
138
|
|
|
872
|
|
|
1,566
|
|
|
137
|
|
Financial
income (expense)
|
|
|
6
|
|
|
(141
|
)
|
|
(27
|
)
|
|
(38
|
)
|
|
(145
|
)
|
|
(13
|
)
|
|
(35
|
)
|
|
45
|
|
|
4
|
|
Other
income (expense), net
|
|
|
73
|
|
|
(41
|
)
|
|
(32
|
)
|
|
(38
|
)
|
|
55
|
|
|
5
|
|
|
8
|
|
|
33
|
|
|
3
|
|
Income
before taxes, employee profit sharing and minority
interest
|
|
|
295
|
|
|
109
|
|
|
479
|
|
|
1,806
|
|
|
1,488
|
|
|
131
|
|
|
845
|
|
|
1,644
|
|
|
144
|
|
Income
tax expense and employee profit
sharing
|
|
|
19
|
|
|
(25
|
)
|
|
159
|
|
|
344
|
|
|
191
|
|
|
17
|
|
|
98
|
|
|
105
|
|
|
9
|
|
Net
income (loss)
|
|
|
276
|
|
|
134
|
|
|
320
|
|
|
1,462
|
|
|
1,297
|
|
|
114
|
|
|
747
|
|
|
1,539
|
|
|
135
|
|
Minority
interest
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
17
|
|
|
2
|
|
|
0
|
|
|
193
|
|
|
17
|
|
Majority
interest
|
|
|
276
|
|
|
134
|
|
|
320
|
|
|
1,462
|
|
|
1,280
|
|
|
112
|
|
|
747
|
|
|
1,346
|
|
|
118
|
|
Net
income per share
|
|
|
2
|
|
|
0.4
|
|
|
1
|
|
|
4
|
|
|
3
|
|
|
0.27
|
|
|
2
|
|
|
3
|
|
|
0.28
|
|
Net
income per ADS
(2)
|
|
|
5
|
|
|
1
|
|
|
3
|
|
|
11
|
|
|
9
|
|
|
0.81
|
|
|
6
|
|
|
10
|
|
|
0.84
|
|
Weighted
average shares outstanding (thousands)
(5)
|
|
|
164,448
|
|
|
299,901
|
|
|
357,159
|
|
|
398,916
|
|
|
413,790
|
|
|
413,790
|
|
|
405,209
|
|
|
419,451
|
|
|
419,451
|
|
Weighted
average ADSs
outstanding
(thousands)
|
|
|
54,816
|
|
|
99,967
|
|
|
119,053
|
|
|
132,972
|
|
|
137,930
|
|
|
137,930
|
|
|
135,070
|
|
|
139,817
|
|
|
139,817
|
|
U.S.
GAAP including effects of inflation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
2,288
|
|
|
2,403
|
|
|
3,048
|
|
|
5,911
|
|
|
12,967
|
|
|
1,138
|
|
|
3,573
|
|
|
11,912
|
|
|
1,045
|
|
Direct
cost of sales
|
|
|
1,530
|
|
|
1,612
|
|
|
2,007
|
|
|
3,429
|
|
|
10,375
|
|
|
910
|
|
|
2,329
|
|
|
9,594
|
|
|
842
|
|
Marginal
profit
|
|
|
758
|
|
|
791
|
|
|
1,041
|
|
|
2,482
|
|
|
2,592
|
|
|
228
|
|
|
1,244
|
|
|
2,318
|
|
|
203
|
|
Operating
income
(4)
|
|
|
200
|
|
|
255
|
|
|
544
|
|
|
1,865
|
|
|
1,544
|
|
|
135
|
|
|
875
|
|
|
1,660
|
|
|
146
|
|
Financial
income (expense)
|
|
|
7
|
|
|
(141
|
)
|
|
(27
|
)
|
|
(38
|
)
|
|
(145
|
)
|
|
(13
|
)
|
|
(35
|
)
|
|
45
|
|
|
4
|
|
Other
income (expense), net
|
|
|
657
|
|
|
(74
|
)
|
|
(32
|
)
|
|
(4
|
)
|
|
93
|
|
|
8
|
|
|
8
|
|
|
33
|
|
|
3
|
|
Income
before taxes, employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
profit
sharing and minority
interest
|
|
|
864
|
|
|
40
|
|
|
485
|
|
|
1,823
|
|
|
1,492
|
|
|
130
|
|
|
848
|
|
|
1,737
|
|
|
152
|
|
Income
tax expense (income)
|
|
|
69
|
|
|
(182
|
)
|
|
207
|
|
|
389
|
|
|
197
|
|
|
17
|
|
|
102
|
|
|
118
|
|
|
10
|
|
Income
before minority interest
|
|
|
795
|
|
|
222
|
|
|
278
|
|
|
1,434
|
|
|
1,295
|
|
|
113
|
|
|
746
|
|
|
1,619
|
|
|
142
|
|
Minority
interest
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
17
|
|
|
1
|
|
|
0
|
|
|
193
|
|
|
17
|
|
U.S.
GAAP Adjustment on minority interest
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
40
|
|
|
3
|
|
Net
Income
|
|
|
795
|
|
|
222
|
|
|
278
|
|
|
1,434
|
|
|
1,278
|
|
|
112
|
|
|
746
|
|
|
1,386
|
|
|
125
|
|
Income
per share
(5)
|
|
|
5
|
|
|
1
|
|
|
1
|
|
|
4
|
|
|
3
|
|
|
0.27
|
|
|
2
|
|
|
3.3
|
|
|
0.30
|
|
Income
per ADS
|
|
|
14
|
|
|
2
|
|
|
2
|
|
|
11
|
|
|
9
|
|
|
0.81
|
|
|
6
|
|
|
10
|
|
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
5,557
|
|
|
5,035
|
|
|
6,570
|
|
|
9,306
|
|
|
14,588
|
|
|
1,280
|
|
|
9,531
|
|
|
16,439
|
|
|
1,442
|
|
Total
long-term liabilities
(3)
|
|
|
803
|
|
|
881
|
|
|
1,153
|
|
|
1,513
|
|
|
2,244
|
|
|
197
|
|
|
1,439
|
|
|
2,003
|
|
|
176
|
|
Total
stockholders’ equity
|
|
|
3,338
|
|
|
4,089
|
|
|
5,062
|
|
|
6,848
|
|
|
9,628
|
|
|
845
|
|
|
7,368
|
|
|
11,902
|
|
|
1,044
|
|
|
|
Year
Ended December 31,
|
|
Six
Months Ended June 30,
|
|
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2005
(1)
|
|
2005
|
|
2006
|
|
2006
(1)
|
|
|
|
(Millions
of constant
June
30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
(Millions
of constant June 30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
|
|
(except
per share and per ADS data)
|
U.S.
GAAP including effects of inflation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
6,507
|
|
|
6,228
|
|
|
6,497
|
|
|
9,173
|
|
|
14,796
|
|
|
1,298
|
|
|
9,548
|
|
|
16,421
|
|
|
1,441
|
|
Total
long-term liabilities
(3)
|
|
|
803
|
|
|
914
|
|
|
1,097
|
|
|
1,476
|
|
|
2,303
|
|
|
202
|
|
|
1,426
|
|
|
1,974
|
|
|
173
|
|
Total
stockholders’ equity
|
|
|
3,949
|
|
|
4,338
|
|
|
5,045
|
|
|
6,752
|
|
|
7,969
|
|
|
699
|
|
|
7,442
|
|
|
9,613
|
|
|
843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
46
|
|
|
10
|
|
|
64
|
|
|
1,285
|
|
|
503
|
|
|
44
|
|
|
6
|
|
|
167
|
|
|
15
|
|
Adjusted
EBITDA
(6)
|
|
|
376
|
|
|
468
|
|
|
737
|
|
|
2,104
|
|
|
1,904
|
|
|
167
|
|
|
1,003
|
|
|
1,768
|
|
|
155
|
|
Depreciation
and amortization from continuing operations
|
|
|
160
|
|
|
177
|
|
|
199
|
|
|
222
|
|
|
326
|
|
|
29
|
|
|
131
|
|
|
202
|
|
|
18
|
|
Working
capital
|
|
|
(560
|
)
|
|
(11
|
)
|
|
1,023
|
|
|
1,968
|
|
|
4,063
|
|
|
356
|
|
|
2,907
|
|
|
5,854
|
|
|
514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operational
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
installed
capacity
(thousands
of tons)
|
|
|
730
|
|
|
730
|
|
|
730
|
|
|
1,210
|
|
|
2,847
|
|
|
2,847
|
|
|
1,210
|
|
|
2,902
|
|
|
2,902
|
|
Tons
shipped
|
|
|
561
|
|
|
609
|
|
|
628
|
|
|
773
|
|
|
1,708
|
|
|
1,708
|
|
|
524
|
|
|
1,369
|
|
|
1,369
|
|
Mexico
|
|
|
512
|
|
|
529
|
|
|
547
|
|
|
676
|
|
|
899
|
|
|
899
|
|
|
449
|
|
|
461
|
|
|
461
|
|
United
States, Canada and others
|
|
|
49
|
|
|
80
|
|
|
81
|
|
|
97
|
|
|
809
|
|
|
809
|
|
|
75
|
|
|
908
|
|
|
908
|
|
SBQ
steel
|
|
|
78
|
|
|
78
|
|
|
63
|
|
|
168
|
|
|
923
|
|
|
923
|
|
|
170
|
|
|
997
|
|
|
997
|
|
Structural
and other steel
products
|
|
|
483
|
|
|
531
|
|
|
565
|
|
|
605
|
|
|
785
|
|
|
785
|
|
|
354
|
|
|
372
|
|
|
372
|
|
Per
ton:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales per ton
|
|
|
4,080
|
|
|
3,943
|
|
|
4,851
|
|
|
7,644
|
|
|
7,591
|
|
|
666
|
|
|
6,821
|
|
|
8,699
|
|
|
763
|
|
Cost
of sales per ton
|
|
|
2,740
|
|
|
2,639
|
|
|
3,187
|
|
|
4,442
|
|
|
6,072
|
|
|
533
|
|
|
4,441
|
|
|
7,070
|
|
|
620
|
|
Operating
income per ton
|
|
|
385
|
|
|
476
|
|
|
857
|
|
|
2,435
|
|
|
924
|
|
|
81
|
|
|
1,666
|
|
|
1,144
|
|
|
100
|
|
Adjusted
EBITDA per ton
|
|
|
670
|
|
|
767
|
|
|
1,174
|
|
|
2,722
|
|
|
1,115
|
|
|
98
|
|
|
1,916
|
|
|
1,291
|
|
|
113
|
|
Number
of employees
|
|
|
1,386
|
|
|
1,333
|
|
|
1,288
|
|
|
2,018
|
|
|
4,360
|
|
|
4,360
|
|
|
1,975
|
|
|
4,340
|
|
|
4,340
|
|
(1)
Peso
amounts have been translated into U.S. dollars solely for the convenience
of the
reader, at the rate of Ps. 11.3973 per $1.00, the interbank transactions
rate in
effect on June 30, 2006.
(2)
Following
our stock split effective May 30, 2006, one ADS represents three series B
shares; previously one ADS represented one series B share.
(3)
Total
long-term liabilities include amounts relating to deferred taxes.
(4)
Reflects
a reclassification in 2005 from other expenses under Mexican GAAP to operating
expenses under U.S. GAAP of Ps. 38 million due to the cancellation of technical
assistance.
(5)
For
U.S.
GAAP and Mexican GAAP purposes, the weighted average shares outstanding were
calculated to give effect to the stock split described in Note 13(a) to the
audited financial statements.
(6)
Adjusted
EBITDA is not a financial measure computed under Mexican or U.S. GAAP. Adjusted
EBITDA derived from our Mexican GAAP financial information means Mexican
GAAP
net income (loss) excluding (i) depreciation and amortization, (ii) financial
income (expense), net (which is composed of net interest expense, foreign
exchange gain or loss and monetary position gain or loss), (iii) other income
(expense) and (iv) income tax expense and employee statutory profit-sharing
expense.
Adjusted
EBITDA does not represent, and should not be considered as, an alternative
to
net income, as an indicator of our operating performance, or as an alternative
to cash flow as an indicator of liquidity. In making such comparisons, however,
you should bear in mind that adjusted EBITDA is not defined and is not a
recognized financial measure under Mexican GAAP or U.S. GAAP and that it
may be
calculated differently by different companies and must be read in conjunction
with the explanations that accompany it. Adjusted EBITDA as presented in
this
table does not take into account our working capital requirements, debt service
requirements and other commitments.
We
believe that adjusted EBITDA can be useful to facilitate comparisons of
operating performance between periods and with other companies in our industry
because it excludes the effect of (i) depreciation and amortization, which
represents a non-cash charge to earnings, (ii) certain financing costs, which
are significantly affected by external factors, including interest rates,
foreign currency exchange rates, and inflation rates, which have little or
no
bearing on our operating performance, (iii) other income (expense) that are
not
constant operations and (iv) income tax expense and employee statutory
profit-sharing expense. However, adjusted EBITDA has certain material
limitations, including that (i) it does not include taxes, which are a necessary
and recurring part of our operations; (ii) it does not include depreciation
and
amortization, which, because we must utilize property, equipment and other
assets in order to generate revenues in our operations, is a necessary and
recurring part of our costs; (iii) it does not include comprehensive cost
of
financing, which reflects our cost of capital structure and assisted us in
generating revenue; and (iv) it does not include
other
income and expenses that are part of our net income. Therefore, any measure
that
excludes any or all of taxes, depreciation and amortization, comprehensive
cost
of financing and other income and expenses has material
limitations.
Adjusted
EBITDA should not be considered in isolation or as a substitute for net income,
net cash flow from operating activities or net cash flow from investing and
financing activities. Reconciliation of net income to adjusted EBITDA is
as
follows:
|
|
Year
Ended December 31,
|
|
Six
Months Ended June 30,
|
|
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2005
(1)
|
|
2005
|
|
2006
|
|
2006
(1)
|
|
|
|
(Millions
of constant
June
30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
(Millions
of constant June 30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
|
|
(except
per share and per ADS data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
276
|
|
|
134
|
|
|
320
|
|
|
1,462
|
|
|
1,297
|
|
|
114
|
|
|
747
|
|
|
1,539
|
|
|
135
|
|
Depreciation
and amortization
|
|
|
160
|
|
|
177
|
|
|
199
|
|
|
222
|
|
|
326
|
|
|
28
|
|
|
131
|
|
|
202
|
|
|
18
|
|
Financial
income (expense)
|
|
|
6
|
|
|
(141
|
)
|
|
(27
|
)
|
|
(38
|
)
|
|
(145
|
)
|
|
(13
|
)
|
|
(35
|
)
|
|
45
|
|
|
4
|
|
Income
tax expense and employee profit sharing
|
|
|
19
|
|
|
(25
|
)
|
|
159
|
|
|
344
|
|
|
191
|
|
|
17
|
|
|
98
|
|
|
105
|
|
|
9
|
|
Other
income (expense)
|
|
|
73
|
|
|
(41
|
)
|
|
(32
|
)
|
|
(38
|
)
|
|
55
|
|
|
5
|
|
|
8
|
|
|
33
|
|
|
3
|
|
Adjusted
EBITDA
|
|
|
376
|
|
|
468
|
|
|
737
|
|
|
2,104
|
|
|
1,904
|
|
|
167
|
|
|
1,003
|
|
|
1,768
|
|
|
155
|
|
SUMMARY
PRO FORMA COMBINED FINANCIAL INFORMATION
The
following tables present our and Republic’s unaudited pro forma condensed
combined pro forma financial information reflecting our and Republic’s combined
accounts on a pro forma basis as of and for the periods indicated.
Also
included in this prospectus, beginning on Page F-136, are unaudited pro forma
condensed combined statements of income reflecting our and Republic’s combined
accounts on a pro forma basis for the year ended December 31, 2005 and for
the
six-month period ended June 30, 2005.
All
pro
forma financial information included in this prospectus is unaudited and
may not
be indicative of the results of operations that actually would have been
achieved had we acquired Republic at the beginning of the periods presented
and
do not purport to be indicative of future results. The information in the
following tables should also be read together with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”.
The
unaudited pro forma condensed combined financial information is prepared
in
accordance with Mexican GAAP, which differs in certain respects from U.S.
GAAP.
For
additional information regarding financial information presented in this
prospectus, see “Presentation of Financial and Other Information”.
|
|
Pro
Forma
|
|
Actual
|
|
|
|
Year
Ended December 31,
|
|
Six
Months Ended June 30,
|
|
|
|
2005
|
|
2005
(1)
|
|
2005
|
|
2006
|
|
2006
(1)
|
|
|
|
(Millions
of constant
June
30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
(Millions
of constant
June
30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
|
|
(except
per share and per ADS data)
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
22,380
|
|
|
1,964
|
|
|
12,388
|
|
|
11,912
|
|
|
1,045
|
|
Direct
cost of sales
|
|
|
18,556
|
|
|
1,628
|
|
|
9,987
|
|
|
9,682
|
|
|
849
|
|
Marginal
profit
|
|
|
3,824
|
|
|
336
|
|
|
2,401
|
|
|
2,230
|
|
|
196
|
|
Indirect
manufacturing, selling, general and administrative
expenses
|
|
|
1,246
|
|
|
109
|
|
|
707
|
|
|
462
|
|
|
41
|
|
Depreciation
and amortization
|
|
|
339
|
|
|
30
|
|
|
144
|
|
|
202
|
|
|
18
|
|
Operating
income
|
|
|
2,239
|
|
|
196
|
|
|
1,550
|
|
|
1,566
|
|
|
137
|
|
Financial
income (expense)
|
|
|
(234
|
)
|
|
(21
|
)
|
|
(120
|
)
|
|
45
|
|
|
4
|
|
Other
income (expense), net
|
|
|
45
|
|
|
4
|
|
|
34
|
|
|
33
|
|
|
3
|
|
Income
before taxes, employee profit sharing and minority
interest
|
|
|
2,050
|
|
|
180
|
|
|
1,464
|
|
|
1,644
|
|
|
144
|
|
Income
tax expense and employee profit
sharing
|
|
|
390
|
|
|
34
|
|
|
323
|
|
|
105
|
|
|
9
|
|
Net
income (loss)
|
|
|
1,660
|
|
|
146
|
|
|
1,141
|
|
|
1,539
|
|
|
135
|
|
Minority
interest
|
|
|
198
|
|
|
17
|
|
|
196
|
|
|
193
|
|
|
17
|
|
Majority
interest
|
|
|
1,462
|
|
|
128
|
|
|
945
|
|
|
1,346
|
|
|
118
|
|
Net
income per share
|
|
|
4
|
|
|
0.31
|
|
|
2
|
|
|
3
|
|
|
0.28
|
|
Net
income per ADS
(2)
|
|
|
11
|
|
|
0.93
|
|
|
7
|
|
|
10
|
|
|
0.87
|
|
Weighted
average shares outstanding (thousands)
(5)
|
|
|
413,790
|
|
|
413,790
|
|
|
405,209
|
|
|
419,451
|
|
|
419,451
|
|
|
|
Pro
Forma
|
|
Actual
|
|
|
|
Year
Ended December 31,
|
|
Six
Months Ended June 30,
|
|
|
|
2005
|
|
2005
(1)
|
|
2005
|
|
2006
|
|
2006
(1)
|
|
|
|
(Millions
of constant
June
30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
(Millions
of constant
June
30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
|
|
(except
per share and per ADS data)
|
|
Weighted
average ADSs
outstanding
(thousands)
|
|
|
137,930
|
|
|
137,930
|
|
|
135,070
|
|
|
139,817
|
|
|
139,817
|
|
U.S.
GAAP including effects of inflation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
22,380
|
|
|
1,964
|
|
|
12,388
|
|
|
11,912
|
|
|
1,045
|
|
Operating
income
(4)
|
|
|
2,239
|
|
|
196
|
|
|
1,550
|
|
|
1,660
|
|
|
146
|
|
Minority
interest
|
|
|
198
|
|
|
17
|
|
|
196
|
|
|
193
|
|
|
17
|
|
Net
Income
|
|
|
1,462
|
|
|
128
|
|
|
945
|
|
|
1,386
|
|
|
122
|
|
Income
per share
(5)
|
|
|
4
|
|
|
0.37
|
|
|
2
|
|
|
3
|
|
|
0.29
|
|
Income
per ADS
|
|
|
11
|
|
|
0.93
|
|
|
7
|
|
|
10
|
|
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
53
|
|
|
5
|
|
|
6
|
|
|
167
|
|
|
15
|
|
Adjusted
EBITDA
(6)
|
|
|
2,578
|
|
|
226
|
|
|
1,694
|
|
|
1,768
|
|
|
155
|
|
Depreciation
and amortization from continuing operations
|
|
|
339
|
|
|
30
|
|
|
144
|
|
|
202
|
|
|
18
|
|
Operational
information:
|
|
|
|
|
|
|
|
|
|
|
|
Annual
installed
capacity
(thousands
of tons)
|
|
|
2,847
|
|
|
2,847
|
|
|
1,210
|
|
|
2,902
|
|
|
2,902
|
|
Tons
shipped
|
|
|
2,683
|
|
|
2,683
|
|
|
1,400
|
|
|
1,369
|
|
|
1,369
|
|
Mexico
|
|
|
910
|
|
|
910
|
|
|
449
|
|
|
461
|
|
|
461
|
|
United
States, Canada and others
|
|
|
1,773
|
|
|
1,773
|
|
|
951
|
|
|
908
|
|
|
908
|
|
SBQ
steel
|
|
|
1,936
|
|
|
1,936
|
|
|
1,046
|
|
|
997
|
|
|
997
|
|
Structural
and other steel products
|
|
|
747
|
|
|
747
|
|
|
354
|
|
|
372
|
|
|
372
|
|
Per
ton:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales per ton
|
|
|
8,341
|
|
|
732
|
|
|
8,849
|
|
|
8,699
|
|
|
763
|
|
Cost
of sales per ton
|
|
|
6,916
|
|
|
607
|
|
|
7,134
|
|
|
7,070
|
|
|
620
|
|
Operating
income per ton
|
|
|
835
|
|
|
73
|
|
|
1,107
|
|
|
1,144
|
|
|
100
|
|
Adjusted
EBITDA per ton
|
|
|
961
|
|
|
84
|
|
|
1,210
|
|
|
1,291
|
|
|
113
|
|
Number
of employees
|
|
|
4,360
|
|
|
4,360
|
|
|
4,433
|
|
|
4,340
|
|
|
4,340
|
|
(1)
Peso
amounts have been translated into U.S. dollars solely for the convenience
of the
reader, at the rate of Ps. 11.3973 per $1.00, the interbank transactions
rate in
effect on June 30, 2006.
(2)
Following
our a stock split effective May 30, 2006, one ADS represents three series
B
shares; previously, one ADS represented one series B share.
(3)
Long-term
debt includes amounts relating to deferred taxes.
(4)
Reflects
a reclassification in 2005 from other expenses under Mexican GAAP to operating
expenses under U.S. GAAP of Ps. 38 million due to the cancellation of technical
assistance.
(5)
For
U.S.
GAAP and Mexican GAAP purposes, the weighted average shares outstanding were
calculated to give effect to the stock split described in Note 13(a) to the
Consolidated Financial Statements.
(6)
Adjusted
EBITDA is not a financial measure computed under Mexican or U.S. GAAP. Adjusted
EBITDA derived from our Mexican GAAP financial information means Mexican
GAAP
net income (loss) excluding (i) depreciation and amortization, (ii) financial
income (expense), net (which is composed of net interest expense, foreign
exchange gain or loss and monetary position gain or loss), (iii) other income
(expense) and (iv) income tax expense and employee statutory profit-sharing
expense.
Adjusted
EBITDA does not represent, and should not be considered as, an alternative
to
net income, as an indicator of our operating performance, or as an alternative
to cash flow as an indicator of liquidity. In making such comparisons, however,
you should bear in mind that adjusted EBITDA is not defined and is not a
recognized financial measure under Mexican GAAP or U.S. GAAP and that it
may be
calculated differently by different companies and must be read in conjunction
with the explanations that accompany it. Adjusted EBITDA as presented in
this
table does not take into account our working capital requirements, debt service
requirements and other commitments.
We
believe that adjusted EBITDA can be useful to facilitate comparisons of
operating performance between periods and with other companies in our industry
because it excludes the effect of (i) depreciation and amortization, which
represents a non-cash charge to earnings, (ii) certain financing
costs,
which are significantly affected by external factors, including interest
rates,
foreign currency exchange rates, and inflation rates, which have little or
no
bearing on our operating performance, (iii) other income (expense) that are
not
constant operations and (iv) income tax expense and employee statutory
profit-sharing expense. However, adjusted EBITDA has certain material
limitations, including that (i) it does not include taxes, which are a necessary
and recurring part of our operations; (ii) it does not include depreciation
and
amortization, which, because we must utilize property, equipment and other
assets in order to generate revenues in our operations, is a necessary and
recurring part of our costs; (iii) it does not include comprehensive cost
of
financing, which reflects our cost of capital structure and assisted us in
generating revenue; and (iv) it does not include other income and expenses
that
are part of our net income. Therefore, any measure that excludes any or all
of
taxes, depreciation and amortization, comprehensive cost of financing and
other
income and expenses has material limitations.
Adjusted
EBITDA should not be considered in isolation or as a substitute for net income,
net cash flow from operating activities or net cash flow from investing and
financing activities. Reconciliation of net income to adjusted EBITDA is
as
follows:
|
|
Pro
Forma
|
|
Actual
|
|
|
|
Year
Ended December 31,
|
|
Six
Months Ended June 30,
|
|
|
|
2005
|
|
2005
|
|
2005
|
|
2006
|
|
2006
|
|
|
|
(Millions
of constant
June
30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
(Millions
of constant
June
30, 2006 pesos)
|
|
|
|
(Millions
of
dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
1,660
|
|
|
146
|
|
|
1,141
|
|
|
1,539
|
|
|
135
|
|
Depreciation
and amortization
|
|
|
339
|
|
|
30
|
|
|
144
|
|
|
202
|
|
|
18
|
|
Financial
income (expense)
|
|
|
(234
|
)
|
|
(20
|
)
|
|
(120
|
)
|
|
45
|
|
|
4
|
|
Income
tax expense and employee profit sharing
|
|
|
390
|
|
|
34
|
|
|
323
|
|
|
105
|
|
|
9
|
|
Other
income (expense)
|
|
|
45
|
|
|
4
|
|
|
34
|
|
|
33
|
|
|
3
|
|
Adjusted
EBITDA
|
|
|
2,578
|
|
|
226
|
|
|
1,694
|
|
|
1,768
|
|
|
155
|
|
Investing
in the series B shares and the ADSs involves a high degree of risk. You should
consider carefully the following risks, as well as all the other information
presented in this prospectus, before making an investment decision. Any of
the
following risks, if they were to occur, could materially and adversely affect
our business, results of operations, prospects and financial condition.
Additional risks and uncertainties not currently known to us or that we
currently deem immaterial may also materially and adversely affect our business,
results of operations, prospects and financial condition. In either event,
the
market price of our series B shares and ADSs could decline, and you could
lose
all or part of your investment.
Risks
Related to Our Business
We
may not be able to pass along price increases for raw materials to our customers
to compensate for fluctuations in price and supply.
Prices
for raw materials necessary for production have fluctuated significantly
in the
past and significant increases could adversely affect our margins. During
periods when prices for scrap metal, iron ore, alloys, coke and other important
raw materials have increased, our industry historically has sought to maintain
profit margins and pass along increased raw materials costs to customers
by
means of price increases.
We
may
not be able to pass along these and other possible cost increases in the
future
and, therefore, our margins and profitability may be adversely affected.
Even
when we can successfully apply surcharges, interim reductions in profit margins
frequently occur due to a time lag between the increase in raw material prices
and the market acceptance of higher selling prices for finished steel products.
We cannot assure you that any of our future customers will agree to pay
increased prices based on surcharges or that any of our current customers
will
continue to pay such surcharges.
Implementing
our growth strategy, which may include acquisitions, may adversely affect
our
operations.
As
part
of our growth strategy, we may need to expand our existing facilities, build
additional plants, acquire other steel assets, enter into joint ventures
or form
strategic alliances that we expect will expand or complement our existing
business. If any of these transactions occur, they will likely involve some
or
all of the following risks:
|
•
|
|
disruption
of our ongoing business;
|
|
•
|
|
diversion
of our resources and of management’s time;
|
|
•
|
|
decreased
ability to maintain uniform standards, controls, procedures and
policies;
|
|
•
|
|
difficulty
managing the operations of a larger company;
|
|
•
|
|
increased
likelihood of involvement in labor, commercial or regulatory disputes
or
litigation related to the new enterprise;
|
|
•
|
|
potential
liability to joint venture participants or to third parties;
|
|
•
|
|
difficulty
competing for acquisitions and other growth opportunities with
companies
having greater financial resources; and
|
|
•
|
|
difficulty
integrating the acquired operations and personnel into our existing
business.
|
Our
operations are capital intensive. We require capital for, among other purposes,
acquiring new equipment, maintaining existing equipment and complying with
environmental laws and regulations. We may not be able to fund our capital
expenditures from operating cash flow or from borrowings. If we are unable
to
fund our capital requirements we may not be able to implement our business
plan.
We
intend
to continue to pursue a growth strategy, the success of which will depend
in
part on our ability to acquire and integrate additional facilities. Some
of
these acquisitions may be outside of Mexico. Acquisitions involve a number
of
special risks that could adversely affect our business, financial condition
and
results of operations, including the diversion of management’s attention, the
assimilation of the operations and personnel of the acquired facilities,
the
assumption of legacy liabilities and the potential loss of key employees.
We
cannot assure you that any acquisition we make will not materially and adversely
affect us or that any such acquisition will enhance our business. We are
unable
to predict the likelihood of any additional acquisitions being proposed or
completed in the near future or the terms of any such acquisitions. If we
determine to make any significant acquisition, we may be required to sell
additional equity or debt securities or obtain additional credit facilities,
which could result in additional dilution to our stockholders. There can
be no
assurance that adequate equity or debt financing would be available to us
for
any such acquisitions.
We
may not be able to integrate successfully our recently acquired steel facilities
into our operations.
In
2005,
we and our controlling shareholder, Industrias CH, acquired 100% of the stock
of
Republic, a U.S. producer of SBQ steel. We acquired 50.2% of Republic’s stock
through our majority owned subsidiary, SimRep, and Industrias CH purchased
the
remaining 49.8% through SimRep. Our future success will depend in part on
our
ability to integrate the operations of Republic successfully into our historic
operations. Furthermore, while we have not yet encountered any material problems
related to the assets acquired, there can be no assurance that problems will
not
arise in the future and that the costs associated with those problems, should
they arise, will not be significant.
We
face significant price and industry competition from other steel producers,
which may adversely affect our profitability and market
share.
Competition
in the steel industry is significant. Continuous advances in materials sciences
and resulting technologies have given rise to products such as plastics,
aluminum, ceramics and glass, all of which compete with steel products.
Competition in the steel industry exerts a downward pressure on prices, and,
due
to high start-up costs, the economics of operating a steel mill on a continuous
basis may encourage mill operators to establish and maintain high levels
of
output even in times of low demand, which further decreases prices and profit
margins. The recent trend of consolidation in the global steel industry may
increase competitive pressures on independent producers of our size if large
steel producers formed through consolidations adopt predatory pricing strategies
that decrease prices and profit margins even further. If we are unable to
remain
competitive with these producers, our market share and financial performance
may
be adversely affected.
Approximately
27.9% of our sales for the six-months ended June 30, 2006 were in Mexico,
where
we face strong competition from other Mexican steel producers. A number of
our
Mexican competitors have undertaken modernization and expansion plans, including
the installation of production facilities and
manufacturing
capacity for certain products that will compete with our products. As these
producers become more efficient, we may experience increased competition
from
them and a loss of market share. In addition, we face competition from
international steel producers. Increased international competition, especially
when combined with excess production capacity, could force us to lower our
prices or to offer increased services at a higher cost to us, which could
reduce
our gross margins and net income.
Since
most of our sales are in the United States and Canada, we also face strong
competition from other steel producers. A number of our competitors have
undertaken modernization and expansion plans, including the installation
of
production facilities and manufacturing capacity for certain products that
will
compete with our products. As these producers become more efficient, we may
experience increased competition from them and a loss of market share. In
addition, we face competition from international steel producers.
Increased international competition, especially when combined with excess
production capacity, could force us to lower our prices or to offer increased
services at a higher cost to us, which could reduce our gross margins and
net
income.
We
depend on distributions from our operating subsidiaries to finance our
operations.
We
need
to receive sufficient funds from our subsidiaries for a substantial portion
of
our internal cash flow, including cash flow to fund any future investment
plans
and to service our future financial obligations. As a result, our cash flow
will
be adversely affected if we do not receive dividends and other income from
our
subsidiaries. The ability of most of our subsidiaries to pay dividends and
make
other transfers to us may be restricted by any indebtedness that we may incur
or
by Mexican law. Any such reduction in cash flow could materially adversely
affect us.
The
operation of our facilities depends on good labor relations with our employees.
At
September 30, 2006, approximately 83% of our non-Mexican and 59% of our Mexican
employees were members of unions. Collective bargaining agreements are typically
negotiated on a facility by facility basis for our Mexican facilities. The
compensation terms of our labor contracts are adjusted on an annual basis,
and
all other terms of the labor contracts are renegotiated every two years.
Any
failure to reach an agreement on new labor contracts or to negotiate these
labor
contracts might result in strikes, boycotts or other labor disruptions. These
potential labor disruptions could have a material adverse effect on our results
of operations and financial condition. There have been no labor disruptions
in
the past five years in our Mexicali and Guadalajara facilities, and there
have
been no labor disruptions in the Apizaco and Cholula facilities or our U.S.
and
Canadian facilities since we acquired them in 2004 and 2005, respectively.
Labor
disruptions, strikes or significant negotiated wage increases could reduce
our
sales or increase our cost, and accordingly could have a material adverse
effect
on our business.
Operations
at our Lackawanna, New York facility depend on our right to use certain property
and assets of an adjoining facility that the Mittal Steel Company N.V. (“Mittal
Steel”) owns. The termination of any such rights could interrupt our operations
and have a material adverse effect on our results of operations and financial
condition.
The
operations at our Lackawanna facility depend on certain easements and other
recorded agreements that the International Steel Group Inc. made in our favor
relating to, among other things, use of certain oxygen pipelines, engine
rooms,
water pipelines, natural gas and compressed air distribution systems and
electrical equipment. Currently we and Mittal Steel are negotiating to extend
these services and utility arrangements for a period of three years. Our
respective rights under these agreements may be terminated in the event of
force
majeure or plant closures by either party. In the event that a plant closure
occurs and affects the supply of utilities or services, either party, upon
notice, has the right of ingress, egress and regress to enter the other party’s
premises for the sole purpose of continuing the supply of the
utility
affected. All of these rights are assignable in the event of a sale of either
of
the parties. These rights are essential to the use and operation of the
Lackawanna facility. In the event of a termination of any of these rights,
we
could be required to cease some or all of our operations at the Lackawanna
facility. Because we produced certain types of products in the Lackawanna
facility that we do not produce in our other facilities, an interruption
of
production at the Lackawanna facility could result in a substantial loss
of
revenue and could damage our relationships with customers.
Our
sales are highly concentrated and could be significantly reduced if one of
our
major customers reduced its purchases of our products or was unable to fulfill
its financial obligations to us.
Our
sales
are concentrated among a relatively small number of customers. Any of our
major
customers can stop purchasing our products or significantly reduce their
purchases at any time. For the six-months ended June 30, 2006, direct sales
of
our products to two of our customers, United States Steel Corporation (“U.S.
Steel”) and American Axle & Manufacturing Holdings, Inc. (“American Axle”)
accounted for approximately 18.7% of our revenue. A disruption in sales to
either of these customers could adversely effect our cash flow and results
of
operations.
There
can
be no assurance that we will be able to maintain our current level of sales
to
these customers or that we will be able to sell our products to other customers
on terms that will be favorable. The loss of, or substantial decrease in
the
amount of purchases by, or a write-off of any significant receivables from,
any
of our major customers would adversely affect our business, results of
operations, liquidity and financial condition.
Unanticipated
problems with our manufacturing equipment and facilities could have an adverse
impact on our business.
Our
capacity to manufacture steel products depends on the suitable operation
of our
manufacturing equipment, including blast furnaces, electric arc furnaces,
continuous casters, reheating furnaces and rolling mills. Although we perform
maintenance to our equipment on a continuous basis, breakdowns requiring
significant time and/or resources to repair, as well as the occurrence of
adverse events such as fires, explosions or adverse meteorological conditions,
could cause temporary production interruptions that could adversely affect
our
results of operations.
We
have
not obtained insurance against all risks, and do not maintain insurance covering
losses resulting from catastrophes or business interruptions. In the event
we
are not able to quickly and cost-effectively remedy problems creating any
significant interruption of our manufacturing capabilities, our operations
could
be adversely affected. In addition, in the event any of our plants were
destroyed or significantly damaged or its production capabilities otherwise
significantly decreased, we would likely suffer significant losses; furthermore,
the capital investments necessary to repair any destroyed or damaged facilities
or machinery would adversely affect our cash flows and our
profitability.
Because
a significant portion of our sales are to the automotive industry, a decrease
in
automotive manufacturing could reduce our cash flows and adversely affect
our
results of operations.
Direct
sales of products to automotive assemblers and manufacturers accounted for
approximately 45% of our total net sales for the six months ended June 30,
2006.
Demand for our products is affected by, among other things, the relative
strength or weakness of the U.S. automotive industry. U.S. automotive
manufacturers have experienced significant reductions in market share to
mostly
Asian companies and have announced planned reduction in working capacity.
Many
large original equipment manufacturers such as Dana Corporation, Delphi
Corporation (“Delphi”) and others, have sought bankruptcy protection. A
reduction in vehicles manufactured in North America, the principal
market
for Republic’s SBQ steel products, would have an adverse effect on our results
of operations. In addition, the U.S. automotive industry is significantly
unionized and subject to unanticipated and extended work slowdowns and stoppages
resulting from labor disputes. We also sell to independent forgers, components
suppliers and steel service centers, all of which sell to the automotive
market
as well as other markets. Developments affecting the U.S. automotive industry
may adversely affect us.
If
we are unable to obtain or maintain quality and environmental management
certifications for our facilities, we may lose existing customers and fail
to
attract new customers.
Most
of
our automotive parts customers in Mexico and the United States require that
we
have ISO 9001 or 14001 certification. All of the U.S. facilities that sell
to
automotive parts customers are currently ISO 9001 or 14001 certified, as
required.
If
the
foregoing certifications are canceled, if approvals are withdrawn or if
necessary additional standards are not obtained in a timely fashion, our
ability
to continue to serve our targeted market, retain our customers or attract
new
customers may be impaired. For example, our failure to maintain these
certifications could cause customers to refuse shipments, which could materially
affect our revenues and results of operations.
In
order
to continue to serve the premium part of the SBQ products market, our U.S.
facilities will need to be ISO/TS 16949 certified as of December 15, 2006.
We
currently are in compliance with this new standard but cannot assure you
of our
future compliance.
In
the
SBQ market, all participants must satisfy quality audits and obtain
certifications in order to obtain the status of “approved supplier”. The
automotive industry has put these stringent conditions in place for the
production of auto parts to assure a vehicle’s quality and safety. We currently
are an approved supplier for our automotive parts customers. Maintaining
these
certifications is crucial in preserving and increasing our market share because
these conditions can be a barrier to entry in the SBQ market and we cannot
assure you that we will do so.
In
the event of environmental violations at our facilities we may incur significant
liabilities.
Our
operations are subject to a broad range of environmental laws and regulations
regulating our impact on air, water, soil and groundwater and exposure to
hazardous substances. We cannot assure you that we will at all times operate
in
compliance with environmental laws and regulations. If we fail to comply
with
these laws and regulations, we may be assessed fines or penalties, be required
to make large expenditures to comply with such laws and regulations and/or
be
forced to shut down noncompliant operations. You should also consider that
environmental laws and regulations are becoming increasingly stringent and
it is
possible that future laws and regulations may require us to incur material
environmental compliance liabilities and costs. In addition, we need to maintain
existing and obtain future environmental permits in order to operate our
facilities. The failure to obtain necessary permits or consents or the loss
of
any permits could result in significant fines or penalties or prevent us
from
operating our facilities. We may also be subject, from time to time, to legal
proceedings brought by private parties or governmental agencies with respect
to
environmental matters, including matters involving alleged property damage
or
personal injury that could result in significant liability. We currently
own a
steel scrap yard in San Diego, California, which has been the subject of
administrative action by state and local environmental authorities. See
“Business—Legal Matters and Regulations—Legal Proceedings—Environmental
Claims.”
If
we are required to remediate contamination at our facilities we may incur
significant liabilities.
We
may be
required to remediate contamination at certain of our facilities and have
established a reserve to deal with such liabilities. However, we cannot assure
you that our environmental reserves will be adequate to cover such liabilities
or that our environmental expenditures will not differ significantly from
our
estimates or materially increase in the future. Failure to comply with any
legal
obligations requiring remediation of contamination could result in liabilities,
imposition of cleanup liens and fines, and we could incur large expenditures
to
bring our facilities into compliance.
We
could incur losses due to product liability claims and may be unable to maintain
product liability insurance on acceptable terms, if at
all.
We
could
experience losses from defects or alleged defects in our steel products that
subject us to claims for monetary damages. For example, many of our products
are
used in automobiles and light trucks and it is possible that a defect in
one of
these vehicles could result in product liability claims against us. In
accordance with normal commercial sales, some of our products include implied
warranties that they are free from defects, are suitable for their intended
purposes and meet certain agreed upon manufacturing specifications. We cannot
assure you that future product liability claims will not be brought against
us,
that we will not incur liability in excess of our insurance coverage, or
that we
will be able to maintain product liability insurance with adequate coverage
levels and on acceptable terms, if at all.
Our
controlling shareholder, Industrias CH, is able to exert significant influence
on our business and policies and its interests may differ from those of other
shareholders.
As
of
June 30, 2006, Industrias CH, which the chairman of our board of directors,
Rufino
Vigil González
,
controls, owned approximately 85% of our shares. Industrias CH nominated
and
elected all of the current members of our board of directors, and Industrias
CH
continues and, after this offering, will continue to be in a position to
elect
our future directors and to exercise substantial influence and control over
our
business and policies, including the timing and payment of dividends. The
interests of Industrias CH may differ significantly from those of other
shareholders. Furthermore, as a result of the significant equity position
of
Industrias CH, there is currently limited liquidity in our series B shares
and
ADSs, and we cannot assure you liquidity will increase significantly as a
result
of this offering.
We
have had a number of transactions with our
affiliates.
Historically,
we have engaged in a significant number and variety of transactions on market
terms with affiliates, including entities that Industrias CH owns or controls.
We expect that in the future we will continue to enter into transactions
with
our affiliates, and some of these transactions may be significant.
We
depend on our senior management and their unique knowledge of our business
and
of the SBQ industry, and we may not be able to replace key executives if
they
leave.
We
depend
on the performance of our executive officers and key employees. Our senior
management has significant experience in the steel industry, and the loss
of any
member of senior management or our inability to attract, retain additional
senior management could adversely affect our business, results of operations,
prospects and financial condition. We believe that the SBQ steel market is
a
niche market where specific industry experience is key to success. We depend
on
the knowledge of our business and the SBQ industry of our senior management
team, including Luis Garcia Limon, our chief executive officer. See
“Management”. In addition, we attribute much of the success of our growth
strategy to our ability to retain most of the key senior management personnel
of
the companies and
businesses
that we have acquired. Competition for qualified personnel is significant,
and
we may not be able to find replacements with sufficient knowledge of, and
experience in, the SBQ industry for our existing senior management or any
of
these individuals if their services are no longer available. Our business
could
be adversely affected if we cannot attract or retain senior management or
other
necessary personnel.
Risks
Related to the Steel Industry
Our
results of operations are significantly influenced by the cyclical nature
of
steel industry.
The
steel
industry is cyclical in nature and sensitive to national and international
macroeconomic conditions. Global demand for steel as well as overall supply
levels significantly influence prices for our products. Changes in these
two
factors likely will impact our operating results. Although global steel prices
increased significantly during 2004, they fell in 2005 over 2004 levels,
increasing again in the first nine months of 2006. We cannot predict or give
you
any assurances as to prices of steel in the future.
The
costs
of ferrous scrap and iron ore, the principal raw materials used in our steel
operations, are subject to price fluctuations. Although our wholly-owned
scrap
collection and processing operations furnish a material portion of our scrap
requirements, we must acquire the remainder of our scrap from other sources.
Because increases in the prices we are able to charge for our finished steel
products may lag increases in ferrous scrap prices, such increases in scrap
prices can adversely affect our operating results. In 2004, the price of
scrap
increased significantly. However, scrap prices decreased significantly in
2005
over 2004 levels. In the first four months of 2006, scrap prices remained
similar to 2005 levels. There can be no assurance that scrap prices will
not
increase and, if so, there can be no assurance that we will be able to pass
all
or a portion of these increases on through higher finished product
prices.
U.S.
Steel supplies the majority of our iron ore and a portion of our coke
requirements. We purchase the balance of our requirements in the open market.
We
expect to purchase increasing amounts of our iron ore requirements in the
open
market in the future. In 2004, U.S. Steel supplied essentially all of Republic’s
iron ore and coke requirements under terms of a supply agreement that was
beneficial to us. In 2005, the prices of these materials increased when we
negotiated new contracts with U.S. Steel, and, therefore, we purchased more
of the material in the open market. In the first six months of 2006, iron
ore
and coke prices decreased from 2005 levels. We cannot guarantee that we
will be able to continue to find suppliers of these raw materials in the
open
market or that the prices of these materials will not increase or that the
quality will remain the same. There is no assurance we will be able to pass
all
or a portion of higher raw material prices on through finished product
prices.
The
energy costs involved in our production processes are subject to fluctuations
that are beyond our control and could significantly increase our costs of
production.
Energy
costs constitute a significant component of our costs of operations. Energy
cost
as a percentage of net sales was 13% for the year ended December 31, 2005.
Our
manufacturing processes are dependent on adequate supplies of electricity
and
natural gas. A substantial increase in the cost of natural gas or electricity
could have a material adverse effect on our margins. In addition, a disruption
or curtailment in supply could have a material adverse effect on our production
and sales levels.
The
Mexican government is currently the only supplier of energy in Mexico and
has,
in some cases, increased prices above international levels. We, like all
other
high volume users of electricity in Mexico, pay special rates to the Mexican
federal electricity commission (
Comisión
Federal de Electricidad
or
“CFE”) for electricity. We also pay special rates to Pemex,
Gas
y
Petroquímica Básica, (“PEMEX”),
the
national oil company, for gas used at the Guadalajara facility. There can
be
no
assurance
these special rates will continue to be available to us or that these rates
may
not increase significantly in the future. We enter into futures contracts
to fix
and reduce volatility of natural gas prices. We have not always been able
to
pass the effect of these increases on to our customers and there is no assurance
that we will be able to pass the effect of these increases on to our customers
in the future or to maintain futures contracts to reduce volatility in natural
gas prices. Changes in the price or supply of natural gas would materially
and
adversely affect our business and results of operations.
Risks
Related to Mexico
Mexican
governmental, political and economic factors may adversely impact our
business.
The
Mexican government has exercised, and continues to exercise, significant
influence over the Mexican economy. Accordingly, Mexican governmental actions
concerning the economy and state-owned enterprises could have a significant
impact on Mexican private sector entities in general and us, in particular,
and
on market conditions, prices and returns on Mexican securities, including
ours.
Our
financial condition, results of operations and prospects may also be affected
by
currency fluctuations, inflation, interest rates, regulation, taxation, social
instability and other political, social and economic developments in or
affecting Mexico. There can be no assurance that future developments in the
Mexican political, economic or social environment, over which we have no
control, will not have a material adverse effect on our business, results
of
operations, financial condition or prospects or adversely affect the market
price of the ADSs and the series B shares.
The
Mexican economy has in the past experienced balance of payment deficits and
shortages in foreign exchange reserves. While the Mexican government does
not
currently restrict the ability of Mexican or foreign persons or entities
to
convert pesos to foreign currencies generally, and to U.S. dollars in
particular, it has done so in the past and no assurance can be given that
the
Mexican government will not institute a restrictive exchange control policy
in
the future. The effect of any exchange control measures adopted by the Mexican
government on the Mexican economy cannot be predicted.
In
the
Mexican national elections held on July 2, 2000, Vicente Fox of the
Partido
Accion Nacional
(the
National Action Party) or PAN, won the presidency. His victory ended more
than
70 years of presidential rule by the
Partido
Revolucionario Institucional
(the
Institutional Revolutionary Party) or PRI. Neither the PRI nor the PAN succeeded
in securing a majority in either house of the Mexican Congress. Further,
elections held in 2003 and 2004, resulted in a reduction in the number of
seats
held by the PAN in the Mexican Congress and state governorships. The resulting
gridlock impeded the progress of structural reforms in Mexico.
On
July
2, 2006, Mexico held presidential and federal congressional elections, and
Felipe Calderón Hinojosa, the PAN candidate, won by a very narrow margin.
However, the
Partido
de la Revolución Democrática
(the
Revolutionary Democratic Party or PRD), the leading opposition party, has
contested the results of the election. On September 6, 2006, the Tribunal
Electoral
del Poder Judicial de la Federación
(the
Federal Electoral Chamber) unanimously declared Mr. Calderón to be the
president-elect whose term as president will run from December 1, 2006
until November 30, 2012. We cannot predict whether the PRD will continue to
generate political unrest in the country or whether any such unrest would
affect
our financial condition results of operations or prospects.
High
levels of inflation and interest rates in Mexico, and weakness in the Mexican
economy, could adversely impact our financial condition and results of
operation.
In
the
past, Mexico has experienced high levels of inflation and high domestic interest
rates. If the Mexican economy falls into a recession, or if inflation and
interest rates increase, consumer purchasing power may decrease, and as a
result, demand for steel products may decrease. In addition, a recession
could
affect our operations to the extent we are unable to reduce our costs and
expenses in response to falling demand. Furthermore, our growth strategy
of
acquiring other companies and assets may be impaired in the future if interest
rates increase, and we are not able to obtain acquisition financing on favorable
terms. These events could adversely affect our business, results of operations,
financial condition or prospects.
Devaluation
or depreciation of the peso against the U.S. dollar may adversely affect
the
dollar value of an investment in the ADSs and the series B shares, as well
as the dollar value of any dividend or other distributions that we may
make.
Fluctuations
in the exchange rate between the peso and the U.S. dollar, particularly peso
depreciations, may adversely affect the U.S. dollar equivalent of the peso
price
of the Series B shares on the Mexican Stock Exchange. As a result, such
peso depreciations will likely affect our revenues and earnings in U.S. dollar
terms and the market price of the ADSs. Exchange rate fluctuations could
also
affect the depositary’s ability to convert into U.S. dollars, and make timely
payment of, any peso cash dividends and other distributions paid in respect
of
the Series B shares.
Our
financial statements are prepared in accordance with Mexican GAAP, and therefore
may not be directly comparable to financial statements of other companies
prepared under U.S. GAAP or other accounting
principles.
All
Mexican companies must prepare their financial statements in accordance with
Mexican GAAP, which differs in certain respects from U.S. GAAP. Among other
differences, Mexican companies are required to incorporate the effects of
inflation directly in their accounting records and in their published financial
statements. Accordingly, Mexican financial statements and reported earnings
may
differ from those of companies in other countries in this and other respects.
See Note 19 to our 2005 consolidated financial statements for a description
of
the principal differences between Mexican GAAP and U.S. GAAP as they relate
to
us.
Tariffs,
anti-dumping and countervailing duty claims imposed in the future could harm
our
ability to export our products.
In
recent
years, the U.S. government has imposed anti-dumping and countervailing duties
against Mexican and other foreign steel producers, but has not imposed any
such
penalties against us or our products. In the first quarter of 2002, the U.S.
government imposed tariffs of 15% on rebar and 30% on hot rolled bar and
cold
finish bar against imports of steel from all the countries with the exception
of
Mexico, Canada, Argentina, Thailand and Turkey; in the first quarter of 2003,
the tariffs were reduced to 12% on rebar and 24% on hot rolled bar and cold
finish bar, and these tariffs were eliminated in late 2003, prior to their
originally scheduled termination date. There can be no assurance that
anti-dumping or countervailing duties suits will not be initiated against
us or
that the U.S. government will not impose tariffs on steel imports from Mexico
or
that existing tariffs on U.S. steel imports from other countries, will not
be
lifted in the future.
In
September 2001, the Mexican government imposed tariffs of 25% against imports
for all products that we produce from all countries with the exception of
those
which have a free trade agreement
with
Mexico, which includes the United States. In April 2002, the Mexican government
increased these tariffs to 35%. These tariffs have subsequently been reduced
over time and are currently 7% for steel products.
There
can
be no assurances that these tariffs will not be further reduced or that
countries seeking to export steel products to Mexico will not impose similar
tariffs on Mexican exports to those countries.
We
are subject to different corporate disclosure and accounting standards than
U.S.
companies.
A
principal objective of the securities laws of the United States, Mexico and
other countries is to promote full and fair disclosure of all material corporate
information. However, there may be less publicly available information about
non-U.S. issuers of securities listed in the United States than is regularly
published by or about U.S. issuers of listed securities. In addition, we
prepare our financial statements in accordance with Mexican GAAP, which differs
from U.S. GAAP in a number of respects. For example, under Mexican GAAP we
must incorporate the effects of inflation directly in our accounting records
and
published financial statements. While we are required to reconcile our net
income and stockholders’ equity to those amounts that would be derived under
U.S. GAAP, the effects of inflation accounting under Mexican GAAP are not
eliminated in such reconciliation. For this and other reasons, the presentation
of Mexican financial statements and reported earnings may differ from that
of
U.S. companies in this and other important respects. Please see Note 19 to
our audited consolidated financial statements for the years ended December
31,
2005, 2004 and 2003 beginning on page F-41 of this prospectus and Note 16
to our
unaudited condensed consolidated financial statements for the six-month period
ended June 30, 2006 beginning on page F-72 of this prospectus.
Risks
Related to the Global Offering
As
a result of the lower level of liquidity and the higher level of volatility
of
the Mexican securities market, the market price of our series B shares, and
as a
result, our ADSs, may experience extreme price and trading volume
fluctuations.
The
Mexican Stock Exchange is one of Latin America’s largest exchanges in terms of
market capitalization, but it remains relatively small, illiquid and volatile
compared to other major world markets. Although the public participates in
the
trading of securities on the Mexican Stock Exchange, a substantial portion
of
such activity consists of transactions by or on behalf of institutional
investors. These market characteristics may limit the ability of a holder
of
series B shares to sell its shares and may also adversely affect the market
price of the series B shares and, as a result, the market price of the ADSs.
The
trading volume for securities issued by emerging market companies tends to
be
lower than the trading volume of securities issued by companies in more
developed countries.
You
may not be entitled to participate in future preemptive rights
offerings.
Under
Mexican law, if we issue new shares for cash as part of a capital increase,
other than in a public offering, we must grant our stockholders the right
to
purchase a sufficient number of shares to maintain their existing ownership
percentage in our company. Rights to purchase shares in these circumstances
are
known as preemptive rights. We may not legally be permitted to allow holders
of
ADSs or holders of series B shares in the United States to exercise any
preemptive rights in any future capital increase unless: (1) we file a
registration statement with the U.S. Securities and Exchange Commission,
or the
SEC, with respect to that future issuance of shares; or (2) the offering
qualifies for an exemption from the registration requirements of the Securities
Act. At the time of any future capital increase, we will evaluate the costs
and
potential liabilities associated with filing a registration
statement
with
the
SEC and any other factors that we consider important to determine whether
we
will file such a registration statement.
We
cannot
assure you that we will file a registration statement with the SEC to allow
holders of ADSs or holders of series B shares in the United States to
participate in a preemptive rights offering. In addition, under current Mexican
law, sales by the depositary of preemptive rights and distribution of the
proceeds from such sales to you, the ADS holders, is not possible. As a result,
your equity interest in us may be diluted proportionately.
ADS
holders may only vote through the depositary and are not entitled to attend
shareholders’ meetings.
Under
the
terms of the ADSs, you have a right to instruct the depositary, The Bank
of New
York, to vote the shares underlying our ADSs. If we provide the depositary
with
notice of shareholders’ meetings, the depositary will notify you of
shareholders’ meetings. Otherwise, you will not be able to exercise your right
to vote unless you withdraw the series B shares underlying the ADSs. We will
use
our best efforts to request that the depositary notify you of upcoming votes
and
ask for your instructions. However, you may not receive voting materials
in time
to ensure that you are able to instruct the depositary to vote your shares
or
otherwise learn of shareholders’ meetings to withdraw your series B shares to
allow you to cast your vote with respect to any specific matter. In addition,
the depositary and its agents may not be able to send out your voting
instructions on time or carry them out in the manner you have instructed.
As a
result, you may not be able to exercise your right to vote and you may lack
recourse if the series B shares underlying your ADSs are not voted as you
requested.
In
addition, Mexican law and our by-laws require shareholders to deposit their
shares with our secretary or with a Mexican custodian or provide evidence
of
their status as shareholders in order to attend shareholders’ meetings. ADS
holders will not be able to meet this requirement and accordingly are not
entitled to attend shareholders’ meetings. ADS holders will also not be
permitted to vote the series B shares underlying the ADSs directly at a
shareholders’ meeting or to appoint a proxy to do so without withdrawing the
series B shares. Please see “Description of American Depositary Receipts” for
further discussion regarding the deposit agreement and your voting
rights.
It
may be difficult to enforce civil liabilities against us or our directors,
officers and controlling persons.
We
are
organized under the laws of Mexico, and most of our directors, officers and
controlling persons reside in Mexico. In addition, a substantial portion
of our
assets and their assets are located in Mexico. As a result, it may be difficult
for investors to effect service of process on such persons within the United
States or elsewhere outside of Mexico or to enforce judgments against us
or
them, including in any action based on civil liabilities under U.S. federal
securities laws. There is doubt as to the enforceability in Mexico, whether
in
original actions or in actions to enforce judgments of U.S. courts or other
courts outside of Mexico, of liabilities based solely on U.S. federal securities
laws.
Future
sales of shares may depress the price of our series B shares and
ADSs.
As
of
June 30, 2006, we had 421,214,706 series B shares outstanding. After this
offering, the series B shares and ADSs sold in this offering will be freely
tradable, without restriction, under the Securities Act, except for any shares
purchased by our “affiliates”, as defined in the Securities Act. Sales of
substantial amounts of any remaining series B shares may depress our stock
price
and, as a result, the price of our ADSs, and we cannot assure you that our
stock
price would recover from any such loss in value.
This
discussion assumes the effectiveness of certain lock-up arrangements with
the
underwriters under which we have agreed not to issue, sell or otherwise dispose
of shares. We cannot assure you that these lock-up arrangements will not
be
terminated prior to 180 days after the global offering without prior notice
to
you by the underwriters.
We
may issue additional series B shares or ADSs in the future which may dilute
the
interest of the public investors.
We
may
offer additional series B shares or ADSs in the future, although we have
no
current intention to do so. Any such offering or the market perception that
such
an offering could occur may result in a decrease in the market price of the
series B shares and ADSs.
This
prospectus contains certain statements regarding our business that may
constitute “forward looking statements” within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. When
used in
this prospectus, the words “anticipates”, “plans”, “believes”, “estimates”,
“intends”, “expects”, “projects” and similar expressions are intended to
identify forward looking statements, although not all forward looking statements
contain those words. These statements, including but not limited to our
statements regarding our strategy for raw material acquisition, products
and
markets, production processes and facilities, sales and distribution and
exports, growth and other trends in the steel industry and various markets,
operations and liquidity and capital resources are based on management’s
beliefs, as well as on assumptions made by, and information currently available
to, management, and involve various risks and uncertainties, some of which
are
beyond our control. Our actual results could differ materially from those
expressed in any forward looking statement. In light of these risks and
uncertainties there can be no assurance that forward looking statements will
prove to be accurate. Factors that might cause actual results to differ from
forward looking statements include, but are not limited to,
·
|
factors
relating to the steel industry (including the cyclicality of the
industry,
finished product prices, worldwide production capacity, the high
degree of
competition from Mexican and foreign producers and the price of
ferrous
scrap, iron ore and other raw materials);
|
·
|
our
ability to operate at high capacity
levels;
|
·
|
the
costs of compliance with U.S. and Mexican environmental
laws;
|
·
|
the
integration of the Mexican steel manufacturing facilities located
in
Apizaco and Cholula, as well as the recently acquired Republic
in the
United States;
|
·
|
future
capital expenditures and
acquisitions;
|
·
|
future
devaluations of the peso;
|
·
|
the
imposition by Mexico of foreign exchange controls and price
controls;
|
·
|
the
influence of economic and market conditions in other countries
on Mexican
securities; and
|
·
|
the
factors discussed in “Risk Factors” beginning on page
16.
|
Forward
looking statements speak only as of the date they were made, and we undertake
no
obligation to update publicly or to revise any forward looking statements
after
we distribute this prospectus because of new information, future events or
other
factors. In light of the risks and uncertainties described above, the forward
looking events and circumstances discussed in this prospectus might not
occur.
We
estimate that the proceeds from the combined offering will be approximately
Ps.
● (U.S.$ ● million) (or approximately Ps. ● (U.S.$ ● million) if the
over-allotment options are exercised in full) based upon an estimated public
offering price per series B share of approximately Ps. ● and after deducting
underwriting discounts and commissions but before the estimated expenses
associated with the combined offering.
We
intend
to use the proceeds that we obtain from the combined offering for general
corporate purposes, including approximately U.S.$110 million for investments
in
fixed assets aimed at increasing our installed capacity in our various
facilities in the U.S., Canada and Mexico. We expect that these investments
will
include an increase in our melt shop capacity (approximately U.S.$15 million),
a
new oxygen plant (approximately U.S.$10 million), new roll mills (approximately
U.S.$27 million), a project to increase production of new SBQ products
(approximately U.S.$20 million), investments to increase stainless steel
production (approximately U.S.$20 million) and a new inspection system for
finished products (approximately U.S.$8 million), as well as possibly potential
acquisitions intended to improve our market share and complement our business
strategy.
The
following table sets forth our unaudited short-term debt and capitalization
under Mexican GAAP as of October 31, 2006 and as adjusted to give effect
to our
receipt of the net proceeds of the sale of our series B shares in the combined
offering (assuming no exercise of the over-allotment options).
You
should read this table together with our audited financial statements and
our
unaudited financial statements included in this prospectus. Information in
the
following table is presented in constant pesos as of October 31, 2006 and
dollar
amounts are translated at the rate of Ps. 10.7093 per U.S.$1.00, the interbank
transactions rate on October 31, 2006.
|
|
As
of October 31, 2006
|
|
|
|
Actual
|
|
As
Adjusted
(1)
|
|
|
|
($
Millions)
|
|
(Ps.
Millions)
|
|
($
Millions)
|
|
(Ps.
Millions)
|
|
Short-term
debt
|
|
|
17
|
|
|
180
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
1,139
|
|
|
12,197
|
|
|
|
|
|
|
|
Total
Capitalization
|
|
|
1,156
|
|
|
12,377
|
|
|
|
|
|
|
|
(1)
Adjusted
values have been calculated based on an assumed offering price of
Ps. ● per series B share.
For
every
● increase or decrease in the price per series B share in this combined
offering, our total stockholders’ equity will increase or decrease by
approximately Ps.
●
(U.S.$
●).
We
have
prepared the information concerning the Mexican securities market set forth
below based on materials obtained from public sources, including the Mexican
National Banking and Securities Commission, the Mexican Stock Exchange, the
Mexican Central Bank, and publications by market participants.
Our
ADSs
are listed on the American Stock Exchange under the symbol “SIM”, and our series
B shares are listed on the Mexican Stock Exchange under the symbol “SIMEC.B”.
We
cannot
predict the extent to which investors will choose to take delivery of series
B
shares in the form of ADSs as compared to series B shares, or the extent
to
which investors will be interested in our ADSs. We also cannot predict the
liquidity of any such market. If the trading volume of our ADSs or series
B
shares in any such market falls below certain levels, our shares or ADSs
could
be delisted or deregistered in that market.
Trading
on the Mexican Stock Exchange
Overview
The
Mexican Stock Exchange, located in Mexico City, is the only stock exchange
in
Mexico. Operating continuously since 1907, the Mexican Stock Exchange is
organized as a corporation (
sociedad
anonima de capital variable
).
Securities trading on the Mexican Stock Exchange occurs each business day
from
8:30 a.m. to 3:00 p.m., Mexico City time.
Since
January 1999, all trading on the Mexican Stock Exchange has been effected
electronically. The Mexican Stock Exchange may impose a number of measures
to
promote an orderly and transparent trading price of securities, including
the
operation of a system of automatic suspension of trading in shares of a
particular issuer when price fluctuation exceeds certain limits. The Mexican
Stock Exchange may also suspend trading in shares of a particular issuer
as a
result of:
·
|
non-disclosure
of material events; or
|
·
|
changes
in the offer or demand, volume traded, or prevailing share price
that are
inconsistent with the shares’ historical performance and cannot be
explained through publicly available
information.
|
The
Mexican Stock Exchange may reinstate trading in suspended shares when it
deems
that the material events have been adequately disclosed to public investors
or
when it deems that the issuer has adequately explained the reasons for the
changes in offer and demand, volume traded, or prevailing share price. Under
current regulations, the Mexican Stock Exchange may consider the measures
adopted by the other stock exchanges in order to suspend and/or resume trading
in an issuer’s shares in cases where the relevant securities are simultaneously
traded on a stock exchange outside of Mexico.
Settlement
on the Mexican Stock Exchange is effected two business days after a share
transaction. Deferred settlement is not permitted without the approval of
the
Mexican National Banking and Securities Commission, even where mutually agreed.
Most securities traded on the Mexican Stock Exchange are on deposit with
the
INDEVAL, a privately owned securities depositary that acts as a clearinghouse,
depositary, and custodian, as well as a settlement, transfer, and registration
agent for Mexican Stock Exchange transactions, eliminating the need for physical
transfer of securities.
Although
the Mexican Securities Market Law (
Ley
del Mercado de Valores
)
provides
for the existence of an over-the-counter market, no such market for securities
in Mexico has developed.
Market
Regulation
In
1925,
the Mexican National Banking Commission (
Comisión
Nacional Bancaria
)
was
established to regulate banking activity and in 1946, the Mexican Securities
Commission (
Comisión
Nacional de Valores
)
was
established to regulate stock market activity. In 1995, these two entities
were
merged to form the Mexican National Banking and Securities Commission
(
Comisión
Nacional Bancaria y de Valores)
.
The
Mexican Securities Market Law, which took effect in 1975, introduced important
structural changes to the Mexican financial system, including the organization
of brokerage firms as corporations (
sociedades
anónimas
).
The
Mexican Securities Market Law sets standards for authorizing companies to
operate as brokerage firms, which authorization is granted at the discretion
of
the Mexican Ministry of Finance and Public Credit (
Secretaria
de Hacienda y Credito Publico
),
upon
the recommendation of the National Banking and Securities Commission. In
addition to setting standards for brokerage firms, the Mexican Securities
Market
Law authorizes the National Banking and Securities Commission, among other
things, to regulate the public offering and trading of securities, corporate
governance, disclosure and reporting standards and to impose sanctions for
the
illegal use of insider information and other violations of the Mexican
Securities Market Law. The National Banking and Securities Commission regulates
and supervises the Mexican securities market, the Mexican Stock Exchange,
INDEVAL and brokerage firms through a board of governors composed of 13
members.
On
December 30, 2005, a new Mexican Securities Market Law was enacted and published
in the Official Gazette. The new Securities Market Law became effective on
June
28, 2006, however, in some cases an additional period of 180 days (until
late
December 2006) will be available for issuers to incorporate the new corporate
governance and other requirements derived from the new law into their by-laws.
The new Mexican Securities Market Law changed the Mexican securities regulation
in various material respects. The reforms were intended to update the Mexican
regulatory framework applicable to the securities market and publicly traded
companies in accordance with international standards.
In
particular, the new Mexican Securities Market Law (i) establishes that public
entities and the entities controlled by them will be considered a single
economic unit, (ii) clarifies the rules for tender offers, dividing them
into
voluntary and mandatory categories, (iii) clarifies standards for disclosure
of
holdings of shareholders of public companies, (iv) expands and strengthens
the
role of the board of directors of public companies, (v) defines the standards
applicable to the board of directors and the duties of the board, each director,
its secretary, the general director and executive officers (introducing concepts
such as the duty of care, duty of loyalty and safe harbors), (vi) replaces
the
statutory auditor (
comisario
)
and its
duties with an audit committee, a corporate practices committee and external
auditors, (vii) clearly defines the roles and responsibilities of executive
officers, (viii) improves the rights of minority shareholders relating to
legal
remedies and access to company information, (ix) introduces concepts such
as
consortiums, groups of related persons or entities, control, related parties
and
decision-making power, (x) sets out three new types of companies different
to
the ones which are set out by the Mexican Companies Law, the (a)
sociedad
anónima promotora de inversión
,
by
which the investment of national and foreigner investors shall be promoted,
(b)
sociedad
anónima promotora de inversión bursátil
and
(c)
sociedad
anónima bursátil,
and
(xi)
expands the definition of applicable sanctions for violations of the Mexican
Securities Market Law, including the punitive damages and criminal
penalties.
In
March
2003, the National Banking and Securities Commission issued certain general
regulations applicable to issuers and other securities market participants.
The
general regulations, which repealed several previously enacted National Banking
and Securities Commission regulations (
circulares
),
now
provide a single set of rules governing issuers and issuer activity, among
other
things.
In
September 2006, these general regulations were amended to give effect to
the
provisions of the Mexican Securities Market Law.
In
addition, in September 2004, the National Banking and Securities Commission
issued general rules applicable to brokerage firms, the National Banking
and
Securities Commission Rules for Brokerage Firms (
circulares
aplicables a casas de bolsa
).
These
rules now provide a single set of rules governing participation of Mexican
underwriters in public offerings, among other things.
Registration
and Listing Standards
To
offer
securities to the public in Mexico, an issuer must meet specific qualitative
and
quantitative requirements. In addition, only securities that have been
registered with the Mexican National Securities Registry as authorized by
National Banking and Securities Commission approval may be listed on the
Mexican
Stock Exchange. The authorization of the National Banking and Securities
Commission with respect to the registration does not imply any kind of
certification or assurance related to the investment quality of the securities,
the solvency of the issuer, or the accuracy or completeness of any information
delivered to the National Banking and Securities Commission. The general
regulations state that the Mexican Stock Exchange must adopt minimum
requirements for issuers to list their securities in Mexico. These requirements
relate to matters such as operating history, financial and capital structure,
minimum trading volumes and minimum public floats, among others. The general
regulations also state that the Mexican Stock Exchange must implement minimum
requirements for issuers to maintain their listing in Mexico. These requirements
relate to matters such as financial condition, trading minimums, capital
structure and minimum public floats, among others. The National Banking and
Securities Commission may waive some of these requirements in certain
circumstances. In addition, some of the requirements are applicable to each
series of shares of the relevant issuer.
The
Mexican Stock Exchange will review compliance with the foregoing requirements
and other requirements on an annual, semi-annual and quarterly basis, and
may
also do it at any other time. The Mexican Stock Exchange must inform the
National Banking and Securities Commission of the results of its review and
this
information must, in turn, be disclosed to investors. If an issuer fails
to
comply with any of the foregoing requirements, the Mexican Stock Exchange
will
request that the issuer propose a plan to cure the violation. If the issuer
fails to propose a plan, if the plan is not satisfactory to the Mexican Stock
Exchange or if an issuer does not make substantial progress with respect
to the
corrective measures, trading of the relevant series of shares on the Mexican
Stock Exchange will be temporarily suspended. In addition, if an issuer fails
to
propose a plan or ceases to follow the plan once proposed, the National Banking
and Securities Commission may suspend or cancel the registration of the shares,
in which case the majority shareholder or any controlling group must carry
out a
tender offer to acquire 100% of the outstanding shares of the issuer in
accordance with the tender offer rules discussed below.
Reporting
Obligations
Issuers
of listed securities are required to file unaudited quarterly financial
statements and audited annual financial statements as well as various periodic
reports with the National Banking and Securities Commission and the Mexican
Stock Exchange. Mexican issuers must file the following reports with the
National Banking and Securities Commission:
·
|
an
annual report prepared in accordance with the National Banking
and
Securities Commission general regulations by no later than June
30 of each
year;
|
·
|
quarterly
reports, within 20 business days following the end of each of the
first
three quarters and 40 business days following the end of the fourth
quarter; and
|
·
|
reports
disclosing material events promptly upon their
occurrence.
|
Pursuant
to the National Banking and Securities Commission’s general regulations, the
internal rules of the Mexican Stock Exchange were amended to implement an
automated electronic information transfer system, or SEDI (
Sistema
Electrónico de Envío y Difusión de Información
),
for
information required to be filed with the Mexican Stock Exchange. Issuers
of
listed securities must prepare and disclose their financial information via
a
Mexican Stock Exchange-approved electronic financial information system,
or
SIFIC (
Sistema
de Información Financiera Computarizada
).
Immediately upon its receipt, the Mexican Stock Exchange makes the financial
information submitted via SIFIC available to the public.
The
National Banking and Securities Commission’s general regulations and the rules
of the Mexican Stock Exchange require issuers of listed securities to file
information through SEDI that relates to any act, event or circumstance that
could influence issuers’ share price. If listed securities experience unusual
price volatility, the Mexican Stock Exchange must immediately request that
an
issuer inform the public as to the causes of the volatility or, if the issuer
is
unaware of the causes, that an issuer make a statement to that effect. In
addition, the Mexican Stock Exchange must immediately request that issuers
disclose any information relating to relevant material events, when it deems
the
information currently disclosed to be insufficient, as well as instruct issuers
to clarify the information when necessary. The Mexican Stock Exchange may
request that issuers confirm or deny any material events that have been
disclosed to the public by third parties when it deems that the material
event
may affect or influence the securities being traded. The Mexican Stock Exchange
must immediately inform the National Banking and Securities Commission of
any
such requests.
An
issuer
may defer the disclosure of material events under some circumstances, as
long
as:
·
|
the
issuer implements adequate confidentiality measures (including
maintaining
records of persons or entities in possession of confidential
information);
|
·
|
the
information is related to incomplete
transactions;
|
·
|
there
is no misleading public information relating to the material event;
and
|
·
|
no
unusual price or volume fluctuation
occurs.
|
Similarly,
if an issuer’s securities are traded on both the Mexican Stock Exchange and a
foreign securities exchange, the issuer must simultaneously file the information
that it is required to file pursuant to the laws and regulations of the foreign
jurisdiction with the National Banking and Securities Commission and the
Mexican
Stock Exchange.
The
new
Mexican Securities Market Law has not substantially modified the reporting
obligations of issuers of equity securities listed on the Mexican Stock
Exchange.
Suspension
of Trading
In
addition to the authority of the Mexican Stock Exchange under its internal
regulations as described above, pursuant to the rules of National Banking
and
Securities Commission, the National Banking and Securities Commission and
the
Mexican Stock Exchange may suspend trading in an issuer’s securities:
·
|
if
the issuer does not disclose a material event;
or
|
·
|
upon
price or volume volatility or changes in the offer or demand in
respect of
the relevant securities that are not consistent with the historic
performance of the securities and cannot be explained solely through
information made publicly available pursuant to the National Banking
and
Securities Commission’s general
regulations.
|
The
Mexican Stock Exchange must immediately inform the National Banking and
Securities Commission and the general public of any such suspension. An issuer
may request that the National Banking and Securities Commission or the Mexican
Stock Exchange resume trading, provided it demonstrates that the causes
triggering the suspension have been resolved and that it is in full compliance
with the periodic reporting requirements under applicable law. If an issuer’s
request has been granted, the Mexican Stock Exchange will determine the
appropriate mechanism to resume trading. If trading in an issuer’s securities is
suspended for more than 20 business days and the issuer is authorized to
resume
trading without conducting a public offering, the issuer must disclose via
SEDI
a description of the causes that resulted in the suspension and reasons why
it
is now authorized to resume trading before trading may resume.
Insider
Trading, Trading Restrictions and Tender Offers
The
Mexican Securities Market Law contains specific regulations regarding insider
trading, including, (i) the requirement that persons in possession of
information deemed privileged abstain (x) from trading in the relevant issuer’s
securities, (y) from making recommendations to third parties to trade in
such
securities and (z) from trading in options and derivatives of the underlying
security issued by such entity, and (ii) providing a counterparty not privy
to
insider information with a right of indemnification from the party possessing
privileged information.
In
addition, if an issuer’s securities are traded on both the Mexican Stock
Exchange and a foreign securities exchange, the issuer must simultaneously
file
with the National Banking and Securities Commission the information that
it is
required to file pursuant to the rules and regulations of the foreign securities
exchange.
Pursuant
to the Mexican Securities Market Law, the following persons must notify the
National Banking and Securities Commission of any transactions undertaken
by a
listed issuer:
·
|
members
of a listed issuer’s board of
directors;
|
·
|
shareholders
controlling 10% or more of a listed issuer’s outstanding share
capital;
|
·
|
groups
controlling 10% or more of a listed issuer’s outstanding share capital;
and
|
In
addition, under the Mexican Securities Market Law insiders must abstain from
purchasing or selling securities of the issuer within 90 days from the last
sale
or purchase, respectively.
Shareholders
of issuers listed on the Mexican Stock Exchange must notify the National
Banking
and Securities Commission before effecting transactions outside of the Mexican
Stock Exchange that result in a transfer of 10% or more of an issuer’s share
capital. Transferring shareholders must also inform the National Banking
and
Securities Commission of the effect of the transactions within three days
following their completion, or, alternatively, that the transactions have
not
been consummated. The
National
Banking and Securities Commission will notify the Mexican Stock Exchange
of
these transactions on a no-name basis.
The
Mexican Securities Market Law also provides that, for purposes of determining
any of the foregoing percentages, convertible securities, warrants and
derivatives must be taken into account.
Subject
to certain exceptions, any acquisition of a public company’s shares that results
in the acquiror owning 10% or more, but less than 30%, of an issuer’s
outstanding share capital must be publicly disclosed to the National Banking
and
Securities Commission and the Mexican Stock Exchange by no later than one
business
day
following the acquisition. Any acquisition by an insider that results in
the
insider holding an additional 5% or more of a public company’s outstanding share
capital must also be publicly disclosed to the National Banking and Securities
Commission and the Mexican Stock Exchange no later than the day following
the
acquisition. Some insiders must also notify the National Banking and Securities
Commission of share purchases or sales that occur within a three-month or
five-day term and that exceed certain value thresholds. The Mexican Securities
Market Law requires that convertible securities, warrants and derivatives
to be
settled in kind be taken into account in the calculation of share ownership
percentages.
The
Mexican Securities Market Law contains provisions relating to public tender
offers and certain other share acquisitions occurring in Mexico. Under the
law,
tender offers may be voluntary or mandatory. Voluntary tender offers, or
offers
where there is no requirement that they be initiated or completed, are required
to be made
pro
rata
.
Any
intended acquisition of a public company’s shares that results in the acquiror
owning 30% or more, but less than a percentage that would result in the acquiror
obtaining control, of a company’s voting shares requires the acquiror to make a
mandatory tender offer for (i) the greater of the percentage of the share
capital intended to be acquired or (ii) 10% of the company’s outstanding
share capital stock. Finally, any intended acquisition of a public company’s
shares that is aimed at obtaining voting control requires the potential acquiror
to make a mandatory tender offer for 100% of the company’s outstanding share
capital (however, under certain circumstances the National Banking and
Securities Commission may permit an offer for less than 100%). The tender
offer
must be made at the same price to all shareholders and classes of shares.
The
board of directors, with the advice of the audit committee, must issue its
opinion of any tender offer resulting in a change of control, which opinion
must
take minority shareholder rights into account and which may be accompanied
by an
independent fairness opinion.
Under
the
Mexican Securities Market Law, all tender offers must be open for at least
20
business days and not 15 business days as required by the general rules and
purchases thereunder are required to be made pro rata to all tendering
shareholders. The Mexican Securities Market Law also permits the payment
of
certain amounts to controlling shareholders over and above the offering price
if
these amounts are (i) fully disclosed, (ii) approved by the board of
directors and (iii) paid in connection with non-compete or similar
obligations. The law also provides exceptions to the mandatory tender offer
requirements and specifically sets forth remedies for non-compliance with
these
tender offer rules (e.g., suspension of voting rights, possible annulment
of
purchases, etc.) and other rights available to prior shareholders of the
issuer.
Anti-Takeover
Protections
The
Mexican Securities Market Law provides that public companies may include
anti-takeover provisions in their by-laws if such provisions (i) are approved
by
a majority of the shareholders, with no more than 5% of the outstanding capital
shares voting against such provisions, (ii) do not exclude any shareholder(s)
or
group of shareholder(s) and (iii) do not restrict, in an absolute manner,
a
change of control.
Market
Price of Series B shares
Our
series B shares are traded on the Mexican Stock Exchange under the symbol
“SIMEC.B”. As of October 24, 2006, the date of our annual shareholders meeting,
there were 421,214,706 series B shares issued and outstanding. As of such
date,
13,735,221
shares
were held in the United States in the form of ADSs by 22 record holders,
and
407,479,485 shares were held in Mexico by approximately 46 record holders.
The
ADSs are evidenced by ADRs issued by The Bank of New York (the “Depositary”), as
depositary under a Deposit Agreement, dated as of July 8, 1993, as amended,
among us, the Depositary and the holders from time to time of ADRs. Because
certain of the shares are held by nominees, the number of record holders
may not
be representative of the number of beneficial owners.
Share
Price Information
The
following table sets forth for the periods indicated the high and low sales
prices expressed in historical pesos of a series B shares on the Mexican
Stock
Exchange and the high and low sales price expressed in dollars of the ADSs
on
the American Stock Exchange. (Table adjusted to reflect May 30, 2006 3 for
1
stock split.)
|
|
Mexican
Stock
Exchange
|
|
American
Stock
Exchange
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
2002
|
|
|
0.89
|
|
|
0.50
|
|
|
1.75
|
|
|
0.80
|
|
2003
|
|
|
37.50
|
|
|
10.20
|
|
|
5.34
|
|
|
0.85
|
|
2004
|
|
|
95.99
|
|
|
22.40
|
|
|
8.75
|
|
|
2.10
|
|
2005
|
|
|
95.00
|
|
|
40.75
|
|
|
8.70
|
|
|
3.63
|
|
2006
|
|
|
84.00
|
|
|
22.00
|
|
|
21.64
|
|
|
3.96
|
|
2005
|
First
Quarter
|
|
|
95.00
|
|
|
49.99
|
|
|
8.70
|
|
|
4.24
|
|
Second
Quarter
|
|
|
54.00
|
|
|
40.75
|
|
|
4.80
|
|
|
3.63
|
|
Third
Quarter
|
|
|
56.60
|
|
|
42.30
|
|
|
5.45
|
|
|
3.91
|
|
Fourth
Quarter
|
|
|
49.00
|
|
|
42.50
|
|
|
4.80
|
|
|
3.77
|
|
2006
|
|
First
Quarter
|
|
|
80.00
|
|
|
43.28
|
|
|
7.48
|
|
|
3.96
|
|
Second
Quarter
|
|
|
84.00
|
|
|
22.00
|
|
|
9.49
|
|
|
5.55
|
|
Third
Quarter
|
|
|
57.50
|
|
|
25.00
|
|
|
15.90
|
|
|
6.60
|
|
Fourth
Quarter
|
|
|
79.40
|
|
|
50.00
|
|
|
21.64
|
|
|
13.50
|
|
2006
|
July
|
|
|
37.10
|
|
|
25.00
|
|
|
10.34
|
|
|
6.60
|
|
August
|
|
|
45.50
|
|
|
34.50
|
|
|
12.66
|
|
|
9.47
|
|
September
|
|
|
57.50
|
|
|
43.09
|
|
|
15.90
|
|
|
11.77
|
|
October
|
|
|
67.41
|
|
|
50.32
|
|
|
19.03
|
|
|
13.50
|
|
November
|
|
|
79.40
|
|
|
62.00
|
|
|
21.64
|
|
|
17.00
|
|
December
|
|
|
77.50
|
|
|
50.00
|
|
|
21.00
|
|
|
13.57
|
|
On
February 20, 2003, we effected a 1 for 20 reverse stock split. On May 30,
2006,
we effected a 3 for 1 stock split. Following the May 30 split, we adjusted
the ADS to share ratio from one ADS representing one share to one ADS
representing three shares.
A
vote by
the majority of our shareholders present at a shareholders’ meeting, generally
upon a recommendation of our board of directors, determines the declaration,
amount and payment of dividends. The declaration and payment of dividends
is
subject to limitations under Mexican law and in case of the existence of
debt
instruments, to any covenants contained in any of such instruments. Our
controlling shareholder, Industrias CH, currently has the power and, after
giving effect to the combined offering, will continue to have the power to
determine our dividend policy. See “Risk Factors - Our controlling shareholder,
Industrias CH, is able to exert significant influence on our business and
policies and its interests may differ from those of other shareholders” and
“Major Shareholders”.
We
have
not paid dividends in the past. Because we intend to devote a substantial
portion of our future cash flows to funding our expansion plan and working
capital requirements, we do not currently expect to pay dividends in the
near
future. We may consider paying dividends in the future based on a number
of
factors, including our results of operations, financial condition, cash
requirements, tax considerations, future prospects and other factors that
our
board of directors and our shareholders may deem relevant, including the
terms
and conditions of any future debt instruments that might limit our ability
to
pay dividends.
The
following tables present our and Republic’s unaudited pro forma condensed
combined pro forma financial information reflecting our and Republic’s combined
accounts on a pro forma basis as of and for the periods indicated.
Also
included in this prospectus, beginning on Page F-136, are our unaudited combined
consolidated pro forma statements of income reflecting our and Republic’s
combined accounts on a pro forma basis for the year ended December 31, 2005
and
as of and for the six-month period ended June 30, 2005.
All
pro
forma financial information included in this prospectus is unaudited and
may not
be indicative of the results of operations that actually would have been
achieved and we acquired Republic at the beginning of the periods presented
and
do not purport to be indicative of future results. The information in the
following tables should also be read together with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”.
The
unaudited pro forma condensed combined financial information is prepared
in
accordance with Mexican GAAP, which differs in certain respects from U.S.
GAAP.
For
additional information regarding financial information presented in this
prospectus, see “Presentation of Financial and Other Information”.
|
|
Pro
Forma
|
|
Actual
|
|
|
|
Year
Ended December 31,
|
|
Six
Months Ended June 30,
|
|
|
|
2005
|
|
2005
(1)
|
|
2005
|
|
2006
|
|
2006
(1)
|
|
|
|
(Millions
of constant
June
30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
(Millions
of constant
June
30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
|
|
(except
per share and per ADS data)
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
22,380
|
|
|
1,964
|
|
|
12,388
|
|
|
11,912
|
|
|
1,045
|
|
Direct
cost of sales
|
|
|
18,556
|
|
|
1,628
|
|
|
9,987
|
|
|
9,682
|
|
|
849
|
|
Marginal
profit
|
|
|
3,824
|
|
|
336
|
|
|
2,401
|
|
|
2,230
|
|
|
196
|
|
Indirect
manufacturing, selling, general and administrative
expenses
|
|
|
1,246
|
|
|
109
|
|
|
707
|
|
|
462
|
|
|
41
|
|
Depreciation
and amortization
|
|
|
339
|
|
|
30
|
|
|
144
|
|
|
202
|
|
|
18
|
|
Operating
income
|
|
|
2,239
|
|
|
196
|
|
|
1,550
|
|
|
1,566
|
|
|
137
|
|
Financial
income (expense)
|
|
|
(234
|
)
|
|
(21
|
)
|
|
(120
|
)
|
|
45
|
|
|
4
|
|
Other
income (expense), net
|
|
|
45
|
|
|
4
|
|
|
34
|
|
|
33
|
|
|
3
|
|
Income
before taxes, employee profit sharing and minority
interest
|
|
|
2,050
|
|
|
180
|
|
|
1,464
|
|
|
1,644
|
|
|
144
|
|
Income
tax expense and employee profit
sharing
|
|
|
390
|
|
|
34
|
|
|
323
|
|
|
105
|
|
|
9
|
|
Net
income (loss)
|
|
|
1,660
|
|
|
146
|
|
|
1,141
|
|
|
1,539
|
|
|
135
|
|
Minority
interest
|
|
|
198
|
|
|
17
|
|
|
196
|
|
|
193
|
|
|
17
|
|
Majority
interest
|
|
|
1,462
|
|
|
128
|
|
|
945
|
|
|
1,346
|
|
|
118
|
|
Net
income per share
|
|
|
4
|
|
|
0.31
|
|
|
2
|
|
|
3
|
|
|
0.28
|
|
Net
income per ADS
(2)
|
|
|
11
|
|
|
0.93
|
|
|
7
|
|
|
10
|
|
|
0.84
|
|
Weighted
average shares outstanding (thousands)
(5)
|
|
|
413,790
|
|
|
413,790
|
|
|
405,209
|
|
|
419,451
|
|
|
419,451
|
|
|
|
Pro
Forma
|
|
Actual
|
|
|
|
Year
Ended December 31,
|
|
Six
Months Ended June 30,
|
|
|
|
2005
|
|
2005
(1)
|
|
2005
|
|
2006
|
|
2006
(1)
|
|
|
|
(Millions
of constant
June
30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
(Millions
of constant
June
30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
|
|
(except
per share and per ADS data)
|
|
Weighted
average ADSs
outstanding
(thousands)
|
|
|
137,930
|
|
|
137,930
|
|
|
135,070
|
|
|
139,817
|
|
|
139,817
|
|
U.S.
GAAP including effects of inflation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
22,380
|
|
|
1,964
|
|
|
12,388
|
|
|
11,912
|
|
|
1,045
|
|
Operating
income
(4)
|
|
|
2,239
|
|
|
196
|
|
|
1,550
|
|
|
1,660
|
|
|
146
|
|
Minority
interest
|
|
|
198
|
|
|
17
|
|
|
196
|
|
|
193
|
|
|
17
|
|
Net
Income
|
|
|
1,462
|
|
|
128
|
|
|
945
|
|
|
1,386
|
|
|
122
|
|
Income
per share
(5)
|
|
|
4
|
|
|
0.37
|
|
|
2
|
|
|
3
|
|
|
0.28
|
|
Income
per ADS
|
|
|
11
|
|
|
1
|
|
|
7
|
|
|
10
|
|
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
53
|
|
|
5
|
|
|
6
|
|
|
167
|
|
|
15
|
|
Adjusted
EBITDA
(6)
|
|
|
2,578
|
|
|
226
|
|
|
1,694
|
|
|
1,768
|
|
|
155
|
|
Depreciation
and amortization from continuing operations
|
|
|
339
|
|
|
30
|
|
|
144
|
|
|
202
|
|
|
18
|
|
Operational
information:
|
|
|
|
|
|
|
|
|
|
|
|
Annual
Installed
capacity
(thousands
of tons)
|
|
|
2,847
|
|
|
2,847
|
|
|
1,210
|
|
|
2,902
|
|
|
2,902
|
|
Tons
shipped
|
|
|
2,683
|
|
|
2,683
|
|
|
1,400
|
|
|
1,369
|
|
|
1,369
|
|
Mexico
|
|
|
910
|
|
|
910
|
|
|
449
|
|
|
461
|
|
|
461
|
|
United
States, Canada and others
|
|
|
1,773
|
|
|
1,773
|
|
|
951
|
|
|
908
|
|
|
908
|
|
SBQ
steel
|
|
|
1,936
|
|
|
1,936
|
|
|
1,046
|
|
|
997
|
|
|
997
|
|
Structural
and other steel products
|
|
|
747
|
|
|
747
|
|
|
354
|
|
|
372
|
|
|
372
|
|
Per
ton:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales per ton
|
|
|
8,341
|
|
|
732
|
|
|
8,849
|
|
|
8,699
|
|
|
763
|
|
Cost
of sales per ton
|
|
|
6,916
|
|
|
607
|
|
|
7,134
|
|
|
7,070
|
|
|
620
|
|
Operating
income per Ton
|
|
|
835
|
|
|
73
|
|
|
1,107
|
|
|
1,144
|
|
|
100
|
|
Adjusted
EBITDA per ton
|
|
|
961
|
|
|
84
|
|
|
1,210
|
|
|
1,291
|
|
|
113
|
|
Number
of employees
|
|
|
4,360
|
|
|
4,360
|
|
|
4,433
|
|
|
4,340
|
|
|
4,340
|
|
(1)
Peso
amounts have been translated into U.S. dollars solely for the convenience
of the
reader, at the rate of Ps. 11.3973 per $1.00, the interbank transactions
rate in
effect on June 30, 2006.
(2)
Due
to a
stock split effective May 30, 2006, one ADS represents three series B shares;
previously one ADS represented one series B share.
(3)
Long-term
debt includes amounts relating to deferred taxes.
(4)
Reflects
a reclassification in 2005 from other expenses under Mexican GAAP to operating
expenses under U.S. GAAP of Ps. 38 million due to the cancellation of technical
assistance.
(5)
For
U.S.
GAAP and Mexican GAAP purposes, the weighted average shares outstanding were
calculated to give effect to the stock split described in Note 13(a) to the
audited financial statements.
(6)
Adjusted
EBITDA is not a financial measure computed under Mexican or U.S. GAAP. Adjusted
EBITDA derived from our Mexican GAAP financial information means Mexican
GAAP
net income (loss) excluding (i) depreciation and amortization, (ii) financial
income (expense), net (which is composed of net interest expense, foreign
exchange gain or loss and monetary position gain or loss), (iii) other income
(expense) and (iv) income tax expense and employee statutory profit-sharing
expense.
Adjusted
EBITDA does not represent, and should not be considered as, an alternative
to
net income, as an indicator of our operating performance, or as an alternative
to cash flow as an indicator of liquidity. In making such comparisons, however,
you should bear in mind that adjusted EBITDA is not defined and is not a
recognized financial measure under Mexican GAAP or U.S. GAAP and that it
may be
calculated differently by different companies and must be read in conjunction
with the explanations that accompany it. Adjusted EBITDA as presented in
this
table does not take into account our working capital requirements, debt service
requirements and other commitments.
We
believe that adjusted EBITDA can be useful to facilitate comparisons of
operating performance between periods and with other companies in our industry
because it excludes the effect of (i) depreciation and amortization, which
represents a non-cash charge to earnings, (ii) certain financing
costs,
which are significantly affected by external factors, including interest
rates,
foreign currency exchange rates, and inflation rates, which have little or
no
bearing on our operating performance, (iii) other income (expense) that are
not
constant operations and (iv) income tax expense and employee statutory
profit-sharing expense. However, adjusted EBITDA has certain material
limitations, including that (i) it does not include taxes, which are a necessary
and recurring part of our operations; (ii) it does not include depreciation
and
amortization, which, because we must utilize property, equipment and other
assets in order to generate revenues in our operations, is a necessary and
recurring part of our costs; (iii) it does not include comprehensive cost
of
financing, which reflects our cost of capital structure and assisted us in
generating revenue; and (iv) it does not include other income and expenses
that
are part of our net income. Therefore, any measure that excludes any or all
of
taxes, depreciation and amortization, comprehensive cost of financing and
other
income and expenses has material limitations.
Adjusted
EBITDA should not be considered in isolation or as a substitute for net income,
net cash flow from operating activities or net cash flow from investing and
financing activities. Reconciliation of net income to adjusted EBITDA is
as
follows:
|
|
Pro
Forma
|
|
|
Actual
|
|
|
|
Year
Ended December 31,
|
|
Six
Months Ended June 30,
|
|
|
|
2005
|
|
2005
|
|
2005
|
|
2006
|
|
2006
|
|
|
|
(Millions
of constant
June
30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
(Millions
of constant
June
30, 2006 pesos)
|
|
|
|
(Millions
of
dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
1,660
|
|
|
146
|
|
|
1,141
|
|
|
1,539
|
|
|
135
|
|
Depreciation
and amortization
|
|
|
339
|
|
|
30
|
|
|
144
|
|
|
202
|
|
|
18
|
|
Financial
income (expense)
|
|
|
(234
|
)
|
|
(20
|
)
|
|
(120
|
)
|
|
45
|
|
|
4
|
|
Income
tax expense and employee profit sharing
|
|
|
390
|
|
|
34
|
|
|
323
|
|
|
105
|
|
|
9
|
|
Other
income (expense)
|
|
|
45
|
|
|
4
|
|
|
34
|
|
|
33
|
|
|
3
|
|
Adjusted
EBITDA
|
|
|
2,578
|
|
|
226
|
|
|
1,694
|
|
|
1,768
|
|
|
155
|
|
The
following tables present our summary consolidated financial information for
each
of the periods indicated. This information should be read in conjunction
with,
and is qualified in its entirety by reference to, our financial statements,
including the notes thereto, as well as “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included elsewhere in this
prospectus. Our financial statements are prepared in accordance with Mexican
GAAP, which differs in certain respects from U.S. GAAP. Note 19 to our audited
consolidated financial statements and Note 16 to our unaudited condensed
consolidated interim financial statements for the six-month period ended
June
30, 2006 provide a summary of the principal differences between Mexican GAAP
and
U.S. GAAP as they relate to our business, along with a reconciliation to
U.S.
GAAP of net income and stockholders’ equity, a statement of changes in
stockholders’ equity and, for the unaudited condensed consolidated interim
financial statements, a statement of cash flows under U.S. GAAP.
Mexican
GAAP provides for the recognition of certain effects of inflation by restating
non-monetary assets and non-monetary liabilities using the Mexican National
Consumer Price Index, restating the components of stockholders’ equity using the
Mexican National Consumer Price Index and recording gains or losses in
purchasing power from holding monetary liabilities or assets. Mexican GAAP
also
requires the restatement of all financial statements to constant Mexican
pesos
as of the date of the most recent balance sheet presented. Our audited
consolidated financial statements and all other financial information contained
herein with respect to the years ended December 31, 2001, 2002, 2003, 2004
and
2005 are accordingly presented in constant pesos with purchasing power as
of
June 30, 2006, unless otherwise noted. Our unaudited interim financial
statements for the six-month period ended June 30, 2006, which include
comparative unaudited financial information for the six-month period ended
June
30, 2005, and all other financial information presented herein, with respect
to
the six-month periods ended June 30, 2006 and 2005 are presented in constant
pesos with purchasing power as of June 30, 2006. Our results of operations
for
the six-month period ended June 30, 2006 are not necessarily indicative of
our
expected results of operations for the year ended December 31, 2006 and should
not be construed as such.
The
financial information includes the consolidation of Republic from July 22,
2005 and the consolidation of the Atlax Acquisition from August 1, 2004.
Period
to period comparison of our results of operations and financial condition
is
made more difficult as a result of the inclusion of financial information
relating to the acquisition of Republic only from July 22, 2005 and of
financial information relating to the Atlax Acquisition only from August
1,
2004.
We
have
derived the selected financial and operating information set forth below
in part
from our consolidated financial statements, which have been reported on by
KPMG
Cárdenas, Dosal, S.C. for the fiscal years ended December 31, 2001, 2002, 2003
and 2004 and by Mancera S.C., a Member Practice of Ernst & Young Global, an
independent, registered public accounting firm for the fiscal year ended
December 31, 2005. In so doing, Mancera, S.C. has relied on the audited
consolidated financial statements of our subsidiary SimRep and its subsidiaries,
reported on by BDO Hernández Marrón y Cía., S.C., a member firm of BDO
International.
|
|
Year
Ended December 31,
|
|
Six
Months Ended June 30,
|
|
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2005
(1)
|
|
2005
|
|
2006
|
|
2006
(1)
|
|
|
|
(Millions
of constant
June
30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
(Millions
of constant June 30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
|
|
(except
per share and per ADS data)
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
2,288
|
|
|
2,403
|
|
|
3,047
|
|
|
5,910
|
|
|
12,967
|
|
|
1,138
|
|
|
3,574
|
|
|
11,912
|
|
|
1,045
|
|
Direct
cost of sales
|
|
|
1,536
|
|
|
1,608
|
|
|
2,002
|
|
|
3,435
|
|
|
10,371
|
|
|
910
|
|
|
2,327
|
|
|
9,682
|
|
|
849
|
|
Marginal
profit
|
|
|
752
|
|
|
795
|
|
|
1,045
|
|
|
2,475
|
|
|
2,596
|
|
|
228
|
|
|
1,247
|
|
|
2,230
|
|
|
196
|
|
Indirect
manufacturing, selling, general and administrative
expenses
|
|
|
376
|
|
|
327
|
|
|
308
|
|
|
371
|
|
|
692
|
|
|
61
|
|
|
244
|
|
|
462
|
|
|
41
|
|
Depreciation
and amortization
|
|
|
160
|
|
|
177
|
|
|
199
|
|
|
222
|
|
|
326
|
|
|
29
|
|
|
131
|
|
|
202
|
|
|
18
|
|
Operating
income
|
|
|
216
|
|
|
291
|
|
|
538
|
|
|
1,882
|
|
|
1,578
|
|
|
138
|
|
|
872
|
|
|
1,566
|
|
|
137
|
|
Financial
income (expense)
|
|
|
6
|
|
|
(141
|
)
|
|
(27
|
)
|
|
(38
|
)
|
|
(145
|
)
|
|
(13
|
)
|
|
(35
|
)
|
|
45
|
|
|
4
|
|
Other
income (expense), net
|
|
|
73
|
|
|
(41
|
)
|
|
(32
|
)
|
|
(38
|
)
|
|
55
|
|
|
5
|
|
|
8
|
|
|
33
|
|
|
3
|
|
Income
before taxes, employee profit sharing and minority interest
|
|
|
295
|
|
|
109
|
|
|
479
|
|
|
1,806
|
|
|
1,488
|
|
|
131
|
|
|
845
|
|
|
1,644
|
|
|
144
|
|
Income
tax expense and employee profit
sharing
|
|
|
19
|
|
|
(25
|
)
|
|
159
|
|
|
344
|
|
|
191
|
|
|
17
|
|
|
98
|
|
|
105
|
|
|
9
|
|
Net
income (loss)
|
|
|
276
|
|
|
134
|
|
|
320
|
|
|
1,462
|
|
|
1,297
|
|
|
114
|
|
|
747
|
|
|
1,539
|
|
|
135
|
|
Minority
interest
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
17
|
|
|
2
|
|
|
0
|
|
|
193
|
|
|
17
|
|
Majority
interest
|
|
|
276
|
|
|
134
|
|
|
320
|
|
|
1,462
|
|
|
1,280
|
|
|
112
|
|
|
747
|
|
|
1,346
|
|
|
118
|
|
Net
income per share
|
|
|
2
|
|
|
0.4
|
|
|
1
|
|
|
4
|
|
|
3
|
|
|
0.27
|
|
|
2
|
|
|
3
|
|
|
0.28
|
|
Net
income per ADS
(2)
|
|
|
5
|
|
|
1
|
|
|
3
|
|
|
11
|
|
|
9
|
|
|
0.81
|
|
|
6
|
|
|
10
|
|
|
0.84
|
|
Weighted
average shares outstanding (thousands)
(5)
|
|
|
164,448
|
|
|
299,901
|
|
|
357,159
|
|
|
398,916
|
|
|
413,790
|
|
|
413,790
|
|
|
405,209
|
|
|
419,451
|
|
|
419,451
|
|
Weighted
average ADSs
outstanding
(thousands)
|
|
|
54,816
|
|
|
99,967
|
|
|
119,053
|
|
|
132,972
|
|
|
137,930
|
|
|
137,930
|
|
|
135,070
|
|
|
139,817
|
|
|
139,817
|
|
U.S.
GAAP including effects of inflation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
2,288
|
|
|
2,403
|
|
|
3,048
|
|
|
5,911
|
|
|
12,967
|
|
|
1,138
|
|
|
3,573
|
|
|
11,912
|
|
|
1,045
|
|
Direct
cost sales
|
|
|
1,530
|
|
|
1,612
|
|
|
2,007
|
|
|
3,429
|
|
|
10,375
|
|
|
910
|
|
|
2,329
|
|
|
9,594
|
|
|
842
|
|
Marginal
profit
|
|
|
758
|
|
|
791
|
|
|
1,041
|
|
|
2,482
|
|
|
2,592
|
|
|
228
|
|
|
1,244
|
|
|
2,318
|
|
|
203
|
|
Operating
income
(4)
|
|
|
200
|
|
|
255
|
|
|
544
|
|
|
1,865
|
|
|
1,544
|
|
|
135
|
|
|
875
|
|
|
1,660
|
|
|
146
|
|
Financial
income (expense)
|
|
|
7
|
|
|
(141
|
)
|
|
(27
|
)
|
|
(38
|
)
|
|
(145
|
)
|
|
(13
|
)
|
|
(35
|
)
|
|
45
|
|
|
4
|
|
Other
income (expense), net
|
|
|
657
|
|
|
(74
|
)
|
|
(32
|
)
|
|
(4
|
)
|
|
93
|
|
|
8
|
|
|
8
|
|
|
33
|
|
|
3
|
|
Income
before taxes, employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
profit
sharing and minority
interest
|
|
|
864
|
|
|
40
|
|
|
485
|
|
|
1,823
|
|
|
1,492
|
|
|
130
|
|
|
848
|
|
|
1,737
|
|
|
152
|
|
Income
tax expense (income)
|
|
|
69
|
|
|
(182
|
)
|
|
207
|
|
|
389
|
|
|
197
|
|
|
17
|
|
|
102
|
|
|
118
|
|
|
10
|
|
Income
before minority interest
|
|
|
795
|
|
|
222
|
|
|
278
|
|
|
1,434
|
|
|
1,295
|
|
|
113
|
|
|
746
|
|
|
1,619
|
|
|
142
|
|
Minority
interest
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
17
|
|
|
1
|
|
|
0
|
|
|
193
|
|
|
17
|
|
U.S.
GAAP adjustment on
minority
interest
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
40
|
|
|
3
|
|
Net
Income
|
|
|
795
|
|
|
222
|
|
|
278
|
|
|
1,434
|
|
|
1,278
|
|
|
112
|
|
|
746
|
|
|
1,426
|
|
|
125
|
|
Income
per share
(5)
|
|
|
5
|
|
|
1
|
|
|
1
|
|
|
4
|
|
|
3
|
|
|
0.27
|
|
|
2
|
|
|
3
|
|
|
0.30
|
|
Income
per ADS
|
|
|
14
|
|
|
2
|
|
|
2
|
|
|
11
|
|
|
9
|
|
|
0.81
|
|
|
6
|
|
|
10
|
|
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
5,557
|
|
|
5,035
|
|
|
6,570
|
|
|
9,306
|
|
|
14,588
|
|
|
1,280
|
|
|
9,531
|
|
|
16,439
|
|
|
1,442
|
|
Total
long-term liabilities
(3)
|
|
|
803
|
|
|
881
|
|
|
1,153
|
|
|
1,513
|
|
|
2,244
|
|
|
197
|
|
|
1,439
|
|
|
2,003
|
|
|
176
|
|
Total
stockholders’ equity
|
|
|
3,338
|
|
|
4,089
|
|
|
5,062
|
|
|
6,848
|
|
|
9,628
|
|
|
845
|
|
|
7,368
|
|
|
11,902
|
|
|
1,044
|
|
U.S.
GAAP including effects of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
Six
Months Ended June 30,
|
|
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2005
(1)
|
|
2005
|
|
2006
|
|
2006
(1)
|
|
|
|
(Millions
of constant
June
30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
(Millions
of constant June 30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
|
|
(except
per share and per ADS data)
|
|
inflation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
6,507
|
|
|
6,228
|
|
|
6,497
|
|
|
9,173
|
|
|
14,796
|
|
|
1,298
|
|
|
9,548
|
|
|
16,421
|
|
|
1,441
|
|
Total
long-term liabilities
(3)
|
|
|
803
|
|
|
914
|
|
|
1,097
|
|
|
1,476
|
|
|
2,303
|
|
|
202
|
|
|
1,426
|
|
|
1,974
|
|
|
173
|
|
Total
stockholders’ equity
|
|
|
3,949
|
|
|
4,338
|
|
|
5,045
|
|
|
6,752
|
|
|
7,969
|
|
|
699
|
|
|
7,442
|
|
|
9,613
|
|
|
843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
46
|
|
|
10
|
|
|
64
|
|
|
1,285
|
|
|
503
|
|
|
44
|
|
|
6
|
|
|
167
|
|
|
15
|
|
Adjusted
EBITDA
(6)
|
|
|
376
|
|
|
468
|
|
|
737
|
|
|
2,104
|
|
|
1,904
|
|
|
167
|
|
|
1,003
|
|
|
1,768
|
|
155
|
Depreciation
and amortization
from
continuing operations
|
|
|
160
|
|
|
177
|
|
|
199
|
|
|
222
|
|
|
326
|
|
|
29
|
|
|
131
|
|
|
202
|
|
|
18
|
|
Working
capital
|
|
|
(560
|
)
|
|
(11
|
)
|
|
1,023
|
|
|
1,968
|
|
|
4,063
|
|
|
356
|
|
|
2,907
|
|
|
5,854
|
|
514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operational
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
installed
capacity
(thousands
of tons)
|
|
|
730
|
|
|
730
|
|
|
730
|
|
|
1,210
|
|
|
2,847
|
|
|
2,847
|
|
|
1,210
|
|
|
2,902
|
|
2,902
|
Tons
shipped
(7)
|
|
|
561
|
|
|
609
|
|
|
628
|
|
|
773
|
|
|
1,708
|
|
|
1,708
|
|
|
524
|
|
|
1,369
|
|
1,369
|
Mexico
|
|
|
512
|
|
|
529
|
|
|
547
|
|
|
676
|
|
|
899
|
|
|
899
|
|
|
449
|
|
|
461
|
|
461
|
United
States, Canada and others
|
|
|
49
|
|
|
80
|
|
|
81
|
|
|
97
|
|
|
809
|
|
|
809
|
|
|
75
|
|
|
908
|
|
908
|
SBQ
steel
|
|
|
78
|
|
|
78
|
|
|
63
|
|
|
168
|
|
|
923
|
|
|
923
|
|
|
170
|
|
|
997
|
|
997
|
Structural
and other steel products
|
|
|
483
|
|
|
531
|
|
|
565
|
|
|
605
|
|
|
785
|
|
|
785
|
|
|
354
|
|
|
372
|
|
372
|
Per
ton:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales per ton
|
|
|
4,080
|
|
|
3,943
|
|
|
4,851
|
|
|
7,644
|
|
|
7,591
|
|
|
666
|
|
|
6,821
|
|
|
8,699
|
|
763
|
Cost
of sales per ton
|
|
|
2,740
|
|
|
2,639
|
|
|
3,187
|
|
|
4,442
|
|
|
6,072
|
|
|
533
|
|
|
4,441
|
|
|
7,070
|
|
620
|
Operating
income per Ton
|
|
|
385
|
|
|
476
|
|
|
857
|
|
|
2,435
|
|
|
924
|
|
|
81
|
|
|
1,666
|
|
|
1,144
|
|
100
|
Adjusted
EBITDA per ton
|
|
|
670
|
|
|
767
|
|
|
1,174
|
|
|
2,722
|
|
|
1,115
|
|
|
98
|
|
|
1,916
|
|
|
1,291
|
|
113
|
Number
of employees
|
|
|
1,386
|
|
|
1,333
|
|
|
1,288
|
|
|
2,018
|
|
|
4,360
|
|
|
4,360
|
|
|
1,975
|
|
|
4,340
|
|
4,340
|
(1)
Peso
amounts have been translated into U.S. dollars solely for the convenience
of the
reader, at the rate of Ps. 11.3973 per $1.00, the interbank transactions
rate in
effect on June 30, 2006 and at the rate of Ps. 10.7777 per $1.00, the
interbank transactions rate in effect on December 31, 2005.
(2)
Due
to a
stock split effective May 30, 2006, one ADS represents three series B shares;
previously one ADS represented one series B share.
(3)
Total
long-term liabilities include amounts relating to deferred taxes.
(4)
Reflects
a reclassification in 2005 from other expenses under Mexican GAAP to operating
expenses under U.S. GAAP of Ps. 38 million due to the cancellation of technical
assistance.
(5)
For
U.S.
GAAP and Mexican GAAP purposes, the weighted average shares outstanding were
calculated to give effect to the stock split described in Note 13(a) to the
Consolidated Financial Statements.
(6)
Adjusted
EBITDA is not a financial measure computed under Mexican or U.S. GAAP. Adjusted
EBITDA derived from our Mexican GAAP financial information means Mexican
GAAP
net income (loss) excluding (i) depreciation and amortization, (ii) financial
income (expense), net (which is composed of net interest expense, foreign
exchange gain or loss and monetary position gain or loss), (iii) other income
(expense) and (iv) income tax expense and employee statutory profit-sharing
expense.
Adjusted
EBITDA does not represent, and should not be considered as, an alternative
to
net income, as an indicator of our operating performance, or as an alternative
to cash flow as an indicator of liquidity. In making such comparisons, however,
you should bear in mind that adjusted EBITDA is not defined and is not a
recognized financial measure under Mexican GAAP or U.S. GAAP and that it
may be
calculated differently by different companies and must be read in conjunction
with the explanations that accompany it. Adjusted EBITDA as presented in
this
table does not take into account our working capital requirements, debt service
requirements and other commitments.
We
believe that adjusted EBITDA can be useful to facilitate comparisons of
operating performance between periods and with other companies in our industry
because it excludes the effect of (i) depreciation and amortization, which
represents a non-cash charge to earnings, (ii) certain financing costs, which
are significantly affected by external factors, including interest rates,
foreign currency exchange rates, and inflation rates, which have little or
no
bearing on our operating performance, (iii) other income (expense) that are
not
constant operations and (iv) income tax expense and employee statutory
profit-sharing expense. However, adjusted EBITDA has certain material
limitations, including that (i) it does not include taxes, which are a necessary
and recurring part of our operations; (ii) it does not include depreciation
and
amortization, which, because we must utilize property, equipment and other
assets in order to generate revenues in our operations, is a necessary and
recurring part of our costs; (iii) it does not include comprehensive cost
of
financing, which reflects our cost of capital structure and assisted us in
generating revenue; and (iv) it does not include other income and expenses
that
are part of our net income. Therefore, any measure that excludes any or all
of
taxes, depreciation and amortization, comprehensive cost of financing and
other
income and expenses has material limitations.
Adjusted
EBITDA should not be considered in isolation or as a substitute for net income,
net cash flow from operating activities or net cash flow from investing and
financing activities. Reconciliation of net income to adjusted EBITDA is
as
follows:
|
|
Year
Ended December 31,
|
|
Six
Months Ended June 30,
|
|
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2005
(1)
|
|
2005
|
|
2006
|
|
2006
(1)
|
|
|
|
(Millions
of constant
June
30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
(Millions
of constant June 30, 2006 pesos)
|
|
(Millions
of
dollars)
|
|
|
|
(except
per share and per ADS data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
276
|
|
|
134
|
|
|
320
|
|
|
1,462
|
|
|
1,297
|
|
|
114
|
|
|
747
|
|
|
1,539
|
|
|
135
|
|
Depreciation
and amortization
|
|
|
160
|
|
|
177
|
|
|
199
|
|
|
222
|
|
|
326
|
|
|
28
|
|
|
131
|
|
|
202
|
|
|
18
|
|
Financial
income (expense)
|
|
|
6
|
|
|
(141
|
)
|
|
(27
|
)
|
|
(38
|
)
|
|
(145
|
)
|
|
(13
|
)
|
|
(35
|
)
|
|
45
|
|
|
4
|
|
Income
tax expense and employee profit sharing
|
|
|
19
|
|
|
(25
|
)
|
|
159
|
|
|
344
|
|
|
191
|
|
|
17
|
|
|
98
|
|
|
105
|
|
|
9
|
|
Other
income (expense)
|
|
|
73
|
|
|
(41
|
)
|
|
(32
|
)
|
|
(38
|
)
|
|
55
|
|
|
5
|
|
|
8
|
|
|
33
|
|
|
3
|
|
Adjusted
EBITDA
|
|
|
376
|
|
|
468
|
|
|
737
|
|
|
2,104
|
|
|
1,904
|
|
|
167
|
|
|
1,003
|
|
|
1,768
|
|
|
155
|
|
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion is derived from our audited financial statements, which
are
presented elsewhere in this prospectus. This discussion does not include
all of
the information included in our financial statements. You should read our
financial statements to gain a better understanding of our business and our
historical results of operations.
We
have prepared our financial statements in accordance with Mexican GAAP, which
differs in certain respects from U.S. GAAP. See Note 19 to our audited financial
statements for the years ended December 31, 2003, 2004 and 2005 and Note
16
to
our unaudited condensed consolidated financial statements for the six-month
period ended June 30, 2006 for a summary of the principal differences
between Mexican GAAP and U.S. GAAP as they relate to us and a reconciliation
to
U.S. GAAP of net income and stockholders’ equity, a statement of changes in
stockholders’ equity and, in our unaudited condensed consolidated interim
financial statements, a statement of cash flows under U.S. GAAP. Our audited
financial statements and all other financial information contained herein
with
respect to the years ended December 31, 2003, 2004 and 2005 are presented
in
constant pesos with purchasing power as of June 30, 2006, unless otherwise
noted. Our unaudited
consolidated
financial statements for the six-month period ended June 30, 2006, which
include
comparative unaudited financial information for the six-month period ended
June
30, 2005, and all other financial information presented below with respect
to
the six-month periods ended June 30, 2006 and 2005 are presented in constant
pesos with purchasing power as of June 30, 2006, unless otherwise noted.
Our
financial statements and the corresponding discussion below includes the
consolidation of Republic from July 22, 2005 and the consolidation of the
Atlax Acquisition from August 1, 2004. Period to period comparison of our
results of operations and financial condition may be difficult as a result
of
the inclusion of the Republic financial information only from July 22, 2005
and of the Atlax Acquisition financial information only from August 1,
2004.
Overview
We
are
producers of SBQ and structural steel products. Accordingly, our net sales
and
profitability are highly dependent on market conditions in the steel industry
which is greatly influenced by general economic conditions in North America
and
elsewhere. As a result of the significant competition in the steel industry
and
the commodity-like nature of some of our products, we have limited pricing
power
over many of our products. The North American and global steel markets influence
finished steel product prices. Nevertheless, the majority of our products
are
SBQ products for which competition is limited, therefore generating somewhat
higher margins as compared with our more commoditized steel products. We
attempt
to adjust the mix of our product output toward higher margin products to
the
extent that we are able to do so, and we also adjust our overall product
levels
based on the product demand and marginal profitability of doing so.
We
focus
on controlling our direct cost of sales as well as our indirect manufacturing,
selling, general and administrative expenses. Our direct cost of sales largely
consist of the costs of acquiring the raw materials necessary to manufacture
steel, primarily scrap and iron ore. Market supply and demand generally
determine scrap and iron ore prices, and, as a result, we have limited ability
to influence their cost or the costs of other raw materials, including energy
costs.
There
is
a correlation between the prices of scrap and iron ore and finished product
prices, although the degree and timing of this correlation varies from time
to
time, so we may not always be able to fully pass along scrap, iron ore and
other
raw material price increases to our customers. Therefore, our ability to
decrease our direct cost of sales as a percentage
of
net
sales is largely dependent on increasing our productivity. Our ability to
control indirect manufacturing, selling, general and administrative expenses,
which do not correlate to net sales as closely as direct costs of sales do,
is a
key element of our profitability.
Production
costs at our U.S. facilities are higher than those in our facilities in Mexico
principally due to the higher cost of labor and the higher cost of ferroalloys
used to manufacture SBQ steel, which is the only steel product that we produce
in the United States.
Sales
Volume, Price and Cost Data, 2005 - 2003
|
|
Year
ended December 31,
|
|
Six
months ended
June
30
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2005
|
|
2006
|
|
Shipments
(thousands of tons)
|
|
|
628
|
|
|
773
|
|
|
1,708
|
|
|
524
|
|
|
1,369
|
|
Guadalajara
and Mexicali
|
|
|
628
|
|
|
617
|
|
|
617
|
|
|
311
|
|
|
307
|
|
Apizaco
and Cholula
|
|
|
-
|
|
|
156
|
|
|
416
|
|
|
213
|
|
|
210
|
|
Republic
facilities
|
|
|
-
|
|
|
-
|
|
|
675
|
|
|
0
|
|
|
852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales (Ps. mm)
|
|
|
3,047
|
|
|
5,910
|
|
|
12,967
|
|
|
3,574
|
|
|
11,912
|
|
Guadalajara
and Mexicali
|
|
|
3,047
|
|
|
4,669
|
|
|
3,957
|
|
|
2,101
|
|
|
2,107
|
|
Apizaco
and Cholula
|
|
|
-
|
|
|
1,241
|
|
|
2,750
|
|
|
1,473
|
|
|
1,439
|
|
Republic
facilities
|
|
|
-
|
|
|
-
|
|
|
6,260
|
|
|
0
|
|
|
8,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
Cost of Sales
(Ps.
mm)
|
|
|
2,002
|
|
|
3,435
|
|
|
10,371
|
|
|
2,327
|
|
|
9,682
|
|
Guadalajara
and Mexicali
|
|
|
2,002
|
|
|
2,567
|
|
|
2,442
|
|
|
1,273
|
|
|
1,204
|
|
Apizaco
and Cholula
|
|
|
-
|
|
|
868
|
|
|
2,028
|
|
|
1,054
|
|
|
1,012
|
|
Republic
facilities
|
|
|
-
|
|
|
-
|
|
|
5,901
|
|
|
0
|
|
|
7,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Price per Ton (Ps.)
|
|
|
4,851
|
|
|
7,644
|
|
|
7,591
|
|
|
6,821
|
|
|
8,699
|
|
Guadalajara
and Mexicali
|
|
|
4,851
|
|
|
7,567
|
|
|
6,413
|
|
|
6,756
|
|
|
6,863
|
|
Apizaco
and Cholula
|
|
|
-
|
|
|
7,955
|
|
|
6,611
|
|
|
6,915
|
|
|
6,852
|
|
Republic
facilities
|
|
|
-
|
|
|
-
|
|
|
9,274
|
|
|
0
|
|
|
9,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Cost per Ton (Ps.)
|
|
|
3,187
|
|
|
4,442
|
|
|
6,072
|
|
|
4,441
|
|
|
7,070
|
|
Guadalajara
and Mexicali
|
|
|
3,187
|
|
|
4,160
|
|
|
3,958
|
|
|
4,093
|
|
|
3,922
|
|
Apizaco
and Cholula
|
|
|
-
|
|
|
5,564
|
|
|
4,875
|
|
|
4,948
|
|
|
4,819
|
|
Republic
facilities
|
|
|
-
|
|
|
-
|
|
|
8,742
|
|
|
0
|
|
|
9,819
|
|
Our
results are affected by general global trends in the steel industry and by
the
economic conditions in the countries in which we operate and in other steel
producing countries. Our results are also affected by the specific performance
of the automotive, non-residential construction, industrial equipment, tooling
equipment and other related industries. Our profitability is also impacted
by
events that affect the price and availability of raw materials and energy
inputs
needed for our operations. The variables and trends mentioned below could
also
affect our results and profitability.
Our
primary source of revenue is the sale of SBQ steel and structural steel
products.
In
August
2004, we completed the Atlax Acquisition. In July 2005, we and our controlling
shareholder, Industrias CH, completed the acquisition of Republic. These
acquisitions allowed us to become the leading producer of SBQ steel in North
America and the leading producer of structural and light structural steel
in
Mexico. We expect the sale of SBQ steel, structural steel and other steel
products to continue to be our primary source of revenue. The markets for
our
products are highly competitive and highly dependent on developments in global
markets for those products. The main competitive factors are price, product
quality and customer relationships and service.
Our
results are affected by economic activity, steel consumption and end-market
demand for steel products
.
Our
results of operations depend largely on macroeconomic conditions in North
America. Historically, there has been a strong correlation between the annual
rate of steel consumption and the annual change in gross domestic products
(“GDP”) in the Mexican, U.S. and Canadian markets.
We
sell
our steel products to the construction, automotive, manufacturing and other
related industries. These industries are generally cyclical, and their demand
for steel is impacted by the stage of their industry market cycles and the
country’s economic performance. In 2004 and 2005, Mexico’s GDP increased 4.2%
and 3.0%, respectively. In 2004 and 2005, the U.S. GDP increased 3.9% and
3.2%,
respectively. Recession or a deterioration in economic conditions in the
countries in which we operate could adversely affect our results
Our
results are affected by international steel prices and trends in the global
steel industry
.
Steel
prices are generally set by reference to world steel prices, which are
determined by global supply and demand trends. As a result of general excess
capacity in the industry, the world steel industry was previously subject
to
substantial downward pricing pressure, which negatively impacted the results
of
steel companies in the second half of 2000 and all of 2001. International
steel
prices generally improved beginning in 2003, driven by a strong increase
in
global demand fostered by economic growth in Asia and an economic recovery
in
the United States, combined with increased rationalization of production
capacity in the United States and elsewhere.
However,
this new period of high prices for steel encouraged reactivation of investment
in production capacity, and, consequently, an increase in the supply of steel
products that contributed to a decline in steel prices. Average steel prices
in
2005 were below those of 2004, but remained substantially higher than steel
prices for the 2001 to 2003 period. In 2006, steel prices have increased
to
levels above those of 2005 due to strong end-market demand fundamentals for
a
number of key steel-consuming industries, continued strong steel demand in
China, India and other developing economies, relatively high raw material
and
energy costs and reductions in U.S. production from some of the industry’s
largest producers.
In
recent
years, there has been a trend toward consolidation of the steel industry.
For
example, Aceralia, Arbed and Usinor merged in February 2002 to create Arcelor,
and LNM Holdings and Ispat International merged in October 2004 to create
Mittal
Steel, which subsequently acquired International Steel Group. In 2006, Arcelor
completed the acquisition of Dofasco in Canada, and Mittal Steel announced
the
acquisition of Arcelor, forming the largest steel company in the world. In
addition, a number of other steel acquisition transactions have been announced,
including the pending acquisition of Oregon Steel by Evraz and the pending
acquisition of Corus by either Tata Steel or CSN. Consolidation has enabled
steel companies to lower their production costs and allowed for more stringent
supply-side discipline, including through selective capacity closures or
idling,
as the ones observed recently in the United States by Mittal Steel, U.S.
Steel
and others. Consolidation may result in increased competition and could
adversely affect our results.
Our
results are affected by competition from imports
.
Our
ability to sell our products is influenced, to varying degrees, by global
trade
for steel products, particularly trends in imports of steel products into
the
Mexican and U.S. markets. In 2004, imports to Mexico declined as international
market conditions improved and the peso weakened. During 2005, the Mexican
government, at the request of CANACERO, implemented several measures to prevent
unfair
trade
practices such as dumping in the steel import market. These measures include
initiating anti-dumping and countervailing duty proceedings temporarily
increasing import tariffs for countries with which Mexico does not have free
trade agreements. As a result, the competitive price pressure from dumping
declined, contributing to a general upward trend in domestic Mexican steel
prices.
Steel
imports to the United States. accounted for an estimated 25% of the domestic
steel market in 2005 and an estimated 26% in 2004. Foreign producers typically
have lower labor costs, and are in some cases are owned, controlled or
subsidized by their governments, allowing production and pricing decisions
to be
influenced by political and economic policy considerations as well as prevailing
market conditions. Increases in future levels of imported steel in the United
States could reduce future market prices and demand levels for steel in the
United States. To this extent, the U.S. Department of Commerce and the U.S.
International Trade Commission are currently conducting five year “sunset”
reviews of existing trade relief in several different steel products. Imports
represent less of a threat to SBQ producers like us in the United States
than to
commodity steel producers because of the high quality requirements and standard
required by buyers of SBQ steel products.
Our
results are affected by the cost of raw materials and energy
.
We
purchase substantial quantities of raw materials, including scrap, iron ore,
coal and ferroalloys for use in the production of our steel products. The
availability and price of these inputs vary according to general market and
economic conditions and thus are influenced by industry cycles. Since 2003,
the
general recovery of the North American economy, the significant increase
in the
demand for steel in China and shortage of shipping capacity has resulted
in a
tight market and higher prices for these raw materials.
In
addition to raw materials, natural gas and electricity are both relevant
components of our cost structure. We purchase natural gas and electricity
at
prevailing market prices in Mexico and the United States. These prices are
impacted by general demand and supply for energy in the United States and
Mexico
and have increased significantly in 2004 and 2005 as economic activity fueled
energy demand and the supply and price of oil was impacted by geopolitical
conflicts.
Comparison
of Six Months Ended June 30, 2006 and 2005
Net
Sales
Our
net
sales in the six months ended June 30, 2006 increased 233% to Ps. 11,912
million
(including sales in Mexico of Ps. 3,546 million and net sales in our newly
acquired Republic plants in the United States and Canada, or our “Republic
facilities”, of Ps. 8,366 million), compared to Ps. 3,574 million in the same
period of 2005 (which sales were only in Mexico). We attribute this increase
to
net sales generated by the Republic facilities. Sales in tons of basic steel
products increased 162% to 1,369,352 metric tons in the six months ended
June
30, 2006 (including 851,752 metric tons generated by the Republic facilities)
compared to 523,501 metric tons in the same period of 2005. Our net sales
in the
six-months ended June 30, 2006 decreased 4% to $11,912 million compared to
$12,388 million in the same period in 2005 on a pro forma basis.
Sales
outside Mexico (including sales by our U.S. subsidiaries) of basic steel
products increased 1,116% to 908,283 metric tons in the six months ended
June
30, 2006 (including 851,752 metric tons generated by the Republic facilities)
compared to 74,692 metric tons in the same period of 2005. We attribute this
increase to sales from our Republic facilities. We sold 1,388 metric tons
of
billet in the six months ended June 30, 2006, compared to 12,870 tons of
billet
in the same period of 2005. Billet sales do not contribute materially to
our net
sales or to our operating results.
The
average price of our steel products (excluding the sales from our Republic
facilities) increased 2% in real terms in the six months ended June 30, 2006
compared to the same period of 2005. We attribute this increase to higher
prices
prevailing in the Mexican steel markets.
Direct
Cost of Sales
Our
direct cost of sales in the six months ended June 30, 2006 increased 316%
to Ps.
9,682 million (including Ps. 7,466 million relating to the newly acquired
Republic facilities) compared to Ps. 2,327 million in the same period of
2005.
Direct cost of sales as a percentage of our net sales was 81% (62% excluding
the
cost of sales of Republic) in the six months ended June 30, 2006 compared
to 65%
in the same period of 2005 and 81% on a pro forma basis. We attribute the
higher
cost of sales in the six months ended June 30, 2006 primarily to the cost
of
sales of the products that we produce in our Republic facilities. The higher
cost of sales of the Republic facilities is mainly a result of higher labor
costs prevailing in our U.S. operations, and the higher cost of raw materials,
which our U.S. operations use in the production of SBQ steel. Hourly wages
at
our Mexican operations are approximately $4 per hour on average compared
to
average hourly wages in our U.S. operations of an average of more than $30
per
hour. Although raw material costs are similar in the United States and Mexico,
our U.S. operations produce only the more costly SBQ steel, which requires
more
expensive raw materials such as chromium, nickel, molybdenum and other alloys.
Our Mexican operations require these alloys to a lesser extent, because they
produce commodity steel as well as SBQ steel. The average cost of raw materials
that we used to produce steel products (excluding the production of Republic)
decreased 2% in real terms in the six months ended June 30, 2006 compared
to the
same period of 2005, primarily as a result of decreases in the price of scrap
and certain other raw materials.
Marginal
Profit
Our
marginal profit in the six months ended June 30, 2006 increased 79% to Ps.
2,230
million (including Ps. 900 million relating to the newly acquired plants
of
Republic) compared to Ps. 1,247 million in the same period of 2005. We attribute
this increase to the increase in sales from the Republic facilities and to
higher prices prevailing in the Mexican steel markets. In early April 2006,
one
of our competitiors, Siderurgica Lazaro Cardenas Las Truchas, S.A. (“SICARTSA”),
the principal producer of rebar in Mexico, stopped production because its
employees went on strike until mid-August 2006. The strike generated a shortage
in the supply of rebar and light section structurals, which generated a price
increase in those products compared to international prices because of an
imbalance in the supply and demand in the Mexican market. As a percentage
of net
sales, marginal profit was 19% (37% excluding the marginal profit of Republic)
in the six months ended June 30, 2006 compared to 35% in the same period
of 2005
and 19% on a pro forma basis. This decrease is the result of the higher cost
of
sales prevailing at our Republic facilities.
Indirect
Manufacturing, Selling, General and Administrative Expenses
Our
indirect manufacturing, selling, general, and administrative expenses (including
depreciation and amortization) in the six months ended June 30, 2006 increased
77% to Ps. 664 million (including Ps. 304 million relating to the Republic
facilities) from Ps. 375 million in the same period of 2005. We recorded
an
increase of Ps. 71 million, or 54%, in depreciation and amortization expense,
which in the six months ended June 30, 2006 was Ps. 202 million (including
Ps.
68 million relating to the Republic facilities) compared to Ps. 131 million
in
the same period of 2005 and increase of Ps. 58 million, or 40%, compared
to Ps.
144 million on a pro forma basis. We attribute this increase to the operating
expenses from our Republic facilities, which we acquired in July of
2005.
Operating
Income
Our
operating income in the six months ended June 30, 2006 increased 79% to Ps.
1,566 million (including Ps. 596 million relating to the newly acquired plants
of Republic) compared to Ps. 872 million in the same period of 2005. Operating
income was 13% of net sales in the six months ended June 30, 2006 compared
to
24% of net sales in the same period of 2005 and 13% on a pro forma basis.
We
attribute the overall decrease as a percentage of our net sales to the
consolidation of Republic’s lower operating income with the operating income at
the Mexican facilities.
Financial
Income (Expense)
We
recorded financial income of Ps. 45 million in the six months ended June
30,
2006 compared to financial expense of Ps. 35 million in the same period of
2005.
Financial income or expense reflects the sum of three components: exchange
gain
or loss, net interest income or expense, and gain or loss from monetary
position. We recorded an exchange gain of approximately Ps. 19 million in
the
six months ended June 30, 2006 compared to an exchange loss of Ps. 36 million
in
the same period of 2005, reflecting a 5.7% decrease in the value of the peso
compared to the dollar in the six months ended June 30, 2006 compared to
a 3.7%
increase in the value of the peso versus the dollar in the same period of
2005.
Net interest income was Ps. 15 million in the six months ended June 30, 2006
compared to Ps. 8 million in the same period of 2005 and Ps. 77 million on
a pro
forma basis. We recorded a gain from monetary position of Ps. 12 million
in the
six months ended June 30, 2006 compared to a loss from monetary position
of Ps.
8 million in the same period of 2005, reflecting the domestic inflation rate
of
0.7% in the six months ended June 30, 2006 as compared to 0.8% in the same
period of 2005. We attribute the increase in financial income to exchange
gains
due to a decrease in the value of the peso relative to the dollar and to
higher
interest net income due in part to our low levels of debt.
Other
Income (Expense), Net
We
recorded other income, net, of Ps. 33 million in the six-months ended June
30,
2006, consisting of (i) income of Ps. 15 million from the cancellation of
labor
obligations in the acquisition of Atlax and Metamex, (ii) income of Ps. 3
million from recovery of expenses, (iii) income of Ps. 2 million from recovery
of insurance freight charges and (iv) other income net, related to other
financial operations of Ps. 13 million. Other income, net of Ps. 8 million
in
the same period of 2005 consisted of (i) income of Ps. 4 million for the
recovery of added value tax, (ii) income of Ps. 1 million from recovery of
insurance freight charges and (iii) other income net, related to other financial
operations of Ps. 3 million.
Income
Tax and Employee Profit Sharing
We
recorded an income tax provision of Ps. 105 million for income tax and employee
profit sharing in the six months ended June 30, 2006 (including a decrease
in
the provision of Ps. 63 million with respect to deferred income tax) compared
to
a provision of Ps. 97 million in the same period of 2005 and Ps. 323 million
on
a pro forma basis (including an increase in the provision of Ps. 24 million
with
respect to deferred income tax). This provision increased due to higher net
sales, operating income and financial income.
The
effective tax rate was 12% and 7% for the six month periods ended June 30,
2005
and 2006 respectively. For the six month period ended June 30, 2005 the
effective tax rate was lower than the 30% applicable tax rate in Mexico,
mainly
because in 2005 the company determined a tax benefit due of the non-accumulation
of taxes, in the coming years, of its inventory balance at December 31, 2004
due
to a corporate restructure (spin-off of its subsidiary COSICA) of the company.
In addition, there was a decrease in the deferred assets valuation allowance
based on an improvement on the recovery of these assets. For the six month
period ended June 30, 2006 the effective tax rate was lower than the 29%
and 35%
tax rates applicable in Mexico and the United States respectively, mainly
because in 2006 the
company
amortized all of its deferred credit (See Note 1f to the interim financial
statements) which is non-taxable income.
Net
Consolidated Income
Our
net
income increased 106% in the six months ended June 30, 2006 to Ps. 1,539
million
compared to net income of Ps. 747 million in the same period of 2005 and
35% to
Ps. 1,141 million on a pro forma basis. We attribute this increase primarily
to
net income from the Republic facilities, higher prices in the Mexican steel
market and higher financial income.
Comparison
of Years Ended December 31, 2005, 2004 and 2003
Net
Sales
Our
net
sales in 2005 increased 119% to Ps. 12,967 million (including the net sales
of
Ps. 2,750 million generated by the plants that we acquired in August 2004
in
Apizaco and Cholula and of Ps. 6,260 million generated by the plants of Republic
that we acquired in July 2005) compared to Ps. 5,910 million in 2004 (including
the net sales of Ps. 1,241 million generated since August 1, 2004 by the
plants
in Apizaco and Cholula) and in 2004 increased 94% compared to Ps. 3,047 million
in 2003. We attribute the increase in 2005 net sales compared to 2004 to
the
inclusion for the full year 2005 of net sales of Ps. 2,750 million from the
plants in Apizaco and Cholula as well as Ps. 6,260 million from the Republic
plants. We attribute the increase in 2004 net sales compared to 2003 net
sales
to substantially higher prices for our basic steel products, reflecting global
steel price increases, primarily in the second quarter of the year and from
significantly higher production levels, largely resulting from the inclusion
of
production by the Apizaco and Cholula facilities. Sales in tons of basic
steel
products increased 121% in 2005 to 1,708,140 tons (including 413,925 metric
tons
generated by the plants in Apizaco and Cholula and 674,957 metric tons generated
by the Republic plants) from 773,297 tons in 2004, which in turn had increased
23% in 2004 (including 155,614 tons produced by the plants in Apizaco and
Cholula) from 628,243 tons in 2003.
Sales
outside Mexico of steel products (including sales of our U.S. subsidiaries)
increased 733% to 809,083 metric tons in 2005 (including 19,261 tons from
our
plants in Apizaco and Cholula and 674,957 metric tons from the Republic
facilities) compared to 97,126 metric tons 2004 (including 12,394 metric
tons
from the plants in Apizaco and Cholula). Exports of basic steel products
in 2004
increased 20% compared to 2003 to 97,126 tons (including 12,394 tons from
the
plants in Apizaco and Cholula). We sold 14,487 tons of billet in 2005, 41,832
tons of billet in 2004 and 63,616 tons of billet in 2003. Billet sales do
not
contribute materially to our net sales or otherwise to our operating results.
The
average price of steel products (excluding the sales of Republic) decreased
14%
in real terms in 2005 compared to 2004 and increased 63% in real terms in
2004
compared to 2003. We attribute the 2005 decrease to the global decrease of
finished steel product prices reflecting higher inventory levels worldwide,
and
we attribute the 2004 increase to the significant global rise in overall
demand
and of finished steel product prices.
Direct
Cost of Sales
Our
direct cost of sales increased 202% in 2005 to Ps. 10,371 million (including
Ps.
2,028 million relating to the newly acquired plants in Apizaco and Cholula
and
Ps. 5,901 million relating to the newly acquired Republic facilities) compared
to Ps. 3,435 million in 2004 (including Ps. 868 million relating to the Apizaco
and Cholula plants) and in 2004 increased 72% compared to Ps. 2,002 million
in
2003. Our
direct
cost of sales as a percentage of net sales increased to 80% in 2005 from
58% in
2004 and 66% in 2003.
We
attribute our higher direct cost of sales in 2005 compared to 2004 to the
cost
of sales relating to the Republic plants, which represented 94.3% as a
percentage of net sales. The higher cost of sales was mainly the result of
higher labor costs prevailing in our U.S. operations and the higher cost
of raw
material involved in the production of SBQ steel, which is the only steel
product that we produce in the United States. We attribute our higher direct
cost of sales in 2004 compared to 2003 to the increased cost of raw materials
and somewhat higher production levels. The average cost of raw materials
that we
used to produce steel products (excluding the production of Republic) increased
1% in real terms in 2005 compared to 2004, primarily as a result of increases
in
the price of scrap and certain other raw materials. The average cost of raw
materials that we used to produce steel products in 2004 increased 45% from
2003, primarily as a result of increases in the price of scrap, electricity
and
gas.
In
2004
we experienced a 45% increase in the price of scrap and other raw materials.
However, due to strong customer demand reflecting low inventory levels, we
were
able to increase our prices by 63%. During this uptrend in the steel cycle
in
2004, we were able to pass on to our customers substantially all raw material
increases through surcharges. As inventory levels started to rise in early
2005
in the international and Mexican markets, we reduced our prices by 14%
(excluding the production of Republic) from 2004 levels, while our direct
costs
of sales per ton increased 1 %.
Marginal
Profit
Our
marginal profit in 2005 increased 5% to Ps. 2,596 million (including Ps.
722
million relating to the newly acquired plants in Apizaco and Cholula and
Ps. 359
million relating to the newly acquired plants of Republic) compared to Ps.
2,475
million in 2004 (including Ps. 373 million relating to the plants in Apizaco
and
Cholula) and in 2004 increased 137% compared to Ps. 1,045 million in 2003.
As a
percentage of net sales, our marginal profit was 20% in 2005 (33% without
Republic) compared to 42% in 2004 and 34% in 2003. We attribute the decrease
in
marginal profit as a percentage of net sales in 2005 to higher labor costs
prevailing in our U.S. operations and higher cost of raw material involved
in
the production of SBQ steel, and we attribute the increase in 2004 to the
significant global rise of finished product prices. Because of low steel
inventories in 2004, we were able to pass on to customers, through surcharges,
more than the cost increases in scrap and certain other raw materials.
Therefore, our marginal profit as a percentage of net sales increased to
42% in
2004 compared to 34% in 2003. As international steel inventory levels increased
in 2005, prices and surcharges decreased, with our marginal profit as a
percentage of net sales falling to 33% which was similar to our 34% marginal
profit level in 2003.
Indirect
Manufacturing, Selling, General and Administrative Expenses
Indirect
manufacturing, selling, general and administrative expenses, which include
depreciation and amortization, increased 72% (25% without Republic) to Ps.
1,018
million in 2005 (including Ps. 249 million relating to the newly acquired
plants
in Apizaco and Cholula and Ps. 271 million relating to the newly acquired
Republic plants) compared to Ps. 593 million in 2004 (including Ps. 75 million
relating to the plants in Apizaco and Cholula) and in 2004 increased 17%
compared to Ps. 507 million in 2003.
We
attribute the increase in these expenses in 2005 compared to 2004 primarily
to
the Republic plants. We attribute the increase in these expenses in 2004
compared to 2003 primarily to the Apizaco and Cholula plants.
Depreciation
and amortization increased by 47% to Ps. 326 million in 2005 (including Ps.
60
million relating to the plants in Apizaco and Cholula and Ps. 69 million
relating to the Republic plants)
and
increased by 11% to Ps. 222 million in 2004 (including Ps. 25 million relating
to the plants in Apizaco and Cholula) from Ps. 199 million in 2003. We attribute
the increase in 2005 compared to 2004 to the inclusion for the full year
2005 of
the depreciation that the Apizaco and Cholula plants generated and the
depreciation relating to the Republic plants. We attribute the increase in
2004
compared to 2003 to the depreciation relating to the Apizaco and Cholula
plants.
Operating
Income
Our
operating income decreased by 16% to Ps. 1,578 million in 2005 from Ps. 1,882
million in 2004 and in 2004 increased 250% from Ps. 538 million in 2003.
Operating income represented 12%, 32% and 18% of our net sales in 2005, 2004
and
2003, respectively. We attribute the decrease in 2005 to the global decrease
of
finished steel product prices, and we attribute the increase in 2004 to the
significant global rise in demand and in finished steel product
prices.
Financial
Income (Expense)
Our
financial expense increased 282% to Ps. 145 million in 2005 from Ps. 38 million
in 2004, and in 2004 increased 40% from Ps. 27 million in 2003. Financial
income
or expense reflects the sum of three components: exchange gain or loss, net
interest income or expense and gain or loss from monetary position. We recorded
an exchange loss of approximately Ps. 75 million in 2005 compared to an exchange
gain of Ps. 4 million in 2004 and an exchange loss of Ps. 3 million in 2003.
These exchange results reflect the 4.3% increase in the value of the peso
versus
the dollar in 2005 compared to a decrease of 0.3% in the value of the peso
versus the dollar in 2004. The exchange gain in 2004 also reflected lower
debt
levels than in the prior year. During 2003 and 2004, we made various prepayments
on our bank debt and we also converted certain loans from our parent to
equity.
Net
interest expense was Ps. 16 million in 2005 compared to Ps. 6 million of
net
interest income in 2004 and Ps. 14 million of net interest expense during
2003.
The increase in 2005 reflected a higher amount of debt outstanding during
2005
compared to 2004 resulting from the acquisition of Republic, and the decrease
in
2004 reflected a lower amount of debt outstanding compared to 2003.
We
recorded a loss from monetary position of Ps. 54 million in 2005 compared
to a
loss from monetary position of Ps. 47 million in 2004 and a loss from monetary
position of Ps. 10 million in 2003. These increases reflected the domestic
inflation rate of 3.3% in 2005 as compared to 5.2% in 2004 and 4% in 2003
as
well as higher debt levels during 2005 compared to 2004 and in 2004 lower
debt
levels as compared to 2003 as a result of the developments discussed above.
Other
Income (Expense), Net
We
recorded other income, net, of Ps. 55 million in 2005. This amount
reflected:
·
|
income
from the amortization of the deferred credit of Ps. 67
million;
|
·
|
expense
for the cancellation of the technical assistance of Ps. 38
million;
|
·
|
income
from the recovery of a commission from Banco Nacional de Comercio
Exterior
for Ps. 8 million; and
|
·
|
other
income, net, related to other financial operations of Ps. 18
million.
|
We
recorded other expense, net, of Ps. 38 million in 2004. This amount
reflected:
·
|
income
from the reversal of an account recorded as a doubtful account
of Ps. 14
million;
|
·
|
a
reserve of Ps. 6 million relating to the clean-up of contaminated
land at
the Pacific Steel facilities;
|
·
|
a
reserve of Ps. 13 million relating to the realizable value of idle
machinery and equipment;
|
·
|
a
reserve for doubtful accounts of Ps. 10 million;
and
|
·
|
other
expense related to other financial operations of Ps. 23
million.
|
We
recorded other expense, net, of Ps. 32 million in 2003. This amount
reflected:
·
|
a
reserve of Ps. 12 million relating to the clean-up of contaminated
land at
the Pacific Steel facilities;
|
·
|
a
reserve of Ps. 19 million relating to the realizable value of idle
machinery and equipment; and
|
·
|
other
expense, net, related to other financial operations of Ps. 1
million.
|
Income
Tax and Employee Profit Sharing
For
the
years ended December 31, 2005, 2004 and 2003 we recorded an income tax provision
of Ps. 191 million, Ps. 344 million and Ps. 159 million, respectively. These
amounts included a provision for deferred income taxes of Ps. 112 million
in
2005, Ps. 320 million in 2004 and Ps. 140 million in 2003.
Our
effective income tax rates for the fiscal years ended December 31, 2005,
2004
and 2003 were 12.8%, 19.02% and 31.98% respectively. The effective income
tax
rate in 2005 was less than the statutory rate of 30%, mainly for the following
reasons:
·
|
In
2004, we had a valuation allowance that covered almost the total
amount of
the recoverable asset tax and tax loss carryforwards due to the
uncertainty of their recovery. However, in 2005 we recovered Ps.
84
million of assets tax. As a result of this recovery and future
estimations, we reduced our valuation allowance on our deferred
tax asset
as of December 31, 2005. The net change in the valuation allowance
for the
year ended December 31, 2005 was a decrease of Ps. 132.4 million.
|
·
|
In
accordance with tax laws in effect through December 31, 2004, inventory
purchases were tax deductible in the year in which they were made,
regardless of the time of sale of finished goods. As of 2005, the
cost of
acquiring inventories was tax deductible only when sold, although
the law
provides transition provisions to tax the ending inventory balance
at
December 31, 2004 over periods that vary depending on the circumstances
of
each entity. During 2005 we obtained a tax benefit of Ps. 420.5
million,
because of the non-accumulation, in subsequent years, of tax on
our
inventory balance at December 31, 2004 due to our corporate restructuring
(spin-off of its subsidiary COSICA). Also, we recorded an additional
deferred tax liability for the amount of Ps. 303.5 million, to
account for
the difference of the net income of the 2005 period for which we
did not
pay taxes. See Note 13(c) to the Consolidated Financial
Statements.
|
These
changes resulted in favorable tax differences that had a one time impact
in our
effective income tax rate for 2005 and 2004.
A
new
income tax law was enacted in Mexico on December 1, 2004, which established
an
income tax rate of 30% for 2005, 29% for 2006, and 28% for 2007 and subsequent
years. As a result of these changes, for the year ended December 31, 2004,
we
recognized a decrease in the net deferred tax liability of Ps. 288.5 million
which was credited to results of operations.
Net
Consolidated Income
We
recorded net income of Ps. 1,280 million, Ps. 1,462 million and Ps. 320 million
in 2005, 2004 and 2003, respectively. We attribute the decrease in 2005 to
the
global decrease of finished steel product prices, and we attribute the increase
in 2004 to the significant global increase in overall demand and in finished
steel product prices.
Liquidity
and Capital Resources
As
a
result of the economic crisis in Mexico arising from the devaluation of the
peso
versus the U.S. dollar in 1994, including the liquidity crisis which affected
the Mexican banking system, the insolvency of our former parent, Sidek, and
our
high levels of short-term indebtedness, we became unable to generate or borrow
funds to refinance our debt or to support our operations and capital
improvements. As of December 15, 1997, and immediately prior to the consummation
of the restructuring discussed below, we had total outstanding indebtedness
of
approximately $322 million. Over half of our debt had matured and was unpaid
and
substantially all of the balance was subject to acceleration.
In
December 1997, we consummated a corporate reorganization and restructuring
of
our liabilities. As part of this restructuring, our wholly-owned subsidiary,
Compañía Siderúrgica de Guadalajara, S.A. de C.V. (“CSG”), incurred new bank
debt and issued new debt securities and paid limited amounts of accrued interest
on certain outstanding debt in exchange for and in an aggregate amount
approximately equal to our aggregate outstanding consolidated debt at the
date
of consummation of the restructuring. In exchange, CSG received equity in
all of
our subsidiaries, and we eliminated the intercompany debt that CSG owed to
us.
The
restructuring did not result in a reduction in the overall amount of our
consolidated outstanding debt, and, accordingly, following the restructuring,
through CSG, we continued be highly leveraged. In 2001, subsequent to Industrias
CH’s acquisition of a controlling interest in us, CSG redeemed or repurchased
all of the outstanding debt securities it had issued in connection with the
restructuring, which it financed principally with borrowings from Industrias
CH.
In 2001, we converted approximately $90 million of bank debt to equity, which
equity Industrias CH acquired. From 2001 through 2004, CSG continued to pay
down
its outstanding bank debt, making scheduled amortization payments as well
as
additional principal payments which it financed primarily by capital
contributions from Industrias CH or borrowings from Industrias CH which it
later
converted to equity. In March 2004, we prepaid U.S.$1.7 million of the remainder
of our outstanding bank debt.
At
June
30, 2006, our total consolidated debt consisted of U.S.$302,000 of 8-7/8%
medium-term notes due 1998 (accrued interest at June 30, 2006 was U.S.$322,798).
We conducted exchange offers for the MTNs in October 1997 and August of 1998.
This amount reflects sums that we did not pay to holders that we could not
identify at the time of the exchange offers.
At
December 31, 2005, our total consolidated debt consisted of U.S.$38 million
(Ps.
433 million), of which U.S.$33.4 million was debt held by GE Capital, U.S.$4.3
million was held by the Ohio
Department
of Development Loan, and U.S.$302,000 was 8-7/8% medium-term notes due 1998
(accrued interest at December 31, 2005 was U.S.$309,311). The U.S.$309,311
reflects sums that we did not pay to holders that we could not identify at
the
time of the exchange offers. At December 31, 2003 and 2004, respectively,
our
total consolidated debt consisted of U.S.$2 million (Ps. 25 million) and
U.S.$13.9 million (Ps. 163 million).
On
August
9, 2004, we acquired the property, plant and equipment and the inventories,
and
assumed liabilities associated with seniority premiums of employees, of the
Mexican steel-making facilities of Grupo Sidenor located in Apizaco and Cholula.
Our total net investment in this transaction was approximately U.S.$122 million
((Ps. 1,483 million) which amount excludes value added tax of $16 million
(Ps.
196 million)) which we paid in 2004 and recouped from the Mexican government
in
2005), funded with our internally generated resources and capital contributions
from Industrias CH of U.S.$19 million (Ps. 230 million) for capital stock
to be
issued in the second quarter of 2005. Approximately $107.5 million (Ps. 1,260
million) of our investment related to the acquisition of property, plant
and
equipment, approximately $7 million (Ps. 86 million) related to a technical
assistance contract with the seller and the balance relates to inventories
acquired.
On
July
22, 2005, we and our parent company Industrias CH acquired 100% of the stock
of
Republic. We acquired 50.2% of Republic’s stock for U.S.$115 million (Ps. 1,310
million) through our majority owned subsidiary, SimRep, and Industrias CH
purchased the remaining 49.8% through SimRep for U.S.$114 million (Ps. 1,299
million). We financed our portion of the U.S.$229 million (Ps. 2,609 million)
purchase price principally from a loan received through Industrias CH that
has
since been repaid in full. At December 31, 2005, the total amount of
Republic’s debt was U.S.$37.7 million (Ps. 409 million), which debt has since
been repaid in full.
We
depend
heavily on cash generated from operations as our principal source of liquidity.
Other sources of liquidity have included financing made available to us by
our
parent Industrias CH (primarily in the form of equity, or debt substantially
all
of which was subsequently converted to equity), most significantly for the
purpose of repaying third party indebtedness, and limited amounts of vendor
financing. We have had very limited access to and have not borrowed any material
amounts from unaffiliated third parties since consummation of the restructuring.
We believe that our existing cash, cash equivalents and cash generated from
operations will be sufficient to satisfy our currently anticipated cash
requirements through the next 12 months, including our currently anticipated
capital expenditures.
Republic
has a committed secured revolving line of credit from General Electric Capital
Corporation (“GE Capital”) under which it can borrow up to U.S.$150 million (the
“GE Facility”), which matures on May 20, 2009, extendible for one year at the
option of Republic. This facility is secured by all of Republic’s inventory and
accounts receivable and bears interest based on one of the two following
formulas, at Republic’s discretion: (1) at an indexed rate equal to the highest
prime rate published by the Wall Street Journal, plus the applicable margin,
or
the federal funds rate plus 50 base percentage points per year and the
applicable margin, or (2) LIBOR plus the applicable margin. Margins were
adjusted based on the available rate for the quarter on a base established
in
advance. Republic currently has no debt outstanding under this
facility.
The
GE
Facility contains covenants including restrictions on engaging in any business
other than our current businesses or businesses reasonably related to our
current businesses, sales of properties or other assets (including the stock
of
any of our subsidiaries), and the amount of capital expenditures; for example,
on a consolidated basis with our subsidiaries, we are restricted from making
unfinanced capital expenditures during any fiscal year that exceed U.S.$
110
million in the aggregate. However, we may increase our unfinanced capital
expenditures in any fiscal year by the lesser of (i) U.S.$ 7.5 million and
(ii)
the amount (if any) equal to U.S.$100 million minus the actual amount of
unfinanced capital
expenditures
in the prior fiscal year. The GE Facility also restricts our ability to incur
additional indebtedness. For example, during any fiscal quarter, we may not
prepay more than U.S.$ 7.5 million in the aggregate of the senior secured
promissory notes due 2009. In addition, after prepayment, we must have on
a
consolidated basis with our subsidiaries a fixed charge coverage ratio for
the
fiscal quarter most recently ended of not less than 1.1:1.0. The GE Facility
also requires that on a consolidated basis with our subsidiaries, we maintain
a
fixed charge coverage ratio of 1.00:1.0 for the 12-month period most recently
ended if at any time 85% of the book value of our eligible accounts plus
the
lesser of (i) 65% of the book value of our eligible inventory at the lower
of
cost or market, (ii) 85% of the net orderly liquidation percentage of eligible
inventory and (iii) U.S.$ 115 million, minus the sum of the revolving loan
and
swing line loan then outstanding, is less than U.S.$ 30 million. In the GE
Facility, the term “fixed charge coverage ratio” means the ratio of (i) EBITDA
less direct proceeds of business interruption insurance solely to the extent
attributable to claims arising as a consequence of events occurring prior
to May
20, 2004 to (ii) the aggregate of all interest expense paid or accrued during
that period, plus payments of principal with respect to indebtedness during
that
period plus unfinanced capital expenditures during that period plus income
taxes
paid or payable in cash with respect to that fiscal period (but excluding
income
taxes, if any on insurance proceeds) plus to the extent not otherwise deducted
in the determination of EBITDA, restricted payments made during that
period.
Our
principal use of cash has generally been to fund our operating activities,
for
debt repayments, to acquire businesses and, to a significantly lesser degree,
capital expenditure programs. The following is a summary of cash flows for
the
three years ended December 31, 2005 and for the six months ended June 30,
2006:
Principal
Cash Flows
|
|
Years
ended December 31,
|
|
Six
Months Ended June 30,
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2005
|
|
2006
|
|
|
|
(millions
of constant Pesos)
|
|
Resources
provided by
operating activities
|
|
|
436
|
|
|
915
|
|
|
1,
863
|
|
|
664
|
|
|
778
|
|
Resources
provided by (used in) financing
|
|
|
31
|
|
|
404
|
|
|
(
242
|
)
|
|
(158
|
)
|
|
(287
|
)
|
Resources
provided by (used in) investing activities
|
|
|
(26
|
)
|
|
(
1,357
|
)
|
|
(
1,
938
|
)
|
|
133
|
|
|
248
|
|
Our
net
resources provided by operations were Ps. 778 million in the six-month period
ended June 30, 2006 compared to Ps. 664 million of net resources provided
by
operations in the same period of 2005 and reflected our net income for the
period. Our net resources provided by operating activities was Ps. 1,863
million
in 2005 and reflected the net income of the year. Our net resources provided
by
operating activities was Ps. 915 million in 2004 and reflected significant
net
income offset by increases in inventories and receivables attributable to
the
acquisition of the Apizaco and Cholula facilities. Our net resources provided
by
operating activities was Ps. 436 million in 2003 and reflected the conversion
of
loans of Industrias CH into our series B shares for Ps. 201
million.
Our
net
resources used by financing activities were Ps. 287 million in the six-month
period ended June 30, 2006 (which amount includes the prepayment of Ps. 409
million (U.S. $37.7 million) of Republic’s bank debt and a capital contribution
of certain minority shareholders of Simec of Ps. 122 million) compared to
Ps.
158 million of net resources used by financing activities in the same period
of
2005. Our net resources used in financing activities was Ps. 242 million
in
2005. This amount reflected the prepayment of Ps. 1,052 million of bank debt
of
Republic and the loan from Industrias CH for Ps. 451 million. Our net resources
provided by financing activities was Ps. 404 million in 2004. This amount
reflected prepayment of bank debt of U.S.$20 million (Ps. 228 million), the
increase in capital stock
issued
to
minority shareholders of Ps. 25 million and a capital contribution from
Industrias CH to us in the amount of Ps. 230 ($20 million) for capital stock
to
be issued in the second quarter of 2005. Our net resources provided by financing
activities was Ps. 31 million in 2003. This amount reflected the semi-annual
amortization installments on our bank debt of Ps. 16 million (U.S.$1.4 million),
the prepayment of Ps. 352 million ($30 million) of bank debt, the conversion
into shares by Industrias CH of Ps. 201 million of loans plus accrued interest
thereon, the increase of the capital stock by the minority shareholders for
Ps.
21 million and the conversion into series B shares of the capital contribution
from Industrias CH to us in the amount of Ps. 169 million (U.S.$15 million)
in
2003.
We
attribute our net resources used in investing activities primarily to the
acquisition of property, plant and equipment and other non-current assets
and
reflects changes in long-term inventories and proceeds from insurance claim.
Our
net resources provided by investing activities (to acquire property, plant
and
equipment and other non-current assets) were Ps. 248 million for the six
months
ended June 30, 2006 compared to net resources provided by investing activities
of Ps. 133 million in the same period of 2005. Our net resources used in
investing activities (to acquire property, plant and equipment and other
non-current assets) were Ps. 1,938 million in 2005, and our net resources
used
to acquire Republic were Ps. 1,310 million. Our net resources used in investing
activities were Ps. 1,357 million in 2004 (which amount reflects the acquisition
of the Apizaco and Cholula facilities) and Ps. 26 million in 2003.
At
June
30, 2006, our total consolidated debt consisted of approximately $302,000
(Ps.
3.4 million) of U.S. dollar denominated debt (accrued interest at June 30,2006
was $322,798). At December 31, 2005, our total consolidated debt consisted
of
approximately $38 million of U.S. dollar denominated debt. At December 31,
2004,
we had outstanding approximately $13.9 million of U.S. dollar-denominated
debt.
In
December 2003, we acquired Administradora de Cartera de Occidente, S.A. de
C.V.
(“Acosa”) from Industrias CH for nominal consideration. Acosa’s sole asset is a
portfolio of defaulted receivables it acquired in June 2003 from various
Mexican
banks which are in the process of liquidation. The purchase price of the
portfolio is payable by Acosa solely from recoveries, if any, net of expenses
of
collection, with respect to the defaulted receivables. Upon payment of the
purchase price from recoveries on the portfolio, Acosa and the Mexican banks
will share in any additional recoveries, net of expenses of collection, on
a
50%/50% basis. At December 31, 2005, we did not have any recoveries with
respect
to the defaulted receivables. We sold Acosa in October of 2006 for nominal
consideration.
In
May
2004, certain minority of our shareholders exercised their pre-emptive rights
arising as a result of the conversion by Industrias CH of certain indebtedness
to purchase capital stock for Ps. 24.7 million at the price per share of
Ps.
14.59 (the equivalent of U.S.$1.25 per ADS). See “Related Party Transactions”
below.
We
do not
have in place any interest rate or currency hedging instruments. We are not
a
party to any non-exchange traded contracts accounted for at fair value other
than, as described in Note 6 to the audited financial statements, certain
futures contracts that we entered into in late 2003 to fix the price of our
natural gas purchases from 2004 to 2006.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements.
Contractual
Obligations
The
table
below sets forth our significant long-term contractual obligations as of
December 31, 2005:
|
|
Maturity
|
|
|
|
Less
than
1
year
|
|
1
- 3 years
|
|
4
- 5 years
|
|
In
excess of 5 years
|
|
Total
|
|
|
|
(millions
of constant Pesos)
|
|
Long-term
debt obligations
|
|
|
18
|
|
|
29
|
|
|
362
|
|
|
0
|
|
|
409
|
|
Long-term
debt obligations (MTNs)
|
|
|
3
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
3
|
|
Long-term
contractual obligations
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Total
|
|
|
21
|
|
|
29
|
|
|
362
|
|
|
0
|
|
|
412
|
|
As
of
December 31, 2005, Republic had U.S.$0.1 million included in property, plant
and
equipment for various equipment and computer capital leases. Republic’s capital
leases required future minimum payments of U.S.$0.3 million for 2006 and
were
repaid in full in 2006.
Quantitative
and Qualitative Disclosures About Market Risk
We
are
exposed to market risk, which is the potential risk of loss in fair values,
cash
flows or earnings due to changes in interest rates and foreign currency rates
(primarily the peso/dollar exchange rate), as a result of our holdings of
financial instrument positions. Our financial instruments include cash and
cash
equivalents, trade and other accounts receivable, accounts payable, long-term
debt securities and related party debt. We do not maintain a trading portfolio.
Our borrowings are entirely denominated in dollars. We do not utilize derivative
financial instruments to manage our market risks with respect to our financial
instruments. Historically, based on the last ten years of data, inflation
in
Mexico has been 327%
higher
than the Mexican peso’s devaluation relative to the dollar.
We
are
exposed to market risk due to fluctuations of the purchase price of natural
gas.
To limit our exposure, in late 2003, we entered into futures contracts
with
PEMEX
.
We
expect
the contracts will guarantee a portion of our natural gas consumption in
our
Mexican operations at a fixed price of $4.462 per
million
British thermal unit (“MMBtu”). Through December 31, 2006, our Mexican
operations obtained approximately 95% of their natural gas consumption, or
2,200,000 MMBtus, from PEMEX. Between January 1, 2007 and January 31, 2007,
we
expect that our operations in the United States will obtain approximately
15% of
their natural gas consumption, or 1,800,000 MMBtus, from futures contracts.
These futures contracts are not entered into for trading purposes but, subject
to market prices of natural gas, are expected to be settled by delivery of
natural gas at the contract price. As described in Note 6 to our audited
financial statements, at December 31, 2005, we recorded an asset of
Ps. 57.5 million with respect to these contracts. We do not believe our
market risk with respect to these natural gas futures contracts is
material.
Market
Risk Measurement
We
measure our market risk related to our financial instruments based on changes
in
interest rates and foreign currency rates utilizing a sensitivity analysis.
The
sensitivity analysis measures the potential loss in fair values, cash flows
and
earnings based on a hypothetical increase in interest rates and a decline
in the
peso/dollar exchange rate. We used market rates as of December 31, 2005 on
our
financial instruments to perform the sensitivity analysis. We believe that
these
potential changes in market rates are reasonably possible in the near-term
(one
year or less). Based upon our analysis of the impact of a 100 basis point
increase in interest rates and a 10% decline in the peso/dollar exchange
rate,
we have determined that such increase in interest rates and such decline
in the
peso/dollar exchange rate would
have
a
material adverse effect on our earnings. Because there is no active trading
market for our debt instruments, we are not able to determine the impact
of
these changes on the fair value of those debt instruments. The sections below
describe our exposure to interest rates and currency rates including the
impact
of changes in these rates on our earnings.
Interest
Rate Exposure
Our
primary interest rate exposure relates to long-term debt. On the asset side,
we
are exposed to changes in short-term interest rates as we invest in short-term
dollar-denominated interest bearing investments. On the liability side, we
utilize a combination of floating rate debt and fixed rate debt. The floating
rate debt is exposed to changes in interest expense and cash flows from changes
in LIBOR, while the fixed rate debt is mostly exposed to changes in fair
value
from changes in medium term interest rates. Based on an immediate 100 basis
point rise in interest rates, we estimate that our earnings before taxes
over a
one-year time horizon would decrease by Ps. 4 million ($0.38
million).
Currency
Rate Exposure
Our
primary foreign currency exchange rate exposure relates to our debt securities
as well as our dollar-denominated trade receivables and trade payables. Our
principal currency exposure is to changes in the peso/dollar exchange rate.
We
estimate that a 10% decline in the peso/dollar exchange rate would result
in a
decrease in our earnings before taxes of Ps. 41 million ($3.8
million).
The
sensitivity analysis is an estimate and should not be viewed as predictive
of
our future financial performance. Additionally, we cannot assure that our
actual
losses in any particular year will not exceed the amounts indicated above.
However, we do believe that these amounts are reasonable based on the financial
instrument portfolio at December 31, 2005 and assuming that the hypothetical
market rate changes selected by us in our market risk analysis occur during
2006. The sensitivity analysis does not give effect to the impact of inflation
on its exposure to increases in interest rates or the decline in the peso/dollar
exchange rate.
Critical
Accounting Policies
The
discussion in this section is based upon our financial statements, which
have
been prepared in accordance with Mexican GAAP. The preparation of these
financial statements requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at year-end, and the reported amount of
revenues and expenses during the year. Management regularly evaluates these
estimates, including those related to the carrying value of property, plant
and
equipment and other non-current assets, inventories and direct cost of sales,
income taxes and employee profit sharing, foreign currency transactions and
exchange differences, valuation allowances for receivables, inventories and
deferred income tax assets, liabilities for deferred income taxes, valuation
of
financial instruments, obligations relating to employee benefits, potential
tax
deficiencies, environmental obligations, and potential litigation claims
and
settlements. Management estimates are based on historical experience and
various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Accordingly, actual results may differ materially from current
expectations under different assumptions or conditions.
Management
believes that the critical accounting policy which requires the most significant
judgments and estimates used in the preparation of the financial statements
relates to the impairment of property, plant and equipment and valuation
allowance on accounts receivable. We evaluate periodically the adjusted values
of our property, plant and equipment, to determine whether there is an
indication of
potential
impairment. Impairment exists when the carrying amount of an asset exceeds
future revenues or net cash flow expected to be generated by the asset. If
such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset exceeds
the
expected revenues or fair value. Assets to be disposed of are reported at
the
lower of the carrying amount or realizable value. Significant judgment is
involved in estimating future revenues and cash flows or realizable value,
as
applicable, of our property, plant and equipment due to the characteristics
of
those assets. The class of our assets which most require complex determinations
based upon assumptions and estimates relates to idle machinery.
With
respect to valuation allowance on accounts receivable, on a periodic basis
management analyzes the recoverability of accounts receivable in order to
determine if, due to credit risk or other factors, some receivables may not
be
collected. If management determines that such a situation exists, the book
value
of the non-recoverable assets is adjusted and charged to the income statement
through an increase in the doubtful accounts allowance. This determination
requires substantial judgment by management. As a result, final losses from
doubtful accounts could differ significantly from estimated
allowances.
New
Accounting Pronouncements
The
following accounting bulletins issued by the Mexican Institute of Public
Accountants are obligatory as of January 1, 2005.
Business
Acquisitions
The
most
significant issues in Bulletin B-7 are as follows: (i) use of the purchase
method as the only alternative for valuing businesses acquired and investments
in associated companies, (ii) change in the accounting for goodwill, eliminating
amortization and also requiring that negative goodwill not fully amortized
at
the date of adoption of Bulletin B-7 be carried to the results of operations,
as
a change in accounting principle and (iii) establishment of specific rules
to
account for the acquisition of minority interest and for transfers of assets
or
exchange of shares among entities under common control.
We
opted
for the early adoption of this Bulletin (see Note 14 to the audited financial
statements).
Labor
Obligations
The
new
accounting Bulletin D-3,
Labor
Obligations
,
was
issued in January 2004. The revised Bulletin replaces and nullifies the previous
Bulletin D-3, issued in January 1993 and revised in 1998. The observance
of
Bulletin D-3 is compulsory for fiscal years beginning on or after January
1,
2004, except for termination payments, which were in force as of January
1,
2005.
The
revised Bulletin incorporates the matter of remunerations for other
post-retirement benefits, thus nullifying the provisions of Circular 50,
Interest
rates to be used in the valuation of labor obligations and supplementary
application of accounting principles related to labor
obligations
.
Bulletin D-3 also eliminates the subject related to unexpected payments and,
instead includes the subject related to termination payments, defining such
payments as those granted to workers at the end of their employment before
reaching the age of retirement, which include two types: (i) due to corporate
restructuring, for which the guidelines of Mexican accounting Bulletin C-9,
Liabilities
,
Provisions
,
Contingent Assets and Liabilities and Commitments, must be followed, and
(ii)
due to reasons other than restructuring, for which we must apply the valuation
and disclosure rules required for retirement pensions and seniority premiums
payments, thus allowing at the time that this Bulletin is adopted, to
immediately recognize the transition
asset
or
liability in results of operations, or its amortization, in conformity with
the
remaining working life of the workers.
We
believe that the adoption of this Bulletin did not have a material effect
on our
financial position or on our results of operations.
Other
Pronouncements
As
of May
31, 2004, the Mexican Institute of Public Accountants, or IMCP, formally
transferred the function of establishing and issuing financial reporting
standards to the Mexican Board for Research and Development of Financial
Reporting Standards, or CINIF, consistent with the international trend of
requiring this function to be performed by an independent entity.
Accordingly,
the task of establishing bulletins of Mexican GAAP and circulars issued by
the
IMCP was transferred to CINIF, who subsequently renamed the standards of
Mexican
GAAP as
Normas
de Información Financiera
,
or
Financial Reporting Standards and determined that the Financial Reporting
Standards would encompass (i) new bulletins established under the new function;
(ii) any interpretations issued thereon; (iii) any Mexican GAAP bulletins
that
have not been amended, replaced or revoked by the new Financial Reporting
Standards; and (iv) International Financial Reporting Standards, or IFRS,
that
are supplementary guidance to be used when Mexican GAAP does not provide
primary
guidance.
One
of
the main objectives of CINIF is to achieve greater concurrence with IFRS.
To
this end, it started by reviewing the Conceptual Framework, or “CF” contained in
Mexican GAAP and modifying it to support the development of financial reporting
standards and to serve as a reference in resolving issues arising in the
accounting practice. The CF consists of eight financial reporting standards,
which comprise the Financial Reporting Standards-A series. The Financial
Reporting Standards-A series, together with Financial Reporting Standards
B-1,
were issued on October 31, 2005. Their provisions are effective for years
beginning January 1, 2006 and thereafter, and supersede all existing Mexican
GAAP series A bulletins.
The
new
Financial Reporting Standards are as follows:
·
|
Financial
Reporting Standards A-1, Structure of Financial Reporting
Standards
|
·
|
Financial
Reporting Standards A-2, Fundamental
Principles
|
·
|
Financial
Reporting Standards A-3, Users’ Needs and Financial Statement
Objectives
|
·
|
Financial
Reporting Standards A-4, Qualitative Characteristics of Financial
Statements
|
·
|
Financial
Reporting Standards A-5, Basic Elements of Financial
Statements
|
·
|
Financial
Reporting Standards A-6, Recognition and
Valuation
|
·
|
Financial
Reporting Standards A-7, Presentation and
Disclosure
|
·
|
Financial
Reporting Standards A-8, Supplementary Standards to Mexican
GAAP
|
·
|
Financial
Reporting Standards B-1, Accounting
Changes
|
The
most
significant changes established under standards are as follows:
·
|
In
addition to the statement of changes in financial position, Financial
Reporting Standards A-3 makes reference to a cash flows statement,
which
should be issued when required by a particular
standard.
|
·
|
Financial
Reporting Standards A-5 includes a new classification for revenues
and
expenses: ordinary and not ordinary. Ordinary revenues and expenses
are
derived from transactions or events that are within the normal
course of
business or that are inherent in the entity’s activities, whether frequent
or not; revenues and expenses classified as not ordinary refer
to unusual
transactions and events, whether frequent or not.
|
·
|
Financial
Reporting Standards A-7 requires the presentation of comparative
financial
statements for at least the preceding period. Through December
31, 2004,
the presentation of prior years’ financial statements was optional. The
financial statements must disclose the authorized date for their
issuance,
and the names of any officers or administrative bodies authorizing
the
related issuance.
|
·
|
Financial
Reporting Standards B-1 establishes that changes in particular
standards,
reclassifications and corrections of errors must be recognized
retroactively. Consequently, basic financial statements presented
on a
comparative basis with the current year that might be affected
by the
change, must be adjusted as of the beginning of the earliest period
presented.
|
The
implementation of these new standards did not have a significant impact on
our
financial information.
Our
History and Development
General
We
are a
diversified manufacturer, processor and distributor of SBQ steel and structural
steel products with production and commercial operations in the United States,
Mexico and Canada.
We
believe that we are the leading producer of SBQ products in North America,
with
leading market positions in both the United States and Mexico and that we
offer
the broadest SBQ product range in those markets today. We also believe that
we
are the leading producer of structural and light structural steel products
in
Mexico, and we have an increasing presence in the U.S. market.
Our
SBQ
products are used across a broad range of highly engineered end-user
applications, including axles, hubs and crankshafts for automobiles and light
trucks, machine tools and off-highway equipment. Our structural steel products
are mainly used in the non-residential construction market and other
construction applications.
We
focus
on the Mexican and U.S. specialty steel markets by providing high value added
products and services from our strategically located plants. The quality
of our
products and services, together with the cost advantage generated by our
facility locations has allowed us to develop long standing relationships
with
most of our SBQ clients, which include U.S. and Mexico based automotive and
industrial equipment manufacturers and their suppliers. In addition, our
facilities located in the North West and Central parts of Mexico allow us
to
serve the structural steel and construction markets in those regions and
South
West California with a significant advantage in the cost of freight.
In
the
United States and Mexico, we own and operate ten state-of-the-art steel making,
processing and/or finishing facilities with a combined annual crude steel
installed production capacity of 3.4 million tons and a combined annual
installed rolling capacity of 2.9 million tons. We operate both mini-mill
and
integrated steel making facilities, which gives us the flexibility to optimize
our production and reduce production costs based on the relative prices of
raw
materials (e.g., scrap for mini-mills and iron ore for blast
furnace).
We
currently own and operate:
·
|
Mexico’s
largest non-flat structural steel mini-mill, located in Guadalajara,
Jalisco;
|
·
|
a
mini-mill in Mexicali, Baja California Norte;
|
·
|
a
mini-mill in Apizaco, Tlaxcala;
|
·
|
a
cold finishing facility in Cholula, Puebla; all of these facilities
are
owned through our indirect wholly-owned subsidiaries, Simec International,
S.A. de C.V. (“SI”), Controladora Simec S.A. de C.V. and Compañia
Siderurgica de Guadalajara S.A. de C.V.; and
|
·
|
a
mini mill in Canton, Ohio, an integrated facility in Lorain, Ohio
and
value-added rolling and finishing facilities in Canton, Lorain
and
Massillon, Ohio; Lackawanna, New York; Gary, Indiana; and Hamilton,
Ontario, all of which are owned through our majority-owned subsidiary,
Republic.
|
We
are
domiciled in the city of Guadalajara, Jalisco, and our principal administrative
office is located at Calzada Lázaro Cárdenas 601, Guadalajara, Jalisco, Mexico
44440. Our telephone number is 011-52-33-1057-5757.
In
the
first half of 2006, almost all of our consolidated sales were in the North
American market, 27.9% in Mexico, 71.9% in the United States and Canada,
and
0.2% of our consolidated sales were exports to markets outside North America.
In
2005,
we had net sales of Ps. 13.0 billion, marginal profit of Ps. 2.6 billion
and net
income attributable to majority interest of Ps. 1.3 billion. In the first
half
of 2006, our net sales were Ps. 11.9 billion, marginal profit of Ps. 2.2
billion
and net income attributable to majority interest of Ps. 1.3
billion.
The
chart
below sets forth a summary of our corporate structure:
(1)
Includes
the following non-operating subsidiaries: Compañía Siderúrgica del Pacífico,
S.A. de C.V. (99.99%), Coordinadora de Servicios Siderúrgicos de Calidad, S.A.
de C.V. (100%), Administradora de Servicios de la Industria Siderúrgica ICH,
S.A. de C.V. (99.99%), Industrias del Acero y del Alambre, S.A. de C.V.
(99.99%), Procesadora Mexicali, S.A. de C.V. (99.99%), Servicios Simec, S.A.
de
C.V. (100%), Sistemas de Transporte de Baja California, S.A. de C.V. (100%),
Operadora de Metales, S.A. de C.V. (100%), Operadora de Servicios Siderúrgicos
de Tlaxcala, S.A. de C.V. (100%), Administradora de Servicios Siderúrgicos de
Tlaxcala, S.A. de C.V. (100%), and Operadora de Servicios de la Industria
Siderúrgica ICH, S.A. de C.V. (100%), Arrendadora Simec S.A. de C.V. (100%),
Controladora Simec S.A. de C.V. (100%) Compañía Siderúrgica de Guadalajara S.A.
de C.V. (100%).
(2)
Our
principal Mexican facilities consist of steel-making facilities in Guadalajara,
Jalisco, Mexicali, Baja California, and Apizaco, Tlaxcala, and a cold finishing
facility in Cholula, Puebla.
(3)
The
remaining 49.8% of SimRep Corporation is owned by our controlling shareholder,
Industrias CH, S.A.B. de C.V.
(4)
SimRep
owns 100% of Republic Engineered Products through its 100% interest in PAV
Republic Inc. Our principal U.S. and Canadian facilities consist of a
steel-making facility in Canton, Ohio, a steel-making and hot-rolling facility
in Lorain, Ohio, a hot-rolling facility in Lackawanna, New York, and cold
finishing facilities in Massillon, Ohio, Gary, Indiana, and Hamilton, Ontario,
Canada.
Our
History
Our
steel
operations commenced in 1969 when a group of families from Guadalajara, Jalisco,
formed CSG, a mini-mill steel company. In 1980, Grupo Sidek, S.A. de C.V.
(“Sidek”), our former parent, was incorporated and became the holding company of
CSG. In 1990, Sidek consolidated its steel and aluminum operations into a
separate subsidiary, Grupo Simec, S.A. de C.V., a Mexican corporation with
limited liability.
In
March
2001, Sidek consummated the sale of its entire approximate 62% controlling
interest in us to Industrias CH. In June 2001, Industrias CH increased its
interest in us to 82.5% by acquiring additional shares from certain of our
bank
creditors that had converted approximately $95.4 million of our debt ($90.2
million of principal and $5.2 million of interest) into our common shares.
Industrias CH subsequently increased its equity position in us through various
conversions of debt to equity and capital contributions to an 85%
interest.
In
August
2004, we acquired the property, plant and equipment and the inventories,
and
assumed liabilities associated with the seniority premiums of employees of
the
Mexican steel-making facilities of Grupo Sidenor located in Apizaco, Tlaxcala
and Cholula, Puebla. Our total net investment in this transaction was
approximately U.S.$122 million (excluding value added tax of approximately
$16
million paid in 2004 and recouped from the Mexican government in 2005), funded
with cash from operations, and a $19 million capital contribution from
Industrias CH. We began to operate the plants in Apizaco, Tlaxcala and Cholula,
Puebla on August 1, 2004, and, as a result, the operations of both plants
are
reflected in our financial results since that date.
In
July
2005, we and Industrias CH acquired 100% of the stock of Republic, a U.S.
producer of SBQ steel. We acquired 50.2% of Republic’s stock through our
majority owned subsidiary, SimRep, and Industrias CH purchased the remaining
49.8% through SimRep. We financed our portion of the U.S.$229 million purchase
price principally through a loan we received from Industrias CH that we have
repaid in full.
Competitive
Strengths
We
believe the following are our principal competitive strengths:
Leading
SBQ producer in North America.
We
believe we have been the leading market producer and supplier of SBQ steel
in
Mexico since August 2004 and in the United States since July 2005. In 2005,
we
supplied approximately 28% of the Mexican market and 20% of the U.S.
market.
Higher
value-added product mix.
To
maximize operating margins, we focus our production on higher value-added
SBQ
products, which represented 79% of our total sales in the first six months
of
2006.
Long-standing
customer relationships.
Our
SBQ
products are highly engineered and tailored to specific client needs. We
continuously work with our clients on design engineering and new product
development to meet the requirements of their evolving platforms. We believe
that the quality of our products and services allows us to develop long lasting
direct relationships with the largest end-users of SBQ products in North
America, which, we believe, increases switching costs and improves our
competitive position.
Reduced
price volatility.
The
quality requirements of the majority of our SBQ clients and the nature of
our
relationships have allowed us to implement favorable pricing policies that
include annual price revisions and price adjustments based on the price of
key
inputs such as scrap, iron ore, energy, alloys and other key raw
materials.
These contribute to maintaining operating margins against raw material price
fluctuations relatively stable.
Competitive
cost structure.
We
believe our cost structure is highly favorable due to our:
·
|
Competitive
cost of raw materials.
We
believe our centralized purchasing strategy and strong financial
position
allow us to obtain favorable terms from our raw materials
suppliers.
|
·
|
Low
freight expenses.
We
believe the strategic location of our facilities allows us to serve
our
SBQ steel and other clients with lower distribution and freight
costs than
most of our competitors.
|
·
|
Relatively
low cost of labor in Mexico.
Our
Mexican operations benefit from the relatively lower cost of labor
in the
Mexican market compared to the United States. In addition, our
Mexican,
U.S. and Canadian operations do not currently have any significant
legacy
liabilities or their associated
costs.
|
·
|
Favorable
labor agreement in the United States.
The
labor agreement in place in our U.S. operations has eliminated
legacy
costs and enhances our ability to maximize workforce flexibility,
allowing
us to reduce production costs.
|
·
|
Lean
operational structure and overhead cost.
We
maintain non-operating costs at low levels by relying on a lean
and cost
efficient overhead structure.
|
State-of-the-art
production facilities.
We
have
recently completed the revamping of our mini-mill steel-making facility in
Canton, Ohio including the installation of a new continuous caster. We believe
that our remaining steel making and processing facilities in Mexico and the
United States are among the most modern and well maintained in North
America.
Extensive
track record of profitable growth.
Over
the
last two years we have significantly increased our installed capacity through
the acquisition of Republic and of plants in Tlaxcala and Cholula, Mexico.
As a
result of these acquisitions, organic growth and operational improvements,
we
have increased our installed capacity from 0.7 million tons as of December
31,
2003 to 3.4 million tons of crude steel as of June 30, 2006.
Significant
organic growth opportunities.
Our
liquid steel making capacity exceeds our rolling and finished steel capacity,
which allows us to continue increasing our finished product capacity through
comparatively low levels of capital investments. We intend to pursue this
option
and plan to invest approximately U.S.$250 million in a rolling mill with
an
annual capacity of 600,000 tons in our facilities. We also intend to explore
expanding our liquid steel-making facilities in Lorain, Ohio by bringing
an
existing second blast furnace online at a cost significantly lower than that
of
purchasing a new blast furnace with the same capacity.
Solid
financial position.
We
seek
to maintain a conservative capital structure and prudent leverage levels.
We
currently have no significant financial debt or significant legacy liabilities.
We believe that these factors, combined
with
our
strong cash flow generation, provide us with the financial flexibility and
resources to continue to pursue growth enhancing initiatives.
Experienced
and committed management team.
Our
management team has extensive experience in, and knowledge of, the North
American steel industry and in evaluating, pursuing and completing both
strategic and organic growth opportunities as well as a track-record of
increasing productivity and reducing costs.
Business
Strategy
We
intend
to further consolidate our position as a leading producer, processor and
distributor of SBQ steel in North America and structural steel in Mexico.
We
also intend to expand our presence in the steel industry by identifying and
pursuing growth opportunities and value enhancing initiatives. Our strategy
includes:
Further
integrating our operations.
We
intend
to continue the integration of our Mexican, U.S. and Canadian operations
to
capitalize on the commercial and cost related synergies contemplated at the
time
of the Atlax Acquisition in 2004 and of the acquisition of Republic in
2005.
Improving
our cost structure.
We
have
substantially reduced our operating cost and non-operating expenses and plan
to
continue to do so by reducing overhead expenses and operating costs through
sharing best practices among our operating facilities and maintaining a
conservative capital structure.
Focusing
on high margin and value-added products.
We
prioritize the production of high margin steel products over volume and
utilization levels. We plan to continue to base our production decisions
on
achieving relatively high margins.
Building
on our strong customer relationships.
We
intend
to strengthen our long-standing customer relationships by maintaining strong
customer service and proactively responding to changing customer
needs.
Pursuing
strategic growth opportunities.
We
have
successfully grown our business by acquiring, integrating and improving under-
performing operations. In addition, we intend to continue in pursuit of
acquisition opportunities that will allow for disciplined growth of our business
and value creation for our shareholders. We also intend to pursue organic
growth
by reinvesting the cash generated by our operating activities to expand the
capacity and increase the efficiency of our existing facilities.
Business
Overview
Our
Products
We
produce a wide range of value-added SBQ steel, long steel and medium-sized
structural steel products. In our Mexican facilities, we produce I-beams,
channels, structural and commercial angles, hot
rolled
bars (round, square and hexagonals), flat bars, rebars, and cold finished
bars.
In our U.S. facilities, we produce hot rolled bars, cold finished bars,
semi-finished tube rounds and other semi-finished trade products. The following
is a description of these products and their main uses:
·
|
I-beams.
I-beams, also known as standard beams, are “I” form steel structural
sections with two equal parallel sides joined together by the center
with
a transversal section, forming 90º angles. We produce I-beams in our
Mexican facilities and they are mainly used by the industrial construction
as structure supports.
|
·
|
Channels.
Channels, also known as U-Beams because of their “U” form, are steel
structural sections with two equal parallel sides joined together
by its
ends with a transversal section, forming 90º angles. We produce channels
in our Mexican facilities and they are mainly used by industrial
construction as structure supports and for stocking systems.
|
·
|
Angles.
Angles are two equal sided sections joined by their ends with a
90º angle,
forming an “L” form. We produce angles in our Mexican facilities and they
are used mainly by the construction and furniture industries as
joist
structures and framing systems.
|
·
|
Hot
rolled bars. Hot rolled bars are round, square and hexagonal steel
bars
that can be made of special or commodity steel. The construction,
autopart
and furniture industries mainly use the round and square bars.
The
hexagonal bars are made of special steel and are mainly used by
the hand
tool industry. We produce the steel sections in our Mexican and
U.S.
facilities.
|
·
|
Flat
bars. Flat bars are rectangular steel sections that can be made
of special
or commodity steel. We produce flat bars in our Mexican facilities.
The
auto part industry mainly uses special steel as springs, and the
construction industry uses the commodity steel flat bars as supports.
|
·
|
Rebar.
Rebar is reinforced, corrugated round steel bars with sections
from 0.375
to 1.5 inches in diameter, and we produced rebar our Mexican facilities.
Rebar is only used by the construction sector to reinforce concrete.
Rebar
is considered a commodity product due to general acceptance by
most
costumers of standard industry
specifications.
|
·
|
Cold-finished
bars. Cold-finished bars are round and hexagonal SBQ steel bars
transformed through a diameter reduction process. This process
consists of
(1) reducing the cross sectional area of a bar by drawing the material
through a die without any pre-heating or (2) turning or “peeling” the
surface of the bar. The process changes the mechanical properties
of the
steel, and the finished product is accurate to size, free from
scale with
a bright surface finish. We produce these bars in our Mexican,
U.S. and
Canadian facilities, and mainly the auto part industry uses
them.
|
·
|
Semi-finished
tube rounds. These are wide round bars used as raw material for
the
production of seamless pipe. The semi-finished tube rounds are
made of SBQ
steel, and we produce them in our U.S. facilities. Seamless pipe
manufacturers use them to produce pipes used in the oil extraction
and
construction industry.
|
The
following table sets forth, for the periods indicated, our sales volume for
basic steel products. These figures reflect the sales of products manufactured
at the Apizaco and Cholula facilities as of August 1, 2004 and sales of
products manufactured at the U.S. and Canadian facilities as of July 22,
2005.
Steel
Product Sales Volume
|
|
Years
ended December 31,
|
|
Six
months ended June 30,
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2005
|
|
2006
|
|
|
|
(Thousands
of tons)
|
|
I-Beams
|
|
|
83.8
|
|
|
76.1
|
|
|
82.2
|
|
|
41.4
|
|
|
42.2
|
|
Channels
|
|
|
50.7
|
|
|
58.9
|
|
|
59.7
|
|
|
23.7
|
|
|
35.1
|
|
Angles
(1)
|
|
|
108.5
|
|
|
135.7
|
|
|
222.6
|
|
|
87.5
|
|
|
107.9
|
|
Hot-rolled
Bars (round, square and hexagonal rods)
|
|
|
174.6
|
|
|
189.0
|
|
|
600.0
|
|
|
100.9
|
|
|
602.0
|
|
Flat
Bar
|
|
|
45.7
|
|
|
91.7
|
|
|
188.5
|
|
|
99.7
|
|
|
81.1
|
|
Rebar
|
|
|
139.0
|
|
|
191.9
|
|
|
239.1
|
|
|
144.1
|
|
|
135.8
|
|
Cold
Finished Bars
|
|
|
17.1
|
|
|
15.7
|
|
|
105.6
|
|
|
22.2
|
|
|
101.7
|
|
Semi-finished
tube rounds
|
|
|
0.00
|
|
|
0.00
|
|
|
165.2
|
|
|
0
|
|
|
210.0
|
|
Other
semi-finished trade products
(2)
|
|
|
0.00
|
|
|
0.00
|
|
|
43.3
|
|
|
0
|
|
|
48.5
|
|
Other
|
|
|
8.8
|
|
|
14.3
|
|
|
1.9
|
|
|
2.8
|
|
|
4.0
|
|
Total
Steel Sales
|
|
|
628.2
|
|
|
773.3
|
|
|
1,708.1
|
|
|
522.3
|
|
|
1,368.3
|
|
_________________
(1)
Angles
include structural angles and commercial angles.
(2)
Includes
billets and blooms (wide section square and round bars).
Our
Operations and Production Facilities
We
conduct our operations at ten facilities throughout North America. At June
30,
2006, our crude steel production capacity was 3.4 million tons, of which
1.0
million tons were based on an integrated blast furnace technology, and 2.4
million were based on electric arc furnace, or mini-mill, technology. Our
Mexican facilities have 1.1 million tons of crude steel production capacity,
operating three mini-mill facilities. Our U.S. operations have 2.3 million
tons
of crude steel production capacity. In addition, we have 2.8 million tons
of
rolling and finishing capacity, of which 1.2 million are located in Mexico,
and
1.6 million are located in the United States and Canada.
We
operate four mini-mills, three in Mexico and one in the United States. The
Mexican mini-mills are located in Guadalajara, Jalisco; Apizaco, Tlaxcala
and
Mexicali, Baja California. Our mini-mill in the United States is located
in
Canton, Ohio, and we have recently completed a revamping process that has
increased capacity of the mill to 1,300,000 tons of steel billet. We also
operate an integrated blast furnace in Lorain, Ohio. There is a second blast
furnace in the same facility with 750,000 tons of yearly capacity that is
not
currently operating, but that we believe could be made operational with
relatively low levels of investment. We operate rolling and finishing facility
in each of our mill facilities in Cholula and in the United States and Canada.
Because
we operate both mini-mill and integrated blast furnace production facilities,
we
can allocate production between each type of facility based on efficiency
and
cost. In addition, as long as our facilities are not operating at full capacity,
we can allocate production based on the relative cost of basic inputs (iron
ore,
coke, scrap and electricity) to the facility where production costs would
be the
lowest. Our production facilities are designed to permit the rapid changeover
from one product to another. This flexibility permits us to efficiently produce
small volume orders to meet customer needs and to produce varying quantities
of
standard product. Production runs, or campaigns, occur on four to eight weeks
cycles, minimizing customer waiting time for both standard and specialized
products.
We
use
ferrous scrap and iron ore to produce our finished steel products. We produce
molten steel using both an electric arc furnace and integrated blast furnace
technology, alloying elements and carbon are added, and which then is
transported to continuous casters for solidification. The
continuous
casters
produce long, square strands of steel that are cut into billet and transferred
to the rolling mills for further processing or, in some cases, sold to other
steel producers. In the rolling mills, the billet is reheated in a walking
beam
furnace with preheating burners, passed through a rolling mill for size
reduction and conformed into final sections and sizes. The shapes are then
cut
into a variety of lengths. In addition, to producing billet, our Canton,
Ohio
facility also produces blooms.
Our
mini-mill plants use an electric arc furnace to melt ferrous scrap and other
metallic components, which are then cast into long, square bars called billet
in
a continuous casting process, all of which occurs in a melt shop. The billet
is
then transferred to a rolling mill, reheated and rolled into finished product.
In contrast, an integrated steel mill heats iron pellets and other primary
materials in a blast furnace to first produce pig iron, that must be refined
in
a basic oxygen furnace to liquid steel, and then cast to billet and finished
product. Mini-mill plants typically produce certain steel products more
efficiently because of the lower energy requirements resulting from their
smaller size and because of their use of ferrous scrap. Mini-mills are designed
to provide shorter production runs with relatively fast product changeover
times. Integrated steel mills are more efficient in producing longer runs
and
are able to produce certain steel products that a mini-mill cannot.
The
production levels and capacity utilization rates for our melt shops and rolling
mills for the periods indicated are presented below. These figures reflect
the
sales of products manufactured at the Apizaco and Cholula facilities starting
from August 1, 2004. These figures reflect the sales of the products
manufactured at the Republic facilities starting from July 22,
2005.
Production
Volume and Capacity Utilization
|
|
Years
ended December 31,
|
|
Six
months ended June 30,
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2005
|
|
2006
|
|
|
|
(Tons
in thousands)
|
Melt
shops
|
|
|
|
Steel
billet production
|
|
|
705.9
|
|
|
877.5
|
|
|
1,748.2
|
|
|
532.6
|
|
|
1,550.5
|
|
Annual
installed capacity
(1)
|
|
|
780.0
|
|
|
1,160.0
|
|
|
3,115.9
|
|
|
1,160.0
|
|
|
3,398.1
|
|
Effective
capacity utilization
|
|
|
90.5
|
%
|
|
93.5
|
%
|
|
89.6
|
%
|
|
91.8
|
%
|
|
91.3
|
%
|
Rolling
mills
|
Total
production
|
|
|
598.1
|
|
|
766.0
|
|
|
1,544.0
|
|
|
502.6
|
|
|
1,242.3
|
|
Annual
installed capacity
(1)
|
|
|
730.0
|
|
|
1,210.0
|
|
|
2,847.5
|
|
|
1,210.0
|
|
|
2,901.9
|
|
Effective
capacity utilization
|
|
|
81.9
|
%
|
|
82.4
|
%
|
|
80.6
|
%
|
|
83.1
|
%
|
|
85.6
|
%
|
_________________
(1)
|
Annual
installed capacity is determined based on the assumption that billet
of
various specified diameters, width and length is produced at the
melt
shops or that a specified mix of rolled products are produced in
the
rolling mills on a continuous basis throughout the year except
for periods
during which operations are discontinued for routine maintenance,
repairs
and improvements. Amounts presented represent annual installed
capacity as
at December 31 for each year. The percentage of effective capacity
utilization for 2004 is determined in the case of the Apizaco and
Cholula
facilities based on utilization over the period from August 1 to
December
31, 2004. The percentage of effective capacity utilization for
2005 is
determined in the case of Republic facilities based on utilization
over
the period from July 22 to December 31,
2005.
|
Mexican
Operations and Facilities
The
following table presents production by product at each of our Mexican facilities
as a percentage of total production at that facility for the six-months ended
June 30, 2006.
Mexican
Production per Facility by Product
|
|
Location
|
|
Product
|
|
Guadalajara
|
|
Mexicali
|
|
Apizaco/Cholula
|
|
Total
|
|
|
|
(Production
%)
|
|
|
|
|
|
|
|
|
|
|
|
I
Beams
|
|
|
20.6
|
%
|
|
0.7
|
%
|
|
0
|
%
|
|
8.1
|
%
|
Channels
|
|
|
9.6
|
%
|
|
14.8
|
%
|
|
0
|
%
|
|
6.8
|
%
|
Angles
|
|
|
24.0
|
%
|
|
13.6
|
%
|
|
21.2
|
%
|
|
20.9
|
%
|
Hot
Rolled Bars (round,
square
and hexagonal rods)
|
|
|
18.8
|
%
|
|
9.0
|
%
|
|
18.4
|
%
|
|
16.6
|
%
|
Rebar
|
|
|
14.2
|
%
|
|
60.0
|
%
|
|
21.5
|
%
|
|
26.3
|
%
|
Flat
Bars
|
|
|
7.9
|
%
|
|
1.9
|
%
|
|
30.0
|
%
|
|
15.7
|
%
|
Cold
Finished Bars
|
|
|
3.2
|
%
|
|
0
|
%
|
|
8.9
|
%
|
|
4.8
|
%
|
Other
|
|
|
1.7
|
%
|
|
0
|
%
|
|
0.0
|
%
|
|
0.8
|
%
|
Total
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Guadalajara
.
Our
Guadalajara mini-mill facility is located in central western Mexico in
Guadalajara, Jalisco, which is Mexico’s third largest city. Our Guadalajara
facilities and equipment include one improved electric arc furnace utilizing
water-cooled sidewalls and roof, one four-strand continuous caster, five
reheating furnaces and three rolling mills. The Guadalajara mini-mill has
an
annual installed capacity of 350,000 tons of billet and an annual installed
capacity of finished product of 480,000 tons. In 2005, the Guadalajara mini-mill
produced 304,295 tons of steel billet and 393,958 tons of finished product
operating at 87% capacity for billet production and 82% capacity for finished
product production. The Guadalajara rolling facilities process billet production
from our Mexicali and Apizaco mills. Our Guadalajara facility is 336 miles
from
Mexico D.F. Our Guadalajara facility mainly produces structurals, SBQ steel,
light structurals and rebars.
Guadalajara
Mini-Mill
|
|
Years
ended December 31,
|
|
Six
months ended June 30
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2005
|
|
2006
|
|
Steel
Sales (thousands of tons)
|
|
|
430
|
|
|
463
|
|
|
407
|
|
|
204
|
|
|
203
|
|
Average
finished product price per ton
|
|
|
Ps.
4,650
|
|
|
Ps.
7,375
|
|
|
Ps.
6,556
|
|
|
Ps.
6,959
|
|
|
Ps.
6,903
|
|
Average
scrap cost per ton
|
|
|
1,713
|
|
|
2,774
|
|
|
2,343
|
|
|
2,535
|
|
|
2,349
|
|
Average
manufacturing conversion cost per ton of finished product
|
|
|
1,366
|
|
|
1,387
|
|
|
1,645
|
|
|
1,625
|
|
|
1,617
|
|
Average
manufacturing conversion cost per ton of billet
|
|
|
848
|
|
|
961
|
|
|
1,050
|
|
|
1,020
|
|
|
1,074
|
|
Mexicali
.
In
1993, we began operations at our mini-mill located in Mexicali, Baja California.
The mini-mill is strategically located approximately 22 miles south of the
California border and approximately 220 miles from Los Angeles.
Our
Mexicali facilities and equipment include one electric arc furnace utilizing
water-cooled sidewalls and roof, one four-strand continuous caster, one walking
beam reheating furnace, one SACK rolling mill, a Linde oxygen plant and a
water
treatment plant. This facility has an annual installed capacity of 430,000
tons
of steel billet and an annual installed capacity of finished product of
250,000
tons.
Excess billet produced at the Mexicali facility is used primarily by the
Guadalajara facility. This allows us to increase the utilization of the
Guadalajara facility’s finishing capacity, which exceeds its production
capacity. In 2005, the Mexicali mini-mill produced approximately 385,873
tons of
billet, of which the Guadalajara mini-mill used 104,415 tons, the Apizaco
mini-mill 60,124 used tons, and we sold 12,870 tons to third parties. In
2005,
the Mexicali mini-mill produced 201,607 tons of finished product. In 2005
we
operated the Mexican mini-mill at 90% capacity for billet production and
at 81%
capacity for finished product production. Our facility is strategically located
and has access to key markets in Mexico and the United States, stable sources
of
scrap, electricity, a highly skilled workforce and other raw materials. The
Mexicali mini-mill also is situated near major highways and a railroad linking
the Mexicali and Guadalajara mini-mills, allowing for coordinated production
at
the two facilities. Our Mexicali facility mainly produces structurals, light
structurals and rebar. In 2005, 66% of the products produced at the Mexicali
mini-mill were rebar, 15% were angles, 9% were hot rolled bars (round, square
and hexagonal rods) and the remaining 10% were other products, principally
channels and flat bars.
Mexicali
Mini-Mill
|
|
Years
ended December 31,
|
|
Six
months ended June 30
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2005
|
|
2006
|
|
Steel
Sales (thousands of tons)
|
|
|
198
|
|
|
181
|
|
|
210
|
|
|
105
|
|
|
105
|
|
Average
finished product price per ton
|
|
|
Ps.
4,310
|
|
|
Ps.
7,031
|
|
|
Ps.
5,680
|
|
|
Ps.
5,803
|
|
|
Ps.
6,691
|
|
Average
scrap cost per ton
|
|
|
1,373
|
|
|
2,046
|
|
|
2,034
|
|
|
2,100
|
|
|
2,041
|
|
Average
manufacturing conversion cost per ton of finished product
|
|
|
1,294
|
|
|
1,426
|
|
|
1,516
|
|
|
1,492
|
|
|
1,520
|
|
Average
manufacturing conversion cost per ton of billet
|
|
|
817
|
|
|
857
|
|
|
908
|
|
|
890
|
|
|
918
|
|
Apizaco
mini-mill and Cholula facility
.
We have
operated the Apizaco mini-mill and Cholula facility since August 1, 2004.
The
mini-mill is located in central Mexico in Apizaco, Tlaxcala. Our Apizaco
facilities and equipment include one EBT Danieli electric arc furnace utilizing
water-cooled sidewalls and roof, two ladle stations (one Danieli and the
other
Daido), one Daido degasification station, one Danieli four-strand continuous
caster, two walking beam reheating furnaces and two rolling mills (one Danieli
and the other Pomini). This facility has an annual installed capacity of
380,000
tons of steel billet and an annual installed capacity of finished product
of
432,000 tons. In 2005, the Apizaco mini-mill produced 377,832 tons of steel
billet, of which the Guadalajara mini-mill used 3,685 tons, and 392,681 tons
of
finished products. Our Apizaco facility is 1,112 miles from Mexicali and
less
than 124 miles from Mexico D.F. Our Apizaco facility mainly produces SBQ
steel,
light structurals and rebar. Our Cholula facility is approximately 25 miles
from
our Apizaco facility, which allows the integrated operations of the Apizaco
mini-mill and Cholula facility. Our Cholula facilities and equipment include
cold drawing and turning machines for peeling bars. This facility has an
annual
installed capacity of finished product of 48,000 tons. In 2005, the Cholula
facility produced 32,494 tons of finished product, at 68% capacity. Our Cholula
facility mainly produces cold finished SBQ steel.
In
2005,
17% of the products we produced at the Apizaco and Cholula facilities were
rebar, 23% were angles, 17% were hot rolled bars (round, square and hexagonals)
and the remaining 43% were other products, flat merchant bar and cold finished
products.
Apizaco
Mini-Mill and Cholula Facility
|
|
Years
ended December 31,
|
|
Six
months ended June 30,
|
|
|
|
2004
(1)
|
|
2005
|
|
2005
|
|
2006
|
|
Steel
Sales (thousands of tons)
|
|
|
156
|
|
|
416
|
|
|
213
|
|
|
209
|
|
Average
finished product price per ton
|
|
|
Ps.
7,822
|
|
|
Ps.
6,632
|
|
|
Ps.
6,923
|
|
|
Ps.
6,891
|
|
Average
scrap cost per ton
|
|
|
3,112
|
|
|
2,745
|
|
|
2,850
|
|
|
2,614
|
|
Average
manufacturing conversion cost per ton of finished product
|
|
|
2,135
|
|
|
2,092
|
|
|
2,024
|
|
|
2,134
|
|
Average
manufacturing conversion cost per ton of billet
|
|
|
1,428
|
|
|
1,416
|
|
|
1,457
|
|
|
1,400
|
|
(1)
Since
August 1, 2004.
U.S.
and Canada Operations and Facilities
We
have
operated our Republic facilities (in Ohio, New York, Indiana and Canada)
since
we acquired them from Republic on July 22, 2005. As of December 31, 2005,
these
facilities had an annual installed capacity of 2,238,000 tons of billet and
1,692,000 tons of finished product. From July 22, 2005 to December 31, 2005,
the
Republic facilities produced 680,219 tons of steel billet, of which 165,201
tons
were sold as semi-finished tube rounds and 43,273 were sold as other
semi-finished trade products. The remainder went to the Lorain, Ohio and
Lackawanna, New York facilities for further processing. For the same period,
the
Republic facilities produced 453,509 tons of hot-rolled bar, of which 49,624
tons were used by the cold finish facilities. The Republic facilities produced
69,764 tons of cold finish bars. During this period, 60% of the products
produced at the Republic facilities were hot-rolled bars, 9% were cold-finished
bars, 25% were semi-finished tube rounds, and 6% were other semi-finished
trade
products.
The
following table sets forth, for the periods indicated, selected operating
data
for our Republic facilities.
|
|
July
22 - December 31
|
|
Six
months ended June 30
|
|
|
|
2005
|
|
2006
|
|
Steel
Sales (thousands of tons)
|
|
|
675
|
|
|
852
|
|
Average
finished product price per ton
|
|
|
Ps.
8,245
|
|
|
Ps.
9,822
|
|
Average
scrap cost per ton
|
|
|
1,800
|
|
|
2,291
|
|
Average
iron ore pellet cost per ton
|
|
|
647
|
|
|
661
|
|
Average
manufacturing conversion cost per ton of finished product
(1)
|
|
|
5,033
|
|
|
4,787
|
|
Average
manufacturing conversion cost per ton of billet
(1)
|
|
|
3,729
|
|
|
3,545
|
|
_____________
(1)
Manufacturing
conversion cost is defined as all production costs excluding the cost of
scrap
and related yield loss.
Lorain,
Ohio
.
The
Lorain facility mainly produces SBQ steel and operates an integrated steel
mill.
We operate one blast furnace, two 220-ton basic oxygen furnaces, a ladle
metallurgy facility, a vacuum degasser, a five-strand continuous bloom caster,
a
six-strand billet caster, a billet rolling mill and two bar rolling mills.
Our
Lorain facility had, at December 31, 2005, an annual installed capacity of
1,170,000 tons of steel billet and 840,000 tons of finished product. During
the
period of July 22 to December 31, 2005, the Lorain facility, was operated
at
82.5% capacity for steel billet and for finished product, 64.6% for
9-10”
rolling
mill and 75.7% for 20” mill finishing and shipping production, and it produced
376,130 net tons of billets and 240,000 net tons of finished
products.
Canton,
Ohio
.
Our
Canton facility mainly produces SBQ steel and includes two 200-ton top charge
electric arc furnaces, a 5-strand bloom/billet caster, two ladle metallurgical
furnaces, two vacuum degassers and two slag rakes. This facility also includes
a
combination Caster rolling facility that continuously casts blooms in a 4-strand
caster, heats the blooms to rolling temperature in a walking beam furnace,
then
rolls billets through an 8-stand rolling mill in an inline operation. We
installed and commissioned the electric arc furnace, the bloom/billet caster,
ladle metallurgical furnace and vacuum degasser in 2005. Other Canton equipment
includes a Mecana billet inspection line, four stationary billet grinders,
a saw
line and a quality verification line (or “QVL line”).
Canton
produces blooms and billets for the three rolling mills in the Republic
facilities and for trade customers. We use the QVL inspection line to inspect
finished bar produced in Lackawanna and Lorain. As of December 2005, the
Canton
facility had annual installed capacity of 790,000 net tons of steel billet.
In the period from July 22, 2005 to December 31, 2005, this facility produced
302,000 net tons of blooms, billets and other semi-finished trade product
and
was operated at 94.2% capacity of steel billet.
Lackawanna,
New York
.
Our
Lackawanna facility mainly produces SBQ steel and includes a three-zone walking
beam billet reheat furnace, a recently upgraded 22 stand rolling mill capable
of
producing rounds, squares, and hexagons in both cut length and coils. This
facility produces hot rolled bar sizes that range from .562" to 3.250" with
coil
weights up to 6000 lb. Our Lackawanna facility’s finishing equipment includes a
QVL inspection line and three saw lines. We sell a portion of the hot rolled
bars produced at our Lackawanna facility to trade customers, and we also
ship a
portion of the finished bars to our cold finishing operations for further
processing. As of December 2005, the Lackawanna facility had annual installed
capacity of 540,000 net tons of hot rolled bars. In the period from July
22,
2005 to December 31, 2005 this facility produced 212,000 tons of hot rolled
bars. Our Lackawanna rolling facility had, at December 31, 2005, an annual
installed capacity of 540,000 tons of hot rolled bars. During the period
of July
22 to December 31, 2005, the Lackawanna produced 212,000 tons of hot rolled
bars
and was operated at 91.9% capacity of finished product.
Massillon,
Ohio
.
Our
Massillon facility mainly produces SBQ steel and contains a cold finishing
facility which includes the machinery and equipment to clean, draw, turn,
chamfer, anneal, grind, straighten and saw bars. Our Massillon facility had,
at
December 31, 2005, an annual installed capacity of 125,000 tons of finished
product. During the period of July 22 to December 31, 2005, the Massillon
facility was operated at 74.9% capacity of finished product and produced
39,000
net tons of cold finished bars.
Gary,
Indiana
.
Our
Gary facility mainly produces SBQ steel and has a cold finishing facility
which
includes the machinery and equipment to clean, draw, turn, chamfer, anneal,
grind, straighten and saw bars. As of December 2005, the Gary facility had
annual installed capacity of 70,000 net tons of cold finished bars. In the
period from July 22, 2005 to December 31, 2005, this facility produced 16,000
tons of cold finished bars and was operated at 61.7% capacity of finished
product.
Hamilton,
Ontario, Canada
.
Our
Hamilton facility mainly produces SBQ steel and has a cold finishing facility
which includes the machinery and equipment to clean, draw, turn, chamfer,
anneal, grind, straighten and saw bars. As of December 2005, the Hamilton
facility had annual installed capacity of 60,000 net tons of cold finished
bars.
In the period from July 22, 2005 to December 31, 2005, this facility produced
14,000 tons of cold finished bars and was operated at 57.4% capacity of finished
product.
The
following table shows the products that we produce, the equipment that we
use
and the volume that we produce in each of our separate production
facilities:
Production
per Facility by Product, Equipment and Volume
Location
|
Product
(%)
|
Equipment
|
2005
Annual Production Volume (tons)
|
Finished
Product Annual
Installed
Capacity (tons)
(2)
|
|
|
|
|
|
Guadalajara
|
Structurals
(56%); Light Structurals (16%);
SBQ
(21%), Rebar (7%)
|
electric
arc furnace with continuous caster, rolling mill and bar processing
lines
|
393,958
|
480,000
|
|
|
|
|
|
Mexicali
|
Structurals
(7%); Rebar (67%);
Light
Structurals (26%)
|
electric
arc furnace with continuous caster and bar rolling mills
|
201,607
|
250,000
|
|
|
|
|
|
Apizaco
and Cholula
|
SBQ
(60%); Rebar (17%); Light Structurals (23%)
|
electric
arc furnace with vacuum tank degasser, continuous caster, bar rolling
mills, cold drawn and bar turning equipment
|
425,175
|
480,000
|
|
|
|
|
|
Lorain
|
SBQ
(100%)
|
blast
furnace, vacuum tank degasser, continuous caster, bar and wire
rod rolling
mills
|
240,000
(1)
|
840,000
|
|
|
|
|
|
Canton
|
SBQ
(100%)
|
electric
arc furnace, vacuum tank degasser, continuous caster, rolling
mills
|
302,000
(1)
|
790,000
(3)
|
|
|
|
|
|
Lakawanna
|
SBQ
(100%)
|
reheat
furnace, bar and wire rod rolling mills
|
212,000
(1)
|
540,000
|
|
|
|
|
|
Massillon
|
SBQ
(100%)
|
cold
drawn bar turning and heat treating equipment
|
39,000
(1)
|
125,000
|
|
|
|
|
|
Gary
|
SBQ
(100%)
|
cold
drawn bar turning and heat treating equipment
|
16,000
(1)
|
70,000
|
|
|
|
|
|
Hamilton
|
SBQ
(100%)
|
cold
drawn bar turning and heat treating equipment
|
14,000
(1)
|
60,000
|
|
|
|
|
|
(1)
Production from July 22, 2005 to December 31, 2005.
(2)
At December 31, 2005.
(3)
Installed capacity at Canton increased to 1,200,000 tons at June
30,
2006 due to the additional 400,000 tons of rolling
capacity.
|
Principal
Capital Expenditures and Divestitures
We
continually seek to improve our operating efficiency and increase sales of
our
products through capital investments in new equipment and technology.
In
2005,
we spent $46.4 million (Ps. 503 million) on capital investments in our Mexican
and our U.S. operations. Projects at the Guadalajara facilities in 2005 included
the addition of a railroad weighing-machine and improvements to the warehouse.
Projects at the Mexicali facility in 2005 included the addition of a cooling
bed
for the rolling mill, special site for dust and a co-jet system for the melt
shop in order to increase productivity and reduce energy consumption. Projects
at the Apizaco facility included the addition of a Straightening Line for
the
rolling mill and an inspection system for the rolling mill. From July 22,
2005
to December 31, 2005, capital investments in our Republic facilities were
$34.4
million (Ps. 392 million), including $17.8 million (Ps. 203 million) for
the new
five strand combined billet/bloom caster in our Canton, Ohio facility, and
the
remainder for the revamping of the Canton melt shop, maintenance, general
capital and infrastructure improvements and modernization.
In
2004,
we spent $109.7 million (Ps. 1,285 million) on capital investments ($107.5
million of which (Ps. 1,225 million) we allocated to the acquisition of the
Apizaco and Cholula facilities). Projects at the Guadalajara facilities in
2004
included the addition of a reheating furnace and a new stand for the rolling
mill. Projects at the Mexicali facility in 2004 included the addition of
a
special site for dust.
In
2003,
we spent $5.4 million (Ps. 64 million) on capital investments. Projects at
the
Guadalajara facility included the addition of a slitting system in order
to
increase production at the rolling mill. Projects at the Mexicali facility
included the addition of a digital regulation system to the electric arc
furnace
in order to reduce energy consumption at the melt shop.
We
anticipate capital investments of $34.1 million (Ps. 389 million) at our
Republic facilities in 2006, including $23.4 million (Ps. 267 million) at
the
Canton, Ohio facility, $9.2 million (Ps. 105 million) at the Lorain, Ohio
facility, $0.5 million (Ps. 5.7 million) at the Lackawanna, New York facility,
$0.4 million (Ps. 4.6 million) at the Massillon, Ohio facility, $0.1 million
(Ps. 1.1 million) at the Hamilton, Ontario, Canada facility, $0.2 million
(Ps.
2.3 million) at the Gary, Indiana facility and $0.3 million (Ps. 3.4 million)
at
our corporate location in Fairlawn, Ohio. We expect to have spent $9.4 million
(Ps. 107 million) on capital improvements at our facilities in Mexico in
2006,
including $7.7 million (Ps. 88 million) at the Apizaco facility, $1.4 million
(Ps. 16 million) at the Mexicali facility and $0.3 million (Ps. 3.4 million)
at
the Guadalajara facility.
Sales
and Distribution
We
sell
and distribute our steel products throughout North America. We also export
steel
products from Mexico to Central and South America and Europe. We believe
that on
a pro forma basis, including Republic for all of 2005, approximately 79%
of our
steel product sales represented SBQ steel products, of which we sold 45%
to the
auto part industry, 15% to service centers, 13% for energy related products,
5%
for hand tools, 5% for mining equipment and the remaining 17% to other
industries. We estimate that 85% of our total production comes from special
orders from our clients.
The
following table sets forth, for the periods indicated, our Mexico, U.S. and
Canada sales as a percentage of total product sales by market. These figures
reflect the sales of products manufactured at the Apizaco and Cholula facilities
starting since August 1, 2004 and the sales of products manufactured at our
U.S.
facilities starting since July 22, 2005.
Steel
Product Sales By Region
|
|
Mexico
|
|
U.S.
and Canada
(1)
|
|
Mexico
|
|
U.S.
and Canada
(1)
|
|
|
|
Years
ended December 31,
|
|
Six
months ended June 30,
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2003
|
|
2004
|
|
2005
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
I-Beams
|
|
|
99
|
%
|
|
100
|
%
|
|
99
|
%
|
|
1
|
%
|
|
0
|
%
|
|
1
|
%
|
|
100
|
%
|
|
98
|
%
|
|
0
|
%
|
|
2
|
%
|
Channels
|
|
|
81
|
%
|
|
80
|
%
|
|
81
|
%
|
|
19
|
%
|
|
20
|
%
|
|
19
|
%
|
|
85
|
%
|
|
59
|
%
|
|
15
|
%
|
|
41
|
%
|
Angles
|
|
|
89
|
%
|
|
95
|
%
|
|
94
|
%
|
|
11
|
%
|
|
5
|
%
|
|
6
|
%
|
|
94
|
%
|
|
90
|
%
|
|
6
|
%
|
|
10
|
%
|
Hot-rolled
Bars(round, square and hexagonal rods)
|
|
|
96
|
%
|
|
91
|
%
|
|
10
|
%
|
|
4
|
%
|
|
9
|
%
|
|
90
|
%
|
|
88
|
%
|
|
12
|
%
|
|
12
|
%
|
|
88
|
%
|
Rebar
|
|
|
67
|
%
|
|
71
|
%
|
|
66
|
%
|
|
33
|
%
|
|
29
|
%
|
|
34
|
%
|
|
65
|
%
|
|
91
|
%
|
|
35
|
%
|
|
9
|
%
|
Flat
bar
|
|
|
89
|
%
|
|
95
|
%
|
|
98
|
%
|
|
11
|
%
|
|
5
|
%
|
|
2
|
%
|
|
97
|
%
|
|
97
|
%
|
|
3
|
%
|
|
3
|
%
|
Cold
Drawn finished bars
|
|
|
96
|
%
|
|
95
|
%
|
|
40
|
%
|
|
4
|
%
|
|
5
|
%
|
|
60
|
%
|
|
99
|
%
|
|
23
|
%
|
|
1
|
%
|
|
77
|
%
|
Semi-finished
tube rounds
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
100
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
100
|
%
|
Other
semi-finished trade products
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
100
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
100
|
%
|
Other
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
100
|
%
|
|
100
|
%
|
|
0
|
%
|
|
0
|
%
|
Total
(weighted average)
|
|
|
87
|
%
|
|
87
|
%
|
|
53
|
%
|
|
13
|
%
|
|
13
|
%
|
|
47
|
%
|
|
86
|
%
|
|
34
|
%
|
|
14
|
%
|
|
66
|
%
|
_________________
(1)
Includes
sales principally into the United States and Canada.
During
the six months ended June 30, 2006, approximately 66% of our sales by volume
came from the U.S. market, with almost 100% of such sales representing SBQ
products. The Mexican market represents approximately 34% of our sales by
volume, with SBQ products representing approximately 26% of such sales and
the
remainder representing commercial steel products. Approximately 61% of our
sales
in the United States and Canadian markets come from contractual long-term
agreements that establish minimum quantities and prices, which are adjustable
based on fluctuations of key production materials. The remainder of our sales
in
the United States and Canadian markets are spot sales either directly to
end
customers through our sales force or through independent
distributors.
We
sell
to the Mexican market through a group of approximately 100 independent
distributors, who also carry other steel companies’ product lines, and through
our wholly owned distribution center in Guadalajara. Our sales force and
distribution center are an important source of information concerning customer
needs and market developments. By working through our distributors, we believe
that we have established and can maintain market leadership with small and
mid-market end-users throughout Mexico. We believe that our domestic customers
are highly service-conscious.
We
sell
to customers in the U.S. and Canadian markets through a staff of professional
sales representatives and sales technicians located in the major manufacturing
centers of the Midwest, Great Lakes and Southeast regions of the United States.
We
distribute our exports outside North America primarily through independent
distributors who also carry other product lines. In addition, we have three
full-time employees in Mexico dedicated exclusively to exports.
During
2004 and 2005, we received orders for our products in our Mexican facilities
on
average approximately two weeks before producing those products. We generally
fill orders for our U.S. and Canadian SBQ steel products within one to 12
weeks
of the order depending on the product, customer needs and other production
requirements. Customer orders are generally cancelable without penalty prior
to
finish size rolling and depend on customers’ changing production schedules.
Accordingly, we do not believe that backlog is a significant factor in our
business. A substantial portion of our production is
ordered
by our customers prior to production. There can be no assurance that significant
levels of pre-production sales orders will continue.
We
have
long term relationships with most of our major customers, in some cases for
10
to 20 years or longer. Our major direct and indirect costumers include leading
automotive and industrial equipment manufacturers General Motors Corporation,
Ford Motor Company, DaimlerChrysler AG, Honda Motor Co., Ltd. Toyota Motor
Corporation, and Caterpillar Inc., first tier suppliers to automotive and
industrial equipment manufacturers such as American Axle, ArvinMeritor, Inc.,
Delphi, Formtech Industries LLC, NTN Driveshaft, Inc., TRW Automotive Holdings
Corp., and Visteon Corporation; forger Jernberg Industries, Inc.; service
centers which include AM Castle & Co., Earle M. Jorgensen Co., and Eaton
Steel Bar Company; and tubular product manufacturer, U.S. Steel. In 2002
we
entered into a long term supply contract with U.S. Steel, which we have extended
several times. On September 22, 2006, we renewed our long term supply contract
with U.S. Steel through September 30, 2008. This contract provides for our
obligation to produce and sell to U.S. Steel, and U.S. Steel’s obligation to
purchase from us 25,000 to 30,000 tons of our tube rounds per month, and
we may
agree to sell rounds to U.S. Steel in excess of 30,000 tons. We may not deliver
fewer than 75,000 tons during any quarter without paying a penalty, unless
the
shortfall is based solely on U.S. Steel’s act or omission.
Our
U.S.
and Canadian facilities are strategically located to serve the majority of
consumers of SBQ products in the United States. Our U.S. and Canadian facilities
ship products between their mills and finished products to customers by rail
and
truck. Customer needs and location dictate the type of transportation used
for
deliveries. The proximity of our rolling mills and cold finishing plants
to our
U.S. customers allows us to provide competitive rail and truck freight rates
and
flexible deliveries in order to satisfy just-in-time and other customer
manufacturing requirements. We believe that the ability to meet the product
delivery requirements of our customers in a timely and flexible fashion is
a key
to attracting and retaining customers as more SBQ product consumers reduce
their
in-plant raw material inventory. We optimize freight costs by using our
significantly greater scale of operations to maintain favorable transportation
arrangements, continuing to combine orders in shipments whenever possible
and
“backhauling” scrap and other raw materials.
Competition
Mexico
We
compete in the Mexican domestic market and in its export markets for non-flat
steel products primarily on the basis of price and product quality. In addition,
we compete in the domestic market based upon our responsiveness to customer
delivery requirements. We believe that we are one of the lowest cost producers
of non-flat steel products in Mexico. We endeavor to enhance our competitive
position in Mexico by working closely with our clients and distributors and
adjusting our production schedule to meet customer requirements. The flexibility
of our production facilities, allows us to respond quickly to the demand
for our
products. We also believe that the geographic locations of our various
facilities throughout Mexico and large variety of products help us to maintain
our competitive market position in Mexico and in the southwestern United
States.
Our Mexicali mini-mill, one of the closest mini-mills to the southern California
market, provides a production and transportation cost advantage in northwestern
Mexico and southern California.
We
believe that our competitors’ closest plants to the southern California market
are: Nucor Steel, located in Plymouth, Utah, Schnitzer Steel (Cascade), located
in McMimville, Oregon, Oregon Steel (Rocky Mountain Steel Mills), located
in
Pueblo, Colorado, Tamco Steel, located in Rancho Cucamanga, California and
Grupo
Villacero (Border Steel), located in El Paso, Texas. We believe that in addition
to our significant advantage in terms of lower
transportation
cost, we also believe that we have an advantage in lower labor cost in our
Mexican operations. We believe our transportation costs in
northwestern
Mexico compare favorably to other local producers, including Grupo Villacero
(SICARTSA), located in Lazaro Cardenas, Michoacan; Ternium (Hylsa), located
in
Apodaca, Nuevo Leon and DeAcero, located in Saltillo, Coahuila.
We
estimate, based on information compiled by Mexico’s National Steel and Iron
Industry Chamber (
Cámara
Nacional de la Industria del Hierro y del Acero
,
or
“CANACERO”), that we are the sole Mexican producer of 5 inch, 6 inch and 200 mm
I-beams and that there is one other small producer of 4-inch I-beams. These
products accounted for approximately 75,894 tons, or 10%, and approximately
80,000 tons, or 5%, of our total finished product sales in 2004 and 2005,
respectively. The revenue that we derived from I-beam products represented
10%
and 5% of our net sales in 2005 and 2004, respectively. Total imports of
these
products, which come mainly from Spain and the United States, represent
approximately 10% of the Mexican market.
In
2005,
we sold approximately 200,000 tons of I-beams, channels and angles at least
three inches in width (including the 80,000 tons of I-beams described above)
which represented approximately 12% of our total finished product sales for
the
year. In 2004, we sold approximately 180,000 tons of I-beams, channels and
angles at least three inches in width (including the 75,000 tons of I-beams
described above) which represented approximately 24% of our total finished
product sales for the year. We believe that the domestic competitors in the
Mexican market for structural steel are Altos Hornos de Mexico, S.A. de C.V.
(“Ahmsa”), Siderúrgica del Golfo, S.A. de C.V. (a wholly-owned subsidiary of
Inustrias CH), Aceros Corsa, S.A. de C.V. (“Corsa”) and Gerdão, S.A. We estimate
that our share of Mexican production of structural steel was 71% in 2005
and 64%
in 2004.
In
2005,
we sold approximately 700,000 tons of hot rolled and cold finished steel
bar,
compared to 200,000 tons in 2004. We estimate, based on information compiled
by
CANACERO, that our share of domestic production of steel bar was 41% in 2005
and
37% in 2004. Our other major product lines are rebar and light structural
steel
(angles less than three inches in width and flat bar), for which our share
of
domestic production in 2005 was 7% and 88%, respectively, compared to 6%
and
40%, respectively, in 2004. Rebar and light structural steel together accounted
for approximately 600,000 tons, or 35%, of our total production of finished
steel products in Mexico and the United States in 2005, compared to
approximately 390,000 tons, or 50%, in 2004. We compete in the Mexican market
with a number of producers of these products, including Ahmsa, Hylsamex,
S.A. de
C.V., Sicartsa, S.A. de C.V., Corsa, Aceros Tultitlán, S.A. de C.V., Commercial
Metals Inc., Belgo Mineira Aceralia Perfiles Bergara, S.A., Chaparral Steel
Company, Aceros San Luis, S.A. de C.V., Deacero, S.A. de C.V., Talleres y
Acero,
Nucor Corporation and Bayou Steel Corporation.
We
distributed our sales of SBQ steel in Mexico as of December 31, 2005 as
follows:
·
|
auto
parts industry, 63%,
|
·
|
bar
processing industry, 15%.
|
We
have
been able to maintain our domestic market share and profitable pricing levels
in
Mexico in part because the central Mexico sites of the Guadalajara, Apizaco
and
Cholula facilities afford us substantial cost advantages relative to U.S.
producers when shipping to customers in central and southern Mexico, and
our
flexible production facility gives us the ability to ship specialty products
in
relatively
small
quantities with short lead times. The Mexicali mini-mill has helped to increase
sales in northwestern Mexico and the southwestern United States because of
its
relatively close proximity to these areas reduces our freight
costs.
United
States and Canada
In
the
United States and Canada, we compete primarily with both domestic SBQ steel
producers and importers. Our U.S. domestic competition for hot-rolled engineered
bar products is both large U.S. domestic steelmakers and specialized mini-mills.
Non-U.S. competition may impact segments of the SBQ market, particularly
where
certifications are not required, and during periods when the U.S. dollar
is
strong as compared with foreign currencies.
The
principal areas of competition in our markets are product quality and range,
delivery reliability, service and price. Special chemistry and precise
processing requirements characterize SBQ steel products. Maintaining high
standards of product quality, while keeping production costs low, is essential
to our ability to compete in our markets. We believe that we have the widest
selection of product grades and sizes in our industry and in many cases provide
“niche” products to our customer base that our U.S. competitors cannot provide;
for example we are the sole U.S. producer of long lead steel. The ability
of a
manufacturer to respond quickly to customer orders currently is, and is expected
to remain, important as customers continue to reduce their in-plant raw material
inventory.
We
estimate that the total market for SBQ products in the United States is 8
million tons per year, and in 2005 we produced 1.7 million tons. We, therefore,
estimate that we have a market share of more than 20%.
We
believe our principal competitors in the U.S. market, depending on the product,
include Nucor Corporation, Niagara LaSalle, Mittal Steel, Charter Steel,
Steel
Dynamics, Inc., The Timken Company and QUANEX Corporation.
Certifications
ISO
is a
worldwide federation of national standards bodies which have united to develop
internationally accepted standards so that customers and manufacturers have
a
system in place to provide a product of known quality and standards. The
standards set by ISO cover every facet of quality from management responsibility
to service and delivery. We believe that adhering to the stringent ISO
procedures not only creates efficiency in manufacturing operations, but also
positions us to meet the strict standards that our customers require. We
are
engaged in a total quality program designed to improve customer service,
overall
personnel qualifications and team work.
The
facilities at Apizaco and Cholula have received ISO 9001:2000 certification
from
International Quality Certifications covering the period January 16, 2004
to
January 15, 2007.
Our
U.S.
operations are currently QS-9000 certified. QS-9000 sets forth a standard
set of
quality requirements for components and materials suppliers to the automotive
industry. Certification requirements vary in scope and generally take between
three and twelve months to achieve. Frequently, the qualification process
requires a producer to supply one or more trial heats of SBQ products for
customer evaluation, although some customers have longer pre-qualification
requirements.
The
QS-9000 standard will cease to be a certification standard as of December
15,
2006. Suppliers currently certified under QS-9000 will need to update their
certifications to comply with the ISO/TS 16949 standard. We are actively
working
toward transitioning to this standard in all of our facilities. The ISO/TS
16949
standard, developed by the International Automotive Task Force, is the result
of
the harmonization of the supplier quality requirements of vehicle manufacturers
worldwide and
provides
for a single quality management system of continuous improvement, defect
prevention and reduction of variation and waste in the supply chain. It places
greater emphasis on management’s commitment to quality and customer focus.
Our
Republic facilities are currently ISO 14001 certified. This certification
is a
voluntary international standard that defines the organizational structure,
responsibilities, procedures, processes and resources for implementing
environmental management systems (“EMS”). It also requires the development of an
environmental policy statement which includes commitments to prevention of
pollution, continual improvement of the EMS leading to improvements in overall
environmental performance and compliance with applicable statutory and
regulatory compliance. Most of the automotive customers of our Republic
facilities require this certification. The certification is effective until
November 2007.
Employees
At
June
30, 2006, we had 4,340 employees (of whom 1,912 were employed at our Mexico
facilities, and 1,143 were unionized, and 2,428 were employed at the Republic
facilities, where no employees were unionized) compared to 4,360 employees
at
December 31, 2005 (of whom 1,905 were employed at our Mexican facilities,
and
1,141 were unionized, and 2,455 were employed at the Republic facilities,
and
2,007 were unionized), compared to 2,018 employees at December 31, 2004 (781
employed at the Apizaco and Cholula facilities and 1,237 employed at the
Guadalajara and Mexicali facilities, and across these facilities a total
of
1,194 were unionized) compared with 1,288 employees at December 31, 2003
(or
whom 889 were unionized).
The
unionized employees in each of our Mexican facilities are affiliated with
different unions. Salaries and benefits of our Mexican unionized employees
are
determined annually through union contracts. Set forth below is the union
affiliation of the employees of each of our Mexican facilities and the
expiration date of the current contract.
·
|
Guadalajara
facilities
:
Sindicato de Trabajadores en la Industria Siderúrgica y Similares en el
Edo. de Jalisco. The contract expires in February 14,
2008.
|
·
|
Mexicali
facilities
:
Sindicato de Trabajadores de la Industria Procesadora y Comercialización
de Metales de Baja California. The contract expires in January
16,
2008.
|
·
|
Apizaco
facilities
:
Sindicato Nacional de Trabajadores de Productos Metalicos, Similares
y
Conexos de la República Mexicana. The contract expires in January 16,
2007.
|
·
|
Cholula
facilities
:
Sindicato Industrial "Acción y Fuerza" de Trabajadores Metalurgicos
Fundidores, Mecánicos y Conexos Crom del Estado. The contract expires in
March 1, 2008.
|
We
have
had good relations with the unions in our Mexican facilities. The bargaining
agreements are revised every two years, and wages are adjusted every
year.
The
employees of our Republic facilities are affiliated with United Steelworkers
of
America. The existing labor agreement with the employees of our Republic
facilities includes an employee profit sharing program, to which our Republic
subsidiary must contribute 15% of its quarterly net income before taxes
exceeding $12.5 million (Ps. 142 million) for the period ending June 30,
2006
for unionized employees and 3% of its quarterly net income before taxes
exceeding $12.5 million (Ps. 142 million) for the period ending June 30,2006
for
the non-unionized employees.
Wages
and
benefits for non-unionized employees are fixed by a compensation system that
incorporates both performance incentives and market wages. We believe that
our
relations with employees are satisfactory within all our operating subsidiaries,
and we have had no strikes or work stoppage in our history. We consider employee
training a priority and, as a result, have implemented programs in the
professional and technical areas of each operating facility
.
Raw
Materials
In
2005,
our cost of sales in Mexico was 67% compared to our U.S. operations where
our
cost of sales was 94%, and our consolidated cost of sales was 80%.
Ferrous
scrap, electricity, iron ore coke, ferroalloys, electrodes and refractory
products are the principal materials that we use to manufacture our steel
products.
Scrap
.
Ferrous
scrap is among the most important components for our steel production and
accounted for approximately 36% of our consolidated direct cost of sales
in 2005
(56% of the direct cost in our Mexico operations and 17.5% of the direct
cost in
our U.S. operations) and 59% of our direct cost of sales in 2004, and
represented 32% of our consolidated direct costs in sales for the six months
ended June 30, 2006 (55% of the direct cost in our Mexico operations and
25% of
the direct cost in our U.S. operations). Ferrous scrap is principally generated
from automobile, industrial, naval and railroad industries. The market for
ferrous scrap is influenced by availability, freight costs, speculation by
scrap
brokers and other conditions largely beyond our control. Fluctuations in
scrap
costs directly influence the cost of sales of finished goods.
We
purchase raw scrap from dealers in Mexico and the San Diego area, and processes
the raw scrap into refined ferrous scrap at our Guadalajara, Mexicali and
Apizaco facilities. We meet our refined ferrous scrap requirements through
three
sources: (i) our wholly owned scrap processing facilities, which in the
aggregate provided us with approximately 5% and 6% of our refined scrap tonnage
in 2005 and 2004, respectively, and (ii) purchases from third party scrap
processors in Mexico and the southwestern United States, which, in the
aggregate, provided us with approximately 84% and 11% in 2005, respectively,
and
approximately 64% and 30% in 2004, respectively, of our refined ferrous scrap
requirements. We are a dominant scrap collector in the Mexicali, Tijuana
and
Hermosillo regions, and, by primarily dealing directly with small Mexican
scrap
collectors, we believe we have been able to purchase scrap at prices lower
than
those in the international and Mexican markets. We purchase scrap on the
open
market through a number of brokers or directly from scrap dealers for our
U.S.
and Canadian facilities. We do not depend on any single scrap supplier to
meet
our scrap requirements.
Iron
Ore Pellets and Coke
.
Our
U.S. and Canadian facilities purchase iron ore pellets and coke. These are
the
principal raw materials used in our blast furnaces. Iron ore pellets and
coke
accounted for approximately 19% of our U.S. and Canadian facilities’ direct
costs for the six months ended June 30, 2006. In 2005, our U.S. and Canadian
facilities purchase 100% of their iron ore pellet and a portion of their
coke
requirement from U.S. Steel. For the six month period ended June 30, 2006,
we
used iron ore pellets and coke in our Lorain, Ohio facility. The iron ore
pellets and coke made up 9% and 10%, respectively, of the direct costs of
sales
in this period. We purchase the remainder of our coke requirement on the
open
market. Our Mexican facilities do not use iron ore pellets or coke.
Ferroalloys,
Electrodes and Refractory Products
.
In our
Mexican operations, ferroalloys, electrodes and refractory products collectively
accounted for approximately 13% of our direct cost of sales in 2005 and 11%
in
2004, and they accounted for 21% of our direct cost of sales for the six
months
ended June 30, 2006 in our U.S. and Canadian facilities. Ferroalloys are
essential for the production of steel and are added to the steel during
manufacturing process to reduce undesirable elements and to enhance its
hardness, durability and resistance to friction and abrasion. For our Mexican
operations, we
buy
most
of our manganese ferroalloys from Compañía Minera Autlán, S.A., and the
remainder from Electrometalúrgica de Veracruz, S.A. de C.V., Manuchar
Internacional, S.A. de C.V. and Industria Nacional de la Fundición, S.A. de C.V.
We
obtain
electrodes used to melt raw materials from Ucar Carbon Mexicana, S.A. de
C.V.,
Graphite Electrode Sales and SGL Carbon, LLC.
Refractory
products include firebricks, which line and insulate furnaces, ladles and
other
transfer vessels. We purchase our refractory products from
RHI
Refmex, S.A. de C.V., LWB de México, S.A. de C.V., Fedmet Resources Corp.,
Vesivius de México, S.A. de C.V., Mayerton Refractories and Tecnologías
Minerales de México, S.A. de C.V. Our U.S. and Canadian facilities purchase most
of their ferroalloys from International Nickel, Climax Molybdenum Co., Considar
Inc., Minerais U.S. LLC and Glencore LTD. The direct cost for the ferroalloys
represents 15% of our consolidated costs, 8% of the direct costs incurred
at our
Mexican operations and 17% of the direct costs incurred at our U.S.
operations.
Electricity
.
As of
December 31, 2005, electricity accounted for approximately 7% of our
consolidated direct cost of sales for the period (10% of the direct cost
of our
Mexican operations and 4% of the direct cost of our U.S. operations).
Electricity accounted for 10% of our direct cost of sales in 2005 and 9%
of
direct cost of sales in 2004 and is supplied by the
Comisión
Federal de Electricidad
(“CFE”)
in our Mexico facilities. It accounted for 3.6% of direct costs of sales
from
July 22 to December 31, 2005 in our U.S. and Canadian operations and is supplied
by American Electric Power Company and Ohio Edison. We, like all other high
volume users of electricity in Mexico, pay special rates to CFE for electricity.
Energy prices in Mexico have historically been very volatile and subject
to
dramatic price increases in short periods of time. In the late 1990s, the
CFE
began to charge for electricity usage based on the time of use during the
day
and the season (summer or winter). As a result, we have modified our production
schedule in order to reduce electricity costs by limiting production during
periods when peak rates are in effect. There can be no assurance that any
future
cost increases will not have a material adverse effect on our business. From
May
through October 2005 and August through October 2004, the Mexicali facility
acquired electricity from Sempra Energy Solutions (“Sempra”), a company based in
San Diego, California. The
Comisión
Reguladora de Energía
of the
Mexican Secretary of Energy authorized this agreement for peak hours in the
period; the rates were less expensive than the rates of CFE in the same period.
In 2006, the Mexicali facility entered into a new contract with Sempra for
the
period May through October 2006.
Natural
Gas
.
Natural
gas (including “combustoleo” which is an oil derivative that is less refined
than gasoline and diesel fuel oil that can be used instead of gasoline in
our
Mexicali plant) consisted of approximately 8% of our consolidated direct
cost of
sales (4.5% of the direct cost of our Mexican operations and 11% of the direct
cost of our U.S. operations). We use natural gas cash-flow exchange contracts
or
swaps where we receive a floating price and pay a fixed price to hedge our
risk
of from fluctuations in natural gas prices. Fluctuations in natural gas prices
from volume consumed are recognized as part of our operating costs. As
applicable, we recognized the fair value of instruments either as liabilities
or
assets. Such fair value and thus, the value of these assets or liabilities
were
restated at each month’s-end. As indicated in Note 6 to the audited financial
statements, we opted for the early adoption of Bulletin C-10
“Derivative
Financial Instruments and Hedging”
;
therefore, at December 31, 2005 and 2004, we recognized the fair value of
the
natural gas swap designated for hedging exposure of future gas consumption
for
the remaining period of January 2004 to December 2006 in terms of fluctuations
in natural gas prices, were recognized within the comprehensive income account
in stockholders’ equity.
Our
contracts are forwards with a minimum volume required to purchase.
At
the
end of 2003, we entered into derivative transactions with PEMEX, to hedge
against fluctuations in natural gas prices. The derivatives will guarantee
a
portion of our natural gas consumption from 2004 to 2006 at a fixed price
of
$4.462 per MMBtu. At the end of 2005, we also held in one of our subsidiaries
in
the United States, 23 open contracts for natural gas swaps, entered to offset
the potential natural gas price volatility for the months of January through
March 2006. These swaps resulted in marking to market all of our open contracts
as of December 2005 and a liability for $1.2 million (Ps. 13
million).
Natural
gas consisted of approximately 9.0% of our U.S. and Canadian facilities’ direct
costs for the period from July 22 through December 31, 2005. Our U.S. and
Canadian operations have a hedging policy to manage their exposure to natural
gas price fluctuations when practical. During 2005, we began using cash flow
hedges with respect to natural gas. Our policy includes establishing a risk
management philosophy and objectives designed to cap our exposure to the
extreme
price volatility of natural gas and thereby limiting the unfavorable effect
of
price increases on our operating costs. We do not enter into contracts for
the
purpose of speculation. We account for these derivative instruments in
accordance with Statement of Financial Accounting Standards No. 133,
“Accounting
for Derivative Instruments and Hedging Activities”
and with
Mexican GAAP relating to Bulletin C-10
“Derivative
Financial Instruments and Hedging”.
At
December 31, 2005, we held cash flow hedges for natural gas with the effective
portion of such instruments reflected in accumulated other comprehensive
loss.
Legal
Matters and Regulations
U.S.
and Canadian Operations
We
are
subject to U.S. federal, state and local environmental laws and administrative
regulations concerning, among other things, hazardous materials disposal.
We
currently own a steel scrap yard in San Diego, California, which has been
the
subject of administrative action by state and local environmental authorities.
See “Legal Proceedings—Environmental Claims”.
Environmental
Matters
We
are
subject to a broad range of environmental laws and regulations, including
those
governing the following:
·
|
discharges
to the air, water and soil;
|
·
|
the
handling and disposal of solid and hazardous
wastes;
|
·
|
the
release of petroleum products, hazardous substances, hazardous
wastes, or
toxic substances to the environment;
and
|
·
|
the
investigation and remediation of contaminated soil and
groundwater.
|
We
monitor our compliance with these laws and regulations through our environmental
management system, and believe that we currently are in substantial compliance
with them, although we cannot assure you that we will at all times operate
in
compliance with all such laws and regulations. If we fail to comply with
these
laws and regulations, we may be assessed fines or penalties which could have
a
material effect on us.
Future
changes in the applicable environmental laws and regulations, or changes
in the
regulating agencies' approach to enforcement or interpretation of their
regulations, could cause us to make additional capital expenditures beyond
what
we currently anticipate. We do not believe that any of our facilities
are
subject
to the Maximum Achievable Control Technology standard for Iron & Steel
Manufacturers, or the Maximum Achievable Control Technology standard for
Industrial, Commercial and Institutional Boilers and Process Heaters, because
they do not emit hazardous air pollutants above the regulatory threshold.
However, it is possible that in the future the regulatory agency could disagree
with our determination or that operations at one or more of our facilities
will
change such that the applicability threshold is exceeded. In that event,
or
under similar circumstances, we could incur additional costs of
compliance.
Various
federal, state and local laws, regulations and ordinances govern the removal,
encapsulation or disturbance of asbestos-containing materials (“ACMs”). These
laws and regulations may impose liability for the release of ACMs and may
permit
third parties to seek recovery from owners or operators of facilities at
which
ACMs were or are located for personal injury associated with exposure to
ACMs.
We are aware of the presence of ACMs at our facilities, but we believe that
such
materials are being properly managed and contained at this time.
Mexican
Operations
We
are
subject to Mexican federal, state and municipal laws, administrative regulations
and Mexican Official Rules (
Normas
Oficiales Mexicanas)
relating
to a variety of environmental matters, anti-trust matters, trade regulations,
and tax and employee matters.
Among
other matters, Mexican tax returns are open for review generally for a period
of
five years, and, according to Mexican tax law, the purchaser of a business
may
become jointly and severally liable for unpaid tax liabilities of the business
prior to its acquisition, which may have an impact on the liabilities and
contingencies derived from any such acquisitions. Although we believe that
we
are in compliance with all material Mexican federal, state and municipal
laws,
administrative regulations and Mexican Official Rules, we cannot assure you
that
the interpretation of the Mexican authorities of the laws and regulations
affecting our business or the enforcement thereof will not change in a manner
that could increase our costs of doing business or could have a material
adverse
effect on our business, results of operations, financial condition or
prospects.
Environmental
Matters
We
are
subject to various Mexican federal, state and municipal laws, administrative
regulations and Mexican Official Rules (
Normas
Oficiales Mexicanas)
relating
to the protection of human health, the environment and natural
resources.
The
major
federal environmental laws applicable to our operations are: (i) the General
Law
of Ecological Balance and Environmental Protection (
Ley
General del Equilibrio Ecológico y la Protección al Ambiente
or
“LGEEPA”) and its regulations, which are administered and overseen by the
Ministry of the Environment and Natural Resources (
Secretaría
de Medio Ambiente y Recursos Naturales
or
“SEMARNAT”) and enforced by the Ministry’s enforcement branch, the Federal
Attorney’s Office for the Protection of the Environment (
Procuraduría
Federal de Protección al Ambiente
or
“
PROFEPA”);
(ii) the General Law for the Prevention and Integral Management of Waste
(
Ley
General para la Prevención y Gestión Integral de los Residuos
or the
“Law on Wastes”), which is also administered by SEMARNAT and enforced by
PROFEPA; and (iii) the National Waters Law (
Ley
de Aguas Nacionales
)
and its
regulations, which are administered and enforced by the National Waters
Commission (
Comisión
Nacional de Agua
),
also a
branch of SEMARNAT.
In
addition to the foregoing, Mexican Official Rules, which are technical standards
issued by applicable regulatory authorities pursuant to the General
Normalization Law (
Ley
General de Metrología y Normalización
)
and to
other laws that include the environmental laws described above, establish
standards relating to air emissions, waste water discharges, the generation,
handling and disposal of
hazardous
wastes and noise control, among others. Mexican Official Rules regarding
soil
contamination and waste management were enacted in order to protect this
potential contingencies. Although not enforceable, the internal administrative
criteria on soil contamination established by PROFEPA are widely used as
guidance in cases where soil remediation, restoration or clean-up is
required.
LGEEPA
sets forth the legal framework applicable to the generation and handling
of
hazardous wastes and materials, the release of contaminants into the air,
soil
and water, as well as the environmental impact assessment of the construction,
development and operation of different projects, sites, facilities and
industrial plants similar to the ones owned and/or operated by us and our
subsidiaries. In addition to LGEEPA, the Law on Wastes regulates the generation,
handling, transportation, storage and final disposal of hazardous
waste.
LGEEPA
also mandates that companies that contaminate soil be responsible for the
clean-up. Furthermore, the Law on Wastes provides that owners and lessors
of
real property with soil contamination are jointly and severally liable for
the
remediation of such contaminated sites, irrespective of any recourse or other
actions such owners and lessors may have against the contaminating party,
and
aside from the criminal or administrative liability to which the contaminating
party may be subject. The Law on Wastes also restricts the transfer of
contaminated sites.
PROFEPA
can bring administrative, civil and criminal proceedings against companies
that
violate environmental laws, regulations and Mexican Official Rules, and has
the
power to impose a variety of sanctions. These sanctions may include, among
others, monetary fines, revocation of authorizations, concessions, licenses,
permits or registries, administrative arrests, seizure of contaminating
equipment, and in certain cases, temporary or permanent closure of
facilities.
Additionally,
as part of its inspection authority, PROFEPA is entitled to periodically
visit
the facilities of companies whose activities are regulated by Mexican
environmental legislation, and verify compliance. Similar rights are granted
to
state environmental authorities pursuant to applicable state environmental
laws.
Companies
in Mexico are required to obtain proper authorizations, concessions, licenses,
permits and registries from competent environmental authorities for the
performance of activities that may have an impact on the environment or may
constitute a source of contamination. Such companies in Mexico are also required
to comply with a variety of reporting obligations that include, among others,
providing PROFEPA and SEMARNAT with periodic reports regarding compliance
with
various environmental laws. Among other permits, the operations and related
activities of the steel industry are subject to the prior obtainment of an
environmental impact authorization granted by SEMARNAT.
We
believe that we have obtained all the necessary authorizations, concessions,
general operating licenses, permits and registries from the applicable
environmental authorities to duly operate our facilities, plants and sites,
and
sell our products and that we are in material compliance with applicable
environmental legislation. We, through our subsidiaries, have made significant
capital investments to assure our production and operation facilities comply
with requirements of federal, state and municipal law and administrative
regulation, and to remain in compliance with our current authorizations,
concessions, licenses, permits and registries.
We
cannot
assure you that in the future, we and our subsidiaries will not be subject
to
stricter Mexican federal, state or municipal environmental laws and
administrative regulations, or more stringent interpretation or enforcement
of
existing laws and administrative regulations. Mexican environmental laws
and
administrative regulations have become increasingly stringent over the last
decade, and this trend is likely to continue, influenced recently by the
North
American Agreement on Environmental Cooperation entered into by Mexico, the
United States and Canada in connection with the North
American
Free Trade Agreement or NAFTA. Further, we cannot assure you that we will
not be
required to devote significant expenditures to environmental matters, including
remediation-related matters. In this regard, any obligation to remedy
environmental damages caused by us or any contaminated sites owned or leased
by
us could require significant unplanned capital expenditures and be materially
adverse to our financial condition and results of operations.
Water
In
Mexico, the National Waters Law regulates water resources. In addition, the
Mexican Official Rules govern the quality of water. A concession granted
by the
National Waters Commission is required for the use and exploitation of national
waters. All of our facilities have a five-year renewable concession to use
and
exploit underground waters from wells in order to meet the water requirements
of
our production processes. We pay the National Waters Commission duties per
cubic
meter of water extracted under our concessions. We believe we are in substantial
compliance with all the requirements imposed by each of the concessions we
have obtained.
Pursuant
to the National Waters Law, companies that discharge waste into national
water
bodies must comply with certain requirements, including maximum permissible
contaminant levels. Periodic reports on water quality must be provided by
dischargers to applicable authorities. Liability may result from the
contamination of underground waters or recipient water bodies. We believe
that
we are in substantial compliance with all water and waste water legislation
applicable to us.
Antitrust
Matters
We
are
also subject to the Mexican Antitrust Law (
Ley
Federal de Competencia Económica
),
which
regulates monopolies and monopolistic practices in Mexico and requires Mexican
government approval of certain mergers, acquisitions and joint ventures.
We
believe that we are currently in compliance with the Mexican Antitrust Law.
However, due to our growth strategy of acquiring new businesses and assets
and
because we are a large manufacturer with a significant share of the markets
in
Mexico with respect to certain of our products, we may be subject to greater
regulatory scrutiny in the future.
Measurements
Law
Mexico’s
Ministry of Economy (
Secretaría
de Economía
),
through the General Rules Department (
Dirección
General de Normas
or
“DGN”), promulgates regulations regarding many products that we manufacture.
Specifically, pursuant to the Measurements Law (
Ley
Federal sobre Metrología y Normalización
),
the
DGN issues specifications on the quality and safety standards for our product
lines. We believe that all of our products are in material compliance with
all
applicable DGN regulations.
Trade
Regulation Matters
We
have
experienced significant competition from imports into Mexico in the past
as a
result of excess worldwide steel production capacity, particularly in periods
of
economic slowdown, and as a consequence of the Peso’s appreciation, making
imports cheaper and more competitive in Peso terms. In 2003, imports declined
as
international market conditions improved and the Peso weakened. Recently,
the
Mexican government, at the request of CANACERO, has taken several measures
to
prevent unfair trade practices such as dumping the steel import market. The
overall climate for imports in Mexico is influenced by the free trade agreements
that Mexico has entered into with other countries, as well as the level of
tariffs and anti-dumping duties (some of which are described
below).
We
have
benefited from the free trade agreements that Mexico has entered into.
Specifically, we have directly benefited from our ability to export finished
steel products directly to export markets and compete with similar products
manufactured in those markets. We have also indirectly benefited from increased
demand from our domestic customers who similarly manufacture their products
to
foreign markets under free trade agreements.
North
American Free Trade Agreement
.
NAFTA
became effective on January 1, 1994. NAFTA provided for the progressive
elimination over a period of ten years of the 10% duties formerly in effect
on
most steel products imported into Mexico from the United States and Canada,
including those that compete with our main product lines. The 1% duty on
most
steel imports into Mexico from the United States and Canada that remained
in
2003 was eliminated in 2004. There is currently no duty.
Mexican-European
Community Free Trade Agreement
.
The
Mexican-European Free Trade Agreement, or “MEFTA”, became effective on July 1,
2000. MEFTA provides for the progressive elimination of Mexican duties for
steel
producers that are members of the European Union over a period of 6.5 years
for
finished steel products, including those that compete with our products.
In July
of 2000, European imports of steel products paid an initial duty of 8% when
importing into Mexico, which is scheduled to be reduced progressively until
reaching zero in 2007. This agreement also provides an opportunity to increase
our exports to the European countries that are parties to MEFTA since their
duties on Mexican steel products were reduced to 1.7% in July 2002 and
eliminated in 2003. Since 2004, following the commitment of the G-7, the
duties
were established at a zero percent rate, giving us an opportunity to increase
our sales to the United States.
Mexico-Japan
Economic Association (the “Association”)
.
The
governments of Mexico and Japan started negotiations to sign the Association
in
June 2001. The negotiations ended up until March 2004 where after fourteen
rounds of negotiations the Association was signed. After the approval from
the
legislative authorities of both countries, the Association was effective
as of
April 1, 2005.
On
January 1, 2004, Japan and the other members of the G-7, agreed to reduce
the
steel tariffs to zero percent, so Mexico has been benefit from this rate
since
such date. However, Mexico is sensitive to the steel exports coming from
Japan,
so the Association was negotiated in the following terms: (i) the specialized
steel that is not produced in Mexico, and that is used to produce vehicles,
spare parts, electronics, machinery and heavy equipment, was released from
any
tariffs, as from the effective date of the Association, (ii) the Japanese
steel
that Mexico imports will be maintained without changes (13% and 18%) during
the
first five years as of the effective date (iii) the steel products coming
from
Japan will start paying less taxes gradually as from January 1, 2010 until
reaching a zero percent rate in 2015, (iv) the products to be imported from
the
Sectors Programs, will pay the tariffs pursuant to the fixed tariffs established
in such Sector Programs, so the electronic and vehicles industries will be
exempted as of the effective date of the Association.
Other
Trade Agreements
.
In the
last several years, Mexico has signed other free trade agreements with Israel
(2000), Iceland, Norway, Liechtenstein and Switzerland (2001), and with the
following Latin American countries: Chile (1992 and amended in 1999); Venezuela
and Colombia (1995); Costa Rica (1995); Bolivia (1995); Nicaragua (1998);
Honduras, El Salvador and Guatemala (2001); and Uruguay (2003). We do not
anticipate any significant increase in competition in the Mexican steel market
as a result of these trade agreements due to their minimal steel production
or,
in the case of Venezuela and Chile, minimal share of the Mexican
market.
Dumping
and Countervailing Duties
.
We are
or have been a party to, or have been affected by, numerous steel dumping
and
countervailing duty claims. Many of these claims have been brought by Mexican
steel producers against international steel companies, while others have
been
brought against Mexican steel companies. In certain instances, such cases
have
resulted in duties being imposed on
certain
imported steel products and, in a few instances, duties have been imposed
on
Mexican steel exports. In the aggregate, these duties have not had a material
impact on our results of operations.
U.S.
and Mexican Safeguard Tariffs on Steel Imports
.
In
September 2001, Mexico’s Ministry of Economy announced a one-year increase in
tariffs to 25% on 39 steel products imported into Mexico from countries with
which Mexico does not have a free trade agreement. On March 15, 2002, Mexico’s
Ministry of Economy announced an immediate increase of such tariffs to 35%.
In
September 2002, the average tariffs returned to 25% and remained at that
level
for 12 months. From September 2003 to March 2003, tariffs were set at 18%,
and
in April 2004, they returned to their previous levels (18% for coated steel
and
13% for the rest of the products).
From
January to October 2002, imports of steel plaques coming from Romania, Russia
and Ukraine increased. The Mexican authorities found sufficient elements
to
start an investigation in 2003, and in 2004, the government announced a
preliminary resolution imposing anti-dumping duties of 120.4% to the exports
of
steel plaques coming from Romania, 36.8% coming from Russia and 60.9% coming
from Ukraine. On March 17, 2006 a final resolution was announced imposing
final
anti-dumping duties of 67.6% to the exports of steel plaques coming from
Romania, 36.8% coming from Russia and 60.1% from Ukraine.
Legal
Proceedings
Mexico
With
the
exception of the tax litigation noted below, there are currently no material
legal or administrative proceedings pending in Mexico against us or any of
our
subsidiaries which we expect to have a material adverse effect on our financial
condition or results of operations, or we expect to result in material capital
expenditures or materially adversely affect our competitive
position.
Tax
Litigation.
On
July
2, 2003, CSG filed a suit with the Mexican Federal Tax and Administrative
Court
of Justice in response to an official communication of the Central International
Fiscal Auditing Office of the Tax Administration Service that stated that
CSG
owed unpaid taxes in the amount of Ps. 89,970 and that alleged that CSG failed
to withhold income from third parties on interest payments abroad in 1998,
1999,
2000 and for the period from January 1, 2001 through June 30, 2001. CSG is
currently waiting for the authorities to respond to its suit. See Note 16(g)
to
the audited financial statements for the year ended December 31,
2005.
United
States
Department
of Toxic Substances Control.
In
September 2002, the Department of Toxic Substances Control inspected Pacific
Steel’s facilities based on an alleged complaint from neighbors due to Pacific
Steel’s excavating to recover scrap metal on its property and on a neighbor’s
property which it rents from a third party. In this same month, the Department
of Toxic Substances Control issued an enforcement order of imminent and
substantial endangerment determination, which alleges that certain soil piles,
soil management and metal recovery operations may cause an imminent and
substantial danger to human health and the environment. Consequently, the
department sanctioned Pacific Steel for violating hazardous waste laws and
the
State of California Security Code and imposed the obligation to make necessary
changes to the location. In July 2004, in an effort to continue with this
order,
the department filed a Complaint for Civil Penalties and Injunctive Relief
in
San Diego Superior Court. On July 26, 2004, the court issued a judgment,
whereby
Pacific Steel is obligated to pay $235,000 (payable in four payments of $58,750
over the course of one year) for fines of $131,250, the department's costs
of
$45,000 and an environmental project of $58,750. At December 31, 2005, Pacific
Steel has made all of the payments.
In
August
2004, Pacific Steel and the Department of Toxic Substances Control entered
into
a corrective action consent agreement. In September 2005, the Department
of
Toxic Substances Control approved the Corrective Measures Plan presented
by
Pacific Steel, provided it obtains permits from the corresponding local
authorities, which are in process at date.
Due
to
the fact that the cleanliness levels have not yet been defined by the Department
and since the characterization of all the property has not yet been finished,
the allowance for the costs for the different remedy options are still subject
to considerable uncertainty.
We
estimated, based on experience in prior years and using the same processes,
a
liability of between $0.8 million and $1.7 million. Due to the above, at
December 31, 2002 and 2003, we created a reserve for this contingency of
approximately $0.8 million and $1.7 million, respectively. At December 31,
2005,
such reserve is Ps. 15,079 million ($1.4 million).
The
Community Development Commission.
The
Community Development Commission of National City, California (CDC) has
expressed its intention to develop the site and is preparing a purchase offer
for Pacific Steel’s land at market value, less the cost of remediation and less
certain investigation costs incurred. Pacific Steel has informed the CDC
that
the land will not be voluntarily sold unless there is an alternate property
where it could relocate its business. The CDC, in accordance with the State
of
California law, has the power to expropriate in exchange for payment at market
value and, in the event that there is no other land available to relocate
the
business, it would also have to pay Pacific Steel the land’s book value. The CDC
made an offer to purchase the land from Pacific Steel for $6.9 million, based
on
a business appraisal. The expropriation process was temporarily suspended
through an agreement entered into by both parties in April 2006. This agreement
allows Pacific Steel to explore the possibility of finishing the remediation
process of the land and to propose an attractive alternative to CDC which
would
allow us to remain in the area.
Due
to
this situation and considering the imminent expropriation of part of the
land on
which Pacific Steel carries out certain operations, for the year ended December
31, 2002, Pacific Steel recorded its land at realizable value based on an
appraisal by independent experts. Such appraisal caused a decrease in the
value
of part of the land of Ps. 22,562 (19,750 historical pesos) and a charge
to
results of operations of 2002 for the same amount.
Environmental
Liabilities.
At
December 31, 2005, we recorded under the caption of “Other Long-term
Liabilities”, a reserve of Ps. 44.0 million to cover probable environmental
liabilities and compliance activities. The current portions of the environmental
reserve are included in the caption “Other Accounts Payable and Accrued
Expenses”, in the attached consolidated balance sheets. We have no knowledge of
any additional environmental remediation liabilities or contingent liabilities
related to environmental issues in regards to the facilities; consequently,
it
would not be appropriate to establish an additional reserve at this
time.
As
is the
case for most steel producers in the United States, we may incur material
expenses related to future environmental issues, including those which arise
from environmental compliance activities and the remediation of past
administrative waste practices in our US facilities.
Directors
Election
of Directors
Our
board
of directors is responsible for managing our business. Pursuant to our by-laws,
the board of directors shall consist of a maximum of 21 but not less than
five
members elected at an ordinary general meeting of shareholders. Alternate
directors are authorized to serve on the board of directors in the absence
of
directors. Our board of directors currently consists of seven directors and
seven alternate directors, each of whom is elected at the annual shareholders’
meeting for a term of one year or until a successor has been appointed. Under
the Mexican Securities Market Law and our by-laws, at least 25% of our directors
must be independent. Under the law, the determination as to the independence
of
our directors made by our shareholders’ meeting may be contested by the Mexican
National Banking and Securities Commission.
At
each
shareholders’ meeting for the election of directors, the holders of shares are
entitled pursuant to our by-laws to elect the directors and their alternates.
Each person (or group of persons acting together) holding 10% of our capital
stock is entitled to designate one director and an alternate.
The
current members of our board of directors were nominated and elected to such
position at the 2006 general meeting of shareholders as proposed by Industrias
CH. We expect that Industrias CH will be in a position to continue to elect
the
majority of our directors and to exercise substantial influence and control
over
our business and policies and to influence us to enter into transactions
with
Industrias CH and affiliated companies. However, our by-laws provide that
at
least two of our directors must be independent from us and our affiliates,
and
our board of directors has passed a resolution requiring the approval of
two
independent directors for certain transactions between us and our affiliates
which are not our subsidiaries.
Under
Mexican law, a majority shareholder has no fiduciary duty to minority
shareholders but may not act contrary to the interests of the corporation
for
the majority shareholder’s benefit. Such a majority shareholder is required to
abstain from voting on any matter in which it directly or indirectly has
a
conflict of interest and can be liable for actual and consequential damages
if
such matter passes as a result of its vote in favor thereof. In addition,
the
directors of a Mexican corporation owe a duty to act in a manner which, in
their
independent judgment, is in the best interests of the corporation and all
its
shareholders.
Our
board
of directors adopted a code of ethics in December 2002.
Authority
of the Board of Directors
The
board
of directors is our legal representative. The board of directors must approve,
among other matters:
·
|
annual
approval of the business plan and the investment
budget;
|
·
|
capital
investments not considered in the approved annual budget for each
fiscal
year;
|
·
|
proposals
to increase our capital or that of our
subsidiaries;
|
·
|
with
input from the audit and corporate practices committee, on an individual
basis: (i) any transactions with related parties, subject to certain
limited exceptions, (ii) our management structure and any amendments
thereto, and (iii) the election of our chief executive officer,
his
compensation and removal for justified causes; (iv) our financial
statements and those of our subsidiaries, (v) unusual or non-recurrent
transactions and any transactions or series of related transactions
during
any calendar year that involve (a) the acquisition or sale of assets
with
a value equal to or exceeding 5% of our consolidated assets or
(b) the
giving of collateral or guarantees or the assumption of liabilities,
equal
to or exceeding 5% of our consolidated assets, and (vi) contracts
with
external auditors;
|
·
|
calling
shareholders’ meetings and acting on their
resolutions;
|
·
|
any
transfer by us of shares in our
subsidiaries;
|
·
|
creation
of special committees and granting them the power and authority,
provided
that the committees will not have the authority which by law or
under our
by-laws is expressly reserved for the
shareholders;
|
·
|
determining
how to vote the shares that we hold in our subsidiaries;
and
|
·
|
the
exercise of our general powers in order to comply with our corporate
purpose.
|
Meetings
of the board of directors will be validly convened and held if a majority
of our
members are present. Resolutions at the meetings will be valid if approved
by a
majority of the members of the board of directors, unless our by-laws require
a
higher number. The chairman has a tie-breaking vote. Notwithstanding the
board’s
authority, our shareholders pursuant to decisions validly taken at a
shareholders’ meeting at all times may override the board.
Duty
of Care and Duty of Loyalty
The
Mexican Securities Market Law imposes a duty of care and a duty of loyalty
on
directors. The duty of care requires our directors to act in good faith and
in
the best interests of the company. In carrying out this duty, our directors
are
required to obtain the necessary information from the general director, the
executive officers, the external auditors or any other person to act in the
best
interests of the company. Our directors are liable for damages and losses
caused
to us and our subsidiaries as a result of violating their duty of
care.
The
duty
of loyalty requires our directors to preserve the confidentiality of information
received in connection with the performance of their duties and to abstain
from
discussing or voting on matters in which they have a conflict of interest.
In
addition, the duty of loyalty is violated if a shareholder or group of
shareholders is knowingly favored or if, without the express approval of
the
board of directors, a director takes advantage of a corporate opportunity.
The
duty of loyalty is also violated, among other things, by (i) failing to disclose
to the audit and corporate practices committee or the external auditors any
irregularities that the director encounters in the performance of his or
her
duties or (ii) disclosing information that is false or misleading or omitting
to
record any transaction in our records that could affect our financial
statements. Directors are liable for damages and losses caused to us and
our
subsidiaries for violations of this duty of loyalty. This liability also
extends
to damages and losses caused as a result of benefits obtained by the director
or
directors or third parties, as a result of actions of such
directors.
Our
directors may be subject to criminal penalties of up to 12 years’ imprisonment
for certain illegal acts involving willful misconduct that result in losses
to
us. Such acts include the alteration of financial statements and
records.
Liability
actions for damages and losses resulting from the violation of the duty of
care
or the duty of loyalty may be exercised solely for our benefit and may be
brought by us, or by shareholders representing 5%
or
more
of our capital stock, and criminal actions only may be brought by the Mexican
Ministry of Finance, after consulting with the Mexican National Banking and
Securities Commission. As a safe harbor for directors, the liabilities specified
above (including criminal liability) will not be applicable if the director
acting in good faith (i) complied with applicable law, (ii) made the decision
based upon information provided by our executive officers or third-party
experts, the capacity and credibility of which could not be subject to
reasonable doubt, (iii) selected the most adequate alternative in good faith
or
if the negative effects of such decision could not have been foreseeable,
and
(iv) complied with shareholders’ resolutions provided the resolutions do
not violate applicable law.
The
members of the board are liable to our shareholders only for the loss of
net
worth suffered as a consequence of disloyal acts carried out in excess of
their
authority or in violation of our by-laws.
In
accordance with the Mexican Securities Market Law, supervision of our management
is entrusted to our board of directors, which shall act through an audit
and
corporate practices committee for such purposes, and to our external auditor.
The audit and corporate practices committee (together with the board of
directors) replaces the statutory auditor (comisario) that previously had
been
required by the Mexican Corporations Law. See “Management -
Committees”.
The
following table sets forth the names and the year of their initial appointment
to their position, of the members of our board of directors and their
alternates.
Name
|
|
Director
Since
|
Directors:
|
Rufino
Vigil González
|
|
2001
|
Raúl
Arturo Pérez Trejo
|
|
2003
|
Eduardo
Vigil González
|
|
2001
|
Raúl
Vigil González
|
|
2001
|
José
Luis Rico Maciel
|
|
2001
|
Rodolfo
García Gómez de Parada
|
|
2001
|
Gerardo
Arturo Avendaño Guzmán
|
|
2001
|
|
|
|
Alternate
Directors:
|
Manuel
Rivero Figueroa
|
|
2003
|
José
Luis Romero Suárez
|
|
2001
|
Sergio
Vigil González
|
|
2001
|
Juan
Méndez Martínez
|
|
2001
|
Luis
García Limón
(1)
|
|
2006
|
Jaime
Vigil Sánchez Conde
|
|
2001
|
Sergio
Villagómez Martínez
|
|
2003
|
_____________________________
(1)
Luis
García Limón is also our Chief Executive Officer.
Biographical
Information
Gerardo
Arturo Avendaño Guzmán
.
Mr.
Avendaño was born in 1955. He is an independent director for purposes of Mexican
law and has been a member of our board of directors and the audit committee
since 2001 and is a member of our audit and corporate practices committee.
Mr.
Avendaño is an independent lawyer specializing in civil, mercantile and fiscal
litigation.
Rodolfo
García Gómez de Parada
.
Mr.
García was born in 1953. He has been a member of our board of directors since
2001 and is an independent director for purposes of Mexican law. He has been
the
tax adviser of Industrias CH since 1978 and our tax adviser since 2001 and
is a
member of the board of directors of a group of self-service stores and
restaurants since 1990.
Raúl
Arturo Pérez Trejo
.
Mr.
Pérez was born in 1959. He has been a member of our board of directors since
2003, and is an independent director for purposes of Mexican law, and is
a
member of our audit and corporate practices committee. Mr. Pérez has also served
since 1992 as the chief financial officer of a group that produces and sells
structural steel racks for warehousing and other industrial
storage.
José
Luis Rico Maciel
.
Mr. Rico
was born in 1926. He has been a member of our board of directors since 2001
and
is an independent director for purposes of Mexican law. He also serves as
our
corporate legal and tax director and is a member of the board of directors
of a
group of self-service stores and restaurants since 1957.
Eduardo
Vigil González
.
Mr.
Vigil was born in 1957. He has been a member of our board of directors since
2001. Since 1976, Mr. Vigil has been chief executive officer of a welded
pipe
corporation. Mr. Vigil is a brother of Rufino Vigil González and Raúl Vigil
González.
Raúl
Vigil González
.
Mr.
Vigil was born in 1961. He has been a member of our board of directors since
2001. Since 1992 he has been chief executive officer of a steel company.
In
addition, he has also been general manager of a steel distribution company.
Mr.
Vigil is a brother of Rufino Vigil González and Eduardo Vigil
González.
Rufino
Vigil González
.
Mr.
Vigil was born in 1948. He is currently the chairman of our board of directors
and has been a member of the board of directors since 2001. Since 1973, Mr.
Vigil has been chief executive officer of a steel related products corporation.
From 1988 to 1993, Mr. Vigil was a member of the board of directors of a
Mexican
investment bank and from 1971 to 1973 he was a construction corporation manager.
Mr. Vigil is a brother of Eduardo Vigil González and Raúl Vigil
González.
Luis
García Limón
.
Mr.
García was born in 1944. He is currently our chief executive officer. From 1982
to 1990 he was general director of CSG, from 1978 to 1982 he was operation
director of CSG, from 1974 to 1978 he was general manager of Moly Cop and
Pyesa,
and from 1969-1974 he was engineering manager of CSG. In addition, from 1967
to
1969 Mr. García was the director of electrical installation of a construction
company.
Manuel
Rivero Figueroa.
Mr.
Rivero was born in 1957. He has been financial manager of the Monclova facility
of Industrias CH since 1994.
José
Luis Romero Suárez.
Mr.
Romero was born in 1956. Since 1984, he has been commercial director of Procesos
de Acero, S.A. de C.V. He is the brother-in-law of Rufino, Eduardo, Sergio
and
Raúl Vigil González.
Sergio
Vigil González.
Mr.
Vigil was born in 1962. Since 2001 he has served as chief financial officer
of
Industrias CH. He is the brother of Rufino, Eduardo and Raul Vigil González and
the uncle of Jaime Vigil Sánchez Conde.
Juan
Méndez Martínez.
Mr.
Méndez was born in 1956. Since 1978 he has served as the chief financial officer
of Operadora Manufacturera de Tubos, S.A. de C.V.
Jaime
Vigil Sánchez Conde.
Mr.
Vigil was born in 1980. Since 2001 he has served as investors’ relations manager
of Industrias CH. He is the son of Rufino Vigil González and the nephew of
Sergio, Raul and Eduardo Vigil González.
Sergio
Villagómez Martínez.
Mr.
Villagómez was born in 1956. Since 1981 he has served as the general manager of
Perfiles Estructurales del Norte, S.A. de C.V., a steel producing corporation.
The
business address of our directors and executive officers is our principal
executive headquarters.
Committees
Our
by-laws provide for an audit and corporate practices committee to assist
the
board of directors with the management of our business.
Audit
and Corporate Practices Committee
The
audit
and corporate practices committee is currently composed of three members.
Raúl
Arturo Pérez Trejo, the president of the audit and corporate practices
committee, was elected at our ordinary and extraordinary shareholders’ meeting
held on October 24, 2006, and Gerardo Arturo Avendaño Guzmán and Rodolfo García
Gómez de Parada were appointed. Raúl Arturo Pérez Trejo has been appointed as
the “audit committee financial expert”. Our by-laws provide that a shareholders’
meeting shall determine the number of members of the audit and corporate
practices committee, all of which must be members of our board of directors.
The
chairman of the audit and corporate practices committee is elected by our
shareholders’ meeting, and the board of directors appoints the remaining
members.
The
audit
and corporate practices committee is responsible, among others, for (i)
supervising our external auditors and analyzing their reports, (ii) analyzing
and supervising the preparation of our financial statements, (iii) informing
the
board of our internal controls and their adequacy, (iv) requesting reports
of
our board of directors and executive officers whenever it deems appropriate,
(v)
informing the board of any irregularities that it may encounter, (vi) receiving
and analyzing recommendations and observations made by the shareholders,
members
of the board, executive officers, our external auditors or any third party
and
taking the necessary actions, (vii) calling shareholders’ meetings, (viii)
supervising the activities of our general director, (ix) providing an annual
report to the board, (x) providing opinions to our board of directors, (xi)
requesting and obtaining opinions from independent third parties and (xii)
assisting the board in the preparation of annual reports and other reporting
obligations.
The
chairman of the audit and corporate practices committee, shall prepare an
annual
report to our board of directors with respect to the findings of the audit
and
corporate practices committee, which shall include (i) the status of the
internal controls and internal audits and any deviations and deficiencies
thereof, taking into consideration the reports of external auditors and
independent experts, (ii) the results of any preventive and corrective measures
taken based on results of investigations in respect of non-compliance of
operating and accounting policies, (iii) the evaluation of external auditors,
(iv) the main results from the review of our financial statements and those
of
our subsidiaries, (v) the description and effects of changes to accounting
policies, (vi) the measures adopted as result of observations of shareholders,
directors, executive officers and third parties relating to accounting, internal
controls, and internal or external audits; (vii) compliance with shareholders’
and directors’ resolutions; (viii) observations with respect to relevant
directors and officers; (ix) the transactions entered into with related parties;
and (x) the remunerations paid to directors and officers.
Executive
Officers
The
following table sets forth the names of our executive officers, their current
position with us and the year of their initial appointment to that
position.
Name
|
|
Position
|
Position
Held
Since
|
Luis
García Limón
|
|
Chief
Executive Officer
|
1982*
|
José
Flores Flores
|
|
Chief
Financial Officer
|
2005
|
Juan
José Acosta Macías
|
|
Chief
Operating Officer
|
2004
|
Marcos
Magaña Rodarte
|
|
Chief
Sales Officer
|
2001
|
__________________
*Represents
the date as of which Mr. García Limón first held this office with our
predecessor, CSG.
|
Luis
García Limón
.
Mr.
García was born in 1944. He is currently our chief executive officer. From 1982
to 1990 he was general director of CSG, from 1978 to 1982 he was Operation
Director of CSG, from 1974 to 1978 he was general manager of Moly Cop and
Pyesa,
and from 1969-1974 he was Engineering Manager of CSG. In addition, from 1967
to
1969 Mr. García was the director of electrical installation of a construction
company.
José
Flores Flores
.
Mr.
Flores was born in 1950. He is currently our chief financial officer. From
2001
to 2004 he was our chief corporate financial planning officer. From 1990
to 2001
he was our manager of financial analysis and stock market disclosure. Before
that, Mr. Flores was the auditor manager of a food company from 1988 to 1990,
the controller manager of Grupo Situr, Holding Company of Hotels, a subsidiary
of Grupo Sidek from 1986 to 1988, and our auditor manager from 1983 to
1986.
Juan
José Acosta Macías
.
Mr.
Acosta was born in 1960. He is currently our chief operating officer. From
1998
to 2004 he was production manager of CSG, he has been working with us since
1983. Prior to working with us, Mr. Acosta worked for Mexicana de Cobre as
a
supervisor in 1982.
Marcos
Magaña Rodarte
.
Mr.
Magaña was born in 1965. He is currently our marketing and sales director.
Before holding this position, Mr. Magaña was domestic sales manager of CSG from
1997 to 2001, sales manager for the western region of CSG from 1994 to 1996,
sales manager of Metálica las Torres, our subsidiary, from 1992 to 1994 and a
salesman for CSG, from 1990 to 1992. Before working with us, Mr. Magaña worked
for a bank as executive promoter of sales.
Our
chief
executive officer and executive officers are required, under the Mexican
Securities Market Law, to act for our benefit and not that of a shareholder
or
group of shareholders. Our chief executive is required, principally, to (i)
implement the instructions of our shareholders’ meeting and our board of
directors, (ii) submit to the board of directors for approval the principal
strategies for the business, (iii) submit to the audit and corporate practices
committee proposals for the systems of internal control, (iv) disclose all
material information to the public and (v) maintain adequate accounting and
registration systems and mechanisms for internal control. Our chief executive
officer and our executive officers will also be subject to liability of the
type
described above in connection with our directors.
The
business address of our directors and executive officers is our principal
executive headquarters.
Compensation
of Directors and Executive Officers
For
the
year ended December 31, 2005 and for the six months ended June 30, 2006,
we paid
no fees to our seven directors and seven alternate directors, and the aggregate
compensation our executive officers earned was approximately Ps. 17 million
and
Ps. 11 million, respectively.
None
of
our directors or executive officers are entitled to benefits upon termination
under their service contracts with us, except for what is due them according
to
the Mexican Federal Labor Law (Ley Federal del Trabajo).
We
have
engaged from time to time in a number of transactions with certain of our
shareholders and companies that are owned or controlled, directly or indirectly,
by our controlling shareholder, Industrias CH. These transactions were made
on
terms that we believe were not less favorable to us than those obtainable
on an
arm’s length basis. See note 4 to our financial statements and note 3 to our
unaudited financial statements. On July 22, 2005, we and Industrias CH acquired
100% of the stock of Republic through SimRep. We acquired 50.2% (U.S.$115
million Ps. 1,259 million) of Republic’s stock through our majority owned
subsidiary, SimRep, and Industrias CH purchased the remaining 49.8% (U.S.$114
million Ps. 1,248) through SimRep.
We
financed our portion of the U.S.$229 million (Ps. 2,507 million) purchase
price
principally from a loan that we received through Industrias CH that has since
been repaid in full. At December 31, 2005, the total amount of Republic’s debt
liabilities was U.S. $37.7 million (Ps. 430 million). Republic’s debt has since
been repaid in full.
We
have
borrowed various amounts from Industrias CH, primarily to finance acquisitions
(including the acquisition of Republic), debt redemptions and bank loan
amortization and interest payments, a substantial portion of which borrowings
were converted to equity. We have also received various capital contributions
from Industrias CH.
From
time
to time we sell steel products, primarily billet, to Industrias CH and its
affiliates. In 2003, these sales totaled Ps. 190 million, in 2004, these
sales
totaled Ps. 129 million, and in 2005 these sales totaled Ps. 25 million. In
addition, in 2004 we purchased Ps. 11 million of steel products from Industrias
CH and its affiliates, and in 2005 we purchased Ps. 2 million of steel products
from Industrias CH and its affiliates. We negotiated these prices on an
arms-length basis.
We
have a
services agreement with Industrias CH, by which Industrias CH provides
administrative services to us and other of our subsidiaries. The term of
the
agreement is indefinite. The payments are paid to Industrias CH on a monthly
basis. In 2003, we paid to Industrias CH for its services Ps. 9 million,
in 2004
we paid Ps. 9 million, and in 2005 we paid Ps. 8 million.
In
1992,
we sold Ferrometal de Baja California, S.A. de C.V. (“Ferrometal”), which
operates steel distribution centers in northwestern Mexico, to two individuals,
Sergio Luis González Melo (our former director) and an executive officer of
Ferrometal. The purchase price of U.S.$2.9 million was determined based upon
arms-length negotiations. The amounts payable from such individuals were
initially denominated in dollars bearing interest at 15% per annum. In 1995,
we
entered into an agreement with the purchasers pursuant to which the interest
accrued as of December 31, 1994 was capitalized, the debt was converted into
pesos with no interest accruing from January 1995, and the entire principal
amount was to be paid no later than December 31, 1996. The executive officer
of
Ferrometal timely paid his obligations. Mr. González, however, still owes us
approximately Ps. 10 million in nominal pesos at December 31, 2002. We obtained
favorable judgments against him in February 2002, June 2002 and February
2003.
This proceeding is not completed, however, and we are not yet entitled to
execute on the judgment. We have established a reserve equal to 100% of the
amount owed by Mr. González. In January 2004 we and Mr. González’ successors
entered into an agreement to pay $1.3 million Ps. 15.6 million to us. In
2004,
the successors of Mr. González paid us a total of $1.3 million (Ps. 15.6
million).
As
of
September 30, 2006, based on information available to us, we believe that
our officers and directors own no series B shares. Accordingly, on an individual
basis, and as a group, our directors and executive officers beneficially
owned
less than one percent of any class of our shares. None of our directors or
officers holds any options to purchase series B shares or preferred shares.
Industrias
CH and its direct wholly-owned subsidiaries currently hold approximately
84% of
our series B shares. Rufino Vigil Gonz
á
lez,
the
chairman of our board of directors, owns approximately 63% of Industrias
CH
directly or through its subsidiaries. Members of the Vigil family currently
control indirectly approximately another 10% of our series B
shares.
The
following table shows the ownership of our series B shares immediately
prior to the offering and as adjusted to give effect to the combined offering,
assuming no exercise of the over-allotment options.
Name
of Shareholder
|
Number
of shares owned prior to the offering
|
%
of shares
owned
prior to
the
offering
|
Number
of shares after the offering
|
%
of shares
owned
after
the
offering
|
Industrias
CH
|
260,184,672
|
62%
|
260,184,672
|
●
|
Tuberías
Procarsa, S.A. de C.V.
(1)
|
93,977,250
|
22%
|
93,977,250
|
●
|
Operadora
de Manufacturera
de
Tubos, S.A. de C.V.
(2)
.
|
25,707,345
|
6%
|
25,707,345
|
●
|
Aceros
y Laminados Sigosa,
S.A.
de C.V
(1)
.
|
4,136,373
|
1%
|
4,136,373
|
●
|
SEYCO
Estructuras S.A. de C.V.
(2)
|
5,847,159
|
1%
|
5,847,159
|
●
|
Industrial
de Herramientas
CH,
S.A. de C.V.
(2)
.
|
2,117,073
|
1%
|
2,117,073
|
●
|
Compañia
Mexicana de Tubos,
S.A.
de C.V.
(2)
.
|
3,629,274
|
1%
|
3,629,274
|
●
|
Public
Investors.
|
25,615,560
|
6%_
|
[
●]
|
_
●__
|
|
|
|
|
|
Total
|
421,214,706
|
100%
|
[
●]
|
100%
|
______________
(1)
A
subsidiary of Industrias CH.
(2)
Companies directly or indirectly owned by members of the Vigil
family.
Set
forth
below is a description of our capital stock and a brief summary of material
provisions of our by-laws and Mexican law (including the new Mexican Securities
Market Law). This description gives effect to the amendment and restatement
of
our by-laws, which we adopted on October 24, 2006, and is qualified in its
entirety by reference to our by-laws and the Mexican Securities Market law
and
other applicable regulations.
General
We
were
incorporated under the name Grupo Simec, S.A. de C.V. on August 22, 1990,
as a
variable capital corporation (
sociedad
anónima de capital variable
)
under
the laws of Mexico.
On
October 24, 2006, we amended and restated our by-laws to incorporate the
provisions required by the Mexican Securities Market Law. As a result, we
became
a public variable capital corporation, a new corporate form for corporations
with stock registered with the Mexican National Securities Registry
(
Registro
Nacional de Valores
)
maintained by the National Banking and Securities Commission and listed on
the
Mexican Stock Exchange.
The
following table sets forth our authorized capital stock and our issued and
outstanding capital stock at October 24, 2006, the date of our last meeting
of
shareholders.
Capital
Stock
|
|
Authorized
|
|
Issued
and outstanding
|
|
Series
B shares
|
|
|
481,214,706
|
|
|
421,214,706
|
|
Total
|
|
|
481,214,706
|
|
|
421,214,706
|
|
All
ordinary shares confer equal rights and obligations to holders within each
series. Our capital stock is divided into ordinary series B and limited series
L
shares. Prior to June 2002, our capital stock also included series A shares.
On
June 5, 2002, we converted all of our series A shares to series B shares
on a
one-for-one basis.
Shares
other than ordinary shares, having limited, restricted or no voting rights,
may
never
represent
more than 25% of our outstanding capital stock. Series B shares represent
100%
of our capital stock. We have issued no series L shares. At September 30,
2006,
our total share capital was Ps. 3,513
million,
represented by a fixed portion of Ps.
1,306
million
,
and a
variable portion of Ps. 2,207 million. On February 20, 2003, we effected
a 1 for
20 reverse stock split. On May 30, 2006, we effected a 3 for 1 stock
split.
The
fixed
portion of our capital stock may be increased or decreased by a resolution
adopted at a general extraordinary shareholders’ meeting and upon amendment to
our by-laws. The variable portion of our capital stock may be increased or
decreased by a resolution adopted at a general ordinary shareholders’ meeting
and without amending our by-laws. Increases or decreases in the fixed or
variable portion of the capital stock must be recorded in our registry of
capital variations and in our share registry. New shares cannot be issued
unless
the then-issued and outstanding shares have been paid in full.
Voting
Rights and Shareholders’ Meetings
Each
series B share entitles its holder to one vote at any meeting of our
shareholders. Each series L share would entitle its holder to one vote at
any
meeting at which holders of series L shares are entitled to vote. Holders
of
series L shares would be entitled
to
vote
only on the following matters:
·
|
our
transformation from one type of company to
another;
|
·
|
extension
of our corporate existence;
|
·
|
to
elect one member of our board of directors and the corresponding
alternate
director pursuant to the provisions of our by-laws and the Securities
Market Law;
|
·
|
any
merger or corporate spin-off in which we are not the surviving
entity;
|
·
|
our
dissolution or liquidation;
|
·
|
cancellation
of the registration of our shares with the National Registry of
Securities; and
|
·
|
any
action that would prejudice the rights of holders of series L shares
and
not prejudice the other classes of shares similarly. A resolution
on any
such action requires the affirmative vote of a majority of all
outstanding
series L shares.
|
Shareholders
may vote by proxy duly appointed in writing. Under Mexican law, holders of
shares of any series are also entitled to vote as a class on any action that
would prejudice the rights of holders of shares of such series but not rights
of
holders of shares of other series, and a holder of shares of such series
would
be entitled to judicial relief against any such action taken without such
a
vote. Our board of directors or other party calling for shareholder action
initially would determine whether an action requires a class vote on these
grounds. A negative determination would be subject to judicial challenge
by an
affected shareholder, and a court ultimately would determine the necessity
for a
class vote. There are no other procedures for determining whether a proposed
shareholder action requires a class vote, and Mexican law does not provide
extensive guidance on the criteria to be applied in making such a
determination.
Under
Mexican law and our by-laws, we may hold three types of shareholders’ meetings:
ordinary, extraordinary and special. Ordinary shareholders’ meetings are those
called to discuss any issue not reserved for extraordinary shareholders’
meeting. An annual ordinary shareholders’ meeting must be convened and held
within the first four months following the end of each fiscal year to discuss,
among other things, the board of director’s report on our financial statements,
the appointment of members of the board of directors, declaration of dividends
and the determination of compensation for members of the board of directors.
Under the Mexican Securities Market Law, our ordinary shareholders’ meeting, in
addition to those matters described above, will have to approve any transaction
representing 20% or more of our consolidated assets, executed in a single
or a
series of transactions, during any fiscal year.
Extraordinary
shareholders’ meetings are those called to consider any of the following
matters:
·
|
extension
of a company’s duration or voluntary
dissolution;
|
·
|
an
increase or decrease in a company’s minimum fixed
capital;
|
·
|
change
in corporate purpose or
nationality;
|
·
|
any
transformation, merger or spin-off involving the
company;
|
·
|
any
stock redemption or issuance of preferred stock or
bonds;
|
·
|
the
cancellation of the listing of our shares with the National Securities
Registry or on any stock exchange;
|
·
|
any
other amendment to our by-laws; and
|
·
|
any
other matters for which applicable Mexican law or our by-laws specifically
require an extraordinary meeting.
|
Special
shareholders’ meetings are those that shareholders of the same series or class
call and hold to consider any matter particularly affecting the relevant
series
or class of shares.
Shareholders’
meetings are required to be held in our corporate domicile, which is
Guadalajara, Jalisco. Calls for shareholders’ meetings must be made by the
chairman or the secretary of the board of directors or the chairman of our
audit
and corporate practices committee. Any shareholder or group of shareholders
representing at least 10% of our capital stock has the right to request that
the
chairman of the board of directors or the chairman of the audit and corporate
practices committee call a shareholders’ meeting to discuss the matters
indicated in the relevant request. If the chairman of the board of directors
or
the chairman of the audit and corporate practices committee fail to call
a
meeting within 15 calendar days following receipt of the request, the
shareholder or group of shareholders representing at least 10% of our capital
stock may request that the call be made by a competent court.
Calls
for
shareholders’ meetings must be published in the official gazette of the state of
Jalisco or any major newspaper located in the City of Guadalajara, Jalisco
at
least 15 calendar days prior to the date of the meeting. Each call must set
forth the place, date and time of the meeting and the matters to be addressed.
Calls must be signed by whomever makes them, provided that calls made by
the
board of directors or the audit and corporate practices committee must be
signed
by the chairman, the secretary or a special delegate appointed by the board
of
directors or the audit and corporate practices committee as appropriate,
for
that purpose. Shareholders’ meetings will be validly held and convened without
the need of a prior call or publication whenever all the shares representing
our
capital are duly represented.
To
be
admitted to any shareholders’ meeting, shareholders must: (i) be registered
in our share registry; and (ii) at least 24 hours prior to the
commencement of the meeting submit (a) an admission ticket issued by us for
that purpose, and (b) a certificate of deposit of the relevant stock
certificates issued by the Secretary or by a securities deposit institution,
a
Mexican or foreign bank or securities dealer in accordance with the Mexican
Securities Market Law. Shareholders may be represented at any shareholders’
meeting by one or more attorneys-in-fact, and these representatives may not
be
one of our directors. Representation at shareholders’ meetings may be
substantiated pursuant to general or special powers of attorney or by a proxy
executed before two witnesses.
At
or
prior to the time of the publication of any call for a shareholders’ meeting, we
will provide copies of the publication to the depositary for distribution
to the
holders of ADSs. Holders of ADSs are entitled to instruct the depositary
as to
the exercise of voting rights pertaining to the Series B shares. See
“Description of American Depository Receipts — Voting Rights”.
Quorums
Ordinary
meetings are regarded as legally convened pursuant to a first call when shares
representing more than 50% of our capital are present or duly represented.
Resolutions at ordinary meetings of shareholders are valid when approved
by a
majority of the shares present at the meeting approves them. Any number of
shares represented at an ordinary meeting of shareholders convened pursuant
to a
second or subsequent call constitutes a quorum. Resolutions at ordinary meetings
of shareholders convened pursuant to a second or subsequent call are valid
when
a majority of the shares present at the meeting approves them.
Extraordinary
shareholders’ meetings are regarded as legally convened pursuant to a first call
when shares representing at least 75% of our capital are present or duly
represented, and extraordinary shareholders’ meetings convened pursuant to a
second or subsequent call are regarded as legally
convened
when shares representing 50% of our capital are present or duly represented.
Resolutions at extraordinary meetings of shareholders are valid when approved
by
50% of our capital. Special meetings of holders of series L shares are governed
by the same rules applicable to extraordinary general meeting of holders
of
series B shares. The quorum for an extraordinary general meeting at which
holders of series L shares may not vote is 75% of the series B shares, and
the
quorum for an extraordinary general meeting at which holders of L shares
are
entitled to vote is 75% of the outstanding capital stock. Whether on first,
second or subsequent call, actions at an extraordinary general meeting generally
may be taken by a majority vote of the series B shares outstanding and, on
matters which holders of series L shares are entitled to vote, a majority
vote
of all the outstanding capital stock.
Our
by-laws also establish that a delisting of our shares requires the vote of
holders of 95% of our capital stock.
Right
of Redemption
Whenever
the shareholders approve a change of corporate purposes, change of nationality
of the corporation or transformation from one form of corporate organization
to
another, the Mexican Corporations Law provides that any shareholder entitled
to
vote on that change that has voted against it may withdraw from its shares.
The
redemption of the shareholders’ shares will be effected at the lower of
(a) 95% of the average trading price determined based on the average of the
prices of our shares on the 30 days on which the shares may have been
quoted prior to the date of the meeting, or (b) the book value of the
shares in accordance with the most recent audited financial statements approved
by our shareholders’ meeting, provided that the shareholder exercises that right
within 15 days following the adjournment of the meeting at which the change
was approved.
Mandatory
Redemption
In
accordance with the Mexican Corporation Law shares representing our capital
stock are subject to redemption in connection with either (i) a reduction
of
capital stock or (ii) a redemption with retained earnings, which in either
case
must be approved by our shareholders. In connection with a capital reduction,
the redemption of shares shall be made pro rata among the shareholders, or,
if
affecting the variable portion of the capital stock, as otherwise determined
in
the relevant shareholders’ meeting, but in no case shall the redemption price be
less than the book value of the shares according to our latest balance sheet
approved at a general ordinary shareholders’ meeting. In the case of a
redemption with retained earnings, such redemption shall be conducted (a)
by
means of a tender offer conducted on the Mexican Stock Exchange at prevailing
market prices, in accordance with the Mexican Corporations Law, the new Mexican
Securities Market Law and our by-laws or (b) pro rata among the
shareholders.
Registration
and Transfer
Our
shares are registered with the National Securities Registry, as required
under
the Mexican Securities Market Law and regulations issued by the National
Banking
and Securities Commission. Our shares are evidenced by share certificates
in
registered form, and registered dividend coupons may be attached thereto.
Our
shareholders either may hold their shares directly, in the form of physical
certificates, or indirectly, in book-entry form, through institutions that
have
accounts with INDEVAL.
INDEVAL
is the holder of record in respect of all such shares held in book-entry
form.
INDEVAL will issue certificates on behalf of our shareholders upon request.
INDEVAL participants, brokers, banks, other financial entities or other entities
approved by the National Banking and Securities Commission maintain accounts
at
INDEVAL. We maintain a stock registry and only those persons listed in such
stock registry, and those holding certificates issued by INDEVAL indicating
ownership, and any relevant INDEVAL participants, will be recognized as our
shareholders.
Dividends
and Distributions
At
the
annual general ordinary shareholders’ meeting, the board of directors submits
our financial statements for the previous fiscal year, together with their
report on us, to the series B shareholders for approval. Under our by-laws
and
Mexican law, our annual net income, based upon our audited financial statements
prepared in accordance with Mexican GAAP, is applied as follows: (i) five
percent of our net earnings must be allocated to a legal reserve fund, until
such fund reaches an amount equal to a least 20% of our then current capital
stock (which, as of June 30, 2006, was approximately Ps. 3,513
million),
(ii) thereafter, a certain percentage of net earnings may be allocated to
any
general or specific reserve fund, and (iii) the remainder of any net earnings
is
allocated as determined by the majority of our shareholders and may be
distributed as dividends. All shares that are fully paid and outstanding
at the
time a dividend or other distribution is declared are entitled to share equally
in any or other distribution. We will distribute through INDEVAL cash dividends
on shares held through INDEVAL. Any cash dividends on shares evidenced by
physical certificates will be paid by surrendering to us the relevant dividend
coupon registered in the name of its holder. See “Dividends and Dividend
Policy”.
To
the
extent that we declare and pay dividends on our shares, owners of ADSs at
the
time a dividend or other distribution is declared will be entitled to receive
any dividends payable in respect of the series B shares underlying their
ADSs,
subject to the terms of the Deposit Agreement. Cash dividends will be paid
to
the Depositary in pesos, and, except as otherwise described under “Description
of American Depositary Receipts—Dividends, Other Distribution and Rights”, the
Depositary will convert them into dollars and pay them to the holders of
ADSs
net of currency expenses and applicable fees.
A
shareholder’s entitlement to uncollected dividends lapses within five years
following the stated payment date, in favor of us.
For
additional tender offer and insider trading rules applicable to our securities
pursuant to Mexican Law, see “Market Information”.
Changes
in Capital Stock
Increases
and reductions of our share capital must be approved at an ordinary or
extraordinary shareholders’ meeting, subject to the provisions of our by-laws
and the Mexican Corporations Law.
Subject
to the individual ownership limitations set forth in our by-laws, in the
event
of an increase of our capital stock, other than (i) in connection with mergers,
(ii) for the conversion of convertible debentures as provided in Section
210 Bis
of the Mexican General Law on Negotiable Instruments and Credit Transactions,
(iii) for purposes of conducting a public offering of such shares or (iv)
for
the resale of shares maintained in our treasury as a result of repurchase
of
shares conducted on the Mexican Stock Exchange, our shareholders will have
a
preemptive right to subscribe and pay for new stock issued as a result of
such
increase in proportion to their shareholder interest at that time. This
preemptive right must be exercised by any method provided in Section 132
of the
Mexican Corporations Law, by subscription and payment of the relevant stock
within fifteen business days after the date of publication of the corresponding
notice to our shareholders in the in the official gazette of the state of
Jalisco and in one of the newspapers of general circulation in Mexico, provided
that if at the corresponding meeting all of our shares are duly represented,
the
fifteen business day period shall commence on the date of the
meeting.
Preemptive rights cannot be waived in advance and cannot be traded separately
from the corresponding shares that give rise to such right.
Holders
of ADSs may exercise preemptive rights in limited circumstances. See
“Description of American Depositary Receipts—Dividends, Other Distributions and
Rights”. If a holder of series B shares or ADSs were unable or unwilling to
exercise its preemptive rights in connection with such a
capital
increase, such holder’s proportionate share of dividends and other distributions
and voting rights would decline. In addition, depending on the series of
shares
increased and the pattern in which preemptive rights were exercised, such
a
capital increase might increase or reduce the portion of our capital stock
represented by series B shares and ADSs or increase or reduce the proportionate
voting rights of such holder.
Our
capital stock may be reduced by resolution of a shareholders’ meeting taken
pursuant to the rules applicable to capital increases. Our capital stock
also
may be reduced upon withdrawal of a shareholder as provided in Section 206
of
the Mexican Corporations Law, see “—Voting Rights and Shareholders’ Meetings”
above, or by repurchase of our own stock in accordance with the Mexican
Securities Market Law, see “—Share Repurchases” below.
Share
Repurchases
We
may
choose to acquire our own shares through the Mexican Stock Exchange on the
following terms and conditions:
·
|
the
acquisition must be carried out through the Mexican Stock
Exchange;
|
·
|
the
acquisition must be carried out at market price, unless a public
offer or
auction has been authorized by the National Banking and Securities
Commission;
|
·
|
the
acquisition must be carried out against our net worth (
capital
contable
)
without adopting a reduction in capital stock or against our capital
stock, and the shares so acquired will be held as treasury stock
without
any requirement to adopt a reduction in capital stock. No shareholder
consent is required for such
purchases.
|
·
|
the
amount and price paid in all share repurchases must be made
public;
|
·
|
the
annual ordinary shareholders meeting must determine the maximum
amount of
resources to be used in the fiscal year for the repurchase of shares;
|
·
|
we
may not be delinquent on payments due on any outstanding debt issued
by us
that is registered with the National Securities Registry;
and
|
·
|
any
acquisition of shares must be in conformity with the requirements
of
Article 54 of the Mexican Securities Market Law, and we must maintain
a
sufficient number of outstanding shares to meet the minimum trading
volumes required by the stock markets on which our shares are
listed.
|
Ownership
of Capital Stock by Subsidiaries
Our
subsidiaries may not, directly or indirectly, invest in our shares, except
for
shares acquired as part of an employee stock option plan and in conformity
with
the Mexican Securities Market Law.
Delisting
Pursuant
to the Mexican Securities Market Law, in the event that we decide to cancel
the
registration of our shares in the National Securities Registry and the listing
of our shares on the Mexican Stock Exchange, or if the National Banking and
Securities Commission orders such cancellation, we will be required to conduct
a
tender offer for the shares held by minority shareholders and to create a
trust
with a term of six months, with amounts sufficient to purchase all shares
not
participating in the tender offer. Under the law, our controlling shareholders
will be secondarily liable for these obligations. The
price
at
which the shares must be purchased in the offer must be the greater of (i)
the
average of the trading price on the Mexican Stock Exchange during the last
30
days on which the shares were quoted prior to the date on which the tender
offer
is made or (ii) the book value of such shares as determined pursuant to our
latest quarterly financial information filed with the National Banking and
Securities Commission and the Mexican Stock Exchange. If the National Banking
and Securities Commission orders the cancellation, we must launch the tender
offer within 180 days from the date of their request. If we initiate it,
under
the Mexican Securities Market Law, the cancellation must be approved by 95%
of
our shareholders.
Other
Provisions
Information
to Shareholders
The
Mexican Corporations Law establishes that companies, acting through their
boards
of directors, must annually present a report at a shareholder’s meeting that
includes:
·
|
a
report of the directors on the operations of the company during
the
preceding year, as well as on the policies followed by the directors
and
on the principal existing projects,
|
·
|
a
report explaining the principal accounting and information policies
and
criteria followed in the preparation of the financial
information,
|
·
|
a
statement of the financial condition of the company at the end
of the
fiscal year,
|
·
|
a
statement showing the results of operations of the company during
the
preceding year, as well as changes in the company’s financial condition
and capital stock during the preceding
year,
|
·
|
the
notes which are required to complete or clarify the above mentioned
information, and
|
In
addition to the foregoing, our by-laws provide that our board of directors
also
should prepare the information referred to above with respect to any subsidiary
that represents at least 20% of our net worth (based on the financial statements
most recently available).
Shareholders’
Conflict of Interest
Under
Mexican law, any shareholder that has a conflict of interest with respect
to any
transaction must abstain from voting thereon at the relevant shareholders’
meeting. A shareholder that votes on a transaction in which its interest
conflicts with ours may be liable for damages in the event the relevant
transaction would not have been approved without such shareholder’s
vote.
Liquidation
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 their
respective share holdings. Shares that are only partially paid will participate
in the distribution in the proportion that they were paid. The general
extraordinary shareholders’ meeting at which the liquidation resolution is made,
will appoint one or more liquidators.
Foreign
Investment
Ownership
by foreign investors of shares of Mexican enterprises in certain economic
sectors is regulated by the Foreign Investment Law and the regulations
thereunder. The Ministry of the Economy
and
the
National Commission on Foreign Investment are responsible for the administration
of the Foreign Investment Law and Regulations.
Pursuant
to the Mexican Foreign Investment Law and Regulations, foreign investors
may
acquire up to 100% of the capital stock of Mexican companies or entities
in the
steel industry. In accordance with our by-laws, Mexican and non-Mexican
nationals may own all series of our share capital. We have registered any
foreign owner of our shares, and the depositary with respect to the ADSs
representing our shares, with the National Registry of Foreign
Investment
(Registro Nacional de Inversión Extranjera)
.
Other
Provisions
Forfeiture
of Shares
.
As
required by Mexican law, our by-laws provide that “any alien who at the time of
incorporation or at any time thereafter acquires an interest or participation
in
the capital of the corporation shall be considered, by virtue thereof, as
Mexican in respect thereof and shall be deemed to have agreed not to invoke
the
protection of his own government, under penalty, in case of breach of such
agreement, of forfeiture of such interest or participation in favor of the
Mexican nation”. Under this provision, a non-Mexican shareholder is deemed to
have agreed not to invoke the protection of his own government by asking
such
government to interpose a diplomatic claim against the Mexican government
with
respect to the shareholder’s rights as a shareholder but is not deemed to have
waived any other rights it may have, including any rights under the U.S.
securities laws, with respect to its investment in us. If the shareholder
invokes such governmental protection in violation of this agreement, its
shares
could be forfeited to the Mexican government. Mexican law requires that such
a
provision be included in the by-laws of all Mexican corporations unless such
by-laws prohibit ownership of shares by non-Mexican persons or
entities.
Duration
.
Our
existence under our by-laws is indefinite.
Certain
Differences between Mexican and U.S. Corporate Law
You
should be aware that the Mexican Corporations Law and the Mexican Securities
Market Law, which apply to us, differ in certain material respects from laws
generally applicable to U.S. corporations and their shareholders.
Independent
Directors
The
Mexican Securities Market Law requires that 25% of the directors of Mexican
public companies must be independent. Pursuant to the rules and regulations
of
the American Stock Exchange, 50% of the directors of listed companies must
be
independent, and foreign companies subject to reporting requirements under
the
U.S. federal securities laws and listed on the American Stock Exchange must
maintain an audit committee comprised entirely of independent directors as
defined in the U.S. federal securities laws.
Mergers,
Consolidations, and Similar Arrangements
A
Mexican
company may merge with another company only if a majority of the shares
representing its outstanding capital stock approve the merger at a duly convened
general extraordinary shareholders’ meeting, unless the company’s by-laws impose
a higher threshold. Dissenting shareholders are not entitled to appraisal
rights. Creditors have ninety days to oppose a merger judicially, provided
they
have a legal interest to oppose the merger.
Under
Delaware law, with certain exceptions, a merger, consolidation, or sale of
all
or substantially all the assets of a corporation must be approved by the
board
of directors and a majority of the outstanding shares entitled to vote thereon.
Under Delaware law, a shareholder of a corporation
participating
in certain major corporate transactions, under certain circumstances, may
be
entitled to appraisal rights pursuant to which the shareholder may receive
payment in the amount of the fair market value of the shares held by the
shareholder (as determined by a court) in lieu of the consideration the
shareholder would otherwise receive in the transaction. Delaware law also
provides that a parent corporation, by resolution of its board of directors
and
without any shareholder vote, may merge with any subsidiary of which it owns
at
least 90% of each class of share capital. Upon any such merger, dissenting
shareholders of the subsidiary would have appraisal rights.
Anti-Takeover
Provisions
Subject
to the approval of the National Banking and Securities Commission, the Mexican
Securities Market Law permits public companies to include anti-takeover
provisions in their by-laws that restrict the ability of third parties to
acquire control of the company without obtaining approval of the company’s board
of directors. See “Market Information
¾
Market
Regulation
¾
Anti-Takeover
Protections”.
Under
Delaware law, corporations can implement shareholder rights plans and other
measures, including staggered terms for directors and super-majority voting
requirements, to prevent takeover attempts. Delaware law also prohibits a
publicly-held Delaware corporation from engaging in a business combination
with
an interested shareholder for a period of three years after the date of the
transaction in which the shareholder became an interested shareholder
unless:
·
|
prior
to the date of the transaction in which the shareholder became
an
interested shareholder, the board of directors of the corporation
approves
either the business combination or the transaction that resulted
in the
shareholder becoming an interested
shareholder;
|
·
|
upon
consummation of the transaction that resulted in the shareholder
becoming
an interested shareholder, the interested shareholder owns at least
85% of
the voting stock of the corporation, excluding shares held by directors,
officers, and employee stock plans;
or
|
·
|
at
or after the date of the transaction in which the shareholder became
an
interested shareholder, the business combination is approved by
the board
of directors and authorized at a shareholders’ meeting by at least 66
2
/
3
%
of the voting stock which is not owned by the interested
shareholder.
|
Shareholders’
Suits
Pursuant
to the Mexican Securities Market Law (
Ley
de Mercado de Valores
),
only a
shareholder or group of shareholders holding at least 5% of our outstanding
shares may bring a claim against some or all of our directors, secretary
of the
board of directors or relevant executives for violation of their duty of
care or
duty of loyalty. In addition, such shareholder or group of shareholders must
include in its claim the amount of damages or losses caused to the company
and
not only the damages or losses caused to the shareholder or group of
shareholders bringing the claim, provided that any amount recovered as
indemnification arising from the liability action will be for the benefit
of the
company, and not for the benefit of the shareholder or group of shareholders.
The shareholder or group or shareholders must demonstrate the direct and
immediate link between the damage or loss caused to the company, and the
acts
alleged to have caused it. There is no requirement for the shareholder or
group
of shareholders to hold the shares for a certain period of time in order
to
bring a claim.
If
the
court determines that the shareholder or group of shareholders that initiated
the claim acted in bad faith, such shareholder or group of shareholders will
be
liable to pay the legal fees and legal proceeding expenses.
The
statute of limitations for these actions is five years from the date on which
the act or event that caused the damage or loss occurred. These actions must
be
brought in the federal or local courts in Guadalajara, Jalisco (Mexico) and
the
court must personally notify the parties that have been sued, and must comply
with all other legal formalities in order to satisfy the due process
requirements of the Mexican Constitution.
Process
must be served on the defendant personally, or, in the defendant’s absence,
process can be served by a judicial officer on the defendant’s domicile whether
or not the defendant is present. A method of service that does not comply
with
these requirements could be considered void. Class action lawsuits are not
permitted under Mexican law.
Shareholder
Proposals
Under
Mexican law and our by-laws, holders of at least 10% of our outstanding capital
stock are entitled to appoint one member of our board of directors and an
alternate.
Delaware
law does not include a provision restricting the manner in which nominations
for
directors may be made by shareholders or the manner in which business may
be
brought before a meeting.
Calling
of Special Shareholders’ Meetings
Under
Mexican law and our by-laws, the board of directors, the chairman of the
board
of directors or the chairman of the audit and corporate practices committee
may
call a shareholders’ meeting. Any shareholder or group of shareholders with
voting rights representing at least 10% of our capital stock may request
that
the chairman of the board of directors or the audit and corporate practices
committee call a shareholders’ meeting to discuss the matters indicated in the
written request. If the chairman of the board of directors or the chairman
of
the audit and corporate practices committee fails to call a meeting within
15
calendar days following date of the written request, the shareholder or group
of
shareholders may request that a competent court call the meeting. A single
shareholder may call a shareholders’ meeting if no meeting has been held for two
consecutive years or if matters to be dealt with at an ordinary shareholders’
meeting have not been considered.
Delaware
law permits the board of directors or any person who is authorized under
a
corporation’s certificate of incorporation or by-laws to call a special meeting
of shareholders.
Cumulative
Voting
Under
Mexican law, cumulative voting for the election of directors is not
permitted.
Under
Delaware law, cumulative voting for the election of directors is permitted
if
expressly authorized in the certificate of incorporation.
Staggered
Board of Directors
Mexican
law does not permit companies to have a staggered board of directors, while
Delaware law does permit corporations to have a staggered board of
directors.
Approval
of Corporate Matters by Written Consent
Mexican
law permits shareholders to take action by unanimous written consent of the
holders of all shares entitled to vote. These resolutions have the same legal
effect as those adopted in a general or special shareholders’ meeting. The board
of directors may also approve matters by unanimous written consent.
Delaware
law permits shareholders to take action by written consent of holders of
outstanding shares having more than the minimum number of votes necessary
to
take the action at a shareholders’ meeting at which all voting shares were
present and voted.
Amendment
of Certificate of Incorporation
Under
Mexican law, it is not possible to amend a company’s certificate of
incorporation (
acta
constitutiva
).
However, the provisions that govern a Mexican company are contained in its
by-laws, which may be amended as described below. Under Delaware law, a
company’s certificate of incorporation generally may be amended by a vote of
holders of a majority of the outstanding stock entitled to vote thereon (unless
otherwise provided in the certificate of incorporation), subsequent to a
resolution of the board of directors proposing such amendment.
Amendment
of By-laws
Under
Mexican law, amending a company’s by-laws requires shareholder approval at an
extraordinary shareholders’ meeting. Mexican law requires that at least 75% of
the shares representing a company’s outstanding capital stock be present at the
meeting in the first call (unless the by-laws require a higher threshold)
and
that the resolutions be approved by a majority of the shares representing
a
company’s outstanding capital stock.
Under
Delaware law, holders of a majority of the outstanding stock entitled to
vote
and, if so provided in the certificate of incorporation, the directors of
the
corporation, have the power to adopt, amend, and repeal the by-laws of a
corporation.
American
Depositary Receipts
The
Bank
of New York, as depositary, will execute and deliver the ADRs. ADRs are American
Depositary Receipts. Each ADR is a certificate evidencing a specific number
of
American Depositary Shares, also referred to as ADSs. Each ADS will represent
three series B shares (or a right to receive three series B shares) deposited
with the principal Mexico office of
BBVA
Bancomer, S.A. de C.V.
,
as
custodian for the depositary. Each ADS will also represent any other securities,
cash or other property which may be held by the depositary. The depositary’s
corporate trust office at which the ADRs will be administered is located
at 101
Barclay Street, New York, New York 10286. The Bank of New York’s principal
executive office is located at One Wall Street, New York, New York
10286.
You
may
hold ADSs either directly (by having an ADR registered in your name) or
indirectly through your broker or other financial institution. If you hold
ADSs
directly, you are an ADR holder. This description assumes you hold your ADSs
directly. If you hold the ADSs indirectly, you must rely on the procedures
of
your broker or other financial institution to assert the rights of ADR holders
described in this section. You should consult with your broker or financial
institution to find out what those procedures are.
As
an ADR
holder, we will not treat you as one of our shareholders and you will not
have
shareholder rights. Mexican law governs shareholder rights. The depositary
will
be the holder of the series B shares underlying your ADSs. As a holder of
ADRs,
you will have ADR holder rights. A deposit agreement among us, the depositary
and you, as an ADR holder, and the beneficial owners of ADRs set out ADR
holder
rights as well as the rights and obligations of the depositary. New York
law
governs the deposit agreement and the ADRs.
The
following is a summary of the material provisions of the deposit agreement.
For
more complete information, you should read the entire deposit agreement and
the
form of ADR. Directions on how to obtain copies of those documents are provided
on page 130.
Dividends
and Other Distributions
How
will you receive dividends and other distributions on the series B
shares?
The
depositary has agreed to pay to you the cash dividends or other distributions
it
or the custodian receives on series B shares or other deposited securities,
after deducting its fees and expenses. You will receive these distributions
in
proportion to the number of series B shares your ADSs represent.
•
Cash
.
The
depositary will convert any cash dividend or other cash distribution we
pay on
the series B shares into U.S. dollars, if it can do so on a reasonable
basis and
can transfer the U.S. dollars to the United States. If that is not possible
or
if any government approval is needed and can not be obtained, the deposit
agreement allows the depositary to distribute the foreign currency only
to those
ADR holders to whom it is possible to do so. It will hold the foreign currency
it cannot convert for the account of the ADR holders who have not been
paid. It
will not invest the foreign currency and it will not be liable for any
interest.
Before
making a distribution, any withholding taxes that must be paid will be deducted.
See “Taxation”. It will distribute only whole U.S. dollars and any balance not
distributable will be held by the depositary (without liability for interest
thereon) and will be added to and become part of the next sum received by
the
depositary for distribution to ADR holders then outstanding.
If
the exchange rates fluctuate during a time when the depositary cannot convert
the foreign currency, you may lose some or all of the value of the
distribution.
•
Series
B shares.
The
depositary may, with our approval and will if we request, distribute additional
ADSs representing any series B shares we distribute as a dividend or free
distribution. The depositary will only distribute whole ADSs. It will sell
series B shares which would require it to deliver a fractional ADS and
distribute the net proceeds in the same way as it does with cash. If the
depositary does not distribute additional ADRs, the outstanding ADSs will
also
represent the new series B shares.
•
Rights
to purchase additional series B shares.
If we
offer holders of our securities any rights to subscribe for additional
series B
shares or any other rights, the depositary may make these rights available
to
you. If the depositary decides it is not legal and practical to make the
rights
available but that it is practical to sell the rights, the depositary may
sell
the rights and distribute the proceeds in the same way as it does with
cash. The
depositary will allow rights that are not distributed or sold to lapse.
In
that case, you will receive no value for them.
If
the
depositary makes rights available to you, it will exercise the rights and
purchase the series B shares on your behalf. The depositary will then deposit
the series B shares and deliver ADSs to you. It will only exercise rights
if you
pay it the exercise price and any other charges the rights require you to
pay.
U.S.
securities laws may restrict transfers and cancellation of the ADSs represented
by series B shares purchased upon exercise of rights. For example, you may
not
be able to trade these ADSs freely in the United States. In this case, the
depositary may deliver restricted depositary series B shares that have the
same
terms as the ADRs described in this section except for changes needed to
put the
necessary restrictions in place.
•
Other
Distributions.
The
depositary will send to you anything else we distribute on deposited securities
by any means it thinks is legal, fair and practical. If it cannot make
the
distribution in that way, the depositary has a choice. It may decide to
sell
what we distributed and distribute the net proceeds, in the same way as
it does
with cash. Or, it may decide to hold what we distributed, in which case
ADSs
will also represent the newly distributed property. However, the depositary
is
not required to distribute any securities (other than ADSs) to you unless
it
receives satisfactory evidence from us that it is legal to make that
distribution.
The
depositary is not responsible if it decides that it is unlawful or impractical
to make a distribution available to any ADR holders. We have no obligation
to
register ADSs, series B shares, rights or other securities under the Securities
Act. We also have no obligation to take any other action to permit the
distribution of ADRs, series B shares, rights or anything else to ADR holders.
This
means that you may not receive the distributions we make on our series B
shares
or any value for them if it is illegal or impractical for us to make them
available to you
.
Deposit
and Withdrawal
How
are ADSs issued?
The
depositary will deliver ADSs if you or your broker deposit series B shares
or
evidence of rights to receive series B shares with the custodian. Upon payment
of its fees and expenses and of any taxes or charges, such as stamp taxes
or
stock transfer taxes or fees, the depositary will register the appropriate
number of ADSs in the names you request and will deliver the ADRs at its
corporate trust office to the persons you request.
How
do ADS holders cancel an ADR and obtain series B shares?
You
may
surrender your ADRs at the depositary’s corporate trust office. Upon payment of
its fees and expenses and of any taxes or charges, such as stamp taxes or
stock
transfer taxes or fees, the depositary will deliver the series B shares and
any
other deposited securities underlying the ADR to you or a person you designate
at the office of the custodian. Or, at your request, risk and expense, the
depositary will deliver the deposited securities at its corporate trust office,
if feasible.
Voting
Rights
How
do you vote?
You
may
instruct the depositary to vote the number of series B shares your ADSs
represent. Upon receipt of notice of any meeting or solicitation of consents
or
proxies, the depositary will notify you of shareholders’ meetings and arrange to
deliver our voting materials to you. Those materials will describe the matters
to be voted on and explain how you may instruct the depositary how to vote
the
series B shares or other deposited securities underlying your ADSs as you
direct. For instructions to be valid, they must reach the depositary by a
date
set by the depositary. The depositary will try, as far as practical, subject
to
Mexican law and the provisions of the our Estatutos Sociales, to vote or
to have
its agents vote the series B shares or other deposited securities as you
instruct. If the depositary does not receive voting instructions from you
by the
specified date, the depositary shall vote or cause to be voted the deposited
securities in the same manner as directed by the majority of instructions
which
the Depositary has received for that meeting, or if no such instructions
have
been received or if there is no majority, the depositary shall vote or cause
to
be voted the deposited securities in the same manner as informed by us that
the
majority of deposited securities is voted as such meeting.
We
can
not assure you that you will receive the voting materials or otherwise learn
of
an upcoming shareholders’ meeting in time to ensure that you can instruct the
depositary to vote your series B shares. In addition, the depositary and
its
agents are not responsible for failing to carry out voting instructions or
for
the manner of carrying out voting instructions.
This
means that you may not be able to exercise your right to vote and there may
be
nothing you can do if your series B shares are not voted as you
requested.
Fees
and Expenses
Persons
depositing series B shares or ADR holders must
pay
:
|
For
:
|
·
$5.00
(or less) per 100 ADSs (or portion of 100 ADSs)
|
·
Issuance
of ADSs, including issuances resulting from a distribution of series
B
shares or rights or other property
·
Cancellation
of ADSs for the purpose of withdrawal, including if the deposit
agreement
terminates
|
|
|
·
$.02
(or less) per ADS
|
·
Any
cash distribution to you
|
|
|
·
Registration
or transfer fees
|
·
Transfer
and registration of series B shares on our series B share register
to or
from the name of the depositary or its agent when you
deposit
|
|
or
withdraw series B shares
|
|
|
·
Expenses
of the depositary
|
·
Cable,
telex and facsimile transmissions (when expressly provided in the
deposit
agreement)
·
converting
foreign currency to U.S. dollars
|
|
|
·
Taxes
and other governmental charges the depositary or the custodian
have to pay
on any ADR or series B share underlying an ADR, for example, stock
transfer taxes, stamp duty or withholding taxes
|
·
As
necessary
|
The
depositary has agreed to reimburse us for expenses that we incur that are
related to establishment and maintenance of the ADR program, including investor
relations expenses and AMEX application and listing fees. There are limits
on the amount of expenses for which the depositary will reimburse us, but
the
amount of reimbursement available to us is not related to the amounts of
fees
the depositary collects from investors.
The
depositary collects its fees for issuance and cancellation of ADSs directly
from
investors depositing shares or surrendering ADSs for the purpose of withdrawal
or from intermediaries acting for them. The depositary collects fees for
making distributions to investors by deducting those fees from the amounts
distributed or by selling a portion of distributable property to pay the
fees. The depositary generally may refuse to provide fee-attracting
services until its fees for those services are paid.
Payment
of Taxes
You
will
be responsible for any taxes or other governmental charges payable on your
ADRs
or on the deposited securities underlying your ADRs. The depositary may,
and
upon receipt of instructions from us will, refuse to transfer your ADRs or
allow
you to withdraw the deposited securities underlying your ADRs until such
taxes
or other charges are paid. It may apply payments owed to you or sell deposited
securities underlying your ADRs, by public or private sale, to pay any taxes
owed and you will remain liable for any deficiency. If the depositary sells
deposited securities, it will, if appropriate, reduce the number of ADSs
to
reflect the sale and pay to you any proceeds, or send to you any property,
remaining after it has paid the taxes.
Reclassifications,
Recapitalizations and Mergers
If
we:
|
Then:
|
·
Change
the par value of our series B shares
·
Reclassify,
split up or consolidate any of the deposited securities
|
The
series B shares or other securities received by the depositary
will become
deposited securities. Each ADS will automatically represent its
equal
series B share of the new deposited securities.
|
·
Distribute
securities on the series B shares that are not distributed to
you
·
Recapitalize,
reorganize, merge,
|
The
depositary may, with our approval or at our request, deliver new
ADRs or
ask you to surrender your outstanding ADRs in exchange for new
ADRs
identifying the new
|
liquidate,
sell all or substantially all of our assets, or take any
similar action
|
deposited
securities.
|
Amendment
and Termination
How
may the deposit agreement be amended?
We
may
agree with the depositary to amend the deposit agreement and the ADRs without
your consent for any reason. If an amendment adds or increases fees or charges,
(except for taxes and other governmental) or prejudices a substantial right
of
ADR holders, it will not become effective for outstanding ADRs until three
months after the depositary notifies ADR holders of the amendment.
At
the time an amendment becomes effective, you are considered, by continuing
to
hold your ADR, to agree to the amendment and to be bound by the ADRs and
the
deposit agreement as amended
.
How
may the deposit agreement be terminated?
The
depositary will terminate the deposit agreement at our direction by mailing
notice of termination to the ADS holders then outstanding at least 30 days
prior
to the date fixed in such notice for such termination. The depositary may
also
terminate the deposit agreement by mailing notice of termination to us and
the
ADS holders then outstanding if 90 days have passed since the depositary
told us
it wants to resign but a successor depositary has not been appointed and
accepted its appointment.
After
termination, the depositary and its agents will do the following under the
deposit agreement but nothing else: collect distributions on the deposited
securities, sell rights and other property, and deliver series B shares and
other deposited securities upon cancellation of ADRs. One year after
termination, the depositary may sell any remaining deposited securities by
public or private sale. After that, the depositary will hold the money it
received on the sale, as well as any other cash it is holding under the deposit
agreement for the
pro
rata
benefit
of the ADR holders that have not surrendered their ADRs. It will not invest
the
money and has no liability for interest. The depositary’s only obligations will
be to account for the money and other cash. After termination our only
obligations will be to indemnify the depositary and to pay fees and expenses
of
the depositary that we agreed to pay.
Limitations
on Obligations and Liability
Limits
on our Obligations and the Obligations of the Depositary; Limits on Liability
to
Holders of ADRs
The
deposit agreement expressly limits our obligations and the obligations of
the
depositary. It also limits our liability and the liability of the depositary.
We
and the depositary:
·
|
agree
to use our best judgment, good faith and diligence in the performance
of
our obligations specifically set forth in the deposit
agreement;
|
·
|
are
not liable if either of us is prevented or delayed by law or circumstances
beyond our control from performing our obligations under the deposit
agreement;
|
·
|
are
not liable if either of us exercises discretion permitted under
the
deposit agreement;
|
·
|
have
no obligation to become involved in a lawsuit or other proceeding
related
to the ADRs or the deposit agreement on your behalf or on behalf
of any
other person;
|
·
|
are
not liable for any action or non-action by it in reliance upon
the advice
of or information from legal counsel, accountants, any person presenting
shares for deposit, any ADR holder or beneficial owner or any other
person
believed by it in good faith to be competent to give such advice
or
information.
|
In
the
deposit agreement, we and the depositary agree to indemnify each other under
certain circumstances.
Requirements
for Depositary Actions
Before
the depositary will deliver or register a transfer of an ADR, make a
distribution on an ADR, or permit withdrawal of series B shares or other
property, the depositary may require:
·
|
payment
of stock transfer or other taxes or other governmental charges
and
transfer or registration fees charged by third parties for the
transfer of
any series B shares or other deposited securities;
|
·
|
satisfactory
proof of the identity and genuineness of any signature or other
information it deems necessary; and
|
·
|
compliance
with reasonable regulations it may establish, from time to time,
consistent with the deposit agreement, including presentation of
transfer
documents.
|
The
depositary may refuse to deliver ADRs or register transfers of ADRs generally
when the transfer books of the depositary or our transfer books are closed
or at
any time if the depositary or we think it advisable to do so.
Your
Right to Receive the Series B shares Underlying your ADRs
You
have
the right to cancel your ADRs and withdraw the underlying series B shares
at any
time except:
·
|
When
temporary delays caused by closing our or the depositary’s transfer books
or the deposit of shares in connection with voting at a shareholders’
meeting, or the payment of dividends.
|
·
|
When
you owe money to pay fees, taxes and similar charges.
|
·
|
When
it is necessary to prohibit withdrawals in order to comply with
any laws
or governmental regulations that apply to ADRs or to the withdrawal
of
series B shares or other deposited securities.
|
This
right of withdrawal may not be limited by any other provision of the deposit
agreement.
Pre-release
of ADRs
The
deposit agreement permits the depositary to deliver ADRs before deposit of
the
underlying series B shares. This is called a pre-release of the ADR. The
depositary may also deliver series B shares upon cancellation of pre-released
ADRs (even if the ADRs are canceled before the pre-release transaction has
been
closed out). A pre-release is closed out as soon as the underlying series
B
shares are delivered to the depositary. The depositary may receive ADRs instead
of series B shares to close out a pre-release. The depositary may pre-release
ADRs only under the following conditions: (1) before or at the time of the
pre-release, the person to whom the pre-release is being made represents
to the
depositary in writing that it or its customer owns the series B shares or
ADRs
to be deposited; (2) the pre-release is fully
collateralized
with cash or other collateral that the depositary considers appropriate;
and (3)
the depositary must be able to close out the pre-release on not more than
five
business days' notice. In addition, the depositary will limit the number
of ADSs
that may be outstanding at any time as a result of pre-release, although
the
depositary may disregard the limit from time to time, if it thinks it is
appropriate to do so.
The
following summary contains a description of the material anticipated U.S.
and
Mexican federal income tax consequences of the purchase, ownership and
disposition of the series B shares or ADSs by a holder that is a citizen
or
resident of the United States or a U.S. domestic corporation or that otherwise
will be subject to U.S. federal income tax on a net income basis in respect
of
the series B shares or ADSs and that is a “non-Mexican holder” (as defined
below) (a “U.S. holder”), but it does not purport to be a comprehensive
description of all of the tax considerations that may be relevant to a decision
to purchase the series B shares or ADSs. In particular, the summary deals
only
with U.S. holders that will hold the series B shares or ADSs as capital assets
and use the U.S. dollar as their functional currency and does not address
the
tax treatment of a U.S. holder that owns or is treated as owning 10% or more
of
our outstanding voting shares. In addition, the summary does not address
any
U.S. or Mexican state or local tax considerations that may be relevant to
U.S.
holders that are subject to special tax rules, such as banks, securities
dealers, insurance companies, tax-exempt entities, persons that hold ADSs
or
series B shares as a hedge or as part of a straddle, conversion transaction
or
other risk reduction transaction for tax purposes.
The
summary is based upon the federal income tax laws of the United States and
Mexico as in effect on the date of this prospectus, including the provisions
of
the income tax treaty between the United States and Mexico and protocol thereto
(the “Tax Treaty”), all of which are subject to change, possibly with
retroactive effect in the case of U.S. federal income tax law. Prospective
investors in the series B shares or ADSs should consult their own tax advisors
as to the U.S., Mexican or other tax consequences of the purchase, ownership
and
disposition of the series B shares or ADSs, including, in particular, the
effect
of any foreign, state or local tax laws and their entitlement to the benefits,
if any, afforded by the Tax Treaty.
For
purposes of this summary, the term “non-Mexican holder” shall mean a holder that
is not a resident of Mexico and that will not hold the series B shares or
ADSs
or a beneficial interest therein in connection with the conduct of a trade
or
business through a permanent establishment or fixed base in Mexico.
For
purposes of Mexican taxation:
·
|
individuals
are residents of Mexico if they have established their principal
place of
residence in Mexico or, if they have established their principal
place of
residence outside Mexico, if their core of vital interests (
centro
de intereses vitales
)
is located in Mexico. Individuals’ core of vital interests will be deemed
to be located in Mexico if, among other
things,
|
·
|
at
least 50% of the individuals’ aggregate annual income derives from Mexican
sources or
|
·
|
the
individuals’ principal center of professional activities is located in
Mexico;
|
·
|
individuals
are residents of Mexico if they are state employees, regardless
of the
location of the individuals’ core of vital interests;
and
|
·
|
legal
entities are residents of Mexico if they were established under
Mexican
law or if they maintain their principal place of business or their
place
of effective management in Mexico.
|
If
non-residents of Mexico are deemed to have a permanent establishment in Mexico
for tax purposes, all income attributable to the permanent establishment
will be
subject to Mexican taxes, in accordance with applicable Mexican tax
law.
In
general, for U.S. federal income tax purposes, holders of ADSs will be treated
as the beneficial owners of the series B shares represented by those
ADSs.
Taxation
of Dividends
Mexican
Tax Considerations
Under
Mexican Income Tax Law provisions (
Ley
del Impuesto Sobre la Renta
),
dividends paid to non-Mexican holders with respect to the series B shares
represented by the ADSs are not subject to Mexican withholding tax.
Dividends
paid from distributable earnings that have not been subject to corporate
income
tax are subject to a corporate-level dividend tax at a rate of 40.85% for
the
year ended December 31, 2006. The corporate-level dividend tax on the
distribution of earnings is not final and may be credited against income
tax
payable during the fiscal year in which the dividend tax was paid and for
the
following two years. Dividends paid from distributable earnings, after corporate
income tax has been paid with respect to these earnings, are not subject
to this
corporate-level dividend tax. Currently, after corporate tax dividend
distributions are not subject to individual withholding taxes for shareholder
recipients thereof.
Distributions
made by us to our shareholders other than as dividends, including capital
reductions, amortization of shares or otherwise, would be subject to taxation
in
Mexico, including withholding taxes. The tax rates applicable and the method
of
assessing and paying taxes applicable to any such non-dividend distributions,
will vary depending on the nature of the distributions.
U.S.
Federal Income Tax Considerations
The
gross
amount of any distributions paid with respect to the series B shares represented
by the ADSs, to the extent paid out of our current or accumulated earnings
and
profits, as determined for U.S. federal income tax purposes, will be taxable
as
dividends and generally will be includible in the gross income of a U.S.
holder
as ordinary income on the date on which the distributions are received by
the
depositary and will not be eligible for the dividends received deduction
allowed
to certain corporations under the U.S. Internal Revenue Code of 1986, as
amended. Subject to certain exceptions for short-term and hedged positions,
the
U.S. dollar amount of dividends received by an individual prior to January
1,
2011 with respect to the B shares and ADSs will be subject to taxation at
a
maximum rate of 15% if the dividends are “qualified dividends”. Dividends paid
on the B shares and ADSs will be treated as qualified dividends if (i) the
issuer is eligible for the benefits of a comprehensive income tax treaty
with
the United States that the IRS has approved for the purposes of the qualified
dividend rules and (ii) we were not, in the year prior to the year in which
the
dividend was paid, and our not, in the year in which the dividend is paid,
a
passive foreign investment company (“PFIC”). The income tax treaty between
Mexico and the United States has been approved for the purposes of the qualified
dividend rules. Based on our audited financial statements and relevant market
and shareholder data, we believe that we were not treated as a PFIC for U.S.
federal income tax purposes with respect to our 2005 taxable year. In addition,
based on our unaudited financial statements for our first three fiscal quarters
of 2006 and our current expectations regarding the value and nature of our
assets, the sources and nature of our income and relevant market and shareholder
data, we do not anticipate having become a PFIC for our 2006 taxable
year.
To
the
extent that a distribution exceeds our current and accumulated earnings and
profits, it generally will be treated as a non-taxable return of basis to
the
extent thereof, and thereafter as capital
gain
from
the sale of series B shares or ADSs. Distributions, which will be made in
pesos,
will be includible in the income of a U.S. holder in a U.S. dollar amount
calculated by reference to the exchange rate in effect on the date they are
received by the depositary whether or not they are converted into U.S. dollars.
U.S. holders should consult their own tax advisors regarding the treatment
of
foreign currency gain or loss, if any, on any pesos received that are converted
into U.S. dollars on a date subsequent to receipt. Dividend income generally
will constitute foreign source “passive income” or, in the case of certain U.S.
holders, “financial services income” for U.S. foreign tax credit
purposes.
Distributions
of additional series B shares to holders of ADSs with respect to their ADSs
that
are made as part of a pro rata distribution to all our stockholders generally
will not be subject to U.S. federal income tax.
Taxation
of Dispositions of Shares or ADSs
Mexican
Tax Considerations
Gain
on
the sale or other disposition of ADSs by a U.S. holder will generally not
be
subject to Mexican tax. Deposits and withdrawals of series B shares in exchange
for ADSs will not give rise to Mexican tax or transfer duties.
Gain
on
the sale of series B shares by a U.S. holder will not be subject to any Mexican
tax if the transaction is carried out through the Mexican Stock Exchange
or
other stock exchange or securities markets approved by the Mexican Ministry
of
Finance and Public Credit. Gain on sales or other dispositions of series
B
shares made in other circumstances generally would be subject to Mexican
tax at
a rate of 25% based on the total amount of the transaction or, subject to
certain requirements applicable to the seller, at a rate of 29% for the year
ended December 31, 2006 of gains realized from the disposition.
Under
the
Tax Treaty, a U.S. holder that is eligible to claim the benefits of the Tax
Treaty will be exempt from Mexican tax on gains realized on a sale or other
disposition of series B shares, in a transaction that is not carried out
through
the Mexican Stock Exchange or such other approved securities markets, so
long as
the holder did not own, directly or indirectly, 25% or more of our share
capital
(including ADSs) during the twelve-month period preceding the sale or other
disposition, and the value of those shares does not derive mainly from immovable
property located in Mexico.
U.S.
Federal Income Tax Considerations
Upon
the
sale or other disposition of the series B shares or ADSs, a U.S. holder
generally will recognize capital gain or loss in an amount equal to the
difference between the amount realized on the sale or other disposition and
such
U.S. holder’s tax basis in the series B shares or ADSs. Gain or loss recognized
by a U.S. holder on such sale or other disposition generally will be long-term
capital gain or loss if, at the time of the sale or other disposition, the
series B shares or ADSs have been held for more than one year. Long-term
capital
gain recognized by a U.S. holder that is an individual generally is subject
to a
maximum federal income tax rate of 15%. The deduction of a capital loss is
subject to limitations for U.S. federal income tax purposes. Deposits and
withdrawals of series B shares by U.S. holders in exchange for ADSs will
not
result in the realization of gain or loss for U.S. federal income tax
purposes.
A
U.S.
holder that receives pesos upon sale or other disposition of the series B
shares
will realize an amount equal to the U.S. dollar value of the pesos upon the
date
of sale (or in the case of cash basis and electing accrual basis taxpayers,
the
settlement date). A U.S. holder will have a tax basis in the pesos received
equal to the U.S. dollar value of the pesos received translated at the same
rate
the U.S. holder used to determine the amount realized on its disposal of
the
series B shares. Any gain or loss realized by
a
U.S.
holder on a subsequent conversion of the pesos generally will be a U.S. source
ordinary income or loss.
Other
Mexican Taxes
There
are
no Mexican inheritance, gift, succession or value added taxes applicable
to the
ownership, transfer or disposition of the series B shares or ADSs by non-Mexican
holders; provided, however, that gratuitous transfers of the series B shares
or
ADSs may in certain circumstances cause a Mexican federal tax to be imposed
upon
the recipient. There are no Mexican stamp, issue, registration or similar
taxes
or duties payable by non-Mexican holders of the series B shares or
ADSs.
U.S.
Backup Withholding Tax and Information Reporting Requirements
In
general, information reporting requirements will apply to certain payments
by a
paying agent to a U.S. holder of dividends in respect of the series B shares
or
ADSs or the proceeds received on the sale or other disposition of the series
B
shares or ADSs, and a backup withholding tax may apply to such amounts if
the
U.S. holder fails to provide an accurate taxpayer identification number to
the
paying agent or fails to establish an exemption or otherwise comply with
these
provisions. Amounts withheld as backup withholding tax will be creditable
against the U.S. holder’s U.S. federal income tax liability, provided that the
required information is furnished to the U.S. Internal Revenue
Service.
The
combined offering consists of
·
|
an
international offering of ● ADSs outside of Mexico,
and
|
·
|
an
offering of ● series B shares in Mexico.
|
Citigroup
Global Markets Inc. is the global coordinator of the combined offering, the
sole
book-runner of the international offering, and is acting as representative
of
the international underwriters named below. Citigroup Global Markets Inc.
is
located at 388 Greenwich Street, New York, NY 10013.
Subject
to the terms and conditions stated in the international underwriting agreement
dated the date of this prospectus, each international underwriter named below
has agreed to purchase, and we have agreed to sell to that international
underwriter, the number of ADSs set forth opposite the international
underwriter’s name.
Underwriter
|
|
Number
of
ADSs
|
|
Citigroup
Global Markets Inc.
|
|
|
●
|
|
Morgan
Stanley & Co. Incorporated
|
|
|
●
|
|
Total
|
|
|
●
|
|
The
international underwriting agreement provides that the obligations of the
international underwriters to purchase the series B shares included in this
offering are subject to the approval of legal matters by counsel and to other
conditions. The international underwriters are obligated to purchase all
the
series B shares (other than those covered by the over-allotment option described
below) if they purchase any of the series B shares.
We
also
have entered into a Mexican underwriting agreement with a syndicate of Mexican
underwriters providing for the concurrent offer and sale of series B shares
in
Mexico. The offering price and the total underwriting discounts and commissions
per series B share for the international offering and the Mexican offering
will
be substantially equivalent. In addition, the international and Mexican
offerings are each conditioned on the closing of the other.
The
international underwriters propose to offer some of the series B shares directly
to the public at the public offering price set forth on the cover page of
this
prospectus and some of the series B shares to dealers at the public offering
price less a concession not to exceed $ ● per series B share. The international
underwriters may allow, and dealers may reallow, a concession not to exceed
$ ●
per series B share on sales to other dealers. If all of the series B shares
are
not sold at the initial offering price, the representative may change the
public
offering price and the other selling terms.
We
have
granted to the underwriters an option, exercisable for 30 days from the date
of
this prospectus, to purchase up to ● additional series B shares or the
equivalent in ADSs at the public offering price less the underwriting discount.
The underwriters may exercise the option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent
the
option is exercised, each underwriter must purchase a number of additional
series B shares (a portion of which may be in the form of ADSs) approximately
proportionate to that underwriter’s initial purchase commitment.
The
Mexican underwriters and the international underwriters have entered into
an
agreement in which they agree to restrictions on where and to whom they and
any
dealer purchasing from them may offer series B shares. The Mexican and
international underwriters also have agreed that they may sell
ADSs
or
series B shares between their respective underwriting syndicates. The number
of
ADSs or series B shares actually allocated to each offering may differ from
the
amount initially offered due to reallocation between the Mexican and
international offerings.
We
and
our officers, directors and principal shareholders have agreed that, for
a
period of 180 days from the date of this prospectus, we will not, without
the
prior written consent of Citigroup Global Markets Inc., dispose of or hedge
any
of our series B shares or any securities convertible into or exchangeable
for
our series B shares. Citigroup Global Markets Inc. in its sole discretion
may
release any of the securities subject to these lock-up agreements at any
time
without notice. The 180-day restricted period described above is subject
to
extension such that, in the event that either (1) during the last 17 days
of the
180-day restricted period, we issue an earnings release or material news,
or a
material event relating to us occurs or (2) prior to the expiration of the
180-day restricted period, we announce that we will release earnings results
during the 16-day period beginning on the last day of the 180-day period,
the
‘‘lock-up’’ restrictions described above will continue to apply until the
expiration of the 18-day period beginning on the issuance of the earnings
release or the occurrence of the material news or material event.
Citigroup
Global Markets Inc. has no present intent or arrangement to release any of
the
securities subject to these lock-up agreements. The release of any lock-up
is
considered on a case by case basis. Factors in deciding whether to release
securities may include the length of time before the lock-up expires, the
number
of shares involved, the reason for the requested release, market conditions,
the
trading price of our series B shares and ADSs, historical trading volumes
of our
common stock and whether the person seeking the release is an officer, director
or affiliate of us.
In
relation to each member state of the European Economic Area that has implemented
the Prospectus Directive (each, a relevant member state), with effect from
and
including the date on which the Prospectus Directive is implemented in that
relevant member state (the relevant implementation date), an offer of ADSs
or
series B shares described in this prospectus may not be made to the public
in
that relevant member state prior to the publication of a prospectus in relation
to the ADSs or series B shares that has been approved by the competent authority
in that relevant member state or, where appropriate, approved in another
relevant member state and notified to the competent authority in that relevant
member state, all in accordance with the Prospectus Directive, except that,
with
effect from and including the relevant implementation date, an offer of
securities may be made to the public in that relevant member state at any
time:
·
|
to
any legal entity that is authorized or regulated to operate in
the
financial markets or, if not so authorized or regulated, whose
corporate
purpose is solely to invest in securities;
or
|
·
|
to
any legal entity that has two or more of (1) an average of at least
250
employees during the last financial year; (2) a total balance sheet
of
more than
€
43,000,000;
and (3) an annual net turnover of more than
€
50,000,000,
as shown in its last annual or consolidated accounts;
or
|
·
|
in
any other circumstances that do not require the publication of
a
prospectus pursuant to Article 3 of the Prospectus
Directive.
|
Each
purchaser of ADSs or series B shares described in this prospectus located
within
a relevant member state will be deemed to have represented, acknowledged
and
agreed that it is a ‘‘qualified investor’’ within the meaning of Article 2(1)(e)
of the Prospectus Directive.
For
purposes of this provision, the expression an ‘‘offer to the public’’ in any
relevant member state means the communication in any form and by any means
of
sufficient information on the terms of the offer and the securities to be
offered so as to enable an investor to decide to purchase or subscribe the
securities, as the expression may be varied in that member state by any measure
implementing the
Prospectus
Directive in that member state, and the expression ‘‘Prospectus Directive’’
means Directive 2003/71/EC and includes any relevant implementing measure
in
each relevant member state.
We
have
not authorized and do not authorize the making of any offer of ADSs or series
B
shares through any financial intermediary on our behalf, other than offers
made
by the underwriters with a view to the final placement of the ADSs or series
B
shares as contemplated in this prospectus. Accordingly, no purchaser of the
ADSs
or series B shares, other than the underwriters, is authorized to make any
further offer of the ADSs or series B shares on behalf of us or the
underwriters.
This
prospectus is only being distributed to, and is only directed at, persons
in the
United Kingdom that are qualified investors within the meaning of Article
2(1)(e) of the Prospectus Directive (‘‘Qualified Investors’’) that are also (i)
investment professionals falling within Article 19(5) of the Financial Services
and Markets Act 2000 (Financial Promotion) Order 2005 (the ‘‘Order’’); or (ii)
high net worth entities, and other persons to whom it may lawfully be
communicated, falling within Article 49(2)(a) to (d) of the Order (all such
persons together being referred to as ‘‘relevant persons’’). This prospectus and
its contents are confidential and should not be distributed, published or
reproduced (in whole or in part) or disclosed by recipients to any other
persons
in the United Kingdom. Any person in the United Kingdom that is not a relevant
person should not act or rely on this document or any of its
contents.
Neither
this prospectus nor any other offering material relating to the ADSs or series
B
shares described in this prospectus has been submitted to the clearance
procedures of the
Autorité
des Marchés Financiers
or
by the
competent authority of another member state of the European Economic Area
and
notified to the
Autorité
des Marchés Financiers.
The
ADSs
and series B shares have not been offered or sold and will not be offered
or
sold, directly or indirectly, to the public in France. Neither this prospectus
nor any other offering material relating to the ADSs or series B shares has
been
or will be:
·
|
released,
issued, distributed or caused to be released, issued or distributed
to the
public in France; or
|
·
|
used
in connection with any offer for subscription or sale of the ADSs
or
series B shares to the public in
France.
|
Such
offers, sales and distributions will be made in France only:
·
|
to
qualified investors (
investisseurs
qualifiés
)
and/or to a restricted circle of investors (
cercle
restreint d’investisseurs
),
in each case investing for their own account, all as defined in,
and
in
accordance
with, Article L.411-2, D.411-1, D.411-2, D.734-1, D.744-1, D.754-1
and
D.764-1 of
the
French
Code
Monétaire et financier
;
or
|
·
|
to
investment services providers authorized to engage in portfolio
management
on behalf of third parties; or
|
·
|
in
a transaction that, in accordance with article L.411-2-II-1°-or-2°-or 3°
of the French
Code
Monétaire et Financier
and
article 211-2 of the General Regulations (
Réglement
Général
)
of the
Autorité
des Marchés Financiers, does not constitute a public offer (
appel
public á l’épargne
).
|
The
ADSs
and series B shares may be resold directly or indirectly, only in compliance
with Articles L.411-1, L.411-2, L.412-1 and L.621-8 through L.621-8-3 of
the
French
Code
Monétaire et Financier
.
The
ADSs
are listed on the AMEX under the symbol ‘‘SIM”, and the series B shares are
listed on the Mexican Stock Exchange under the symbol “SIMEC.B”.
The
following table shows the underwriting discounts and commissions that we
are to
pay to the international underwriters in connection with this offering. These
amounts are shown assuming both no exercise and full exercise of the
international underwriters’ option to purchase additional series B
shares.
|
|
Paid
by Grupo Simec, S.A.B. de C.V.
|
|
|
|
No
Exercise
|
|
Full
Exercise
|
|
Per
series B share
|
|
$
|
●
|
|
$
|
●
|
|
Per
ADS
|
|
$
|
●
|
|
$
|
●
|
|
Total
|
|
$
|
●
|
|
$
|
●
|
|
We
estimate that our portion of the total expenses of this offering will be
$
●.
In
connection with the offering, the representative on behalf of the underwriters,
may purchase and sell ADSs or series B shares in the open market. These
transactions may include short sales, syndicate covering transactions and
stabilizing transactions. Short sales involve syndicate sales of ADSs or
series
B shares in excess of the number of ADSs or series B shares to be purchased
by
the Mexican underwriters and the international underwriters in the offering,
which creates a syndicate short position. ‘‘Covered’’ short sales are sales of
ADSs or series B shares made in an amount up to the number of ADSs or series
B
shares represented by the Mexican underwriters’ and international underwriters’
over-allotment option. In determining the source of series B shares to close
out
the covered syndicate short position, the representative will consider, among
other things, the price of ADSs or series B shares available for purchase
in the
open market as compared to the price at which they may purchase ADSs or series
B
shares through the over-allotment option. Transactions to close out the covered
syndicate short position involve either purchases of ADSs or series B shares
in
the open market after the distribution has been completed or the exercise
of the
over-allotment option. The international underwriters may also make ‘‘naked’’
short sales of ADSs in excess of the over-allotment option. The Mexican
underwriters are not permitted to make “naked” short sales of series B shares on
the Mexican Stock Exchange. The international underwriters must close out
any
naked short position by purchasing ADSs in the open market. A naked short
position is more likely to be created if the Mexican underwriters and the
international underwriters are concerned that there may be downward pressure
on
the price of the ADSs or series B shares in the open market after pricing
that
could adversely affect investors who purchase in the offering. Stabilizing
transactions consist of bids for or purchases of ADSs or series B shares
in the
open market while the offering is in progress.
The
underwriters also may impose a penalty bid. Penalty bids permit the underwriters
to reclaim a selling concession from a syndicate member when Citigroup Global
Markets Inc. repurchases ADSs originally sold by that syndicate member in
order
to cover syndicate short positions or make stabilizing purchases.
Any
of
these activities may have the effect of preventing or retarding a decline
in the
market price of the ADSs or series B shares. They may also cause the price
of
the ADSs or series B shares to be higher than the price that would otherwise
exist in the open market in the absence of these transactions. The international
underwriters and the Mexican underwriters may conduct these transactions
on the
AMEX or the Mexican Stock Exchange or in the over-the-counter market, or
otherwise. If the international underwriters and the Mexican underwriters
commence any of these transactions, they may discontinue them at any
time.
The
underwriters may, from time to time, engage in transactions with us and perform
services for us in the ordinary course of their business. The underwriters
have,
from time to time, performed, and expect to perform in the future, investment
banking and advisory services for us and our affiliates, for which they have
received, and may continue to receive, customary fees and expenses.
A
prospectus in electronic format may be made available on the websites maintained
by one or more of the underwriters. The representative may agree to allocate
a
number of ADSs, in the form of ADSs or series B shares, to international
underwriters for sale to their online brokerage account holders. The
representative will allocate ADSs, in the form of ADSs or series B shares,
to
international underwriters that may make Internet distributions on the same
basis as other allocations. In addition, ADSs, in the form of ADSs or series
B
shares, may be sold by the international underwriters to securities dealers
who
resell ADSs, in the form of ADSs or series B shares, to online brokerage
account
holders.
We
have
agreed to indemnify the international underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
the
international underwriters may be required to make because of any of those
liabilities.
Resale
Restrictions
The
distribution of the series B shares in Canada is being made only on a private
placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of series B shares are made. Any resale of the series B shares in
Canada
must be made under applicable securities laws which will vary depending on
the
relevant jurisdiction, and which may require resales to be made under available
statutory exemptions or under a discretionary exemption granted by the
applicable Canadian securities regulatory authority. Purchasers are advised
to
seek legal advice prior to any resale of the shares.
Representations
of Purchasers
By
purchasing shares in Canada and accepting a purchase confirmation a purchaser
is
representing to us, the selling shareholder and the dealer from whom the
purchase confirmation is received that
¾
·
|
the
purchaser is entitled under applicable provincial securities laws
to
purchase the shares without the benefit of a prospectus qualified
under
those securities laws,
|
·
|
where
required by law, that the purchaser is purchasing as principal
and not as
agent, and
|
·
|
the
purchaser has reviewed the text above under Resale
Restrictions.
|
Rights
of Action
¾
Ontario
Purchasers
The
securities being offered are those of a foreign issuer and Ontario purchasers
will not receive the contractual right of action prescribed by Ontario
securities law. As a result, Ontario purchasers must rely on other remedies
that
may be available, including common law rights of action for damages or
rescission or rights of action under the civil liability provisions of the
U.S.
federal securities laws.
Enforcement
of Legal Rights
All
of
the issuer’s directors and officers as well as the experts named herein and the
selling shareholder may be located outside of Canada and, as a result, it
may
not be possible for Canadian purchasers to effect service of process within
Canada upon the issuer or such persons. All or a substantial portion of the
assets of the issuer and such persons may be located outside of Canada and,
as a
result, it may not be possible to satisfy a judgment against the issuer or
such
persons in Canada or to enforce a judgment obtained in Canadian courts against
such issuer or persons outside of Canada.
Taxation
and Eligibility for Investment
Canadian
purchasers of shares should consult their own legal and tax advisors with
respect to the tax consequences of an investment in the shares in their
particular circumstances and about the eligibility of the shares for investment
by the purchaser under relevant Canadian legislation.
We
have
filed with the Commission a registration statement (including amendments
and
exhibits to the registration statement) on Form F-1 under the Securities
Act.
This prospectus, which is part of the registration statement, does not contain
all of the information set forth in the registration statement and the exhibits
and schedules to the registration statement. For further information, we
refer
you to the registration statement and the exhibits and schedules filed as
part
of the registration statement. If a document has been filed as an exhibit
to the
registration statement, we refer you to the copy of the document that has
been
filed.
We
are
subject to the informational requirements of the U.S. Securities Exchange
Act of
1934, or the Exchange Act. Accordingly, we file reports and other information
with the Commission, including annual reports on Form 20-F and reports on
Form
6-K. You may inspect and copy the reports and other information that we file
with the Commission at the public reference facilities of the Commission
at 100
F. Street, N.E., Washington D.C. 20549. You may obtain information on the
operation of the Commission’s public reference room by calling the Commission in
the United States at 1-800-SEC-0330. In addition, the Commission maintains
an
internet website at
www.sec.gov
from
which you can electronically access the registration statement and the other
materials that we file with the Commission.
As
a
foreign private issuer, we are not subject to the same disclosure requirements
as a domestic U.S. registrant under the Exchange Act. For example, we are
not
required to prepare and issue quarterly reports. However, we are required
to
file with the SEC, promptly after it is made public or filed, information
that
we make public in Mexico, file with the Mexican Stock Exchange or the National
Banking and Securities Commission or distribute to our securityholders. As
a
foreign private issuer, we are exempt from Exchange Act rules regarding proxy
statements and short-swing profits.
We
are
not making offers to, nor are accepting offers to buy from, holders in any
jurisdiction in which this offer would not comply with local securities laws.
Initial offers and sales of series B shares outside the United States may
be made in reliance on Regulation S under the Securities Act.
We
are a
corporation organized under the laws of Mexico. All of our directors and
officers, and certain of the experts named in this prospectus reside in Mexico.
In addition, a substantial portion of our assets are located in Mexico. Our
Mexican counsel, Mijares, Angoita, Cortés Fuentes, S.C., has advised us that you
may not be able to serve process within the United States upon these individuals
or enforce against them judgments of U.S. courts, including judgments based
on
the civil liability provisions of the federal securities laws of the United
States, and Mexican courts may not recognize the grounds or remedies for
actions
originally brought in a Mexican court against us, our directors and officers,
the Mexican government and any expert named in this prospectus based on the
federal securities laws of the United States.
The
validity of the ADSs will be passed upon for us by Thacher Proffitt & Wood
llp
,
our
U.S. counsel, and for the underwriters by Milbank, Tweed, Hadley & McCloy
llp
,
U.S.
counsel to the underwriters. The validity of the series B shares will be
passed
upon for us by Mijares, Angoitia, Cortés y Fuentes, S.C., our Mexican counsel,
and for the underwriters by Creel Garcia-Cuellar y Muggenberg, S.C., Mexican
counsel to the underwriters.
Our
consolidated financial statements for the fiscal years ended December 31,
2003
and 2004, included in this prospectus have been audited by KPMG Cárdenas, Dosal,
S.C., an independent registered public accounting firm, as stated in their
report and have been so included in reliance upon the report of such firm
given
upon their authority as experts in accounting and auditing.
The
consolidated financial statements of Grupo Simec, S.A.B. de C.V. at December
31,
2005, and for the year then ended, appearing in this Prospectus and Registration
Statement have been audited by Mancera S.C., a Member Practice of Ernst &
Young Global, an independent registered public accounting firm, as set forth
in
their report thereon appearing elsewhere herein which, as to the year 2005,
are
based on the report of BDO Hernández Marrón y Cia, S.C., a member firm of BDO
International, an independent registered public accounting firm. The financial
statements referred to above are included in reliance upon such reports given
on
the authority of such firms as experts in accounting and auditing.
The
Republic financial statements for the fiscal year ended December 31, 2004
included in this prospectus have been audited by KPMG LLP, an independent
registered public accounting firm, as stated in their report and have been
so
included in reliance upon the report of such firm given upon their authority
as
experts in accounting and auditing. The Republic financial statements for
the
period from January 1, 2005 through July 22, 2005 included in this
prospectus have been audited by BDO Seidman, LLP, an independent registered
public accounting firm, as stated in their report and have been so included
in
reliance upon the report of such firm given upon their authority as experts
in
accounting and auditing.
INDEX
TO FINANCIAL STATEMENTS
Grupo
Simec, S.A.B. de C.V.
Audited
Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAV
Republic, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
Pro Forma Condensed Combined Financial
Statements
|
Schedules
to Financial Statements
|
The
Stockholders of
Grupo
Simec, S.A. de C.V. and Subsidiaries
We
have
audited the accompanying consolidated balance sheet of Grupo Simec, S.A. de
C.V.
and subsidiaries (the “Company”) as of December 31, 2005, and the related
consolidated statements of income, changes in stockholders’ equity, and changes
in financial position for the year then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. We did not audit the financial statements of
Simrep Corporation and subsidiaries, a majority owned subsidiary, which
statements reflect total assets of Ps. 6,023,387 (thousand), as of December
31,
2005, and total revenues of Ps. 6,260,674 (thousand), for the period then ended.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for Simrep
Corporation and subsidiaries, is based solely on the report of the other
auditors.
We
conducted our audit in accordance with auditing standards generally accepted
in
Mexico and in accordance with the Standards of the Public Company Accounting
Oversight Board (United States of America). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform
an
audit of the Company’s internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial presentation. We believe that our audit and
the
report of other independent auditors provide a reasonable basis for our
opinion.
In
our
opinion, based on our audit and the report of the other independent auditors,
the above-mentioned consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Grupo Simec, S.A.
de
C.V. and subsidiaries at December 31, 2005, and the consolidated results of
their operations and changes in their financial position for the year then
ended, in conformity with accounting principles generally accepted in Mexico,
which differ in certain respects from those followed in the United States of
America (see Note 19).
Mancera,
S.C.
A
Member
Practice of
Ernst
& Young Global
C.P.C.
Jose Maria Tabares
Guadalajara,
Jalisco México
April
28,
2006 (except for Note 19,
as
to
which the date is June 28, 2006;
and
for
the restatement to constant Pesos
as
of
June 30, 2006, for Note 13 a v) and
for
the
share and per share information both
as
to
which the date is July 11, 2006 and for
Note
15
as to which the date is January 4, 2007)
The
Board
of Directors and Stockholders of
Grupo
Simec, S. A. de C. V.:
We
have
audited the accompanying consolidated balance sheet of Grupo Simec, S.A. de
C.V.
and subsidiaries (the Company) as of December 31, 2004 and the related
consolidated statements of income, stockholders’ equity and changes in financial
position for each of the years in the two-year period ended December 31, 2004.
These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As
mentioned in note 14 to the consolidated financial statements, on August 9,
2004
the Company acquired, as an industrial unit, assets and labor obligations
accrued at such date. The assets consist of inventories and steel
plants.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Grupo Simec, S.A. de C.V.
and subsidiaries as of December 31, 2004, and the results of their operations
and the changes in their financial position for each of the years in the
two-year period ended December 31, 2004, in conformity with accounting
principles generally accepted in Mexico.
As
described in note 2, the accompanying consolidated balance sheet, statements
of
income, stockholders’ equity and changes in financial position have been
restated to reflect their presentation in Mexican pesos of constant purchasing
power as of June 30, 2006.
Accounting
principles generally accepted in Mexico vary in certain significant respects
from accounting principles generally accepted in the United States of America.
Information relating to the nature and effect of such differences is presented
in note 19 to the consolidated financial statements.
KPMG
CARDENAS DOSAL, S. C.
Jorge
O.
Pérez Zermeño
Guadalajara,
Mexico.
April
25,
2005, except for the restatement to June 30, 2006 constant Mexican pesos, as
to
which the date is July 10, 2006.
·
BDO
Hernández Marrón y Cía, S.C.
·
Contadores
Pûblicos y
·
Consultores
de Empresas
|
·
Av.
Ejército Nacional 904 Piso 7
·
Los
Morales Polanco
·
11510
México, D.F.
·
Tel.
(52-55)
5901-3900
·
Fax
(52-55)
5901-3925
·
www.bdo-mexico.com
|
To
the Board of Directors and Shareholders of
SimRep
Corporation
We
have
audited the consolidated balance sheet of
SimRep
Corporation and subsidiaries
as of
December 31, 2005, and the related consolidated statements of operations,
changes in shareholders’ equity and changes in financial position for the period
from July 22 (date of acquisition) to December 31, 2005. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audit.
We
conducted our audit
in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit
to
obtain reasonable assurance about whether the financial statements are free
of
material misstatement. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. Our
audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
as
well as evaluating the overall financial statement presentation. We believe
that
our audit provides a reasonable basis for our opinion.
Accounting
principles generally accepted in Mexico vary in certain significant respects
from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences
is presented in Note 22 to the financial statements.
In
our
opinion, the accompanying consolidated financial statements present fairly,
in
all material respects, the consolidated financial position of
SimRep
Corporation and subsidiaries
as of
December 31, 2005, and the consolidated results of their operations, the changes
in shareholders’ equity and the changes in their financial position for the
period from July 22 (date of acquisition) to December 31, 2005, in conformity
with accounting principles generally accepted in Mexico.
These
consolidated financial statements have been translated into English solely
for
the convenience of readers of this language.
Hernández,
Marrón y Cía., S.C.
Bernardo
Soto Peñafiel, CPA
Partner
Mexico
City
April
28, 2006, except for the restatement to June 30, 2006 constant Mexican pesos,
as
to which the date is July 10, 2006.
GRUPO
SIMEC, S.A. DE C.V. AND SUBSIDIARIES
December
31, 2005 and 2004
(Thousands
of constant Mexican pesos as of June 30, 2006)
Assets
|
|
|
2005
|
|
|
2004
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
Ps.
|
|
|
209,416
|
|
|
Ps.
|
|
|
526,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
|
|
|
|
2,316,954
|
|
|
|
|
|
1,016,826
|
|
Related
parties (Note 4)
|
|
|
|
|
|
2,456
|
|
|
|
|
|
5,499
|
|
Recoverable
value added tax
|
|
|
|
|
|
115,703
|
|
|
|
|
|
164,332
|
|
Other
receivables
|
|
|
|
|
|
216,537
|
|
|
|
|
|
12,676
|
|
|
|
|
|
|
|
2,651,650
|
|
|
|
|
|
1,199,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
allowance for doubtful accounts
|
|
|
|
|
|
31,273
|
|
|
|
|
|
15,080
|
|
Total
accounts receivable, net
|
|
|
|
|
|
2,620,377
|
|
|
|
|
|
1,184,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories,
net (Note 5)
|
|
|
|
|
|
3,660,501
|
|
|
|
|
|
1,175,075
|
|
Prepaid
expenses
|
|
|
|
|
|
230,226
|
|
|
|
|
|
8,935
|
|
Derivative
financial instruments (Note 6)
|
|
|
|
|
|
57,477
|
|
|
|
|
|
19,025
|
|
Total
current assets
|
|
|
|
|
|
6,777,997
|
|
|
|
|
|
2,914,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
inventories (Note 2e)
|
|
|
|
|
|
76,843
|
|
|
|
|
|
68,982
|
|
Property,
plant and equipment, net (Note 7)
|
|
|
|
|
|
7,114,996
|
|
|
|
|
|
6,007,190
|
|
Other
assets and deferred charges, net (Note 2h)
|
|
|
|
|
|
618,721
|
|
|
|
|
|
315,444
|
|
|
|
|
Ps.
|
|
|
14,588,557
|
|
|
Ps.
|
|
|
9,305,647
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to banks (Note 9a)
|
|
|
Ps.
|
|
|
-
|
|
|
Ps.
|
|
|
159,252
|
|
Current
portion of long-term debt (Note 9b)
|
|
|
|
|
|
21,034
|
|
|
|
|
|
3,538
|
|
Accounts
Payable
|
|
|
|
|
|
1,411,813
|
|
|
|
|
|
612,449
|
|
Accruals
(Note 8)
|
|
|
|
|
|
15,208
|
|
|
|
|
|
8,938
|
|
Other
accounts payable and accrued expenses
|
|
|
|
|
|
675,565
|
|
|
|
|
|
161,543
|
|
Related
parties (Note 4)
|
|
|
|
|
|
460,228
|
|
|
|
|
|
21
|
|
Deferred
credit (Note 2l)
|
|
|
|
|
|
131,441
|
|
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
|
|
|
2,715,289
|
|
|
|
|
|
945,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (Note 9b)
|
|
|
|
|
|
391,550
|
|
|
|
|
|
-
|
|
Seniority
premiums and termination benefits (Note 10)
|
|
|
|
|
|
19,777
|
|
|
|
|
|
7,002
|
|
Other
long-term liabilities (Notes 2q and 16e)
|
|
|
|
|
|
112,067
|
|
|
|
|
|
15,067
|
|
Deferred
income tax (Note 12)
|
|
|
|
|
|
1,513,079
|
|
|
|
|
|
1,490,545
|
|
Deferred
credit (Note 2l)
|
|
|
|
|
|
208,114
|
|
|
|
|
|
-
|
|
Total
long-term liabilities
|
|
|
|
|
|
2,244,587
|
|
|
|
|
|
1,512,614
|
|
Total
liabilities
|
|
|
|
|
|
4,959,876
|
|
|
|
|
|
2,458,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity (Note 13):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
stock
|
|
|
|
|
|
3,476,499
|
|
|
|
|
|
3,408,488
|
|
Additional
paid-in-capital
|
|
|
|
|
|
845,018
|
|
|
|
|
|
682,066
|
|
Contributions
for future capital stock increases
|
|
|
|
|
|
-
|
|
|
|
|
|
230,309
|
|
Retained
earnings
|
|
|
|
|
|
4,519,677
|
|
|
|
|
|
3,239,779
|
|
Cumulative
deferred income tax
|
|
|
|
|
|
(905,828
|
)
|
|
|
|
|
(905,828
|
)
|
Result
of non-monetary assets
|
|
|
|
|
|
(154,723
|
)
|
|
|
|
|
179,309
|
|
Fair
value of derivative financial instruments (Note 6)
|
|
|
|
|
|
40,354
|
|
|
|
|
|
12,847
|
|
Majority
stockholders' equity
|
|
|
|
|
|
7,820,997
|
|
|
|
|
|
6,846,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
|
|
|
1,807,684
|
|
|
|
|
|
322
|
|
Total
stockholders' equity
|
|
|
|
|
|
9,628,681
|
|
|
|
|
|
6,847,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ps.
|
|
|
14,588,557
|
|
|
Ps.
|
|
|
9,305,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
GRUPO
SIMEC, S.A. DE C.V. AND SUBSIDIARIES
Years
ended December 31, 2005, 2004 and 2003
(Thousands
of constant Mexican pesos as of June 30, 2006, except earnings per share
figures)
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales (Notes 14 and 15)
|
|
|
Ps.
|
|
|
12,966,627
|
|
|
5,910,363
|
|
|
3,047,392
|
|
Direct
cost of sales (Note 14)
|
|
|
|
|
|
10,370,940
|
|
|
3,435,057
|
|
|
2,001,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marginal
profit
|
|
|
|
|
|
2,595,687
|
|
|
2,475,306
|
|
|
1,045,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect
overhead, selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
|
|
|
|
|
|
1,018,105
|
|
|
593,276
|
|
|
507,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
|
|
1,577,582
|
|
|
1,882,030
|
|
|
538,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
financing cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(expense) income, net
|
|
|
|
|
|
(15,728
|
)
|
|
5,791
|
|
|
(13,499
|
)
|
Foreign
exchange (loss) gain, net
|
|
|
|
|
|
(75,279
|
)
|
|
3,987
|
|
|
(2,783
|
)
|
Monetary
position loss
|
|
|
|
|
|
(53,663
|
)
|
|
(47,411
|
)
|
|
(10,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
financial result, net
|
|
|
|
|
|
(144,670
|
)
|
|
(37,633
|
)
|
|
(26,706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to the recovery value of land, machinery and equipment
|
|
|
|
|
|
-
|
|
|
(14,722
|
)
|
|
(19,499
|
)
|
Deferred
credit amortization
|
|
|
|
|
|
67,175
|
|
|
-
|
|
|
-
|
|
Other,
net
|
|
|
|
|
|
(11,686
|
)
|
|
(23,402
|
)
|
|
(12,905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net
|
|
|
|
|
|
55,489
|
|
|
(38,124
|
)
|
|
(32,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax and statutory employee profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sharing
|
|
|
|
|
|
1,488,401
|
|
|
1,806,273
|
|
|
479,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (Note 12):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
78,877
|
|
|
23,136
|
|
|
13,419
|
|
Deferred
|
|
|
|
|
|
111,718
|
|
|
320,466
|
|
|
139,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income tax
|
|
|
|
|
|
190,595
|
|
|
343,602
|
|
|
153,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
employee profit sharing (Note 12)
|
|
|
|
|
|
417
|
|
|
-
|
|
|
5,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
consolidated income
|
|
|
Ps.
|
|
|
1,297,389
|
|
|
1,462,671
|
|
|
320,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
|
|
|
17,491
|
|
|
-
|
|
|
1
|
|
Majority
interest
|
|
|
|
|
|
1,279,898
|
|
|
1,462,671
|
|
|
320,522
|
|
|
|
|
Ps.
|
|
|
1,297,389
|
|
|
1,462,671
|
|
|
320,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Majority
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
413,788,797
|
|
|
398,917,437
|
|
|
357,158,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share (pesos)
|
|
|
Ps.
|
|
|
3.09
|
|
|
3.67
|
|
|
0.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GRUPO
SIMEC, S.A. DE C.V. AND SUBSIDIARIES
Years
ended December 31, 2005, 2004 and 2003
(Thousands
of constant Mexican pesos as of June 30, 2006)
|
|
Capital
stock
|
|
Stock
premium
|
Contributions
for
future
capital
stock
increases
|
|
Retained
earnings
|
|
Cumulative
deferred
income
tax
|
|
Result
of holding
non-monetary
assets
|
Fair
value
of
derivative
financial
instruments
(Note
6)
|
|
Total
majority
interest
|
|
Minority
interest
|
|
Total
stockholders'
equity
|
Balance
at December 31, 2002
|
Ps.
|
2,991,443
|
Ps.
|
682,066
|
-
|
Ps.
|
1,456,586
|
Ps.
|
(905,828)
|
Ps.
|
(135,864)
|
-
|
Ps.
|
4,088,403
|
Ps.
|
275
|
Ps.
|
4,088,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases
in capital stock
(Note
13)
|
|
392,352
|
|
-
|
-
|
|
-
|
|
-
|
|
-
|
-
|
|
392,352
|
|
-
|
|
392,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
(Note
13)
|
|
-
|
|
-
|
-
|
|
320,522
|
|
-
|
|
249,263
|
10,483
|
|
580,268
|
|
-
|
|
580,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003
|
|
3,383,795
|
|
682,066
|
-
|
|
1,777,108
|
|
(905,828)
|
|
113,399
|
10,483
|
|
5,061,023
|
|
275
|
|
5,061,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases
in capital stock
(Note
13)
|
|
24,693
|
|
-
|
-
|
|
-
|
|
-
|
|
-
|
-
|
|
24,693
|
|
-
|
|
24,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions
for future capital
stock
increases (Note 13)
|
|
-
|
|
-
|
230,309
|
|
-
|
|
-
|
|
-
|
-
|
|
230,309
|
|
-
|
|
230,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
(Note
13)
|
|
-
|
|
-
|
-
|
|
1,462,671
|
|
-
|
|
65,910
|
2,364
|
|
1,530,945
|
|
47
|
|
1,530,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2004
|
|
3,408,488
|
|
682,066
|
230,309
|
|
3,239,779
|
|
(905,828)
|
|
179,309
|
12,847
|
|
6,846,970
|
|
322
|
|
6,847,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases
in capital stock
(Note
13)
|
|
68,011
|
|
162,952
|
(230,309)
|
|
-
|
|
-
|
|
-
|
-
|
|
654
|
|
-
|
|
654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
(Note
13)
|
|
-
|
|
-
|
-
|
|
1,279,898
|
|
-
|
|
(334,032)
|
27,507
|
|
973,373
|
|
1,807,362
|
|
2,780,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2005
|
Ps.
|
3,476,499
|
Ps.
|
845,018
|
-
|
Ps.
|
4,519,677
|
Ps.
|
(905,828)
|
Ps.
|
(154,723)
|
40,354
|
Ps.
|
7,820,997
|
Ps.
|
1,807,684
|
Ps.
|
9,628,681
|
See
accompanying notes to consolidated financial statements
GRUPO
SIMEC, S.A. DE C.V. AND SUBSIDIARIES
Years
ended December 31, 2005, 2004 and 2003
(Thousands
of constant Mexican pesos as of June 30, 2006)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
|
Net
income
|
Ps.
|
1,297,389
|
|
1,462,671
|
|
320,523
|
Add
(deduct) items not requiring the use of resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
325,671
|
|
222,415
|
|
199,303
|
Deferred
income tax
|
|
111,718
|
|
320,466
|
|
139,779
|
Write-down
of idle machinery
|
|
-
|
|
14,722
|
|
19,499
|
Deferred
credit amortization
|
|
(67,175)
|
|
-
|
|
-
|
Seniority
premiums and termination benefits
|
|
5,212
|
|
1,338
|
|
271
|
|
|
|
|
|
|
|
|
|
1,672,815
|
|
2,021,612
|
|
679,375
|
|
|
|
|
|
|
|
Net
changes in operating assets and liabilities:
|
|
|
|
|
|
|
Trade
receivables, net
|
|
(129,339)
|
|
(529,890)
|
|
(21,981)
|
Other
accounts receivable and prepaid expenses
|
|
(222,986)
|
|
(168,282)
|
|
61,465
|
Inventories,
net
|
|
623,584
|
|
(859,030)
|
|
(9,910)
|
Derivative
financial instruments
|
|
(10,946)
|
|
-
|
|
(15,646)
|
Related
parties receivables
|
|
3,044
|
|
(1,725)
|
|
(3,774)
|
Accounts
payable, other accounts payable and accrued expenses
|
|
(165,392)
|
|
453,402
|
|
(65,754)
|
Other
long-term liabilities
|
|
91,883
|
|
-
|
|
-
|
Related
parties payable
|
|
-
|
|
(830)
|
|
(188,220)
|
|
|
|
|
|
|
|
Resources
provided by operating activities
|
|
1,862,663
|
|
915,257
|
|
435,555
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
Related
parties payable (financing)
|
|
451,307
|
|
-
|
|
-
|
Increases
in capital stock
|
|
654
|
|
24,693
|
|
392,351
|
Contribution
for future capital stock increases
|
|
-
|
|
230,309
|
|
-
|
Unpaid
foreign exchange gain
|
|
8,900
|
|
-
|
|
6,048
|
Short-term
loans (repaid) obtained
|
|
(136,510)
|
|
159,252
|
|
-
|
Financial
debt repayment
|
|
(1,052,050)
|
|
(19,833)
|
|
(362,673)
|
Decrease
in debt due to restatement to constant Mexican pesos
|
|
|
|
|
|
|
as
of year end
|
|
(5,246)
|
|
(1,213)
|
|
(4,319)
|
Other
long-term liabilities
|
|
-
|
|
10,899
|
|
82
|
Increase
of investment in PAV Republic by Industrias CH
|
|
490,533
|
|
-
|
|
-
|
|
|
|
|
|
|
|
Resources
(used in) provided by financing activities
|
|
(242,412)
|
|
404,107
|
|
31,489
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
(Increase)
decrease in long-term inventories
|
|
(7,861)
|
|
(811)
|
|
63,953
|
Acquisition
of property, plant and equipment
|
|
(503,735)
|
|
(1,284,970)
|
|
(64,372)
|
Effect
from the acquisition of Pav Republic
|
|
(1,309,783)
|
|
-
|
|
-
|
Increase
(decrease) in other noncurrent assets
|
|
16,659
|
|
(71,507)
|
|
(26,002)
|
Effect
from the acquisition of OAL
|
|
(132,858)
|
|
-
|
|
-
|
|
|
|
|
|
|
|
Resources
used in investing activities
|
|
(1,937,578)
|
|
(1,357,288)
|
|
(26,421)
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
(317,327)
|
|
(37,924)
|
|
440,623
|
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
At
beginning of year
|
|
526,743
|
|
564,667
|
|
124,044
|
|
|
|
|
|
|
|
At
end of year
|
Ps.
|
209,416
|
|
526,743
|
|
564,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
GRUPO
SIMEC, S.A. DE C.V. AND SUBSIDIARIES
December
31, 2005 and 2004
(Amounts
in thousands of Constant Mexican pesos as of June 30, 2006, unless otherwise
indicated)
(1)
Description
of the Business and Significant Transactions
Description
of the Business
The
principal activities of Grupo Simec, S.A. de C.V. and subsidiaries (the Company)
are the manufacture and sale of iron and steel products for the construction
and
automotive industries both in Mexico and abroad. The Company is a subsidiary
of
Industrias CH, S.A. de C.V. (Industrias CH).
Significant
Transactions
(a)
|
As
mentioned in Note 14 a) of these notes, on July 22, 2005, the Company
and
Industrias CH acquired the outstanding shares of PAV Republic Inc.
(Republic) through its subsidiary SimRep Corporation, a U.S. company.
Such
transaction, was valued at USD 245 million where USD 229 million
corresponds to the purchase price and USD 16 million, to the direct
cost
of the business combination. The Company contributed US 123 million
to
acquire 50.2% of the representative shares of SimRep Corporation
and
Industrias CH, the holding company, acquired the remaining
49.8%.
|
The
total
purchase price of Republic was allocated among the assets acquired and
liabilities assumed based on their fair values at July 22, 2005. Such fair
values were determined based on both independent appraisals and estimates made
by management. The purchase price gave rise to negative goodwill that was
allocated among all the non-current assets acquired.
(b)
|
On
July 20, 2005, the Company acquired all the shares of Operadora de
Apoyo
Logístico, S.A. de C.V., (“OAL”) a subsidiary of Grupo TMM, S.A. de C.V.,
for a purchase price of Ps. 133 million, for the purpose of converting
the
acquired company into the operator of three of the iron and steel
plants
in Mexico. OAL’s primary assets consisted of deferred tax assets resulting
from net operating losses carryforwards (See Note 14
b).
|
(c)
|
On
November 2005 the Company’s Board of Directors decided to spin off its
subsidiary Compañía Siderúrgica de California, S.A. de C.V., transferring
all of the subsidiary’s assets, liabilities and stockholders’ equity to
the following two new companies: Controladora Simec, S.A. de C.V.
and
Arrendadora Simec, S.A. de C.V.; consequently, the original company
was
dissolved to separate the control over the shares of the subsidiaries
from
the assets that comprise the industrial plants in Guadalajara and
Mexicali. This restructure had no effect on the consolidated financial
statements.
|
(d)
|
As
mentioned in Note 14 c) of these notes, on August 9, 2004, the Company
acquired the majority of the assets of Atlax, S.A. de C.V. and certain
assets of Operadora Metamex, S.A. de C.V., as well as their accumulated
labor obligations at
|
|
such
date. Such assets consisted of inventories and steel plants located
in
Apizaco, Tlaxcala and Cholula, Puebla, which produce specialty steel
products and commercial profiles. The purchase price of these assets
was
approximately USD 120 million.
|
(e)
|
In
2003, the Company’s subsidiaries Compañía Siderúrgica de Guadalajara, S.A.
de C.V. (CSG), Compañía Siderúrgica de Occidente, S.A. de C.V. (CSO) and
Compañía Siderúrgica de California, S.A. de C.V. (CSC) repaid USD
1,452,887 for installments due in such year on
the industrial mortgage loan agreement
.
Furthermore,
in 2003, said companies also prepaid USD 29,930,517 on the loan.
On
March 18, 2004, the Company prepaid USD 1,697,952 plus interest,
thus
repaying the loan in full as mentioned in Note
9c.
|
(f)
|
In
2005, 2004 and 2003, capital increases and certain changes in stock
ownership were carried out, which are described in Note
13.
|
(g)
|
As
mentioned in Note 16 f) of these notes,
Pacific
Steel, Inc (PS) (subsidiary company located in the U.S.) has been
sued by
the Government of the State of California in the U.S., which requires
that
PS clean up and relocate part of its facilities related to the generation,
storage, transportation and disposal of materials classified as hazardous
waste.
The Company has filed an appeal against these claims; however, at
the date
of issue of the consolidated financial statements, the final results
of
such appeals remain unknown.
|
(h)
|
Pursuant
to a public bidding process for non-performing loans without recourse,
in
2003, Industrias CH acquired through its subsidiary Administradora
de
Cartera de Occidente, S.A. de C.V. (ACOSA), the assignment of shared
recovery loans as well as litigation rights and certain loan-related
obligations. Subsequently, on December 11, 2003, with the authorization
of
the assignor banks, Industrias CH sold 99.98% of the ACOSA shares
to the
Company. At December 31, 2003, the total investment amount was Ps.
10,905.
When the Company reaches its break-even point it must pay the assignors
50% of the amounts recovered (after deducting authorized expenses
spent on
recovering these amounts), which should be paid in the first five
business
days of the month following the recovery. At December 31, 2004, ACOSA
fully reserved the balance of this account since it has not recovered
any
amounts. At December 31, 2005, Simec did not have any recoveries
with
respect to the defaulted
receivables.
|
(2)
Summary
of Significant Accounting Policies
(a)
Basis
of preparation and disclosure
The
Company recognizes the effects of inflation on financial information as required
by Mexican Accounting Principles Bulletin B-10, “Accounting recognition of the
effects of inflation on financial information,” issued by the Mexican Institute
of Public Accountants (MIPA). Consequently, the amounts shown in the
accompanying financial statements and in these notes are expressed in thousands
of constant Mexican Pesos as of June 30, 2006, solely to facilitate comparison
with our unaudited condensed consolidated financial statements as of such date,
and except for restatement of financial information in constant pesos, no change
has been made to our 2005, 2004 and 2003 audited financial
statements.
The
annual rates of inflation used to recognize the effects of inflations, as
determined based on the National Consumer Price Index (NCPI), published by
Banco
de México. were as follows:
Date
|
NCPI
|
Inflation
|
June
30, 2006
|
117.059
|
0.65%
Six months
|
December
31, 2005
|
116.301
|
3.33%
Year
|
December
31, 2004
|
112.550
|
5.19%
Year
|
December
31, 2003
|
106.996
|
3.97%
Year
|
The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
Significant items subject to such estimates and assumptions include the carrying
amount of property, plant and equipment, other non-current assets, the valuation
allowance of accounts receivable, inventories and deferred tax assets, the
valuation of financial instruments, and the liability for labor obligations.
Actual results could differ from these estimates and assumptions.
For
purposes of disclosure in these notes, hereinafter the term “pesos” or
abbreviation “Ps.” shall refer to Mexican pesos; the term dollars, or
abbreviation USD shall be taken to mean U.S. dollars.
(b)
Basis of consolidation
The
consolidated financial statements include the financial statements of Grupo
Simec, S.A. de C.V. and those of its majority-owned and/or controlled
subsidiaries. All significant intercompany balances and transactions have been
eliminated in the consolidation. The consolidation was based on the audited
financial statements of the issuing companies, which were prepared under Mexican
GAAP.
The
Company’s subsidiaries and its equity percentage are as follows:
|
Equity
interest
%
|
-
Compañía Siderúrgica de Guadalajara, S.A. de C.V.
|
99.99%
|
-
Compañía Siderúrgica de California, S.A. de C.V. (spun off in
2005)
|
100%
|
-
Arrendadora Simec, S.A. de C.V.
|
100%
|
-
Simec International, S.A. de C.V.
|
100%
|
-
Controladora Simec, S.A. de C.V.
|
100%
|
-
SimRep Corporation and Subsidiaries
(1)
|
50.22%
|
-
Undershaft Investments, N.V.
|
100%
|
-
Pacific Steel, Inc.
|
100%
|
-
Compañía Siderúrgica del Pacífico, S.A. de C.V.
|
99.99%
|
-
Consorcio Internacional, S.A. de C.V. (liquidated in 2004)
|
99.79%
|
-
Coordinadora de Servicios Siderúrgicos de Calidad, S.A. de
C.V.
|
100%
|
-
Administradora de Servicios de la Industria Siderúrgica ICH, S.A. de C.V.
|
99.99%
|
-
Industrias del Acero y del Alambre, S.A. de C.V.
|
99.99%
|
-
Procesadora Mexicali, S.A. de C.V.
|
99.99%
|
-
Servicios Simec, S.A. de C.V.
|
100%
|
-
Sistemas de Transporte de Baja California, S.A. de C.V.
|
100%
|
-
Operadora de Metales, S.A. de C.V.
(2)
|
100%
|
-
Operadora de Servicios Siderúrgicos de Tlaxcala, S.A. de C.V.
(2)
|
100%
|
-
Administradora de Servicios Siderúrgicos de Tlaxcala, S.A,. de C.V.
(2)
|
100%
|
-
Operadora de Servicios de la Industria Siderúrgica ICH, S.A. deC.V.
(2)
|
100%
|
-
Administradora de Cartera de Occidente, S.A. de C.V.
(3)
|
99.99%
|
_______________________________
|
|
(1)
|
Companies
that started being part of Grupo Simec during
2005.
|
(2)
|
Companies
that started being part of Grupo Simec during
2004.
|
(3)
|
Companies
that started being part of Grupo Simec during
2003.
|
(c)
Basis
of translation of financial statements of foreign
subsidiaries
For
consolidation purposes, the financial statements of the subsidiaries abroad,
Simrep and subsidiaries, Pacific Steel and Undershaft Investment, were
translated into pesos in conformity with Mexican accounting Bulletin B-15,
Transactions
in Foreign Currency and Translation of Financial Statements of Foreign
Operations
.
The
subsidiary SimRep was considered as a foreign entity for translation purposes;
therefore the financial statements as reported by the subsidiary abroad were
adjusted to conform with Mexican GAAP, which includes the recognition of the
effects of inflation as required by Mexican accounting Bulletin B-10, applying
inflation adjustment factors derived from the U.S. Consumer Price Index (CPI)
published by the U.S. labor department. The financial information already
restated to include inflationary effects, is translated to Mexican pesos as
follows:
–
|
By
applying the prevailing exchange rate at the consolidated balance
sheet
date for monetary and non-monetary assets and
liabilities.
|
–
|
By
applying the prevailing exchange rate for stockholders’ equity accounts,
at the time capital contributions were made and earnings were
generated.
|
–
|
By
applying the prevailing exchange rate at the consolidated balance
sheet
date for revenues and expenses during the reporting
period.
|
–
|
The
related effect of translation is recorded in stockholders’ equity under
the caption Equity adjustments for non monetary
assets.
|
–
|
The
resulting amounts were restated applying adjustment factors derived
from
the NCPI, in conformity with Mexican accounting Bulletin
B-10.
|
The
subsidiaries Pacific Steel and Undershaft Investment, were considered an
“integral part of the operations” of the Company; and the financial statements
of such subsidiaries were translated into Mexican pesos as follows:
–
|
By
applying the prevailing exchange rate at the consolidated balance
sheet
date for monetary items.
|
–
|
By
applying the prevailing exchange rate at the time the non-monetary
assets
and capital are generated, and the weighted average exchange rate
of the
period for income statement items.
|
–
|
The
related effect of translation is recorded in the statement of operations
as part of the caption Comprehensive financing
cost.
|
–
|
The
resulting amounts were restated applying adjustment factors derived
from
the Mexican NCPI, in conformity with Mexican accounting Bulletin
B-10.
|
(d)
Cash
equivalents
Cash
equivalents consist of bank deposits, foreign currency and other highly liquid
investments with maturities of less than 90 days. At the date of the financial
statements, interest income and foreign exchange gains and losses are included
in the results of operations under the caption Comprehensive financing
cost.
(e)
Inventories
and cost of sales
Domestic
subsidiaries’ inventories are recorded initially at average cost and then
adjusted to the lower of replacement cost or net realizable market value under
the direct costing system.
Foreign
subsidiaries’ inventories are valued on a last-in, first-out (LIFO). For
translation effects into Mexican GAAP the inventories have been adjusted from
LIFO to the lower of replacement cost or net realizable market
value.
The
inventory values of the Company were determined as follows:
Billet,
finished goods and work in process.
|
At
the most recent direct production
cost
|
Direct
cost of sales represents the replacement cost of inventories at the time of
sale, expressed in constant pesos as of the most recent balance sheet date
reported on.
Raw
materials.
|
At
the prevailing market purchase price at the consolidated balance
sheet
date
|
Materials,
spare parts and rollers.
|
At
historical cost, restated using the inflation rates of the steel
industry
|
The
Company classifies rollers and spare parts as long-term inventories, which
in
accordance with historical data and production trends will not be used in the
short-term (one year).
The
restated value of inventories at the balance sheet date is not in excess of
market.
The
reserve for slow-moving inventories is determined considering the reprocessing
cost of the materials and finished products inventories with a turnover above
one year.
(f)
Derivative
financial instruments
In
2005,
2004 and 2003, the Company used derivative financial instruments for hedging
risks associated with natural gas prices for which it conducted studies on
historical consumption, future requirements and commitments acquired, thus
diminishing its exposure to risks other than its normal operating
risks.
To
mitigate the risks associated with changes in natural gas prices occurring
naturally as a result of the supply and demand on international markets, the
Company uses natural gas cash-flow exchange contracts or natural gas swaps
to
offset fluctuations in the price of natural gas, whereby the Company receives
a
floating price and pays a fixed price. Fluctuations in natural gas prices from
volumes consumed are recognized as part of the Company’s operating
costs.
The
Company recognizes the fair value as an asset or liability and records the
offsetting amount in other comprehensive income/loss (OCI). The cumulative
OCI
is reversed in the month of settlement and the net settlement and any related
contract costs are booked to cost of goods sold in the month of
settlement.
The
fair
value of these assets or liabilities is restated at the end of each month based
on the new estimate. As mentioned in Note 6 of these notes, the Company opted
for the early adoption of Mexican accounting Bulletin C-10,
Accounting
for Derivative Instruments and Hedging Activities
;
consequently, at December 31, 2005, 2004 and 2003, these contracts were
recognized on the balance sheet at fair value, either as liabilities or assets.
The Company periodically evaluates the changes in the cash flows of the
derivative instruments to analyze if the swaps are highly effective for
mitigating the exposure to natural gas price fluctuations. In 2005, 2004 and
2003 the derivatives qualified as a derivative financial hedging instrument
of
the cash flow type and thus the fair value and subsequent changes of the swaps
are recorded under stockholders’ equity as Comprehensive income net of the
deferred tax effect.
(g)
Property
plant and equipment
Property,
plant and equipment is recorded initially at acquisition cost, and then adjusted
for inflation by applying NCPI factors, except for imported machinery and
equipment, which is restated based on the inflation rate in the country of
origin and changes in the foreign exchange rate of the country’s particular
currency in relation to the peso.
Depreciation
of property, plant and equipment is computed using the straight-line method
based on the estimated remaining useful lives of the related assets as
determined on an individual basis by independent appraisals and
management.
The
comprehensive financing cost which includes (i) the interest cost, (ii) any
foreign currency fluctuations, and (iii) the related monetary position result
of
assets under construction or installation is capitalized as part of the value
of
such assets and is restated based on the NCPI factors from the date capitalized
through year-end and amortized over the average depreciation period of the
related assets.
The
estimated useful lives of the Company’s property, plant and equipment are as
follows:
|
Years
|
Buildings
|
15
to 65
|
Machinery
and equipment
|
10
to 40
|
Transportation
equipment
|
4
|
Furniture,
fixtures and computer equipment
|
10
|
Maintenance
and minor repairs are expensed as incurred.
(h)
Other
assets, intangible assets and deferred charges
Other
assets include mainly technical assistance, organization and pre-operating
expenses and, except for technical assistance, are restated for inflation based
on the NCPI factors. Amortization is computed on restated values using the
straight-line method, over periods ranging from 3 to 20 years.
As
mentioned in note 1 a), as a result of the Republic acquisition, the Company
identified and recorded intangible assets at a fair value totaling Ps. 347.8
million. As of December 31, 2005 the Company’s intangible assets and deferred
charges include Ps. 320.6 million net of Ps. 27.2 of accumulated depreciation
related to the Republic trade name, customer list, and certain labor, licenses,
and suppliers agreements. The amount recorded and the useful life were
determined based on independent appraisals. The Republic trade name has an
indefinite useful life and will not be amortized.
The
estimated useful lives and amortization are as follows:
INTANGIBLES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
at
|
|
Useful
|
|
2005
|
|
Estimated
Future Amortization
|
|
|
|
22-Jul-05
|
|
Life
|
|
Amortization
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Republic
Tradename
|
|
Ps.
|
79,276
|
|
|
Indefinite
|
|
Ps.
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Union
Agreements
|
|
|
127,727
|
|
|
24.5
months
|
|
|
23,496
|
|
|
62,560
|
|
|
41,671
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Kobe
Tech
|
|
|
92,487
|
|
|
144
months
|
|
|
2,897
|
|
|
7,740
|
|
|
7,740
|
|
|
7,740
|
|
|
7,740
|
|
|
7,740
|
|
Customer
Relationships
|
|
|
48,440
|
|
|
240
months
|
|
|
911
|
|
|
2,423
|
|
|
2,423
|
|
|
2,423
|
|
|
2,423
|
|
|
2,423
|
|
|
|
Ps
|
347,930
|
|
|
|
|
Ps
|
27,304
|
|
|
72,723
|
|
|
51,834
|
|
|
10,163
|
|
|
10,163
|
|
|
10,163
|
|
At
December 31, 2005 intangible assets subject to amortization are being amortized
over periods ranging from 2 to 20 years with a weighted average amortization
period of approximately 9 years. Amortization expense aggregated Ps. 27.3
million from the date Republic was acquired through the date of the financial
statements.
(i)
Accruals
Based
on
management estimates, the Company recognizes accruals for these present
obligations for which the transfer of assets or the rendering of services exist,
arise as a consequence of past events (such events refer primarily to salaries
and other amounts payable to employees, and fees) or it is probable that the
effects will materialize and can be reasonably quantified.
(j)
Seniority
premiums and termination payments
The
accumulated benefits for seniority premiums to which employees are entitled
by
law, are recognized in the results of operations of each year, based on
actuarial computations of the present value of such obligation. Past service
costs are being amortized over the estimated remaining working lifetime of
employees. At December 31, 2005, the estimated average working lifetime of
the
Company’s employees entitled to pension benefits ranges from 8 to 9 years,
approximately.
Through
2004, other compensations to which employees were entitled, mainly termination
payments, were charged to results of operations of the year, if and when the
payments were vested.
The
revised Mexican accounting Bulletin D-3,
Labor
Obligations
,
issued
by the Mexican Institute of Public Accountants and adopted in 2005 by the
Company, establishes the overall rules for the valuation, presentation and
disclosure of so-called “other post-retirement benefits and the reduction and
early extinguishment of such benefits”, and includes rules applicable to
employee termination pay.
(k)
Income
tax, asset tax and employee profit sharing
Deferred
income tax is accounted for using the asset and liability method, which is
based
on a comparison of the book and tax values of balance sheet accounts. Deferred
tax assets and liabilities are recognized on temporary differences between
assets and liabilities for financial and tax reporting purposes, as well as
the
available tax loss carryforward and creditable asset tax paid. Deferred tax
assets and liabilities are determined using the enacted income tax rate at
the
balance sheet date, or the enacted income tax rate that will be in effect at
the
time the temporary differences giving rise to deferred tax assets and
liabilities are expected to be recovered or paid, respectively. The effect
on
deferred tax assets and liabilities due to changes in tax rates is recognized
in
results of operations in the period in which such changes are
approved.
The
Company is required to estimate income taxes in each of the jurisdictions in
which it operates. This process involves the jurisdiction-by-jurisdiction
estimation of actual current tax exposure and the assessment of temporary
differences.
Asset
tax
is offset against deferred income tax, making the appropriate evaluation of
recovery. Deferred tax assets are evaluated periodically, providing, if
necessary, an estimate for those amounts of doubtful recovery.
The
Company records a valuation allowance to reduce the deferred tax assets to
an
amount that it considers is more likely than not to be realized. In assessing
the need for the valuation allowance, the Company considers future taxable
income. In the event that estimates of projected future taxable income change,
or amendments in current tax regulations are enacted that would impose
restrictions on the timing or
extent
of
our ability to utilize the tax benefits of the deferred income tax assets,
an
adjustment to the recorded amount of net deferred tax assets would be made,
with
a related charge to income.
Significant
management judgment is required in determining our provisions for income taxes,
deferred tax assets and liabilities. If actual results differ from these
estimates, or we adjust these estimates in future periods, our financial
position and results of operations may be materially affected.
Deferred
employee profit sharing is recognized only on temporary differences determined
in the reconciliation of current year net income and taxable income for employee
profit sharing purposes, provided it may be reasonably estimated that a future
liability or benefit will arise and there is no indication that the related
liability or benefit will not be realized in the future.
(l)
Deferred
credit
The
Company applied on a supplementary basis to Mexican GAAP, US EITF 98-11
“Accounting for Acquired Temporary Differences in Certain Purchase Transactions
that are not Accounted for as Business Combinations” to the OAL acquisition. The
deferred credit is obtained from the difference between the amount paid and
the
deferred tax asset recognized resulting from the purchase of future tax benefits
from OAL.
The
deferred credit is being amortized to results of operations in the same
proportion to the realization of the tax benefits that gave rise to the deferred
credit (See note 14b).
(m)
Restatement of capital stock, other capital contributions and retained
earnings
The
restatement of capital stock, other capital contributions and retained earnings
is determined by applying the NCPI from the time
contributions
were made and earnings were generated through the most recent
year-end.
The
resulting amount represents the amount needed to maintain the stockholders’
investment at a constant level.
(n)
Cumulative deferred income tax
This
caption represents the accumulated effect of deferred taxes determined at the
time the related accounting principle was first applied, restated at the most
recent balance sheet date.
(o)
Equity adjustment for non-monetary assets
This
caption represents the difference between the restatement of non-monetary assets
using the specific-cost method and the restatement based on the NCPI, reduced
by
the related deferred tax effect at the time Bulletin B-10 was first
applied.
(p)
Comprehensive financing cost
Comprehensive
financing cost consists of interest, net exchange differences and the monetary
effect. Transactions in foreign currency are recorded at the prevailing exchange
rate on the day of the related transactions. Monetary assets and liabilities
denominated in foreign currency are translated using the prevailing exchange
rate at
the
balance sheet date. Exchange differences determined on foreign currency
denominated assets or liabilities are charged or credited to results of
operations.
The
monetary effect is determined by multiplying the difference between monetary
assets and liabilities at the beginning of each month by the rate of inflation
through year-end. The result thereby obtained represents the net monetary
position gain or loss on inflation and is credited or charged to results of
operations.
(q)
Environmental costs
It
is the
Company’s policy to endeavor to comply with applicable environmental laws and
regulations. The Company established a liability for an amount which the Company
believes it is appropriate, based on information currently available, to cover
costs of environmental remediation it deems probable and estimable.
The
recorded amounts represent estimates of the environmental remediation costs
associated with future events triggering or confirming the costs that, in
management’s judgment, are probable. These estimates are based on currently
available facts, existing technology and presently enacted laws and regulations,
and take into consideration the likely effects of inflation and other societal
and economic factors.
(r)
Revenue recognition
Revenues
from the sale of products are recognized at the time products are shipped and
the related risks and benefits of merchandise are transferred to the customer.
The
Company provides for freight expenses, returns and sales discounts at the time
the related revenue is recognized. These provisions are deducted from net sales
in the income statement.
(s)
Business and credit concentration-
The
Company does not believe it has significant concentrations of credit risks
in
its accounts receivable. The Company has a large customer base and
geographically diverse, consequently, no significant concentration in a specific
customer or market. The Company records an allowance for doubtful accounts
which
covers accounts receivables with specific collection problems based on analyses
and estimates made by management.
(t)
Earnings per share
The
basic
earnings per share of each period have been computed by dividing the net
consolidated income by the weighted average number of shares outstanding of
each
period.
(u)
Use of estimates
The
preparation of consolidated financial statements requires management to make
estimates and assumptions that affect the financial statements, the disclosure
of contingent assets and liabilities at the date of the financial statements
and
the reported amounts of revenues and expenses during the year. Actual results
could differ from these estimates.
The
Company has made significant accounting estimates with respect to the valuation
allowances of accounts receivable, inventories, long-lived assets, deferred
tax
assets and liabilities, environmental obligations and employee health care
obligations.
The
following is the rollforward of the allowance for bad debt for the year ended
December 31, 2005 (previous years’ allowance was considered not
significant):
Balance
as of December 31, 2004
|
Ps.
|
15,080
|
Provision
for the year
|
|
26,399
|
Write-off
of uncollectible accounts
|
|
(10,450)
|
Restatement
of the initial balance
|
|
244
|
Balance
as of December 31, 2005
|
Ps.
|
31,273
|
(v)
Contingencies
Significant
liabilities or losses derived from contingencies are recognized when it is
probable that such contingencies will materialize and when there are reasonable
elements for quantifying the related liabilities. When a reasonable estimate
cannot be made, contingencies are disclosed qualitatively in the notes to the
consolidated financial statements.
(w)
Impairment in the value of property, machinery and equipment and other
non-current assets
The
Company periodically evaluates the book value of its long-lived assets,
machinery and equipment, intangibles and other assets to determine whether
there
are any indications of impairment (i.e., carrying value in excess of recoverable
amount). The recoverable amount represents the net potential income that may
reasonably be expected to be obtained from the use or sale of such assets.
If
the book value of a given asset is determined to be excessive, the Company
makes
the necessary allowances to reduce the carrying value of the asset to its
recoverable amount. Assets to be sold are presented in the financial statements
at the lower of their carrying value or recoverable amount.
(3)
|
Foreign
Currency Position
|
Foreign
currency denominated assets and liabilities at December 31, 2005 and 2004 were
as follows:
|
|
Thousands
of U.S. dollars
|
|
Thousands
of euros
|
|
Thousands
of
pounds
sterling
|
|
Thousands
of
deutsche
marks
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Current
assets
|
|
USD
|
163,318
|
|
USD
|
68,091
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
(180,511
|
)
|
|
(32,809
|
)
|
EUR
|
(86
|
)
|
EUR
|
(78
|
)
|
GBP
|
(87
|
)
|
GBP
|
(87
|
)
|
DEM
|
(49
|
)
|
DEM
|
(49
|
)
|
Long-term
liabilities
|
|
|
(36,095
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
liabilities
|
|
|
(216,606
|
)
|
|
(32,809
|
)
|
|
(86
|
)
|
|
(78
|
)
|
|
(87
|
)
|
|
(87
|
)
|
|
(49
|
)
|
|
(49
|
)
|
Net
assets (liabilities)
|
|
|
(53,288
|
)
|
|
35,282
|
|
|
(86
|
)
|
|
(78
|
)
|
|
(87
|
)
|
|
(87
|
)
|
|
(49
|
)
|
|
(49
|
)
|
The
exchange rates at April 28, 2006 and at December 31, 2005 and 2004 were as
follows (amounts in pesos):
|
|
April
28
2006
|
|
December
31,
2005
|
|
December
31,
2004
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
Ps.
|
11.1578
|
|
Ps.
|
10.7777
|
|
Ps.
|
11.264
|
|
Euro
|
|
|
13.9983
|
|
|
12.5797
|
|
|
15.169
|
|
Pound
sterling
|
|
|
20.1838
|
|
|
18.3570
|
|
|
21.474
|
|
Deutsche
mark
|
|
|
7.1572
|
|
|
6.4319
|
|
|
7.755
|
|
At
December 31, 2005 and 2004, the Company had the following monetary position
from
foreign non-monetary assets, or from assets whose replacement cost can only
be
determined in U.S. dollars.
|
|
Thousands
of U.S. dollars
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Machinery
and equipment, net
|
|
Ps.
|
341,302
|
|
Ps.
|
280,909
|
|
Inventories
|
|
|
287,043
|
|
|
38,105
|
|
|
|
Ps.
|
628,345
|
|
Ps.
|
319,014
|
|
The
summary of transactions carried out in U.S. dollars for the years ended December
31, 2005, 2004 and 2003, excluding imports of machinery and equipment, is as
follows:
|
|
Thousands
of U.S. dollars
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Sales
|
|
USD
|
650,508
|
|
USD
|
52,468
|
|
USD
|
28,810
|
|
Purchases
(raw materials)
|
|
|
(392,269
|
)
|
|
(78,422
|
)
|
|
(24,304
|
)
|
Other
expenses (spare parts)
|
|
|
(7,522
|
)
|
|
(4,898
|
)
|
|
(462
|
)
|
Interest
expense
|
|
|
(3,478
|
)
|
|
(28
|
)
|
|
(3,312
|
)
|
The
exchange rate of the peso to foreign currencies used by the Company is based
on
the weighted average of free market rates available to settle its overall
foreign currency transactions.
The
Company has three foreign subsidiaries, whose combined assets, liabilities
and
stockholders’ equity are as follows:
|
|
Thousands
of U.S. dollars
|
|
|
|
2005
|
|
2004
|
|
Current
monetary assets
|
|
|
110,499
|
|
|
1,292
|
|
Inventories
and prepaid expenses
|
|
|
278,157
|
|
|
7
|
|
Current
liabilities
|
|
|
(121,745
|
)
|
|
(6,824
|
)
|
|
|
|
|
|
|
|
|
Working
capital
|
|
|
266,911
|
|
|
(5,525
|
)
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
139,787
|
|
|
1,766
|
|
Other
assets and deferred charges
|
|
|
32,702
|
|
|
-
|
|
Long-term
liabilities
|
|
|
(100,233
|
)
|
|
-
|
|
Stockholders’
equity
|
|
|
339,167
|
|
|
(3,759
|
)
|
(4)
Related
Party Transactions and Balances
Transactions
carried out with related parties, primarily with Industrias CH, during the
years
ended December 31, 2005, 2004 and 2003 were as follows:
|
|
2005
|
|
2004
|
|
2003
|
|
Sales
(1)
|
|
|
Ps
24,968
|
|
|
129,562
|
|
|
189,632
|
|
Purchases
|
|
|
1,659
|
|
|
11,076
|
|
|
13,822
|
|
Interest
income
|
|
|
-
|
|
|
-
|
|
|
2,754
|
|
Administrative
services expenses
(2)
|
|
|
8,191
|
|
|
8,777
|
|
|
9,174
|
|
(1)
Primarily
this transaction relates to Intercompany sales of inventory with Industrias
CH
(2)
These
operations relate to Intercompany payroll services primarily with Administración
de empresas CH, S.A. de C.V.
Balances
due from/to, related companies at December 31, 2005 and 2004 are as
follows:
|
|
2005
|
|
2004
|
|
Accounts
receivable:
|
|
|
|
|
|
Industrias
CH
(1)
|
|
Ps.
|
-
|
|
|
|
|
Administración
de empresas CH, S.A. de C.V.
(2)
|
|
|
2,456
|
|
Ps.
|
5,499
|
|
|
|
|
2,456
|
|
Ps.
|
5,499
|
|
|
|
|
|
|
|
|
|
Accounts
payable:
|
|
|
|
|
|
|
|
Industrias
CH
(1)
|
|
Ps.
|
460,228
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
21
|
|
|
|
Ps.
|
460,228
|
|
Ps.
|
21
|
|
(1)
Holding
Company
(2)
Affiliate
The
account payable to Industrias CH is for an indefinite term and is a current
account that bears no interest. The balance of this payable is derived from
funds that the company received to finance the acquisition of PAV
Republic.
(5)
Inventories
Inventories
are comprised as follows:
|
|
2005
|
|
2004
|
|
Finished
goods
|
|
Ps.
|
2,915,705
|
|
Ps.
|
172,983
|
|
Work
in process
|
|
|
8,946
|
|
|
1,626
|
|
Billets
|
|
|
124,064
|
|
|
160,198
|
|
Raw
materials and supplies
|
|
|
276,183
|
|
|
586,300
|
|
Materials,
spare parts and rollers
|
|
|
131,425
|
|
|
86,132
|
|
Advances
to suppliers and others
|
|
|
147,597
|
|
|
114,776
|
|
Goods
in transit
|
|
|
60,581
|
|
|
57,010
|
|
|
|
|
3,664,501
|
|
|
1,179,025
|
|
|
|
|
|
|
|
|
|
Less:
allowance for obsolescence
|
|
|
4,000
|
|
|
3,950
|
|
|
|
|
|
|
|
|
|
|
|
Ps.
|
3,660,501
|
|
Ps.
|
1,175,075
|
|
(6)
Derivative
Financial Instruments
The
Company uses derivative financial instruments primarily to offset its exposure
to financial risks related to the price of natural gas. Derivative instruments
currently used by the Company consist of natural gas swap contracts. These
contracts are recognized on the balance sheet at fair value. The swaps are
considered as cash flow hedges since the cash flow exchanges under the swap
are
highly effective in mitigating exposure to natural gas price fluctuations.
The
fair value of the swaps are recorded as part of Comprehensive income in
stockholders’ equity, in conformity with Mexican accounting Bulletin C-10,
Accounting
for Derivative Instruments and Hedging Activities
,
which
the Company adopted early at December 31, 2003.
In
Mexico
the Company entered into these types of contracts with PEMEX Gas and
Petroquímica Básica (PGPB) under which the Company pays a fixed price and
receives a floating price during the contract period of 2004-2006. In the United
States the swap contracts entered by the Company are for terms of less than
one
year.
At
December 31, 2005 and 2004, the swaps gave rise to the recognition of an asset
of Ps. 57,477 and Ps. 19,025, and a deferred tax liability of Ps. 16,669 and
Ps.
5,708, as well as a net comprehensive income item in stockholders’ equity of Ps.
40,354 and Ps. 12,847, respectively. Amounts recorded in comprehensive income
were Ps. 10,483, Ps. 2,364 and Ps. 27,507 in the years 2005, 2004 and 2003
respectively.
Based
on
its inventory turnover, the Company believes that the natural gas burned and
incorporated in its products during a given month is reflected in the cost
of
sales of the subsequent month; consequently, the realized effects of this hedge
are reclassified from the comprehensive income account to results of operations
in the following month. According to the contract termination dates, the whole
value of the swaps will be realized during the year 2006. In the year ended
December 31, 2005, the Company recorded Ps. 35.1 million as a reduction in
the
cost of sales as a result of the transactions settled.
(7)
Property,
Plant and Equipment
Property,
plant and equipment are comprised as follows:
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Buildings
|
|
Ps.
|
1,894,157
|
|
Ps.
|
1,774,205
|
|
Machinery
and equipment
|
|
|
6,527,797
|
|
|
6,129,556
|
|
Transportation
equipment
|
|
|
48,598
|
|
|
48,021
|
|
Furniture,
fixtures and computer equipment
|
|
|
54,699
|
|
|
40,215
|
|
|
|
|
8,525,251
|
|
|
7,991,997
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
2,516,798
|
|
|
2,520,848
|
|
|
|
|
6,008,453
|
|
|
5,471,149
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
515,189
|
|
|
492,664
|
|
Construction
in progress
(1)
|
|
|
560,587
|
|
|
11,586
|
|
Idle
machinery and equipment
|
|
|
30,767
|
|
|
31,791
|
|
|
|
Ps.
|
7,114,996
|
|
Ps.
|
6,007,190
|
|
(1)
Construction
in progress corresponds primarily to machinery. The completion date of these
projects is scheduled for May 2006 and the pending investment amount is Ps.
5,610.
Through
December 31, 2005 and 2004, the Company has capitalized the comprehensive
financing cost of building and machinery and equipment in the net amount of
Ps.
7,593, and Ps. 480,707, respectively, as an addition to the acquisition
cost.
At
December 31, 2005 and 2004, the specific restatement rate of machinery and
equipment was lower than the NCPI, since a significant portion of such machinery
is imported and accordingly, the inflation factor of the country of origin
and
the devaluation of the peso versus the respective currency were lower than
the
NCPI.
(8)
Accruals
Accruals
at December 31, 2005 and 2004 include the following:
Salaries
and other
personnel
benefits
|
|
December
31, 2005
|
|
|
|
Fees
|
|
Total
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
Ps.
|
5,336
|
|
Ps.
|
Ps.
3,601
|
|
Ps.
|
Ps.
8,937
|
|
Increases
charged to operations
|
|
|
256,597
|
|
|
3,120
|
|
|
259,717
|
|
Payments
|
|
|
(251,076
|
)
|
|
(2,370
|
)
|
|
(253,446
|
)
|
Balance
at December 31, 2005
|
|
Ps.
|
Ps.
10,857
|
|
Ps.
|
Ps.
4,351
|
|
Ps.
|
Ps.
15,208
|
|
December
31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003
|
|
Ps.
|
8,149
|
|
Ps.
|
1,533
|
|
Ps.
|
9,682
|
|
Increases
charged to operations
|
|
|
52,157
|
|
|
6,428
|
|
|
58,585
|
|
Payments
|
|
|
(54,969
|
)
|
|
(4,360
|
)
|
|
(59,329
|
)
|
Balance
at December 31, 2004
|
|
Ps.
|
5,337
|
|
Ps.
|
3,601
|
|
Ps.
|
8,938
|
|
(9)
Notes
Payable, Long-term Debt and Medium-term Notes
(a)
Notes payable
This
caption includes uncollateralized loans with BBVA Bancomer, S.A. that bear
annual interest ranging from 3.24% to 3.37% and mature at March 31,
2005.
(b)
Long-term debt
At
December 31, 2005 and 2004, the Company’s long-term debt is as
follows
|
|
2005
|
|
2004
|
|
Debt
with Ohio Department of Development
|
|
Ps.
|
46,994
|
|
Ps.
|
-
|
|
Revolving
loan with General Electric Capital (GE)
|
|
|
362,315
|
|
|
-
|
|
Medium-term
notes
|
|
|
3,275
|
|
|
3,538
|
|
Total
long-term debt
|
|
|
412,584
|
|
|
3,538
|
|
|
|
|
|
|
|
|
|
Less:
current portion of long-term debt
|
|
|
21,034
|
|
|
3,538
|
|
|
|
|
|
|
|
|
|
Long-term
debt excluding current portion
|
|
Ps.
|
Ps.
391,550
|
|
Ps.
|
-
|
|
Long-term
debt
The
company has a loan with Ohio Department of Development that was used to
modernize the plant in Lorain, Ohio. The project concluded in 2003. The initial
amount of the loan was USD 5 million, bearing 3% annual interest and maturing
on
the first day of each month, through the final maturity of July 2008. Principal
amounts of USD 1.6 million, USD 1.7 million and USD 1 million mature during
2006, 2007 and 2008, respectively. The loan is guaranteed by the project to
modernize the 20-inch bar mill in the Lorain plant.
Revolving
line of credit with General Electric Capital (GE)
On
July
22, 2005, Republic one of the Company’s subsidiaries located in USA had an
available revolving line of credit with a guarantee of Ps 2,700.6 million (USD
250 million) with General Electric Capital Corporation (GE capital). Such loan
matures in May 2009 but may be rolled over through May 20, 2010. As of November
1, 2005, the available credit line of Ps 2,700 millions (USD 250 million) was
reduced to Ps 1,620.4 millions (USD 150 million).
At
December 31, 2005 has an outstanding balance with GE Capital of Ps 362.3 million
(USD 33.4 million) and Ps 35.6 million (USD 3.3 million) on letters of credit.
The company’s available balance at December 31, 2005 aggregates Ps 1,223.9
million (USD 113.3 million). The company has to pay a 0.50% annual commission
on
the unused credit. The available draw downs are limited to the sum of 85% of
Republic’s determined accounts receivable plus 65% of its determined
inventory.
The
loan
is unconditionally and irrevocably guaranteed by Republic’s subsidiaries and
specifically with their current inventories and accounts receivable, as well
as
its subsequent acquisitions. As of December 31, 2005 the inventories and
accounts receivables aggregated Ps 2,769 million and Ps 1,167 millions
respectively.
Such
loan
bears interest based on one of the two following options, which the Company
shall choose at its own discretion: 1) at an indexed rate equal to the highest
prime rate published by the Wall Street Journal, plus the applicable margin,
or
the federal funds rate plus 50 base percentage points per year and the
applicable margin; 2) the LIBOR plus the applicable margin. Margins were
adjusted based on the available rate for the quarter on a base established
in
advance. The base for the applicable margin for the indexed rate was adjusted
between 0.00% and 1.00%, and the rate for margins applicable to the LIBOR was
adjusted between 1.75% and 2.75%. From November 1, 2005 through the end of
2005,
the rate was fixed at 0.00% for the applicable margins for the prime rate and
1.00% for the applicable margin for the LIBOR. At December 31, 2005, the loans
from GE Capital bear interest at an annual 7.25% rate for the loans at indexed
rates and an annual 5.38% rate for those at the LIBOR.
As
of
January 1, 2006, the applicable margins will be adjusted from 0.00% to 0.25%
for
the indexed rate, and 0.875% to 1.25% for the loans at the LIBOR, based on
the
average daily availability of the preceding quarter. The new agreement also
changes the commission on the unused credit from 0.50% to 0.375%. Based on
the
last quarter of 2005, in accordance with the available daily rate, the initial
margins for 2006 will be 0.00% for the indexed rate, 0.875% for the LIBOR,
0.500% for the commission on the unused credit, and 0.875% applicable to the
letters of credit.
The
loan
from GE Capital establishes a series of requirements, obligations and
restrictive covenants, including limitations in capital investments and
maintenance. Expenses in capital investment exclusively in Republic for any
fiscal year are limited to Ps 1,084.8 million (USD 100 million), excluding
expenses on capital investments financed by earnings from insurance recoveries.
At December 31, 2005, the Company is in compliance with all such requirements,
obligations and restrictive covenants established in the loan with GE
Capital.
(c)
Industrial mortgage loan
Advance
payments of USD 1,697,952 were made on the industrial mortgage loan in 2004,
plus the corresponding interest. On March 18, 2004, the Company repaid in full
the loan in the amount of USD 1,697,952.
The
Company and all of its subsidiaries that own property, plant and equipment
took
out an industrial mortgage as security on this loan. The Company’s management is
in the process of canceling the guarantees established in the restructuring
agreement entered into with the banks, which allows the industrial mortgage
to
be released.
(10)
Seniority
Premiums and Termination Payments
The
cost,
obligations and other components of seniority premiums and termination payments
mentioned in note 2j were determined based on computations made by independent
actuaries at December 31, 2005, 2004 and 2003.
The
components of the net period cost for the years ended December 31, 2005, 2004
and 2003 are as follows:
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
Net
period cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor
cost
|
|
|
Ps.
|
|
|
2,859
|
|
|
Ps.
|
|
|
593
|
|
|
Ps.
|
|
|
309
|
|
Financial
cost
|
|
|
|
|
|
1,057
|
|
|
|
|
|
321
|
|
|
|
|
|
216
|
|
Amortization
of transition liability
|
|
|
|
|
|
1,128
|
|
|
|
|
|
405
|
|
|
|
|
|
259
|
|
Amortization
of prior service cost and
plan
modifications
|
|
|
|
|
|
198
|
|
|
|
|
|
95
|
|
|
|
|
|
69
|
|
Effect
of cancelled obligations
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
371
|
|
|
|
|
|
-
|
|
Net
period cost
|
|
|
Ps.
|
|
|
5,211
|
|
|
Ps.
|
|
|
1,785
|
|
|
Ps.
|
|
|
853
|
|
An
analysis of the present value of benefit obligations is as follows:
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
benefit obligation
|
|
|
Ps.
|
|
|
21,752
|
|
|
Ps.
|
|
|
8,093
|
|
|
Ps.
|
|
|
6,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition
liability
|
|
|
|
|
|
(9,506
|
)
|
|
|
|
|
(2,978
|
)
|
|
|
|
|
(2,508
|
)
|
Prior
service cost and plan
modifications
|
|
|
|
|
|
(357
|
)
|
|
|
|
|
(410
|
)
|
|
|
|
|
-
|
|
Variances
in assumptions and
experience
adjustments
|
|
|
|
|
|
1,308
|
|
|
|
|
|
(338
|
)
|
|
|
|
|
(333
|
)
|
Additional
liability
|
|
|
|
|
|
6,580
|
|
|
|
|
|
2,635
|
|
|
|
|
|
2,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
projected liability recognized in
consolidated
balance sheets
(1)
|
|
|
Ps.
|
|
|
19,777
|
|
|
Ps.
|
|
|
7,002
|
|
|
Ps.
|
|
|
5,608
|
|
(1)
The
Net
projected liability as of December 31, 2005 includes Ps.6.3 million related
to a
defined retiree health care plan of PAV Republic which is one of the company’s
subsidiaries located in US. Such plan covers approximately 14 union hourly
employees. This plan assumed a health care cost rate for the year of
10%.
The
remainder of the increase as of December 31, 2005 in the net periodic cost
and
the net projected liability is due mainly to inclusion of the termination
payment obligation starting January 1, 2005, as required by revised accounting
Bulletin D-3.
The
most
significant assumptions used in determining the net period cost of the plan
are
as follows:
|
|
2005
|
|
2004
|
|
Actual
discount rate used to reflect present value of
obligations
|
|
|
4.5%
|
|
|
4.5%
|
|
Actual
rate of future salary increases
|
|
|
1%
|
|
|
1%
|
|
Actual
expected return rate of plan assets
|
|
|
4.5%
|
|
|
4.5%
|
|
(11)
Other
Benefit Plans
From
the
companies of the group only Republic offers other benefit plans for its
employees. Most of the production workers are insured by collective contracting
with the United Steelworkers of America (USWA). The collective contracting
expires August 15, 2007 (labor agreement). From the Mexican operations
approximately 60% of the
employees
are under a collective contract. The Mexican collective contracts expire in
periods greater than one year.
The
labor
agreement provides a defined health and retirement contribution program and
pension benefits. Republic is required to contribute to the program for each
work hour accrued at a rate of Ps. 41 (actual amount) per hour until the labor
agreement expires. For the period from July 22, 2005 through December 31, 2005,
During 2005 there was an expense of Ps. 69.1 million.
The
labor
agreement includes an employee profit sharing program, to which Republic must
contribute 15% of its quarterly earnings exceeding Ps. 135.1 million before
taxes. For the period from July 22, 2005 through December 31, 2005, there was
an
expense of Ps. 7.5 million for the profit sharing program.
In
addition, Republic has a defined retirement contribution plan which covers
virtually all of its non-union salaried employees. This plan is designed to
provide retirement benefits through the Company contributions and deferred
employee compensation. Republic contributes to this plan each payment period
based on the age and length of service of its personnel at January of each
year.
The contribution amount is equal to the base salary multiplied by the
appropriate percentage as determined based on the worker’s age and years of
service.
The
full
contribution percentage is acquired upon completing 5 years of service.
Furthermore, workers are allowed to make contributions to a 401(k) plan through
wage discounts. The Company contributes to the Republic’s employees 25% on the
first 5% of wages that the worker chooses to contribute. Workers eventually
acquire a 100% match of 401(k) contributions from the Company. For the period
from July 22, 2005 through December 31, 2005, there was a recorded expense
of
Ps. 12 million on retirement contribution plans and 401(k) contribution
plans.
In
accordance with the profit sharing plan for salary and non-union workers,
excluding a select group of managers and executives, Republic contributed 3%
of
quarterly earnings exceeding Ps. 135.1 million before taxes. For the period
from
July 22, 2005, through December 31, 2005, there was a recorded expense of Ps.
1.1 million.
Republic
offers, an administrative incentive plan to a select group of managers and
executives. The incentives are based on the achievement of select corporate
and
individual objectives which include financial results, improvement in product
yield, energy use, quality and safety standards and cash flow. For the period
from July 22, 2005 through December 31, 2005, there was not any recorded expense
for this plan. In regards to the acquisition of Republic on July 22, 2005,
the
Company assumed the accumulated liability for this plan of Ps. 9.8 million,
which was paid in January 2006. The Company also assumed an incentive
compensation for Republic’s C.E.O Joseph Lapinsky of Ps. 5.4 million, which was
paid in January 2006.
Republic
has a deferred compensation plan that covers certain key workers. The plan
allows the worker to defer an annual amount of his/her base salary and grants
an
annual fixed contribution by Republic based on a percentage of salary. For
the
period from July 22, 2005 through December 31, 2005, there was a related expense
recorded of Ps. 1.1 million.
(12)
Income
Tax, Asset Tax and Employee Profit Sharing and Tax Loss
Carryforwards
Industrias
CH, holding company files a Consolidated Tax Return. Under Mexican Income Tax
Law (MITL) Industrias CH does not have to allocate any tax to its subsidiaries
since each of its subsidiaries has the obligation to calculate on a stand alone
basis its own taxes and only pay the minority part of such taxes directly to
the
Mexican Income Revenue Service (IRS). The majority interest for consolidated
tax
purposes is paid through the holding company. The Company computes its tax
provision on a stand alone basis.
Under
current tax regulations, companies must pay the greater between income tax
and
asset tax.
The
computation of both taxes considers the effects of inflation, although
differently from accounting principles generally accepted in
Mexico.
Statutory
employee profit sharing is computed practically on the same basis as income
tax,
but excluding the effects of inflation.
The
Mexican Asset Tax Law establishes payment of a 1.8% tax on the value of restated
assets net of certain liabilities.
An
analysis of income tax charged to results of operations for the years ended
December 31, 2005, 2004 and 2003 is as follows:
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
Current
Income Tax Mexican Subsidiaries
|
|
|
Ps.
|
|
|
124,037
|
|
|
Ps.
|
|
|
21,137
|
|
|
Ps.
|
|
|
13,006
|
|
Current
Income Tax Foreign Subsidiaries
|
|
|
|
|
|
(45,160
|
)
|
|
|
|
|
1,999
|
|
|
|
|
|
413
|
|
Deferred
Income Tax Mexican Subsidiaries
|
|
|
|
|
|
40,806
|
|
|
|
|
|
320,466
|
|
|
|
|
|
139,779
|
|
Deferred
Income Tax Foreign Subsidiaries
|
|
|
|
|
|
70,912
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Income
tax expense
|
|
|
Ps.
|
|
|
190,595
|
|
|
Ps.
|
|
|
343,602
|
|
|
Ps.
|
|
|
153,198
|
|
At
December 31, 2005 and 2004 and 2003, the tax expense attributable to income
before income tax, employee profit sharing and minority interest differed from
the expense computed by applying the income tax rate of 30% in 2005, 33% in
2004
and 34% in 2003 to income before these provisions and minority interest. An
analysis is as follows:
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
tax expense
|
|
|
Ps.
|
|
|
446,521
|
|
|
Ps.
|
|
|
596,069
|
|
|
Ps.
|
|
|
162,868
|
|
Increase
(decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
effect of inflation
|
|
|
|
|
|
30,601
|
|
|
|
|
|
35,025
|
|
|
|
|
|
42,691
|
|
Adjustments
for enacted changes in tax laws and rates
|
|
|
|
|
|
-
|
|
|
|
|
|
(288,455
|
)
|
|
|
|
|
(34,652
|
)
|
Change
in valuation allowance of deferred tax assets
(1)
|
|
|
|
|
|
(132,326
|
)
|
|
|
|
|
(1,536
|
)
|
|
|
|
|
(46,993
|
)
|
Majority
asset tax
|
|
|
|
|
|
5,840
|
|
|
|
|
|
10,757
|
|
|
|
|
|
13,278
|
|
Effect
of beginning inventory due to change in Tax laws
and
corporate restructure
(2)
|
|
|
|
|
|
(420,537
|
)
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Deferred
credit amortization
(3)
|
|
|
|
|
|
(20,072
|
)
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Additional
liability
|
|
|
|
|
|
303,461
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Others,
net
|
|
|
|
|
|
(22,893
|
)
|
|
|
|
|
(8,258
|
)
|
|
|
|
|
16,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
Ps.
|
|
|
190,595
|
|
|
Ps.
|
|
|
343,602
|
|
|
Ps.
|
|
|
153,198
|
|
(1)
The
valuation allowance for deferred assets at December 31, 2005 and 2004 is Ps.
68,329 and Ps. 200,655, respectively. In 2004, the Company had a valuation
allowance that covered almost the total amount of the recoverable asset tax
and
tax loss carryforwards due to the uncertainty of their recovery. However, in
2005 the Company recovered part of the recoverable asset tax and reduced
deferred tax assets by Ps. 84,086. As a result of the asset tax recovery, the
Company estimated that a higher amount of deferred tax assets is more likely
than not to be recovered, consequently it reduced its valuation allowance on
its
deferred tax asset as of December 31, 2005 The net change in the valuation
allowance for the years ended December 31, 2005 and 2004 was a decrease of
Ps.
132,326 and Ps. 1,536, respectively.
(2)
In conformity with the Mexican Income Tax Law (MITLA) in force through
December 31, 2004, the cost of sales was considered as a non-deductible expense
and instead, purchases of inventory and production costs were considered as
deductible items. This tax treatment in the MITLA gave rise to a deferred tax
liability because of the difference in the book value of inventories and its
corresponding tax value. Effective January 1, 2005, the MITLA considers cost
of
sales as a deductible item instead of inventory purchases and production costs.
The MITLA established transition rules to be followed to accumulate the December
31, 2004 inventory balance into taxable revenue. However, during 2005 the
Company recorded a tax benefit of Ps. 420,537, because of the non-accumulation,
in the coming years, of its inventory balance at December 31, 2004 in compliance
with the specific transition rules of MITLA as a result of a corporate
restructuring (liquidation of its Subsidiary, COSICA) of the
Company.
Also,
the
Company recorded an additional deferred tax liability for the amount of Ps.
303,461 to account for the difference in net income of the 2005 period for
which
the Company did not pay taxes (See Note 13c). This additional tax liability
primarily relates to the inventory item and tax law change described above
as it
is the primary source of income for which the Company did not pay
taxes.
(3)
Benefit in the Income Tax derived from Net Operating Losses (NOLs) obtained
through OAL acquisition (Note 14 b).
The
effective tax rate for the fiscal years ending December 31, 2005, 2004 and
2003
were 12.8%, 19.02% and 31.98% respectively. The effective income tax rate during
2005 had a significant improvement that was the result of a corporate
restructure. These changes resulted in favorable tax differences that had a
one
time impact in our effective income tax rate for the year ended December 31,
2005.
The
tax
effects of temporary differences that give rise to significant portions of
the
deferred tax assets and liabilities at December 31, 2005 and 2004 are as
follows
:
|
|
|
|
2005
|
|
|
|
2004
|
|
Deferred
tax
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for bad debts
|
|
|
Ps.
|
|
|
60,864
|
|
|
Ps.
|
|
|
7,222
|
|
Liability
provisions
|
|
|
|
|
|
106,591
|
|
|
|
|
|
19,046
|
|
Advances
from customers
|
|
|
|
|
|
22,392
|
|
|
|
|
|
29,825
|
|
Tax
loss carryforward
|
|
|
|
|
|
316,796
|
|
|
|
|
|
18,594
|
|
Recoverable
asset tax
|
|
|
|
|
|
103,931
|
|
|
|
|
|
188,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
gross deferred assets
|
|
|
|
|
|
610,574
|
|
|
|
|
|
262,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
valuation allowance
|
|
|
|
|
|
68,329
|
|
|
|
|
|
200,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
assets, net
|
|
|
|
|
|
542,245
|
|
|
|
|
|
62,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
|
|
|
399,042
|
|
|
|
|
|
325,907
|
|
Derivative
financial instruments
|
|
|
|
|
|
16,669
|
|
|
|
|
|
5,708
|
|
Property,
plant and equipment
|
|
|
|
|
|
1,246,885
|
|
|
|
|
|
1,030,126
|
|
Pre-operating
expenses
|
|
|
|
|
|
89,240
|
|
|
|
|
|
76,204
|
|
Purchase
commitment
|
|
|
|
|
|
-
|
|
|
|
|
|
108,243
|
|
Others
|
|
|
|
|
|
27
|
|
|
|
|
|
6,406
|
|
Additional
liabilities resulting from excess of
book
value of stockholders’ equity over its
tax
value
|
|
|
|
|
|
303,461
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deferred liabilities
|
|
|
|
|
|
2,055,324
|
|
|
|
|
|
1,552,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liability, net
|
|
|
Ps.
|
|
|
1,513,079
|
|
|
Ps.
|
|
|
1,490,545
|
|
For
the
years ended December 31, 2005 and 2004, deferred employee profit sharing is
deemed immaterial.
An
analysis of partnership capital tax accounts at December 31, 2005 is as
follows:
|
|
Restated
contributed capital account (CUCA)
|
Ps.
4,316,203
|
Net
tax profit account (CUFIN)
|
189
|
Tax
loss
carryforward and recoverable asset tax at December 31, 2005 expire as
follows:
|
|
Restated
amount
at
June 30, 2006
|
Year
of
expiration
|
|
Tax
loss
Carryforward
|
|
Recoverable
asset
tax
|
2006
|
Ps.
|
582
|
Ps.
|
7,115
|
2007
|
|
4,683
|
|
13,328
|
2008
|
|
17,805
|
|
20,513
|
2009
|
|
31,252
|
|
16,847
|
2010
|
|
2,367
|
|
18,671
|
2011
|
|
399
|
|
15,396
|
2012
|
|
5,754
|
|
3,234
|
2013
|
|
150,097
|
|
1,802
|
2014
|
|
14,874
|
|
2,089
|
2015
|
(1)
|
3,757,154
|
|
4,936
|
|
|
|
|
|
|
Ps.
|
3,984,967
|
Ps.
|
103,931
|
A
new
income tax law in México was enacted on December 1, 2004, which established an
income tax rate of
30%
for
2005, 29% for 2006, and 28% for 2007 and subsequent years.
As
a
result of these changes, for the year ended December 31, 2004, the Company
recognized a decrease in the net deferred tax liability of Ps. 288,455 which
was
credited to results of operations.
(1)
Includes
tax loss carryforwards as described in Note 14 b.
(13)
Stockholders’
Equity
(a)
Structure of capital stock
i)
|
At
an Extraordinary Stockholders’ Meeting held on April 29, 2005, the
stockholders agreed to convert 15,000,000 shares owned by Industrias
CH
consisting of variable capital stock, which have a nominal value
of Ps.
220,245, into fixed capital shares. In the same meeting, the stockholders
approved a 3-for-1 stock split (effective until May 30, 2006) for
all
outstanding shares to increase the number of shares, thus facilitating
their tradability. The Company’s Board of Directors is delegated the power
to approve, on the date the Board sees fit, the terms and conditions
under
which the Company shall perform the approved split and the secretary
of
the Board of Directors shall be advised as to how and when to proceed
with
the cancellation of the replaced shares received once all the Company’s
shares have been exchanged.
|
ii)
|
At
a regular stockholders’ meeting held on April 29, 2005, it was agreed to
increase the Company’s variable capital stock by Ps. 110,303 (Ps. 103,785
nominal amount) by issuing 7,114,285 common “B” series shares, 4,386,615
of which were subscribed and paid in by Industrias CH through the
capitalization of contributions for future capital increases of Ps.
68,011
(Ps. 63,992 nominal amount) and a stock premium of Ps. 162,952 (Ps.
152,707 nominal amount). The remaining 2,727,670 shares are to be
offered
to the rest of the Company’s stockholders, with prior authorization of the
National Registry of Securities, so as to provide them the opportunity
to
exercise their
|
|
preemptive
rights to subscribe and pay in the capital increase in proportion
to their
stock holding. It was agreed that the Ps. 34.81(actual amount) difference
between the nominal theoretical value of the shares of Ps. 14.59
(actual
amount) and the subscription price of the shares of the capital increase
of Ps. 49.40 (actual amount) would be recorded by the Company as
a stock
premium.
|
iii)
|
At
a Board of Directors’ meeting held on December 3, 2004, it was resolved to
record Ps. 230,309 (Ps. 216,698 historical) as contributions for
future
capital stock increases corresponding to various contributions by
Industrias CH, for the purpose of having the Company and CSC acquire
the
assets of the steel plants located in Tlaxcala and Puebla, as well
as for
the assignment of a technical assistance agreement derived from such
acquisition.
|
iv)
|
At
a Board of Directors’ meeting held on May 13, 2004, the Company’s minority
stockholders exercised their preemptive rights to subscribe and pay
in the
increase in variable capital stock declared on November 19, 2003,
contributing Ps. 24,693 (Ps. 22,902 nominal amount) through the
subscription and payment of 1,569,962 shares. A total of 301,153
shares
that were neither subscribed nor paid in were
cancelled.
|
v)
|
At
an extraordinary stockholders’ meeting held on May 30, 2006, the
stockholders approved the increase on that same date in the number
of
outstanding shares by means of a three-for-one stock split. All per
share
and shares outstanding data in these financial statements have been
retroactively restated to reflect the three-for-one stock
split.
|
Subsequent
to the above-mentioned resolutions and activities, the Company’s capital stock
aggregates Ps. 3,476,499, represented by 413,788,797 common “B” series shares
(137,929,599 common “B” series shares prior to the stock split) with no par
value. Such shares may be subscribed and paid in by both Mexican and foreign
individuals or companies.
Shares
outstanding for 2005, 2004 and 2003 are as follows:
|
2005
|
|
2004
|
|
2003
|
Common
“B” series shares
|
413,788,797
|
|
400,628,952
|
|
395,919,066
|
Common
“B” series shares prior to the stock split
|
137,929,599
|
|
133,542,984
|
|
131,973,022
|
Each
share has the right to one vote at stockholders’ meetings.
Minimum
fixed capital not subject to withdrawal is Ps. 441,786, nominal amount, which
may be increased or decreased by a resolution passed at a general extraordinary
shareholders’ meeting.
(b)
Comprehensive income
Comprehensive
income reported on the statement of changes in stockholders’ equity represents
the result of all of the Company’s activities during the year and includes the
following captions, which in conformity with accounting principles generally
accepted in Mexico, were applied directly to stockholders’ equity, except for
net income:
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
Net
income
|
|
|
Ps.
|
|
|
1,279,898
|
|
|
Ps.
|
|
|
1,462,671
|
|
|
Ps.
|
|
|
320,522
|
|
Equity
adjustment for non-
monetary
assets
(1)
(2)
|
|
|
|
|
|
(446,443
|
)
|
|
|
|
|
91,436
|
|
|
|
|
|
392,155
|
|
Deferred
taxes applied to the
equity
adjustments for non-
monetary
assets
|
|
|
|
|
|
112,411
|
|
|
|
|
|
(25,527
|
)
|
|
|
|
|
(142,892
|
)
|
Fair
value of derivative
financial
instruments
|
|
|
|
|
|
38,652
|
|
|
|
|
|
3,379
|
|
|
|
|
|
15,646
|
|
Deferred
tax on the fair value
of
derivative financial
instruments
|
|
|
|
|
|
(11,145
|
)
|
|
|
|
|
(1,014
|
)
|
|
|
|
|
(5,163
|
)
|
|
|
|
|
|
|
973,373
|
|
|
|
|
|
1,530,945
|
|
|
|
|
|
580,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
(3)
|
|
|
|
|
|
17,491
|
|
|
|
|
|
47
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Ps.
|
|
|
990,864
|
|
|
Ps.
|
|
|
1,530,992
|
|
|
Ps.
|
|
|
580,269
|
|
(1)
In
2005,
includes Cumulative Translation Adjustment of SimRep for Ps.14,935.
(2)
Includes
primarily equity adjustment for non-monetary due to fixed assets.
(3)
Minority
interest represents the minority share holding of Industrias CH in SimRep
Corporation.
(c)
Restrictions on stockholders' equity
The
Company is required to appropriate at least 5% of the net income of each year
to
increase the legal reserve. This practice must be continued until the legal
reserve reaches 20% of capital stock issued and outstanding. At December 31,
2005, the legal reserve aggregates Ps. 21,586.
Stockholder
contributions, which are restated for tax purposes, may be refunded tax-free,
provided that the reimbursed amount is equal to or in excess of the Company’s
stockholders’ equity.
Earnings
distributed on which no income tax has been paid, as well as other stockholders’
equity account distributions, are subject to payment of income tax, payable
by
the Company, at the rate of 29%; consequently, the stockholders may only receive
71% of such dividends.
The
variable portion of the capital stock may never exceed ten times the amount
represented by the fixed portion. The fixed portion of Simec’s capital stock may
be increased or decreased by a resolution passed at a general extraordinary
shareholders’ meeting. The variable portion of the Company’s capital stock may
be increased or decreased by a resolution passed at a general ordinary
shareholders’ meeting. Any increase or decreases in the Company’s capital stock
must be recorded in the Company’s registry of capital variations.
(14)
Acquisitions
(a)
|
On
July 22, 2005, the Company and Industrias CH acquired the outstanding
shares of PAV Republic Inc. (Republic) through their subsidiary SimRep
Corporation, a U.S. company. Such transaction was valued at USD 245
million where USD 229 million corresponds to the purchase price and
USD 16
million, to the direct cost of the business combination. The Company
contributed USD 123 million to acquire 50.2% of the representative
shares
of SimRep Corporation and Industrias CH, the holding company, acquired
the
remaining 49.8%. SimRep then acquired all the shares from Republic
through
a stock purchase agreement. Under the terms of the stock purchase
agreement, the Company acquired the right to a portion of the
reimbursement from an unresolved insurance claim. Any receipts will
change
the final purchase accounting adjustment to reflect the fair value
of the
assets acquired and liabilities assumed (See Note 17 c). Republic
has six
production plants: five in the United States and one in Canada. The
Company and Industrias CH acquired Republic to increase their presence
in
the US market.
|
The
total
Republic acquisition price was allocated to the assets acquired and the
liabilities assumed based on their fair values as of July 22, 2005. The
following table summarizes the fair values of the assets acquired and the
liabilities assumed in connection with the acquisition. The fair values were
primarily determined based on independent appraisals and estimates made by
management. The acquisition price resulted in negative goodwill which was
allocated proportionally to all non-current assets. The consolidated financial
position at date of the acquisition, restated at December 31, 2005, is as
follows:
Current
assets
|
Ps.
|
4,405,135
|
Property,
plant and equipment
|
|
1,275,784
|
Intangibles
and deferred charges
|
|
369,505
|
Other
assets
|
|
61,022
|
Total
assets
|
|
6,111,446
|
|
|
|
Current
liabilities
|
|
1,703,562
|
Long-term
debt
|
|
695,050
|
Renewable
credit
|
|
748,547
|
Deferred
taxes
|
|
282,869
|
Other
long-term debt
|
|
72,296
|
|
|
3,502,324
|
Net
assets acquired
|
Ps.
|
2,609,122
|
As
a
result of the acquisition of Republic, an analysis of information regarding
Simec’s results of operations of 2005 and 2004, including Republic’s 6 plants,
over a twelve-month period, as if the plants had been incorporated into the
Company since the beginning of the year (unaudited information) is as
follows:
|
|
|
|
Unaudited
|
|
|
|
|
|
2005
|
|
|
|
2004
|
|
Net
sales
|
|
|
Ps.
|
|
|
22,380,726
|
|
|
Ps.
|
|
|
21,270,065
|
|
Marginal
profit
|
|
|
Ps.
|
|
|
3,824,626
|
|
|
Ps.
|
|
|
4,203,760
|
|
Majority
net income
|
|
|
Ps.
|
|
|
1,462,215
|
|
|
Ps.
|
|
|
1,989,927
|
|
Earnings
per share (pesos)
|
|
|
|
|
|
3.53
|
|
|
|
|
|
4.98
|
|
Tons
sold
|
|
|
|
|
|
2,683,312
|
|
|
|
|
|
2,612,178
|
|
(b)
|
On
July 20, 2005, the Company acquired all shares of Operadora de Apoyo
Logístico, S.A. de C.V. (OAL), a subsidiary of Grupo TMM, S.A. de C.V.,
for Ps. 133 million, to make it the operating company of the three
steel
plants in Mexico. This transaction resulted in a deferred credit
of Ps.
406,731.
|
The
consolidated financial position at date of the acquisition, restated at
June 30, 2006, is as follows:
Current
assets
|
|
|
Ps.
|
|
|
1,006
|
|
Deferred
tax asset
|
|
|
|
|
|
526,753
|
|
Total
assets
|
|
|
|
|
|
527,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets acquired
|
|
|
Ps.
|
|
|
527,759
|
|
OAL
had
accumulated NOLs of Ps. 1,331,953 that could be offset against future taxable
income. However the recorded financial effect of this tax benefit is Ps. 526,753
(See Note 12). Since OAL had no operations before the acquisition, no pro forma
results from operations are included here.
(c)
|
On
August 9, 2004, the Company acquired the inventories, land, buildings,
machinery and equipment and assumed the labor obligations of the
Apizaco,
Tlaxcala and Cholula, Puebla plants that were owned by Atlax, S.A.
de C.V.
and Operadora Metamex, S.A. de C.V. (the sellers). The purchase amounted
to approximately USD 120 million. The Company began operating the
Tlaxcala
and Puebla plants on August 1,
2004.
|
A
summary
of the estimated fair value of the assets acquired and the liabilities assumed
at the acquisition date, restated for inflation through June 30, 2006 is as
follows:
Current
assets (inventories)
|
|
|
Ps.
|
|
|
136,427
|
|
Property,
plant and equipment
|
|
|
|
|
|
1,259,592
|
|
Prepaid
technical assistance
|
|
|
|
|
|
86,537
|
|
Total
assets acquired
|
|
|
|
|
|
1,482,556
|
|
|
|
|
|
|
|
|
|
Labor
obligations
|
|
|
|
|
|
3,448
|
|
Net
assets acquired
|
|
|
Ps.
|
|
|
1,479,108
|
|
As
a
result of the above-mentioned acquisition of assets, an analysis of certain
information regarding the results of operations of the Apizaco and Cholula
plants over a twelve-month period ended December 31, 2004, as if the plants
had
been incorporated into the Company since the beginning of the year (unaudited
information) is as follows:
|
|
|
|
|
|
Net
sales
|
|
|
Ps.
|
|
|
7,205,165
|
|
Marginal
profit
|
|
|
|
|
|
2,788,234
|
|
Net
income
|
|
|
Ps.
|
|
|
1,525,374
|
|
Net
income earnings per share (pesos)
|
|
|
|
|
|
11.47
|
|
Tons
sold
|
|
|
|
|
|
978,969
|
|
The
Company and the sellers agreed to indemnify the other party for damages
resulting from (i) any false or inaccurate statement or warranty, or (ii)
failure to comply with any
of
the
obligations of the purchase agreement. The claim shall be valid over a two-year
period following the closure of the sale and for up to 4 million
dollars.
(15)
Segment
Information
In
2006
the Company’s management has changed the manner in which the business is
monitored and the decision-making process is performed. Accordingly, the
disclosures below have been changed in 2005 for comparative purposes with 2006.
The
Company segments its information by region, due to the operational and
organizational structure of its business. The Company’s sales are made primarily
in Mexico and the United States. The Mexican segment of the Company includes
the
manufacturing plants of Mexicali, Guadalajara and Tlaxcala. The United States
segment includes the seven manufacturing plants of Republic acquired on July
22,
2005. Republic’s manufacturing plants are located in the United States (six
total in Ohio, Indiana and New York) and one in Canada (Ontario). The plant
in
Canada represents approximately 5% of total sales of the segment. Both segments
manufacture and sell long steel products primarily for the construction and
automotive industries.
|
|
|
|
As
of December 31 2005 and the year then ended
|
|
|
|
|
|
As
restated
|
|
|
|
|
|
Mexico
|
|
United
States
|
|
Total
|
|
Results
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
|
Ps.
|
|
|
6,705,953
|
|
|
6,260,674
|
|
|
12,966,627
|
|
Direct
cost of sales
|
|
|
|
|
|
4,469,393
|
|
|
5,901,547
|
|
|
10,370,940
|
|
Marginal
profit
|
|
|
|
|
|
2,236,560
|
|
|
359,127
|
|
|
2,595,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect
overhead, selling, general and administrative expenses
|
|
|
|
|
|
746,865
|
|
|
271,240
|
|
|
1,018,105
|
|
Operating
income
|
|
|
|
|
|
1,489,695
|
|
|
87,887
|
|
|
1,577,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
(expense) income, net
|
|
|
|
|
|
21,133
|
|
|
(36,861
|
)
|
|
(15,728
|
)
|
Foreign
exchange (loss) gain, net
|
|
|
|
|
|
(75,279
|
)
|
|
-
|
|
|
(75,279
|
)
|
Monetary
position loss
|
|
|
|
|
|
(51,656
|
)
|
|
(2,007
|
)
|
|
(53,663
|
)
|
Other
income (expense), net
|
|
|
|
|
|
44,273
|
|
|
11,216
|
|
|
55,489
|
|
Income
before taxes
|
|
|
|
|
|
1,428,166
|
|
|
60,235
|
|
|
1,488,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax
|
|
|
|
|
|
164,844
|
|
|
25,751
|
|
|
190,595
|
|
Statutory
employee profit sharing
|
|
|
|
|
|
417
|
|
|
-
|
|
|
417
|
|
Net
income
|
|
|
|
|
|
1,262,905
|
|
|
34,484
|
|
|
1,297,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
Ps.
|
|
|
8,565,170
|
|
|
6,023,387
|
|
|
14,588,557
|
|
Depreciation
and amortization
|
|
|
|
|
|
256,558
|
|
|
69,113
|
|
|
325,671
|
|
Capital
expenditures
|
|
|
|
|
|
130,290
|
|
|
373,445
|
|
|
503,735
|
|
For
the
year ended December 31, 2005 there were no transactions between the reportable
segments. For the years ended December 31, 2004 and 2003 the only reportable
segment was Mexico.
The
Company’s net sales to foreign or regional customers are as
follows:
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
Sales
|
|
Sales
|
|
Sales
|
|
Mexico
|
|
|
Ps.
|
|
|
5,885,041
|
|
|
5,279,278
|
|
|
2,698,223
|
|
United
States
|
|
|
|
|
|
6,734,518
|
|
|
626,528
|
|
|
344,444
|
|
Canada
|
|
|
|
|
|
338,076
|
|
|
-
|
|
|
-
|
|
Latin
America
|
|
|
|
|
|
8,475
|
|
|
2,444
|
|
|
2,477
|
|
Others
|
|
|
|
|
|
517
|
|
|
2,113
|
|
|
2,248
|
|
|
|
|
Ps.
|
|
|
12,966,627
|
|
|
5,910,363
|
|
|
3,047,392
|
|
(16)
Commitments
and Contingent Liabilities
Commitments
(a)
|
As
discussed in note 6 to the financial statements, at the end of 2003,
the
Company engaged in derivative financial instruments with PEMEX Gas
y
Petroquímica Básica, for hedging purposes to cover natural gas price
fluctuations. The coverage will guarantee a portion of the Company’s
natural gas consumption from 2004 to 2006 at a fixed price of USD
4.462
per MMBtu. At the end of 2005, the Company also held in one of its
subsidiaries in the USA, 23 open contracts for natural gas swaps,
entered
to offset the potential natural gas price volatility for the months
of
January - March 2006. These swaps resulted in the marking to market
of all
the open contracts as of December 2005 and recording a liability
for USD
1.2 million.
|
(b)
|
At
December 31, 2005, the Company has a number of supply contracts,
whereby
it agrees to supply certain customers with steel products during
the first
months of 2006. Should the Company fail to comply with such agreement,
the
customers have the right to reject and/or return the merchandise,
with no
liability whatsoever.
|
(c)
|
On
October 11, 2004, the installation of a new five-position machine
which
produces strips and ingots and the installation of related equipment
were
approved in Republic's facilities located in Canton, Ohio. The Company
began to prepare the installation of the new equipment in December
2004.
The project was estimated to cost approximately Ps. 626.5 million,
not
including capitalized interest costs. It is expected to be in full
operation during the first quarter of 2006. At December 31, 2005,
the
Company has pending purchase agreements of Ps. 30.3 million. Furthermore,
the Company currently estimates that an additional Ps. 24.9 million
will
be needed to finish this project.
|
(d)
|
The
Company has certain operating lease agreements for equipment, office
space
and computer equipment, and such agreements cannot be cancelled.
The rent
will expire on different dates through 2012. In 2005, the rent expense
related to such agreements aggregated Ps. 41.1 million. At December
31,
2005, the total minimum
|
|
rental
payments in accordance with such agreements that cannot be cancelled
aggregate Ps. 41.1 million in 2006, Ps. 13 million in 2007, Ps. 10.8
million in 2008, Ps. 8.7 million in 2009, Ps. 3.2 million in 2010
and Ps.
4.3 million in subsequent years.
|
(e)
|
The
Company’s subsidiary Republic has an agreement with the USWA to manage
health insurance benefits for Republic workers of the USWA while
they
temporarily do not render their services, and to administer monthly
contribution payments to the Steelworkers' Pension Trust by local
union
officers while they work for the union. To fund this program, in
February
2004, the USWA granted an initial contribution of Ps. 27 million
in cash
to be used to provide health insurance benefits and Ps. 5.4 million
to
provide benefits for pensions for those who work in the steel industry.
At
December 31, 2005, the balance of this cash account aggregated Ps.
30.3
million. The Company has agreed to continue managing these programs
until
the fund is completely exhausted. Republic will provide the USWA
with
periodic reports on the fund's status. At December 31, 2005, the
cash
account balance is included in Other assets and the related liability
is
included in Other long-term liabilities in the attached consolidated
balance sheets.
|
Contingent
liabilities
(f)
|
California
Regional Water Control
Board
|
In
1987,
Pacific Steel, Inc. (Pacific Steel), a subsidiary of Simec based in National
City in San Diego County, California, received a notice from the California
Regional Water Control Board, San Diego Region (the “Regional Board”), which
prohibited Pacific Steel from draining into the street waters from spraying
borax (waste resulting from the process of the scrap yard). This and other
subsequent requirements obligated Pacific Steel to (i) stop operations in the
scrap yard, (ii) send an enclosure of the borax which was stored in its yards
and (iii) take samples of the soil where the borax was found. The result of
this
study was that the residual metal contents represented no significant threat
to
the quality of water.
Department
of Toxic Substances Control
In
September 2002, the Department of Toxic Substances Control inspected Pacific
Steel’s facilities based on an alleged complaint from neighbors due to Pacific
Steel’s excavating to recover scrap metal on its property and on a neighbor’s
property which it rents from a third party. In this same month, the department
issued an enforcement order of imminent and substantial endangerment
determination, which alleges that certain soil piles, soil management and metal
recovery operations may cause an imminent and substantial danger to human health
and the environment. Consequently, the department sanctioned Pacific Steel
for
violating hazardous waste laws and the State of California Security Code and
imposed the obligation to make necessary changes to the location. In July 2004,
in an effort to continue with this order, the department filed a Complaint
for
Civil Penalties and Injunctive Relief in San Diego Superior Court. On July
26,
2004, the court issued a judgment, whereby Pacific Steel is obligated to pay
USD
235,000 (payable in four payments of USD 58,750 over the course of one year)
for
fines of USD 131,250, the department's costs of USD 45,000 and an environmental
project of USD 58,750. At December 31, 2005, Pacific Steel has made all of
the
payments.
In
August
2004, Pacific Steel and the Department entered into a corrective action consent
agreement. In September 2005, the Department approved the Corrective Measures
Plan
presented
by Pacific Steel, provided it obtains permits from the corresponding local
authorities, which are in process at date.
Due
to
the fact that the cleanliness levels have not yet been defined by the Department
and since the characterization of all the property has not yet been finished,
the allowance for the costs for the different remedy options are still subject
to considerable uncertainty.
The
Company estimated, based on experience in prior years and using the same
processes, a liability of between USD 0.8 and USD 1.7 million. Due to the above,
at December 31, 2002, the Company created a reserve for this contingency of
approximately USD 1.7 million. At December 31, 2005, such reserve is Ps. 15,079
million (USD 1.4 million).
The
Community Development Commission
Additionally,
the Community Development Commission of National City, California (CDC) has
expressed its intention to develop the site and is preparing a purchase offer
for Pacific Steel’s land at market value, less the cost of remediation and less
certain investigation costs incurred. Pacific Steel has informed the CDC that
the land will not be voluntarily sold unless there is an alternate property
where it could relocate its business. The CDC, in accordance with the State
of
California law, has the power to expropriate in exchange for payment at market
value and, in the event that there is no other land available to relocate the
business, it would also have to pay Pacific Steel the land’s book value. The CDC
made an offer to purchase the land from Pacific Steel for USD 6.9 million,
based
on a business appraisal. The expropriation process was temporarily suspended
through an agreement entered into by both parties in April 2006. This agreement
allows Pacific Steel to explore the possibility of finishing the remediation
process of the land and to propose an attractive alternative to CDC which would
allow the Company to remain in the area.
Due
to
this situation and considering the imminent expropriation of part of the land
on
which Pacific Steel carries out certain operations, for the year ended December
31, 2002, Pacific Steel recorded its land at realizable value based on an
independent appraisal. Such appraisal caused a decrease in the value of part
of
the land of Ps. 22,562 (19,750 historical pesos) and a charge to results of
operations of 2002 for the same amount.
(g)
|
On
July 2, 2003, CSG filed a nullity suit with the Mexican
Federal
Tax and Administrative Court of Justice
against an official communication issued by the Central International
Fiscal Auditing Office of the Tax Administration Service, whereby
CSG is
deemed to have unpaid taxes of Ps. 89,970 on alleged omissions of
income
taxes it should have withheld from third parties on interest payments
abroad in 1998, 1999, 2000, and for the period from January 1, 2001
through June 30, 2001. CSG is currently waiting for the authorities
to
respond it the suit. According to Company management and its legal
advisors,
there
are reasonable grounds on which to obtain a favorable resolution
for
CSG
accordingly no reserve was
recorded.
|
(h)
|
The
Company is involved in a number of lawsuits and claims that have
arisen
throughout the normal course of business. The Company and its legal
advisors do not expect the final outcome of these matters to have
any
significant adverse effects on the Company’s financial position and
results of operations.
|
(i)
|
In
conformity with current tax legislation, federal, state and municipal
taxes are open to review by the tax authorities for a period of five
years, prior to the last income tax return
filed.
|
(j)
|
In
accordance with the Mexican Income Tax Law, companies that do business
with related parties are subject to specific requirements in respect
to
agreed upon prices, since such prices must be comparable to those
that
would be charged in similar transactions between unrelated parties.
Should
the authorities review and reject the Company’s intercompany pricing, the
authorities may demand payment of the omitted taxes plus restatement
and
surcharges, as well as fines for an amount up to 100% of the restated
omitted taxes.
|
(k)
|
Republic
environmental liabilities
|
At
December 31, 2005, the Company recorded under the caption of Other Long-term
Liabilities, a reserve of Ps. 44.3 million to cover probable environmental
liabilities and compliance activities. The non-current portions of the
environmental reserve are included in the caption “Other Accounts Payable and
Accrued Expenses”, in the attached consolidated balance sheets. Republic has no
knowledge of any additional environmental remediation liabilities or contingent
liabilities related to environmental issues in regards to the facilities;
consequently, it would not be appropriate to establish an additional reserve
at
this time.
As
is the
case for most steel producers in the United States, Republic may incur in
material expenses related to future environmental issues, including those which
arise from environmental compliance activities and the remediation of past
administrative waste practices in Republic’s facilities.
(17)
Subsequent
Events
(a)
|
At
a Board of Directors’ meeting held on February 13, 2006, the minority
stockholders exercised their preemptive rights to subscribe and pay
for
the increase in variable capital stock declared on April 29, 2005
(see
note 12 (a) section ii), contributing Ps. 36,345 (Ps. 14.59 actual
amount
share value) and a premium for subscribing and paying shares of Ps.
86,170
historical (Ps. 34.81 premium per share) by subscribing and paying
2,475,303 shares and canceling 252,367 shares that were neither subscribed
nor paid in.
|
(b)
|
On
May 30, 2006, the Company effected a 3 for 1 stock split. After the
split
the ADS now represent 3 shares of series B common stock. Before that
stock
split was completed, each ADS represented one share of series B common
stock. The ADSs are evidenced by American depositary receipts (“ADRs”)
issued by the Bank of New York (“Depositary”), as depositary under a
Deposit Agreement, dated as of July 8, 1993, as amended, among Simec,
the
Depositary and the holders from time to time of
ADRs.
|
(c)
|
In
accordance with the agreement to purchase shares of Republic mentioned
in
note 1a, the Company acquired the right to a portion of the reimbursement
of an unresolved loss claim at the time of purchase by the insurer.
A
Settlement Agreement and Release was reached on April 24, 2006. As
of
April 28, 2006, approximately Ps. 400 million, net of payment to
Predecessor’s shareholders and professional fees, has been received by the
Company. Approximately Ps. 13.1 million, net of payment to Predecessor’s
shareholders and professional fees is estimated to be received by
May 15,
2006 (see note 1a).
|
(18)
New
Accounting Pronouncements
The
following accounting bulletins issued by the Mexican Institute of Public
Accountants are obligatory as of January 1, 2005.
(a)
Business acquisitions
The
most
significant issues in Bulletin B-7 are as follows: (a) use of the purchase
method as the only alternative for valuing businesses acquired and investments
in associated companies, thus eliminating the supplementary application of
former International Accounting Standard 22,
Business
Combinations,
(b)
change in the accounting for goodwill, eliminating amortization and requiring
that goodwill be evaluated for impairment, and also requiring that negative
goodwill not fully amortized at the date of adoption of Bulletin B-7 be carried
to the results of operations, as a change in accounting principle; (c)
establishment of specific rules to account for the acquisition of minority
interest and for transfers of assets or exchange of shares among entities under
common control, and (d) accounting for intangible assets acquired in a business
combination, under Bulletin C-8,
Intangible
Assets
.
The
Company opted for the early adoption of this Bulletin (see note
14).
(b)
Labor obligations
The
new
accounting Bulletin D-3,
Labor
Obligations
,
was
issued in January 2004. The revised Bulletin replaces and nullifies the previous
Bulletin D-3, issued in January 1993 and revised in 1998. The observance of
Bulletin D-3 is compulsory for fiscal years beginning on or after January 1
2004, except for termination payments, which will be in force as of January
1,
2005.
The
revised Bulletin incorporates the matter of remunerations for other
post-retirement benefits, thus nullifying the provisions of Circular 50,
Interest
rates to be used in the valuation of labor obligations and supplementary
application of accounting principles related to labor
obligations
.
Bulletin D-3 also eliminates the subject related to unexpected payments and,
instead includes the subject related to termination payments, defining such
payments as those granted to workers at the end of their employment before
reaching the age of retirement, which include two types: (i) due to corporate
restructuring, for which the guidelines of Mexican accounting Bulletin C-9,
Liabilities,
Provisions, Contingent Assets and Liabilities and Commitments,
must be
followed, and (ii) due to reasons other than restructuring, for which the
Company must apply the valuation and disclosure rules required for retirement
pensions and seniority premiums payments, thus allowing at the time that this
Bulletin is adopted, to immediately recognize the transition asset or liability
in results of operations, or its amortization, in conformity with the remaining
working life of the workers.
The
Company considers that the adoption of this Bulletin did not have a material
effect on its financial position or on its results of operations.
(19)
Differences
between Mexican and United States accounting principles:
The
Company’s consolidated financial statements are prepared in accordance with
Mexican GAAP, which differ in certain significant respects from U.S.
GAAP.
The
Mexican GAAP consolidated financial statements include the effects of inflation
as provided for under Bulletin B-10, as amended. The following reconciliation
to
U.S. GAAP does not include the reversal of the adjustments for the effects
of
inflation, since the application of Bulletin B-10 represents 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.
Other
significant differences between Mexican GAAP and U.S. GAAP and the effects
on
consolidated net income and consolidated stockholders’ equity are presented
below, in thousands of constant Mexican pesos as of December 31, 2005, with
an
explanation of the adjustments.
Reconciliation
of net income:
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Net
income as reported under Mexican GAAP
|
|
|
Ps.
|
|
|
1,297,389
|
|
|
1,462,671
|
|
|
320,523
|
|
Inventory
indirect costs
|
|
|
|
|
|
(3,958
|
)
|
|
5,858
|
|
|
(4,528
|
)
|
Depreciation
on restatement of machinery and
equipment
|
|
|
|
|
|
(24,820
|
)
|
|
(24,073
|
)
|
|
(25,871
|
)
|
Others
|
|
|
|
|
|
-
|
|
|
(635
|
)
|
|
5,502
|
|
Deferred
income taxes
|
|
|
|
|
|
(5,696
|
)
|
|
(45,699
|
)
|
|
(54,176
|
)
|
Deferred
employee profit sharing
|
|
|
|
|
|
46
|
|
|
15
|
|
|
220
|
|
Pre-operating
expenses, net
|
|
|
|
|
|
26,023
|
|
|
28,650
|
|
|
28,648
|
|
Amortization
of gain from monetary position
and exchange loss capitalized under Mexican
GAAP
|
|
|
|
|
|
7,239
|
|
|
7,238
|
|
|
7,238
|
|
Minority
interest
|
|
|
|
|
|
(17,491
|
)
|
|
-
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
approximate U.S. GAAP
adjustments
|
|
|
|
|
|
(18,657
|
)
|
|
(28,646
|
)
|
|
(42,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
net income under U.S. GAAP
|
|
|
Ps.
|
|
|
1,278,732
|
|
|
1,434,025
|
|
|
277,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average outstanding basic
|
|
|
|
|
|
137,929,599
|
|
|
132,972,749
|
|
|
119,052,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share (pesos)
|
|
|
Ps.
|
|
|
9.27
|
|
|
10.78
|
|
|
2.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average outstanding basic after split
(1)
|
|
|
|
|
|
413,788,797
|
|
|
398,918,247
|
|
|
357,158,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share (pesos) after split
(1)
|
|
|
Ps.
|
|
|
3.09
|
|
|
3.59
|
|
|
0.78
|
|
(1)
As
explained in Note 17 (b) the Company affected a 3 for 1 stock split on May
30,
2006. This information presents the retrospective effect on the Earnings per
Share after the split in accordance with US GAAP.
In
2005
the Company recorded Ps. 38,467 under other expenses which were reclassified
under operating expenses for U.S. GAAP purposes.
There
are
several entries recorded in other expenses in 2004 under Mexican GAAP, which
amounts to approximately Ps. 34,581 that according to U.S. GAAP should be
presented as operating expenses.
Reconciliation
of stockholders’ equity:
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity reported under
Mexican
GAAP
|
|
|
Ps.
|
|
|
9,628,681
|
|
|
6,847,292
|
|
|
5,061,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest included in stockholders’
equity
under Mexican GAAP
|
|
|
|
|
|
(1,807,684
|
)
|
|
(322
|
)
|
|
(274
|
)
|
Inventory
indirect costs
|
|
|
|
|
|
12,455
|
|
|
16,413
|
|
|
10,555
|
|
Restatement
of machinery and equipment
|
|
|
|
|
|
589,152
|
|
|
278,904
|
|
|
386,998
|
|
Accrued
vacation costs
|
|
|
|
|
|
(615
|
)
|
|
(635
|
)
|
|
-
|
|
Deferred
income taxes
|
|
|
|
|
|
(57,792
|
)
|
|
37,094
|
|
|
56,244
|
|
Deferred
employee profit sharing
|
|
|
|
|
|
748
|
|
|
701
|
|
|
686
|
|
Pre-operating
expenses
|
|
|
|
|
|
(212,400
|
)
|
|
(238,423
|
)
|
|
(274,188
|
)
|
Gain
from monetary position and exchange
loss
capitalized, net
|
|
|
|
|
|
(182,611
|
)
|
|
(189,851
|
)
|
|
(197,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
approximate U.S. GAAP
adjustments
|
|
|
|
|
|
(1,658,747
|
)
|
|
(96,119
|
)
|
|
(17,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
approximate stockholders’ equity under
U.S.
GAAP
|
|
|
Ps.
|
|
|
7,969,934
|
|
|
6,751,173
|
|
|
5,044,223
|
|
A
summary
of changes in stockholders’ equity, after the approximate U.S. GAAP adjustments
described above, is as follows:
|
|
|
|
Capital
Stock
and
Paid-in
Capital
|
|
|
|
Retained
Earnings
|
|
|
|
Fair
Value of
Derivative
Financial
Instruments
|
|
|
|
Cumulative
Restatement
Effect
|
|
|
|
Total
Stockholders’
Equity
|
|
Balances
as of
December
31,
2003
|
|
|
Ps.
|
|
|
3,525,252
|
|
|
Ps.
|
|
|
506,517
|
|
|
Ps.
|
|
|
10,483
|
|
|
Ps.
|
|
|
1,001,971
|
|
|
Ps.
|
|
|
5,044,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in capital
stock
|
|
|
|
|
|
24,693
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
24,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
comprehensive
income
|
|
|
|
|
|
-
|
|
|
|
|
|
1,434,025
|
|
|
|
|
|
2,364
|
|
|
|
|
|
245,868
|
|
|
|
|
|
1,682,257
|
|
Balances
as of
December
31,
2004
|
|
|
|
|
|
3,549,945
|
|
|
|
|
|
1,940,542
|
|
|
|
|
|
12,847
|
|
|
|
|
|
1,247,839
|
|
|
|
|
|
6,751,173
|
|
Increase
in capital
stock
|
|
|
|
|
|
230,963
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
(230,309
|
)
|
|
|
|
|
654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
comprehensive
income
|
|
|
|
|
|
-
|
|
|
|
|
|
1,278,732
|
|
|
|
|
|
27,507
|
|
|
|
|
|
(88,132
|
)
|
|
|
|
|
1,218,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
as of
December
31,
2005
|
|
|
Ps.
|
|
|
3,780,908
|
|
|
Ps.
|
|
|
3,219,274
|
|
|
Ps.
|
|
|
40,354
|
|
|
Ps.
|
|
|
929,398
|
|
|
Ps.
|
|
|
7,969,934
|
|
The
cumulative difference between the amounts included under Capital Stock and
Paid-in Capital for U.S. GAAP and Capital Stock and Paid-in Capital for Mexican
GAAP arise from the following items:
Issuance
of capital stock:
During
1993 and 1994 the Company recorded Ps. 92,601 and Ps. 29,675, respectively,
corresponding to expenses related to the issuance of shares in a simultaneous
public offering in the United States and Mexico as a reduction of the proceeds
from the issuance of capital stock. In 1993 and 1994, these expenses were
deducted for tax purposes resulting in a tax benefit of Ps. 32,180 and Ps.
10,091. These tax benefits were included in the statement of operations for
Mexican GAAP purposes. For U.S. GAAP purposes these items were shown as a
reduction of cost of issuance of the shares, thereby increasing the net proceeds
from the offering.
Maritime
operations and amortization of negative goodwill:
In
1993,
Grupo Simec disposed of its maritime operations by spinning-off the two entities
acquired in 1992 to Grupo Sidek (former parent company of Grupo Simec) and
transferring its remaining maritime subsidiary to Grupo Sidek for its
approximate book value.
The
operations sold had a tax loss carryforward of approximately Ps. 197,117 which
were related to operations prior to the date the entities were acquired by
the
Company. During 1994, Ps. 4,608 of these tax loss carryforwards were realized
(resulting in a tax benefit of Ps. 1,587).
For
U.S.
GAAP purposes, the retained tax benefit of Ps. 1,587 realized in 1994, had
been
reflected as an increase to the corresponding paid-in capital rather than in
net
earnings as done for Mexican GAAP purposes.
Gain
on extinguishment:
On
February 7, 2001, the Company’s Board of Directors approved the issuance of
492,852,025 shares of Series “B” variable capital stock in exchange for the
extinguishment of debt amounting to USD 110,257,012. Under Mexican GAAP, the
increase in stockholders’ equity resulting from the conversion or extinguishment
of debt is equal to the carrying amount of the extinguished debt. The Company
assigned a value of USD 110,257,012 to the Series “B” capital stock and,
therefore, no difference existed between the equity interest granted and the
carrying amount of the debt extinguished. Under U.S. GAAP, the difference
between the fair value of equity interest granted and the carrying amount of
extinguished debt is recognized as a gain or loss on extinguishment of debt
in
the statement of operations. For U.S. GAAP purposes, the fair value of the
Series “B” capital stock was determined by reference to the quoted market price
on March 29, 2001, the date the transaction was effected, and the difference
between the fair value of the Series “B” capital stock and the carrying amount
of the extinguished debt was recognized as a gain in the statement of
operations. The related restated effect as of December 31, 2005 is Ps.
584,503.
Reconciliation
of Net Income and Stockholders’ Equity:
The
Company’s consolidated financial statements are prepared in accordance with
Mexican GAAP, which differ in certain significant respects from U.S. GAAP.
The
explanations
of the related adjustments included in the Reconciliation of net income and
the
Reconciliation
of stockholders’ equity are explained below:
Restatement
of prior year financial statements:
In
accordance with Mexican GAAP, prior year financial information of a foreign
subsidiary must be restated using the inflation rate of the country in which
the
foreign subsidiary is located, and then translated to pesos at the exchange
rate
as of year end. This procedure results in the presentation of prior year amounts
representing the purchasing power of the respective currencies as of the end
of
the latest year presented.
Under
U.S. GAAP, prior year financial information of a foreign subsidiary must be
restated in constant units of the reporting currency, the Mexican peso, which
requires the restatement of such prior year amounts using the inflation rate
of
Mexico.
This
difference will be applicable starting next year (2006), when the prior year
integrated subsidiaries needs to be restated.
Inventory:
As
permitted by Mexican GAAP, some inventories are valued under the direct cost
system, which includes material, direct labor and other direct costs. For
purposes of complying with U.S. GAAP, inventories have been valued under the
full absorption cost method, which includes the indirect costs.
Under
Mexican GAAP, inventories include prepaid advances to suppliers. For U.S. GAAP
purposes, the prepaid advances to suppliers are considered as prepaid
expenses.
Restatement
of property, machinery and equipment:
As
explained in note 2(g), in accordance with Mexican GAAP, imported machinery
and
equipment has been restated during 2005, 2004 and 2003 by applying devaluation
and inflation factors of the country of origin.
Under
U.S. GAAP, during 2005, 2004 and 2003 the restatement of all machinery and
equipment, both domestic and imported, has been done in constant units of the
reporting currency, the Mexican peso, using the inflation rate of
Mexico.
Accordingly,
a reconciling item for the difference in methodologies of restating imported
machinery and equipment is included in the reconciliation of net income and
stockholders’ equity.
Deferred
income taxes and employee profit sharing:
As
explained in Note 2(k) under Mexican GAAP, the Company accounts for deferred
income tax following the guidelines of Mexican Bulletin D-4. The main
differences between SFAS No. 109 and Bulletin D-4, as they relate to the
Company, which are included as reconciling items between Mexican and U.S. GAAP
are:
·
|
the
income tax effect of gain from monetary position and exchange loss
capitalized that is recorded as an adjustment to stockholders’ equity for
Mexican GAAP purposes,
|
·
|
the
income tax effect of capitalized pre-operating expenses which for
U.S.
GAAP purposes, are expensed when
incurred,
|
·
|
the
effect on income tax of the difference between the indexed cost and
the
restatement through use of specific indexation factors of fixed assets
which is recorded as an adjustment to stockholders’ equity for Mexican
GAAP, and,
|
·
|
the
income tax effect of the inventory cost which for Mexican GAAP some
inventories are valued under the direct cost system and for U.S.
GAAP
inventories have been valued under the full absorption cost
method.
|
The
cumulative deferred income tax for U.S. GAAP purposes is included under Retained
Earnings. Under Mexican GAAP such effect is included under the cumulative
deferred income taxes caption.
In
addition, the Company is required to pay employee profit sharing in accordance
with Mexican labor law. Deferred employee profit sharing under U.S. GAAP has
been determined following the guidelines of SFAS N0. 109. Under Mexican GAAP,
the deferred portion of employee profit sharing is determined on temporary
non-recurring differences with a known turnaround time.
To
determine operating income under U.S. GAAP, deferred employee profit sharing
and
employee profit sharing expense (under Mexican GAAP included under the caption
provisions in the income statement) are considered as operating
expenses.
The
effects of temporary differences giving rise to significant portions of the
deferred tax assets and liabilities at December 31, 2005 and 2004, under U.S.
GAAP are presented below:
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
|
|
IT
|
|
|
|
ESPS
|
|
|
|
IT
|
|
ESPS
|
|
Deferred
tax assets:
Allowance
for doubtful receivables
|
|
|
Ps.
|
|
|
60,864
|
|
|
Ps.
|
|
|
-
|
|
|
Ps.
|
|
|
7,222
|
|
|
-
|
|
Accrued
expenses
|
|
|
|
|
|
117,975
|
|
|
|
|
|
748
|
|
|
|
|
|
27,980
|
|
|
-
|
|
Advances
from customers
|
|
|
|
|
|
11,186
|
|
|
|
|
|
-
|
|
|
|
|
|
21,079
|
|
|
-
|
|
Net
operating loss carryforwards
|
|
|
|
|
|
316,796
|
|
|
|
|
|
-
|
|
|
|
|
|
18,594
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoverable
AT
|
|
|
|
|
|
103,931
|
|
|
|
|
|
-
|
|
|
|
|
|
188,017
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
gross deferred tax
assets
|
|
|
|
|
|
610,752
|
|
|
|
|
|
748
|
|
|
|
|
|
262,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
valuation allowance
|
|
|
|
|
|
68,329
|
|
|
|
|
|
-
|
|
|
|
|
|
200,655
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
|
|
|
|
542,423
|
|
|
|
|
|
748
|
|
|
|
|
|
62,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories,
net from the balance as
of
December 31, 1986 not yet
deducted
|
|
|
|
|
|
402,654
|
|
|
|
|
|
-
|
|
|
|
|
|
330,831
|
|
|
-
|
|
Derivative
financial
instruments
|
|
|
|
|
|
11,145
|
|
|
|
|
|
-
|
|
|
|
|
|
5,708
|
|
|
-
|
|
Property,
plant and
equipment
|
|
|
|
|
|
1,360,718
|
|
|
|
|
|
-
|
|
|
|
|
|
1,055,063
|
|
|
-
|
|
Others
|
|
|
|
|
|
35,319
|
|
|
|
|
|
-
|
|
|
|
|
|
124,094
|
|
|
-
|
|
Additional
liabilities resulting from
excess
of book value of
stockholders’
equity
over its tax value
|
|
|
|
|
|
303,461
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deferred liabilities
|
|
|
|
|
|
2,113,297
|
|
|
|
|
|
-
|
|
|
|
|
|
1,515,696
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax liability
(asset)
|
|
|
Ps.
|
|
|
1,570,874
|
|
|
Ps.
|
|
|
(748
|
)
|
|
Ps.
|
|
|
1,453,459
|
|
|
-
|
|
The
total
net deferred tax liability under U.S. GAAP includes a current portion as of
December 31, 2005 of Ps. 93,102 with the remainder being classified as long
term.
The
deferred income taxes of Ps. 1,360,718 and Ps. 1,055,063 result from differences
between the financial reporting and tax bases of property, plant and equipment
at December 31, 2005 and 2004, respectively. Beginning in 1997 the restatement
of property, plant and equipment and the effects thereof on the statement of
operations are determined by using factors derived from the NCPI or, in the
case
of imported machinery and equipment, by applying devaluation and inflation
factors of the country of origin. Until 1996, for financial reporting purposes,
property, plant and equipment were stated at net replacement cost based upon
annual independent appraisals and depreciation was provided by using the
straight-line method over the estimated remaining useful lives of
the
assets. For income tax reporting purposes, property, plant, and equipment and
depreciation are computed by a method which considers the NCPI.
Domestic
operations accounted for 99% percent of the Company’s pre-tax income and IT
expense in 2004 and 2003 and 96.5% in 2005.
In
accordance with APB Opinion No. 23 it is the policy of the Company to accrue
appropriate Mexican and foreign income taxes on earnings of subsidiary companies
which are intended to be remitted to the parent company in the near future.
Unremitted earnings of subsidiaries which have been, or are intended to be,
permanently reinvested, exclusive of those amounts which if remitted in the
near
future would result in little or no such tax by operation of relevant statutes
currently in effect, aggregated Ps. 11.8 million at December 31,
2005.
Pre-operating
expenses:
For
Mexican GAAP purposes, the Company capitalized pre-operating expenses related
to
the production facilities at Mexicali, as well as costs and expenses incurred
in
the manufacturing and design of new products. For U.S. GAAP purposes, these
items are expensed when incurred.
Financial
expense capitalized:
Under
Mexican GAAP, financial expense capitalized during the period required to bring
property, plant and equipment into the condition required for their intended
use, includes interest, exchange losses and gains from monetary position. Under
U.S. GAAP when financing is in Mexican pesos, the monetary gain is included
in
this computation; when financing is denominated in U.S. dollars, only the
interest is capitalized and exchange losses and monetary position are not
included.
Minority
interest:
Under
Mexican GAAP, the minority interest in consolidated subsidiaries is presented
as
a separate component within stockholders’ equity on the consolidated balance
sheet. For U.S. GAAP purposes, minority interest is not included in
stockholders’ equity.
Disclosure
about Fair Value of Financial Instruments:
In
accordance with SFAS No. 107, “Disclosures about Fair Value of Financial
Instruments,” under U.S. GAAP it is necessary to provide information about the
fair value of certain financial instruments for which it is practicable to
estimate that value. The carrying amounts of cash and short-term investments,
accounts receivable and accounts payable and accrued liabilities approximate
fair values due to the short term maturity of these instruments.
The
fair
value of the borrowings with General Electric Capital are based on short term
interest rates available to the Company, and the estimated fair values of these
financial instruments approximate their recorded carrying amounts.
The
fair
values of the long term debt obligations are estimated based upon quoted market
prices for the same or similar issues or on the current rates offered for debt
of the same remaining maturities. As of December 31, 2005 both the carrying
value and the fair value of total debt were of Ps. 362,315.
Pension
and other retirement benefits:
The
Company records seniority premiums based on actuarial computations as described
in note 2(j).
For
purposes of determining seniority premium costs under U.S. GAAP, the Company
utilized SFAS No. 87. Adjustments to U.S. GAAP for seniority premiums were
not
individually or in the aggregate significant for any period.
SFAS
No.
106, “Employers’ Accounting for Post-retirement Benefits Other than Pensions”,
requires accrual of post-retirement benefits other than pensions during the
employment period. The Company does not provide its employees any
post-retirement benefit subject to the provisions of SFAS No. 106.
SFAS
No.
112, “Employers’ Accounting for Post-employment Benefits”, requires employers to
accrue for post-employment benefits that are provided to former or inactive
employees after employment during the employment period. For the purpose of
determining Termination Benefits Obligations for U.S. GAAP, the Company utilized
SFAS No. 112. Adjustments to U.S. GAAP benefit were not individually or in
the
aggregate significant for any period.
For
the
year ended December 31, 1998, the Company adopted SFAS No. 132, “Employers’
Disclosures about Pensions and Other Post-retirement Benefits”, which requires
certain additional disclosures, without any changes in the measurement or
recognition of pensions and other post-retirement benefit obligations. The
additional disclosures are as follows:
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Change
in projected benefit obligation-
|
|
|
|
|
|
|
|
|
|
|
Projected
benefit obligation at beginning of
year
|
|
|
Ps.
|
|
|
8,093
|
|
|
6,405
|
|
Service
cost
|
|
|
|
|
|
2,859
|
|
|
593
|
|
Financial
cost
|
|
|
|
|
|
1,057
|
|
|
321
|
|
Actuarial
gain, net
|
|
|
|
|
|
11,037
|
|
|
1,644
|
|
Benefits
paid
|
|
|
|
|
|
(1,295
|
)
|
|
(870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Projected
benefit obligation at end of year
|
|
|
Ps.
|
|
|
21,751
|
|
|
8,093
|
|
Variable
capital common stock:
Under
operation of Mexican law, stockholders holding shares representing variable
capital common stock may require the Company, with a notice of at least three
months prior to December 31 of each year, to redeem those shares at a price
equal to the lesser of either (i) 95% of the market price, based on an average
of trading prices during the 30 trading days preceding the end of the fiscal
year in which the redemption is to become effective or (ii) the book value
of
the Company’s shares approved at the meeting of shareholders for the latest
fiscal year prior to the redemption date. Although the variable capital common
stock is potentially redeemable by the terms described above, such shares have
been classified as a component of stockholders’ equity in the consolidated
balance sheet under both Mexican GAAP and U.S. GAAP.
Company’s
management believes the variable capital common stock represents permanent
capital because the timing and pricing mechanism through which a shareholder
would exercise the option to redeem are such that a shareholder, from an
economic standpoint, would not exercise this option. At the time a shareholder
is required to give notice of redemption, the shareholder will not be able
to
know at what price the shares would be redeemed and would not expect the present
value of the future redemption payment to equal or exceed the amount which
would
be received by the shareholder in a public sale. Such redemption also requires
approval at a shareholders’ meeting.
Statement
of cash flows:
Under
Mexican GAAP, the Company presents a consolidated statement of changes in
financial position in accordance with Bulletin B-12, which identifies the
generation and application of resources as representing differences between
beginning and ending financial statement balances in constant Mexican pesos.
It
also requires that monetary and unrealized exchange gains and losses be treated
as cash items in the determination of resources generated by
operations.
SFAS
No.
95, “Statement of Cash Flows”, requires presentation of a statement of cash
flows.
The
following presents a reconciliation of the resources generated by (used in)
operating, investing and financing activities under Mexican GAAP to the
resources generated by (used in) such activities under U.S. GAAP:
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income as reported under U.S. GAAP
|
|
|
Ps.
|
|
|
1,278,732
|
|
|
Ps.
|
|
|
1,434,025
|
|
|
Ps.
|
|
|
277,555
|
|
Add
charges (deduct credits) to operations
not
requiring (providing) funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
317,229
|
|
|
|
|
|
210,600
|
|
|
|
|
|
192,065
|
|
Unrealized
exchange loss (gain)
|
|
|
|
|
|
8,900
|
|
|
|
|
|
-
|
|
|
|
|
|
6,048
|
|
Deferred
income taxes
|
|
|
|
|
|
117,414
|
|
|
|
|
|
366,164
|
|
|
|
|
|
193,953
|
|
Deferred
employee profit sharing
|
|
|
|
|
|
(46
|
)
|
|
|
|
|
(15
|
)
|
|
|
|
|
(220
|
)
|
Minority
interest
|
|
|
|
|
|
17,491
|
|
|
|
|
|
-
|
|
|
|
|
|
1
|
|
Write-down
of idle machinery
|
|
|
|
|
|
-
|
|
|
|
|
|
14,722
|
|
|
|
|
|
45,369
|
|
Deferred
credit amortization
|
|
|
|
|
|
(67,175
|
)
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Seniority
premiums and termination
benefits
|
|
|
|
|
|
5,212
|
|
|
|
|
|
1,338
|
|
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
provided by operations
|
|
|
|
|
|
1,677,757
|
|
|
|
|
|
2,026,834
|
|
|
|
|
|
715,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(investing in) financing from operating
accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
receivables, net
|
|
|
|
|
|
(161,623
|
)
|
|
|
|
|
(553,171
|
)
|
|
|
|
|
(39,588
|
)
|
Other
accounts receivable and prepaid
expenses
|
|
|
|
|
|
(234,220
|
)
|
|
|
|
|
(172,982
|
)
|
|
|
|
|
58,874
|
|
Inventories
|
|
|
|
|
|
589,674
|
|
|
|
|
|
(874,622
|
)
|
|
|
|
|
(21,600
|
)
|
Accounts
payable and accrued expenses
|
|
|
|
|
|
(151,356
|
)
|
|
|
|
|
324,845
|
|
|
|
|
|
(21,624
|
)
|
Accounts
payable to related parties
|
|
|
|
|
|
3,044
|
|
|
|
|
|
(2,699
|
)
|
|
|
|
|
(184,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
provided (used in) by financing
activities
|
|
|
|
|
|
45,519
|
|
|
|
|
|
(1,278,629
|
)
|
|
|
|
|
(208,711
|
)
|
Approximate
net resources generated by
operations
under U.S. GAAP
|
|
|
Ps.
|
|
|
1,723,276
|
|
|
Ps.
|
|
|
748,205
|
|
|
Ps.
|
|
|
506,331
|
|
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
Financing
activities under Mexican GAAP
|
|
|
Ps.
|
|
|
(242,412
|
)
|
|
Ps.
|
|
|
404,107
|
|
|
Ps.
|
|
|
31,489
|
|
Decrease
in debt due to
restatement
to constant Mexican
pesos
|
|
|
|
|
|
5,246
|
|
|
|
|
|
1,213
|
|
|
|
|
|
4,319
|
|
Exchange
(loss) gain
|
|
|
|
|
|
(8,900
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(6,048
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
net resources generated by
(used
in) financing activities under U.S.
GAAP
|
|
|
Ps.
|
|
|
(246,066
|
)
|
|
Ps.
|
|
|
405,320
|
|
|
Ps.
|
|
|
29,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
resources used in investing activities
under
Mexican GAAP-
(1)
|
|
|
Ps.
|
|
|
(1,937,578
|
)
|
|
Ps.
|
|
|
(1,357,288
|
)
|
|
Ps.
|
|
|
(10,561
|
)
|
Restatement
of non-current inventories
|
|
|
|
|
|
(2,223
|
)
|
|
|
|
|
4,986
|
|
|
|
|
|
(5,045
|
)
|
Other
non-cash investing activities
|
|
|
|
|
|
-
|
|
|
|
|
|
71,507
|
|
|
|
|
|
10,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
net resources used in
investing
activities under U.S. GAAP
|
|
|
Ps.
|
|
|
(1,939,801
|
)
|
|
Ps.
|
|
|
(1,280,795
|
)
|
|
Ps.
|
|
|
(5,463
|
)
|
Net
resources used in operating activities include cash payments for interest and
income taxes as follows:
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest paid
|
|
|
Ps.
|
|
|
30,669
|
|
|
Ps.
|
|
|
2,183
|
|
|
Ps.
|
|
|
18,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
|
Ps.
|
|
|
300,461
|
|
|
Ps.
|
|
|
27,805
|
|
|
Ps.
|
|
|
38,668
|
|
(1)
|
This
caption includes the acquisition of PAV Republic (Note 1a). The Company
acquired the outstanding shares of PAV Republic Inc. through its
subsidiary SimRep Corporation, a U.S. company. Such transaction,
paid by
the Company and ICH, was valued at USD 245 million where USD 229
million
corresponds to the purchase price and USD 16 million to the direct
cost of
the business combination. The Company contributed USD 123 million
to
acquire 50.2% of the representative shares of SimRep Corporation
and ICH,
the holding company, acquired the remaining 49.8%. SimRep then acquired
all the shares from PAV Republic
Inc.
|
Subsequent
event: Foreign exchange rates:
The
exchange rates at June 28, 2006 were as follows (amounts in pesos):
|
June
28, 2006
|
|
|
Dollar
|
Ps.
11.4090
|
Euro
|
14.3239
|
Pound
sterling
|
20.7506
|
Recent
accounting pronouncements in the US:
In
November 2004, Statement of Financial Accounting Standards No. 151, “Inventory
Costs-an amendment of ARB No. 43, Chapter 4” (SFAS No. 151), was issued. This
Statement amends the guidance in Accounting Research Bulletin no. 43, Chapter
4,
“Inventory Pricing,” to clarify the accounting of abnormal amounts of idle
facility expense, freight, handling cost, and wasted material (spoilage). SFAS
No. 151 is effective for inventory costs incurred during fiscal years
beginning
after June 15, 2005. The effect on the adoption of this bulletin was not
significant because prior to the release of SFAS 151, since Mexican GAAP already
contains similar guidance.
In
March
2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations (an interpretation of SFAS Statement No. 143) (FIN 47).
This Interpretation clarifies that the term conditional asset retirement
obligation, as used in SFAS Statement No. 143, Accounting for Asset Retirement
Obligations, refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional
on a
future event that may or may not be within the control of the entity. The
obligation to perform the asset retirement activity is unconditional even though
uncertainty may exist about the timing and (or) method of settlement.
Accordingly, an entity is required to recognize the fair value of a liability
for the conditional asset retirement obligation when incurred and the
uncertainty about the timing and (or) method of settlement should be factored
into the measurement of the liability when sufficient information exists. This
Interpretation is effective for fiscal years ending after December 15, 2005.
The
Company has evaluated the application of SFAS Interpretation No. 47 and
determined it has no effect on the Company’s consolidated financial
statements.
In
May
2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections” which
addresses the accounting and reporting for changes in accounting principles.
SFAS 154 replaces APB 20 and FIN 20. The adoption of SFAS 154 had no effect
on
the Company’s financial position or on its results of operations.
In
September 2005 the FASB issued SFAS 155, “Accounting for Certain Hybrid
Financial Instruments—an amendment of SFAS Statements No. 133 and 140”, that
amends SFAS Statements No. 133, Accounting for Derivative Instruments and
Hedging Activities, and No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This Statement resolves
issues addressed in Statement 133 Implementation Issue No. D1, “Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets.” The
adoption of SFAS 155 had no material effect on the Company’s financial position
or on its results of operations.
Other
pronouncements issued by the FASB or other authoritative accounting standards
groups with future effective dates are either not applicable or not significant
to the Company’s financial statements.
GRUPO
SIMEC, S.A.B. DE C.V. AND SUBSIDIARIES
(Thousands
of constant Mexican pesos as of June 30, 2006)
Assets
|
|
Audited
December
31
2005
|
|
Unaudited
June
30
2006
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
Ps.
|
|
|
209,416
|
|
|
948,625
|
|
Accounts
receivable, net (Note 4)
|
|
|
|
|
|
2,620,377
|
|
|
2,851,746
|
|
Inventories,
net (Note 5)
|
|
|
|
|
|
3,660,501
|
|
|
4,321,500
|
|
Derivative
financial instruments (Note 6)
|
|
|
|
|
|
57,477
|
|
|
20,831
|
|
Prepaid
expenses and other current assets
|
|
|
|
|
|
230,226
|
|
|
246,147
|
|
Total
current assets
|
|
|
|
|
|
6,777,997
|
|
|
8,388,849
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net (Note 7)
|
|
|
|
|
|
7,114,996
|
|
|
7,443,991
|
|
Other
assets and deferred charges, net
|
|
|
|
|
|
695,564
|
|
|
606,398
|
|
Total
Assets
|
|
|
Ps.
|
|
|
14,588,557
|
|
|
16,439,238
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt (Note 9)
|
|
|
Ps.
|
|
|
21,034
|
|
|
3,442
|
|
Accounts
payable and accrued liabilities (Note 8)
|
|
|
|
|
|
2,694,255
|
|
|
2,531,335
|
|
Total
current liabilities
|
|
|
|
|
|
2,715,289
|
|
|
2,534,777
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (Note 9)
|
|
|
|
|
|
391,550
|
|
|
-
|
|
Other
long-term liabilities (Note 10)
|
|
|
|
|
|
339,958
|
|
|
117,294
|
|
Deferred
taxes (Note 11)
|
|
|
|
|
|
1,513,079
|
|
|
1,885,490
|
|
Total
long-term liabilities
|
|
|
|
|
|
2,244,587
|
|
|
2,002,784
|
|
Total
liabilities
|
|
|
|
|
|
4,959,876
|
|
|
4,537,561
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity (Note 12):
|
|
|
|
|
|
|
|
|
|
|
Capital
stock
|
|
|
|
|
|
3,476,499
|
|
|
3,512,577
|
|
Additional
paid-in-capital
|
|
|
|
|
|
845,018
|
|
|
931,110
|
|
Retained
earnings
|
|
|
|
|
|
4,519,677
|
|
|
5,865,548
|
|
Cumulative
deferred income tax
|
|
|
|
|
|
(905,828
|
)
|
|
(905,828
|
)
|
|
|
|
|
|
|
7,935,366
|
|
|
9,403,407
|
|
Other
accumulated comprehensive (loss) income items
|
|
|
|
|
|
(114,369
|
)
|
|
239,699
|
|
Total
majority stockholders' equity
|
|
|
|
|
|
7,820,997
|
|
|
9,643,106
|
|
Minority
interest
|
|
|
|
|
|
1,807,684
|
|
|
2,258,571
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
|
|
|
9,628,681
|
|
|
11,901,677
|
|
Total
liabilities and stockholders' equity
|
|
|
Ps.
|
|
|
14,588,557
|
|
|
16,439,238
|
|
See
accompanying notes to condensed consolidated financial
statements
GRUPO
SIMEC, S.A.B. DE C.V. AND SUBSIDIARIES
(Thousands
of constant Mexican pesos as of June 30, 2006, except earnings per share
figures)
|
|
Unaudited
Six
months ended June 30,
|
|
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
Ps.
|
|
|
3,573,182
|
|
|
11,912,466
|
|
Direct
cost of sales
|
|
|
|
|
|
2,326,363
|
|
|
9,681,900
|
|
|
|
|
|
|
|
|
|
|
|
|
Marginal
profit
|
|
|
|
|
|
1,246,819
|
|
|
2,230,566
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect
overhead, selling, general and administrative expenses
|
|
|
|
|
|
374,630
|
|
|
664,093
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
|
|
872,189
|
|
|
1,566,473
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
financing cost:
|
|
|
|
|
|
|
|
|
|
|
Interest
(expense) income, net
|
|
|
|
|
|
8,454
|
|
|
14,842
|
|
Foreign
exchange (loss) gain, net
|
|
|
|
|
|
(35,926
|
)
|
|
18,598
|
|
Monetary
position (loss) gain
|
|
|
|
|
|
(7,601
|
)
|
|
11,574
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
financial result, net
|
|
|
|
|
|
(35,073
|
)
|
|
45,014
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses), net:
|
|
|
|
|
|
|
|
|
|
|
Other,
net
|
|
|
|
|
|
7,633
|
|
|
32,748
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses), net
|
|
|
|
|
|
7,633
|
|
|
32,748
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax and employee profit sharing
|
|
|
|
|
|
844,749
|
|
|
1,644,235
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax:
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
73,324
|
|
|
168,228
|
|
Deferred
|
|
|
|
|
|
24,160
|
|
|
(63,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
income tax
|
|
|
|
|
|
97,484
|
|
|
104,939
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
consolidated income
|
|
|
Ps.
|
|
|
747,265
|
|
|
1,539,296
|
|
Allocation
on net income
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
|
|
|
-
|
|
|
193,425
|
|
Majority
interest
|
|
|
Ps.
|
|
|
747,265
|
|
|
1,345,871
|
|
|
|
|
Ps.
|
|
|
747,265
|
|
|
1,539,296
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
405,209,451
|
|
|
419,450,541
|
|
Earnings
per share
|
|
|
Ps.
|
|
|
1.84
|
|
|
3.21
|
|
See
accompanying notes to condensed consolidated financial statements
GRUPO
SIMEC, S.A.B. DE C.V. AND SUBSIDIARIES
(Thousands
of constant Mexican pesos as of June 30, 2006)
|
|
|
|
Capital
stock
|
|
Additional
paid-in
capital
|
|
Retained
earnings
|
|
Cumulative
deferred
income
tax
|
|
Equity
adjustments
for
non-monetary
assets
|
|
Translation
effect
in
foreign
subsidiaries
|
|
Fair
value
of
derivative
financial
instruments
|
|
Total
majority
interest
|
|
Minority
interest
|
|
Comprehensive
Income
|
|
Total
stockholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2005
|
|
|
Ps.
|
|
|
3,476,499
|
|
|
845,018
|
|
|
4,519,677
|
|
|
(905,828
|
)
|
|
(169,658
|
)
|
|
14,935
|
|
|
40,354
|
|
|
7,820,997
|
|
|
1,807,684
|
|
|
-
|
|
|
9,628,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases
in capital stock (Note 12)
|
|
|
|
|
|
36,078
|
|
|
86,092
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
122,170
|
|
|
-
|
|
|
-
|
|
|
122,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in Pav Republic by ICH
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
135,110
|
|
|
-
|
|
|
135,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income of the period
|
|
|
|
|
|
-
|
|
|
-
|
|
|
1,345,871
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,345,871
|
|
|
193,425
|
|
|
1,539,296
|
|
|
1,539,296
|
|
Effect
of translation of foreign entities
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
123,335
|
|
|
-
|
|
|
123,335
|
|
|
122,352
|
|
|
245,687
|
|
|
245,687
|
|
Equity
adjustment for non-monetary assets
net
of deferred taxes
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
256,743
|
|
|
-
|
|
|
-
|
|
|
256,743
|
|
|
-
|
|
|
256,743
|
|
|
256,743
|
|
Effect
of market value of swaps net of
deferred taxes
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(26,010
|
)
|
|
(26,010
|
)
|
|
-
|
|
|
(26,010
|
)
|
|
(26,010
|
)
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at June 30, 2006 (unaudited)
|
|
|
Ps.
|
|
|
3,512,577
|
|
|
931,110
|
|
|
5,865,548
|
|
|
(905,828
|
)
|
|
87,085
|
|
|
138,270
|
|
|
14,344
|
|
|
9,643,106
|
|
|
2,258,571
|
|
|
2,015,716
|
|
|
11,901,677
|
|
See
accompanying notes to condensed consolidated financial statements
GRUPO
SIMEC, S.A.B. DE C.V. AND SUBSIDIARIES
(Thousands
of constant Mexican pesos as of June 30, 2006, except earnings per share
figures)
|
|
|
|
Six
months ended June 30,
|
|
|
|
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Net
consolidated income
|
|
|
Ps.
|
|
|
747,265
|
|
|
1,539,296
|
|
Add
(deduct) items not requiring the use of resources
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
130,940
|
|
|
201,972
|
|
Deferred
income tax
|
|
|
|
|
|
24,160
|
|
|
(63,289
|
)
|
Seniority
premiums and termination benefits
|
|
|
|
|
|
686
|
|
|
933
|
|
|
|
|
|
|
|
|
|
|
|
|
Resources
provided by operations
|
|
|
|
|
|
903,051
|
|
|
1,678,912
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivables, net
|
|
|
|
|
|
(220,488
|
)
|
|
(231,369
|
)
|
Prepaid
expenses and other current asset
|
|
|
|
|
|
2,866
|
|
|
(15,921
|
)
|
Inventories,
net
|
|
|
|
|
|
141,152
|
|
|
(615,074
|
)
|
Derivative
financial instrument
|
|
|
|
|
|
48
|
|
|
10,636
|
|
Accounts
payable, other accounts payable and accrued expenses
|
|
|
|
|
|
(171,284
|
)
|
|
(32,328
|
)
|
Other
long-term liabilities
|
|
|
|
|
|
8,351
|
|
|
(16,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Resources
provided operating activities
|
|
|
|
|
|
663,696
|
|
|
778,029
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
Increases
in capital stock
|
|
|
|
|
|
925
|
|
|
122,170
|
|
Short-term
loans repaid
|
|
|
|
|
|
(159,400
|
)
|
|
(17,592
|
)
|
Financial
debt repayment
|
|
|
|
|
|
-
|
|
|
(391,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Resources
used in financing activities
|
|
|
|
|
|
(158,475
|
)
|
|
(286,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
Disposition
(acquisition) of property, plant and equipment
|
|
|
|
|
|
45,827
|
|
|
(285,261
|
)
|
Decrease
(increase) in other noncurrent assets
|
|
|
|
|
|
87,346
|
|
|
(9,027
|
)
|
Increase
of investment in Pav Republic by ICH
|
|
|
|
|
|
-
|
|
|
135,110
|
|
Proceeds
from insurance claim, net
|
|
|
|
|
|
-
|
|
|
407,330
|
|
|
|
|
|
|
|
|
|
|
|
|
Resources
provided by (used in) investing activities
|
|
|
|
|
|
133,173
|
|
|
248,152
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
|
|
|
638,394
|
|
|
739,209
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
At
beginning of year
|
|
|
|
|
|
526,709
|
|
|
209,416
|
|
|
|
|
|
|
|
|
|
|
|
|
At
end of year
|
|
|
Ps.
|
|
|
1,165,103
|
|
|
948,625
|
|
See
accompanying notes to condensed consolidated financial statements
GRUPO
SIMEC, S.A.B. DE C.V. AND SUBSIDIARIES
(Amounts
in thousands of constant Mexican Pesos as of June 30, 2006, unless otherwise
indicated)
(1)
|
Significant
Accounting Policies
|
a)
Basis
of Presentation
Except
as
described in the following paragraph, the accompanying unaudited condensed
consolidated financial statements are presented on the same basis of accounting
as described in the audited financial statements of Grupo Simec, S.A.B. de
C.V.
and subsidiaries (the Company) as of December 31, 2005 (the “audited financial
statements”), and have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they
do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the
six-month period ended June 30, 2006 are not necessarily indicative of the
results that may be expected for the year 2006.
The
unaudited condensed balance sheet as of December 31, 2005 has been derived
from
the audited financial statements at that date, but does not include all of
the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
consolidated financial statements at December 31, 2005.
b)
Basis
of Consolidation
The
unaudited condensed consolidated financial statements include all the accounts
of Grupo Simec, S.A.B. de C.V. and its subsidiaries. All of the companies
operate in the manufacture and sale of iron and steel products primarily for
the
construction and automotive industries in the North American market (Canada,
United States and Mexico) or provide services to companies operating in such
sectors. All significant intercompany balances and transactions have been
eliminated in the consolidated financial statements.
c)
Revenue
recognition
Revenues
from the sale of products are generally recognized at the time products are
shipped and the related risks and benefits of the merchandise are transferred
to
the customer. In certain cases the company signs supply agreements with its
customers which provide the client to the right to return the merchandise if
certain conditions set in those contracts are not met. Revenues on these type
of
agreements are recognized once all the conditions set in the contracts are
met
and when the customers accept the merchandise delivered to them.. The Company
provides for freight expenses, returns and sales discounts at the time the
related revenue is recognized. These provisions are deducted from net sales
in
the income statement.
d)
Recognition
of the effects of inflation on financial information
The
unaudited condensed consolidated financial statement were prepared in accordance
with Bulletin B-10 (“Accounting Recognition of the Effects of Inflation on
Financial Information”) as described in
the
audited financial statements; consequently, all financial statements presented
herewith were restated to constant pesos as of June 30, 2006. The June 30,
2006
restatement factors applied to the financial statements at December 31, 2005,
and June 30, 2005 were 1.0065, and 1.0318, which represent the rate of inflation
from December 31, 2005 and June 30, 2005 up to June 30, 2006, respectively,
based on the Mexican National Consumer Price Index (NCPI) published by Banco
de
México (the Central Bank).
e)
Basis
of translation of financial statements of foreign
subsidiaries
The
financial statements of foreign subsidiaries and affiliates, located in the
United States of America, are translated into Mexican pesos in conformity with
Mexican accounting Bulletin B-15 (Foreign Currency Transactions and Translation
of Financial Statements of Foreign Operations), issued by the Mexican Institute
of Public Accountants (MIPA), as follows:
The
subsidiary SimRep was considered as a foreign entity for translation purposes;
therefore, the financial statements as reported by the subsidiary abroad were
adjusted to conform with Mexican GAAP, which includes the recognition of the
effects of inflation as required by Mexican accounting Bulletin B-10, applying
inflation adjustment factors derived from the U.S. Consumer Price Index (CPI)
published by the U.S. Labor Department. The financial information already
restated to include inflationary effects, is then translated to Mexican pesos
as
follows:
i.
By
applying the prevailing exchange rate at the consolidated balance sheet date
for
monetary and non-monetary assets and liabilities.
ii.
By
applying the prevailing exchange rate for stockholders’ equity accounts, at the
time capital contributions were made and earnings were generated.
iii.
By
applying the prevailing exchange rate at the consolidated balance sheet date
for
revenues and expenses during the reporting period.
iv.
The
related effect of translation is recorded in stockholders’ equity under the
caption, “Translation effect of foreign subsidiaries”.
The
subsidiaries Pacific Steel and Undershaft Investment, were considered an
“integral part of the operations” of the Company; and the financial statements
of such subsidiaries were translated into Mexican pesos as follows:
1.
By
applying the prevailing exchange rate at the consolidated balance sheet date
for
monetary items.
2.
By
applying the prevailing exchange rate at the time the non-monetary assets and
capital were generated, and the weighted average exchange rate of the period
for
income statement items.
3.
The
related effect of translation is recorded in the statement of operations as
part
of the caption, “Foreign exchange (loss)/gain, net”.
The
Company’s financial statements at December 31, 2005 and June 30, 2005, were
restated to constant Mexican pesos with purchasing power at June 30, 2006 based
on the
annual
rate of inflation in Mexico. The effects of inflation and variances in exchange
rates were not material.
f)
Deferred
credit
The
Company applied on a supplementary basis to Mexican GAAP, US EITF 98-11
“Accounting for Acquired Temporary Differences in Certain Purchase Transactions
that are not Accounted for as Business Combinations” to the OAL acquisition made
on July 20, 2005 (see Note 13). The deferred credit is obtained from the
difference between the amount paid and the deferred tax asset recognized
resulting from the purchase of future tax benefits from OAL.
The
deferred credit is being amortized to results of operations in the same
proportion to the realization of the tax benefits that gave rise to the deferred
credit . The deferred credit amortization in the six months period ended June
30, 2006 was Ps. 339,555.
(2)
|
Foreign
Currency Position
|
Foreign
currency denominated assets and liabilities at December 31, 2005 and June 30,
2006 were as follows:
|
|
Thousands
of U.S. dollars
|
|
Thousands
of euros
|
|
Thousands
of
pounds
sterling
|
|
Thousands
of
deutsche
marks
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
Current
assets
|
|
|
USD163,318
|
|
|
USD212,394
|
|
|
-
|
|
|
EUR
16
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
(180,511
|
)
|
|
(162,410
|
)
|
|
EUR(86
|
)
|
|
-
|
|
|
GBP(87
|
)
|
|
GBP(87
|
)
|
|
DEM(49
|
)
|
|
DEM(49
|
)
|
Long-term
liabilities
|
|
|
(36,095
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
liabilities
|
|
|
(216,606
|
)
|
|
(162,410
|
)
|
|
(86
|
)
|
|
-
|
|
|
(87
|
)
|
|
(87
|
)
|
|
(49
|
)
|
|
(49
|
)
|
Net
assets (liabilities)
|
|
|
(53,288
|
)
|
|
49,984
|
|
|
(86
|
)
|
|
16
|
|
|
(87
|
)
|
|
(87
|
)
|
|
(49
|
)
|
|
(49
|
)
|
The
exchange rates at December 31, 2005 and June 30, 2006 were as follows (amounts
in pesos):
|
December
31,
2005
|
June
30,
2006
|
|
|
|
Dollar
|
Ps.
10.7777
|
11.3973
|
Euro
|
12.5797
|
14.3800
|
Pound
sterling
|
18.3570
|
20.7951
|
Deutsche
mark
|
6.4319
|
7.3524
|
The
summary of transactions carried out in U.S. dollars (in thousands) for the
six-month period ended June 30, 2005 and 2006, excluding imports of machinery
and equipment, is as follows:
|
2005
|
2006
|
|
|
|
Sales
|
USD
39,355
|
767,174
|
Purchases
(raw materials)
|
(12,977)
|
(543,848)
|
Other
expenses (spare parts)
|
(3,353)
|
(3,460)
|
Interest
expense
|
(14)
|
(313)
|
The
exchange rate of the peso to foreign currencies used by the Company is based
on
the weighted average of free market rates available to settle its overall
foreign currency transactions.
(3)
Related
Party Transactions and Balances
Transactions
carried out with related parties, primarily with Industrias CH, during the
six-month period ended June 30, 2005 and 2006 were as follows:
|
2005
|
2006
|
|
|
|
Sales
(1)
|
Ps.
24,800
|
-
|
Purchases
|
428
|
1,353
|
Administrative
services expenses
(2)
|
Ps.
4,580
|
6,967
|
(1)
Primarily
this transaction relates to Intercompany sales of inventory with Industrias
CH
(2)
These
operations relate to Intercompany payroll services primarily with Administración
de empresas CH, S.A. de C.V.
Balances
due from/to, related companies at December 31, 2005 and June 30, 2006 are as
follows:
|
December
31,
2005
|
June
30,
2006
|
Accounts
receivable: (Note 4)
|
|
|
Industrias
CH
(1)
|
Ps.
-
|
5,315
|
Administración
de empresas CH, S.A. de C.V.
(2)
|
2,456
|
2,570
|
|
Ps.
2,456
|
7,885
|
Accounts
payable: (Note 8)
|
|
|
Industrias
CH
(1)
|
Ps.
460,228
|
155
|
(1)
Holding
Company
(2)
Affiliate
The
account payable to Industrias CH is for an indefinite term and is a current
account that bears no interest. The balance of this payable is derived from
funds that the company received to finance the acquisition of PAV Republic.
The
amount was paid during 2006.
(4)
Accounts
receivable
Accounts
receivable consist of the following:
|
|
December
31,
2005
|
|
June
30,
2006
|
Trade
|
Ps.
|
2,316,954
|
|
2,584,484
|
Related
parties (Note 3)
|
|
2,456
|
|
7,885
|
Recoverable
value added tax
|
|
115,703
|
|
99,844
|
Other
receivables
|
|
216,537
|
|
182,341
|
Total
|
|
2,651,650
|
|
2,874,554
|
Allowance
for doubtful accounts
|
|
(31,273)
|
|
(22,808)
|
Net
accounts receivable
|
Ps.
|
2,620,377
|
|
2,851,746
|
(5)
Inventories
Inventories
are comprised as follows:
|
December
31,
2005
|
June
30,
2006
|
|
|
|
Finished
goods
|
Ps.
2,915,705
|
3,555,257
|
Work
in process
|
8,946
|
11,795
|
Billets
|
124,064
|
213,574
|
Raw
materials and supplies
|
276,183
|
155,277
|
Materials,
spare parts and rollers
|
131,425
|
94,580
|
Advances
to suppliers and others
|
147,597
|
264,459
|
Goods
in transit
|
60,581
|
30,545
|
|
3,664,501
|
4,325,487
|
Less:
allowance for obsolescence
|
4,000
|
3,987
|
|
Ps.
3,660,501
|
4,321,500
|
(6)
Derivative
Financial Instruments
The
Company uses derivative financial instruments primarily to offset its exposure
to financial risks related to the price of natural gas. Derivative instruments
currently used by the Company consist of natural gas swap contracts. These
contracts are recognized on the balance sheet at fair value. The swaps are
considered as cash flow hedges since the cash flow exchanges under the swap
are
highly effective in mitigating exposure to natural gas price fluctuations.
The
fair value of the swaps are recorded as part of Comprehensive income in
stockholders’ equity.
At
December 31, 2005 and June 30, 2006, the swaps gave rise to the recognition
of
an asset of Ps. 57,477 and Ps. 20,831, and a deferred tax liability of Ps.
16,669 and Ps. 6,487, as well as a net comprehensive income item in
stockholders’ equity of Ps. 40,354 and Ps. 14,344, respectively. Amounts
recorded as comprehensive loss were Ps. 101 and Ps. 26,010 (net of deferred
taxes), for the six month period ended June 30, 2005 and 2006
respectively.
Based
on
its inventory turnover, the Company believes that the natural gas burned and
incorporated in its products during a given month is reflected in the cost
of
sales of the subsequent month.
(7)
Property,
Plant and Equipment
Property,
plant and equipment as of December 31, 2005 and June 30, 2006 are comprised
as
follows:
|
|
December
31,
2005
|
|
June
30,
2006
|
|
|
|
|
|
|
|
Buildings
|
|
|
Ps.
1,894,157
|
|
|
1,888,046
|
|
Machinery
and equipment
|
|
|
6,527,797
|
|
|
7,584,475
|
|
Transportation
equipment
|
|
|
48,598
|
|
|
45,797
|
|
Furniture,
fixtures and computer equipment
|
|
|
54,699
|
|
|
53,111
|
|
|
|
|
8,525,251
|
|
|
9,571,429
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
2,516,798
|
|
|
2,878,670
|
|
|
|
|
6,008,453
|
|
|
6,692,759
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
515,189
|
|
|
513,356
|
|
Construction
in progress
|
|
|
560,587
|
|
|
207,109
|
|
Idle
machinery and equipment
|
|
|
30,767
|
|
|
30,767
|
|
Ps.
7,114,996
|
|
|
|
|
|
7,443,991
|
|
Depreciation
expense for the six-month periods ended in June 30, 2005 and 2006 was
Ps.
130,940 and Ps. 192,905 respectively.
(8)
Other
accounts payable and accrued expenses
Other
accounts payable and accrued expenses as of December 31, 2005 and June 30,
2006
consist of the following:
|
|
December
31,
2005
|
|
June
30,
2006
|
|
Accounts
payable
|
|
|
Ps.
1,411,813
|
|
|
1,640,252
|
|
Accruals
|
|
|
267,610
|
|
|
301,864
|
|
Accumulated
expenses and taxes
|
|
|
378,921
|
|
|
474,824
|
|
Advanced
payments from clients
|
|
|
44,242
|
|
|
114,240
|
|
Related
parties (Note 3)
|
|
|
460,228
|
|
|
155
|
|
Deferred
credit - current portion (Note 1f)
|
|
|
131,441
|
|
|
-
|
|
Total
|
|
|
Ps.
2,694,255
|
|
|
2,531,335
|
|
(9)
Long-term
Debt
|
|
December
31, 2005
|
|
|
|
June
30, 2006
|
|
|
|
Currency
|
|
Items
|
|
Rate
|
|
Maturity
from
2005
to
|
|
Total
2005
|
|
Rate
|
|
Maturity
from
2006
to
|
|
Total
2006
|
|
Dollars
|
|
|
Debt
with Ohio
Department
of
Development
|
|
|
3
|
%
|
|
2008
|
|
|
Ps.
46,994
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Dollars
|
|
|
Revolving
loan with
General
Electric Capital
|
|
|
|
|
|
2009
|
|
|
362,315
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Dollars
|
|
|
Medium
Term Notes
|
|
|
8
7/8
|
%
|
|
2005
|
|
|
3,275
|
|
|
8
7/8
|
%
|
|
2006
|
|
|
3,442
|
|
Total
debt
|
|
|
|
|
|
|
|
|
|
|
|
412,584
|
|
|
|
|
|
|
|
|
3,442
|
|
Less:
short
term
debt
and
current
portion
of
long-term
debt
|
|
|
|
|
|
|
|
|
|
|
|
21,034
|
|
|
|
|
|
|
|
|
3,442
|
|
Long
term
debt
|
|
|
|
|
|
|
|
|
|
|
|
Ps.391,550
|
|
|
|
|
|
|
|
|
-
|
|
(10)
Other
long-term liabilities
Other
long-term liabilities as of December 31, 2005 and June 30, 2006 consist of
the
following:
|
|
December
31,
2005
|
|
June
30,
2006
|
|
Seniority
premiums and
termination
benefits
|
|
|
Ps.
19,777
|
|
|
16,684
|
|
Other
long term liabilities
|
|
|
112,067
|
|
|
100,610
|
|
Deferred
credit (Note 1f)
|
|
|
208,114
|
|
|
-
|
|
Total
|
|
|
Ps.
339,958
|
|
|
117,294
|
|
(11)
Income
Tax, Asset Tax and Employee Profit Sharing
Industrias
CH, holding company files a Consolidated Tax Return. Under Mexican Income Tax
Law (MITL) Industrias CH does not have to allocate any tax to its subsidiaries
since each of its subsidiaries has the obligation to calculate on a stand alone
basis its own taxes and only pay the minority part of such taxes directly to
the
Mexican Income Revenue Service (IRS). The majority tax for consolidated tax
purposes is paid through the holding company. The Company computes its tax
provision on a stand alone basis.
Under
current tax regulations, companies must pay the greater between income tax
and
asset tax. The computation of both taxes considers the effects of inflation,
although differently from accounting principles generally accepted in
Mexico.
Statutory
employee profit sharing is computed practically on the same basis as income
tax,
but excluding the effects of inflation.
The
Mexican Asset Tax Law establishes payment of a 1.8% tax on the value of restated
assets net of certain liabilities.
An
analysis of income tax charged to results of operations for the six-month period
ended June 30, 2005 and 2006 is as follows:
|
|
|
|
2005
|
|
2006
|
|
Current
Income Tax Mexican Subsidiaries
|
|
|
Ps.
|
|
|
72,868
|
|
|
44,133
|
|
Current
Income Tax Foreign Subsidiaries
|
|
|
|
|
|
456
|
|
|
124,095
|
|
|
|
|
|
|
|
73,324
|
|
|
168,228
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Income Tax Mexican Subsidiaries
|
|
|
|
|
|
24,160
|
|
|
143,487
|
|
Deferred
Income Tax Foreign Subsidiaries
|
|
|
|
|
|
-
|
|
|
130,586
|
|
Deferred
credit amortization (Note 1f)
|
|
|
|
|
|
-
|
|
|
(337,362
|
)
|
|
|
|
|
|
|
24,160
|
|
|
(63,289
|
)
|
Income
tax expense
|
|
|
Ps.
|
|
|
97,484
|
|
|
104,939
|
|
The
tax
effects of temporary differences that give rise to significant portions of
the
deferred tax assets and liabilities at June 30, 2006 and December 31, 2005
are
as follows:
|
|
|
|
December
31,
2005
|
|
June
30,
2006
|
|
Deferred
tax assets:
Allowance
for bad debts
|
|
|
Ps.
|
|
|
60,864
|
|
|
58,117
|
|
Liability
provisions
|
|
|
|
|
|
106,591
|
|
|
130,196
|
|
Advances
from customers
|
|
|
|
|
|
22,392
|
|
|
17,626
|
|
Tax
loss carryforward
|
|
|
|
|
|
316,796
|
|
|
7,141
|
|
Recoverable
asset tax
|
|
|
|
|
|
103,931
|
|
|
126,040
|
|
Total
gross deferred assets
|
|
|
|
|
|
610,574
|
|
|
339,120
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
valuation allowance
|
|
|
|
|
|
68,329
|
|
|
26,564
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
assets, net
|
|
|
|
|
|
542,245
|
|
|
312,556
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
|
|
|
399,042
|
|
|
411,362
|
|
Derivative
financial instruments
|
|
|
|
|
|
16,669
|
|
|
6,487
|
|
Property,
plant and equipment
|
|
|
|
|
|
1,246,885
|
|
|
1,394,503
|
|
Pre-operating
expenses
|
|
|
|
|
|
89,240
|
|
|
81,830
|
|
Others
|
|
|
|
|
|
27
|
|
|
403
|
|
Additional
liabilities resulting from excess of
book
value of stockholders’ equity over its tax
value
|
|
|
|
|
|
303,461
|
|
|
303,461
|
|
Total
deferred liabilities
|
|
|
|
|
|
2,055,324
|
|
|
2,198,046
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liability, net
|
|
|
Ps.
|
|
|
1,513,079
|
|
|
1,885,490
|
|
The
effective tax rate was 12% and 7% for the six month periods ended June 30,
2005
and 2006 respectively. For the six month period ended June 30, 2005 the
effective tax rate was lower than the 30% applicable tax rate in Mexico, mainly
because in 2005 the Company determined a tax benefit due of the non-accumulation
of taxes, in the coming years, on its
inventory
balance at December 31, 2004 due to a corporate restructure (spin-off of its
Subsidiary COSICA) of the Company. In addition there was a decrease in the
deferred assets valuation allowance based on an improvement on the recovery
of
these assets. For the six month period ended June 30, 2006 the effective tax
rate was lower than the 29% and 35% tax rates applicable in Mexico and the
United States respectively, mainly because in 2006 the Company amortized all
of
its deferred credit (see Note 1f) which is a non-taxable income.
The
current and deferred employee profit sharing for the six month periods ended
June 30, 2005 and 2006 were not significant.
(12)
Stockholders’
Equity
(a)
Structure
of capital stock
i)
On
May
30, 2006, the Company effected a 3 for 1 stock split. After the split the ADS
now represent 3 shares of series B common stock. Before that stock split was
completed, each ADS represented one share of series B common stock. The ADSs
are
evidenced by American depositary receipts (“ADRs”) issued by the Bank of New
York (“Depositary”), as depositary under a Deposit Agreement, dated as of July
8, 1993, as amended, among Simec, the Depositary and the holders from time
to
time of ADRs. All share and per share information has been adjusted to reflect
the three for one split.
ii)
At
a
regular stockholders’ meeting held on February 13, 2006, it was agreed to
increase the Company’s capital stock by Ps. 36,078 (Ps. 36,110) nominal amount)
by issuing 2,475,303 common “B” series shares and a stock premium of Ps. 86,092
(Ps.86,169 nominal amount) that were wholly paid.
Shares
outstanding as of December 31, 2005 and June 30, 2006 are as
follows:
|
2005
|
|
2006
|
Common
“B” series shares
|
137,929,599
|
|
421,214,706
|
Each
share has the right to one vote at stockholders’ meetings.
Minimum
fixed capital not subject to withdrawal is Ps. 441,786, nominal amount, which
may be increased or decreased by a resolution passed at a general extraordinary
shareholders’ meeting.
At
December 31, 2005 and June 30, 2006 the Other accumulated comprehensive (loss)
income is as follows:
|
|
December
31,
2005
|
|
June
30,
2006
|
|
Equity
adjustment for non-monetary assets
|
|
|
Ps.(235,636
|
)
|
|
120,951
|
|
Translation
effect in foreign subsidiaries
|
|
|
14,935
|
|
|
138,270
|
|
Fair
value of derivative financial instruments
|
|
|
57,477
|
|
|
20,831
|
|
Deferred
tax
|
|
|
48,855
|
|
|
(40,353
|
)
|
Total
|
|
|
Ps.(114,369
|
)
|
|
239,699
|
|
(13)
Acquisitions
|
(a)
|
On
July 22, 2005, the Company and Industrias CH acquired the outstanding
shares of PAV Republic Inc. (Republic) through their subsidiary SimRep
Corporation, a U.S. company. Such transaction was valued at USD 245
million where USD 229 million corresponds to the purchase price and
USD 16
million, to the direct cost of the business combination. The Company
contributed USD 123 million to acquire 50.2% of the representative
shares
of SimRep Corporation and Industrias CH, the holding company, acquired
the
remaining 49.8%. SimRep then acquired all the shares from Republic
through
a stock purchase agreement. Under the terms of the stock purchase
agreement, the Company acquired the right to a portion of the
reimbursement from an unresolved insurance claim. On April 24, 2006
a
Settlement Agreement and Release was reached and approximately Ps.
407
million, net of payment to Predecessor’s shareholders of Ps. 211 and
professional fees has been received by the Company. Due to the receipt,
the Company changed the final purchase accounting adjustment to reflect
the fair value of the assets acquired and liabilities assumed. Republic
has six production plants: five in the United States and one in Canada.
The Company and Industrias CH acquired Republic to increase their
presence
in the US market.
|
The
total
Republic acquisition price was allocated to the assets acquired and the
liabilities assumed based on their fair values as of July 22, 2005. The
following table summarizes the fair values of the assets acquired and the
liabilities assumed in connection with the acquisition. The fair values were
primarily determined based on independent appraisals and estimates made by
management. The acquisition price resulted in negative goodwill which was
allocated proportionally to all non-current assets. The consolidated financial
position at date of the acquisition, restated for inflation at June 30, 2006,
is
as follows:
|
|
|
|
As
originally
recorded
|
|
Subsequent
to
Insurance
Settlement
|
|
Current
assets
|
|
|
Ps.
|
|
|
4,405,135
|
|
|
4,812,907
|
|
Property,
plant and equipment
|
|
|
|
|
|
1,275,784
|
|
|
1,065,150
|
|
Intangibles
and deferred charges
|
|
|
|
|
|
369,505
|
|
|
310,169
|
|
Other
assets
|
|
|
|
|
|
61,022
|
|
|
59,116
|
|
Total
assets
|
|
|
|
|
|
6,111,446
|
|
|
6,247,342
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
1,703,562
|
|
|
1,839,458
|
|
Long-term
debt
|
|
|
|
|
|
695,050
|
|
|
695,050
|
|
Renewable
credit
|
|
|
|
|
|
748,547
|
|
|
748,547
|
|
Deferred
taxes
|
|
|
|
|
|
282,869
|
|
|
282,869
|
|
Other
long-term debt
|
|
|
|
|
|
72,296
|
|
|
72,296
|
|
|
|
|
|
|
|
3,502,324
|
|
|
3,638,220
|
|
Net
assets acquired
|
|
|
Ps.
|
|
|
2,609,122
|
|
|
2,609,122
|
|
As
a
result of the acquisition of Republic, an analysis of information regarding
Simec’s results of operations of 2005, including Republic’s 6 plants, over a
six-month period, as if the plants had been incorporated into the Company since
the beginning of the year (unaudited information) is as follows:
|
|
|
|
Unaudited
Six-month
Period ended June 30, 2005
|
|
Net
sales
|
|
|
Ps.
|
|
|
12,388,821
|
|
Marginal
profit
|
|
|
|
|
|
2,401,672
|
|
Net
income
|
|
|
Ps.
|
|
|
1,141,114
|
|
Earnings
per share (pesos)
|
|
|
|
|
|
2.33
|
|
|
(b)
|
On
July 20, 2005, the Company acquired all shares of Operadora de Apoyo
Logístico, S.A. de C.V. (OAL), a subsidiary of Grupo TMM, S.A. de C.V.,
for Ps. 133 million, to make it the operating company of the three
steel
plants in Mexico. This transaction resulted in a deferred credit
of Ps.
406,731.
|
The
consolidated financial position at date of the acquisition, restated at
June 30, 2006, is as follows:
Current
assets
|
|
|
Ps.
|
|
|
1,006
|
|
Deferred
tax asset
|
|
|
|
|
|
526,753
|
|
Net
assets acquired
|
|
|
Ps.
|
|
|
527,759
|
|
OAL
had
accumulated NOLs of Ps. 1,331,953 that could be offset against future taxable
income. However the recorded financial effect of this tax benefit is Ps.
530,177. Since OAL had no operations before the acquisition, no pro forma
results from operations are included here.
(14)
Segment
Information
The
Company segments its information by region, due to the operational and
organizational structure of its business. The Company’s operations are primarily
in Mexico and the United States. The Mexican segment of the Company includes
the
manufacturing plants of Mexicali, Guadalajara and Tlaxcala. The United States
segment includes the seven manufacturing plants of Republic acquired on July
22,
2005. Republic’s manufacturing plants are located in the United States (six
total in Ohio, Indiana and New York) and one in Canada (Ontario). The plant
in
Canada represents approximately 4% of total sales of the segment.
|
|
|
|
As
of June 30 and the six-month period then ended,
|
|
|
|
|
|
2005
|
|
2006
|
|
|
|
|
|
Mexico
|
|
United
States
|
|
Total
|
|
Mexico
|
|
United
States
|
|
Total
|
|
Assets
|
|
|
Ps.
|
|
|
9,246,739
|
|
|
-
|
|
|
9,246,739
|
|
|
9,113,116
|
|
|
7,326,122
|
|
|
16,439,238
|
|
Sales
|
|
|
Ps.
|
|
|
3,573,182
|
|
|
-
|
|
|
3,573,182
|
|
|
3,547,133
|
|
|
8,365,333
|
|
|
11,912,466
|
|
Income
before taxes
|
|
|
Ps.
|
|
|
844,749
|
|
|
-
|
|
|
844,749
|
|
|
1,012,060
|
|
|
632,175
|
|
|
1,644,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company’s net sales to foreign or regional customers are as
follows:
|
|
|
|
Six
months ended June 30,
|
|
|
|
|
|
2005
|
|
2006
|
|
|
|
|
|
Sales
|
|
Sales
|
|
México
|
|
|
Ps.
|
|
|
3,124,770
|
|
|
3,324,932
|
|
United
States
|
|
|
|
|
|
443,579
|
|
|
8,218,128
|
|
Canada
|
|
|
|
|
|
-
|
|
|
351,524
|
|
Latin
America
|
|
|
|
|
|
2,408
|
|
|
10,107
|
|
Others
|
|
|
|
|
|
2,425
|
|
|
7,775
|
|
|
|
|
Ps.
|
|
|
3,573,182
|
|
|
11,912,466
|
|
(15)
Commitments
and Contingent Liabilities
Commitments
|
(a)
|
As
discussed in note 6 to the financial statements, at the end of 2003,
the
Company engaged in derivative financial instruments with PEMEX Gas
y
Petroquímica Básica, for hedging purposes to cover natural gas price
fluctuations. The coverage will guarantee a portion of the Company’s
natural gas consumption from 2004 to 2006 at a fixed price of USD
4.462
per MMBtu. The Company also held in one of its subsidiaries in the
USA
some contracts for natural gas swaps, entered to offset the potential
natural gas price volatility. These swaps resulted in the marking
to
market of all the open contracts as of June 30, 2006 and recording
a
liability for USD 1.1 million.
|
|
(b)
|
Regarding
the US operations, US Steel is the primary supplier of iron ore and
coke.
On March 8, 2006 the Company and US Steel entered into an agreement
which
extends the supply agreements to provide iron ore and a portion of
the
Company’s coke requirements through September 30, 2006. A renewal is
currently under negotiation. The US operations purchase coke in the
domestic and foreign markets and are working to develop additional
sources
for both coke and iron ore.
|
|
(c)
|
On
October 11, 2004, the installation of a new five-position machine
which
produces strips and ingots and the installation of related equipment
were
approved in Republic's facilities located in Canton, Ohio. Republic
began
to prepare the installation of the new equipment in December 2004.
The
project was completed during June 2006 and the caster was put into
production. Project costs of $56.0 million were reclassified from
construction-in-progress to buildings and improvements and machinery
and
equipment upon completion. On June 30, 2006, it was decided to temporarily
idle the caster based on sufficient alternative melt capacity. The
caster
will restart when commodity prices and business conditions warrant.
|
|
(d)
|
The
Company has certain operating lease agreements for equipment, office
space
and computer equipment, and such agreements cannot be cancelled.
The rent
will expire on different dates through 2012. In 2005, the rent expense
related to such agreements aggregated Ps. 41.1 million. At December
31,
2005, the total minimum rental payments
|
|
|
in accordance with such agreements that cannot be
cancelled aggregate Ps. 41.1 million in 2006, Ps. 13 million in 2007,
Ps.
10.8 million in 2008, Ps. 8.7 million in 2009, Ps. 3.2 million in 2010
and
Ps. 4.3 million in subsequent years.
|
|
(e)
|
The
Company’s subsidiary Republic has an agreement with the USWA to manage
health insurance benefits for Republic workers of the USWA while
they
temporarily do not render their services, and to administer monthly
contribution payments to the Steelworkers' Pension Trust by local
union
officers while they work for the union. To fund this program, in
February
2004, the USWA granted an initial contribution of Ps. 27 million
in cash
to be used to provide health insurance benefits and Ps. 5.4 million
to
provide benefits for pensions for those who work in the steel industry.
At
June 30, 2006, the balance of this cash account aggregated Ps. 31.9
million. The Company has agreed to continue managing these programs
until
the fund is completely exhausted. Republic will provide the USWA
with
periodic reports on the fund's status. At June 30, 2005, the cash
account
balance is included in Other assets and the related liability is
included
in Other long-term liabilities in the attached consolidated balance
sheets.
|
Contingent
liabilities
|
(f)
|
California
Regional Water Control
Board
|
In
1987,
Pacific Steel, Inc. (Pacific Steel), a subsidiary of Simec based in National
City in San Diego County, California, received a notice from the California
Regional Water Control Board, San Diego Region (the “Regional Board”), which
prohibited Pacific Steel from draining into the street waters from spraying
borax (waste resulting from the process of the scrap yard). This and other
subsequent requirements obligated Pacific Steel to (i) stop operations in the
scrap yard, (ii) send an enclosure of the borax which was stored in its yards
and (iii) take samples of the soil where the borax was found. The result of
this
study was that the residual metal contents represented no significant threat
to
the quality of water.
|
(g)
|
Department
of Toxic Substances
Control
|
In
September 2002, the Department of Toxic Substances Control inspected Pacific
Steel’s facilities based on an alleged complaint from neighbors due to Pacific
Steel’s excavating to recover scrap metal on its property and on a neighbor’s
property which it rents from a third party. In this same month, the department
issued an enforcement order of imminent and substantial endangerment
determination, which alleges that certain soil piles, soil management and metal
recovery operations may cause an imminent and substantial danger to human health
and the environment. Consequently, the department sanctioned Pacific Steel
for
violating hazardous waste laws and the State of California Security Code and
imposed the obligation to make necessary changes to the location. In July 2004,
in an effort to continue with this order, the department filed a Complaint
for
Civil Penalties and Injunctive Relief in San Diego Superior Court. On July
26,
2004, the court issued a judgment, whereby Pacific Steel is obligated to pay
USD
235,000 (payable in four payments of USD 58,750 over the course of one year)
for
fines of USD 131,250, the department's costs of USD 45,000 and an environmental
project
of USD 58,750. At December 31, 2005, Pacific Steel has made all of the
payments.
In
August
2004, Pacific Steel and the Department entered into a corrective action consent
agreement. In September 2005, the Department approved the Corrective Measures
Plan presented by Pacific Steel, provided it obtains permits from the
corresponding local authorities, which are in process at date.
Due
to
the fact that the cleanliness levels have not yet been defined by the Department
and since the characterization of all the property has not yet been finished,
the allowance for the costs for the different remedy options are still subject
to considerable uncertainty.
The
Company estimated, based on experience in prior years and using the same
processes, a liability of between USD 0.8 and USD 1.7 million. Due to the above,
at June 30, 2006 the Company has a reserve for this contingency of approximately
USD 1.4 million.
|
(h)
|
The
Community Development
Commission
|
Additionally,
the Community Development Commission of National City, California (CDC) has
expressed its intention to develop the site and is preparing a purchase offer
for Pacific Steel’s land at market value, less the cost of remediation and less
certain investigation costs incurred. Pacific Steel has informed the CDC that
the land will not be voluntarily sold unless there is an alternate property
where it could relocate its business. The CDC, in accordance with the State
of
California law, has the power to expropriate in exchange for payment at market
value and, in the event that there is no other land available to relocate the
business, it would also have to pay Pacific Steel the land’s book value. The CDC
made an offer to purchase the land from Pacific Steel for USD 6.9 million,
based
on a business appraisal. The expropriation process was temporarily suspended
through an agreement entered into by both parties in April 2006. This agreement
allows Pacific Steel to explore the possibility of finishing the remediation
process of the land and to propose an attractive alternative to CDC which would
allow the Company to remain in the area.
Due
to
this situation and considering the imminent expropriation of part of the land
on
which Pacific Steel carries out certain operations, for the year ended December
31, 2002, Pacific Steel recorded its land at realizable value based on an
independent appraisal.
|
(i)
|
Nullity
suit with the Mexican Federal
Tax.
|
On
July
2, 2003, CSG filed a nullity suit with the Mexican
Federal
Tax and Administrative Court of Justice
against
an official communication issued by the Central International Fiscal Auditing
Office of the Tax Administration Service, whereby CSG is deemed to have unpaid
taxes of Ps. 89,970 on alleged omissions of income taxes it should have withheld
from third parties on interest payments abroad in 1998, 1999, 2000, and for
the
period from January 1, 2001 through June 30, 2001. CSG is currently waiting
for
the authorities to respond it the suit. According to Company management
and
its
legal advisors,
there
are
reasonable grounds on which to obtain a favorable resolution for
CSG
accordingly no reserve was recorded.
The
Company is involved in a number of lawsuits and claims that have arisen
throughout the normal course of business. The Company and its legal advisors
do
not expect the final outcome of these matters to have any significant adverse
effects on the Company’s financial position and results of
operations.
In
conformity with current tax legislation, federal, state and municipal taxes
are
open to review by the tax authorities for a period of five years, prior to
the
last income tax return filed.
In
accordance with the Mexican Income Tax Law, companies that do business with
related parties are subject to specific requirements in respect to agreed upon
prices, since such prices must be comparable to those that would be charged
in
similar transactions between unrelated parties. Should the authorities review
and reject the Company’s intercompany pricing, the authorities may demand
payment of the omitted taxes plus restatement and surcharges.
|
(m)
|
Republic
environmental liabilities
|
At
June
30, 2006, the Company recorded a reserve of Ps. 43.3 million to cover probable
environmental liabilities and compliance activities. The non-current portions
of
the environmental reserve are included in the caption “Other long-term
liabilities”, in the attached consolidated balance sheets. Republic has no
knowledge of any additional environmental remediation liabilities or contingent
liabilities related to environmental issues in regards to the facilities;
consequently, it would not be appropriate to establish an additional reserve
at
this time.
As
is the
case for most steel producers in the United States, Republic may incur in
material expenses related to future environmental issues, including those which
arise from environmental compliance activities and the remediation of past
administrative waste practices in Republic’s facilities.
(16)
Differences
between Mexican and United States accounting principles:
The
Company’s consolidated financial statements are prepared in accordance with
Mexican GAAP, which differ in certain significant respects from U.S.
GAAP.
The
Mexican GAAP consolidated financial statements include the effects of inflation
as provided for under Bulletin B-10, as amended. The following reconciliation
to
U.S. GAAP does not include the reversal of the adjustments for the effects
of
inflation, since the application of Bulletin B-10 represents 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.
Other
significant differences between Mexican GAAP and U.S. GAAP and the effects
on
consolidated net income and consolidated stockholders’ equity are presented
below, in thousands of constant Mexican pesos as of June 30, 2006, with an
explanation of the adjustments.
Reconciliation
of net income:
|
|
|
|
Six
months ended June 30,
|
|
|
|
|
|
2005
|
|
2006
|
|
Net
income as reported under Mexican GAAP
|
|
|
Ps.
|
|
|
747,265
|
|
|
1,539,296
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
indirect costs
|
|
|
|
|
|
(2,817
|
)
|
|
88,403
|
|
Depreciation
on restatement of machinery and
equipment
|
|
|
|
|
|
(11,951
|
)
|
|
(13,215
|
)
|
Deferred
income taxes
|
|
|
|
|
|
(4,802
|
)
|
|
(13,383
|
)
|
Deferred
employee profit sharing
|
|
|
|
|
|
47
|
|
|
(23
|
)
|
Pre-operating
expenses, net
|
|
|
|
|
|
14,326
|
|
|
14,326
|
|
Amortization
of gain from monetary position and
exchange
loss capitalized under Mexican GAAP
|
|
|
|
|
|
3,620
|
|
|
3,620
|
|
Minority
interest
|
|
|
|
|
|
-
|
|
|
(193,425
|
)
|
U.S.
GAAP adjustments on minority interest
|
|
|
|
|
|
-
|
|
|
(39,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
U.S. GAAP adjustments
|
|
|
|
|
|
(1,577
|
)
|
|
(153,191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income under U.S. GAAP
|
|
|
Ps.
|
|
|
745,688
|
|
|
1,386,105
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average outstanding basic after split
(1)
|
|
|
|
|
|
405,209,451
|
|
|
419,450,541
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share (pesos) after split
(1)
|
|
|
Ps.
|
|
|
1.84
|
|
|
3.30
|
|
|
(1)
|
As
explained in Note 12 (a) the Company affected a 3 for 1 stock split
on May
30, 2006. This information presents the retrospective effect on the
Earnings per Share after the split in accordance with US
GAAP.
|
Reconciliation
of stockholders’ equity:
|
|
|
|
June
30,
|
|
|
|
|
|
December
31,
2005
|
|
June
30,
2006
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity reported under
Mexican
GAAP
|
|
|
Ps.
|
|
|
9,628,681
|
|
|
11,901,677
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest included in stockholders’
equity
under Mexican GAAP
|
|
|
|
|
|
(1,807,684
|
)
|
|
(2,258,571
|
)
|
U.S.
GAAP adjustments on minority interest
|
|
|
|
|
|
-
|
|
|
(39,494
|
)
|
Inventory
indirect costs
|
|
|
|
|
|
12,454
|
|
|
100,857
|
|
Restatement
of machinery and equipment
|
|
|
|
|
|
589,151
|
|
|
258,403
|
|
Accrued
vacation costs
|
|
|
|
|
|
(611
|
)
|
|
(611
|
)
|
Deferred
income taxes
|
|
|
|
|
|
(57,795
|
)
|
|
27,160
|
|
Deferred
employee profit sharing
|
|
|
|
|
|
746
|
|
|
723
|
|
Pre-operating
expenses
|
|
|
|
|
|
(212,399
|
)
|
|
(198,073
|
)
|
Gain
from monetary position and exchange
loss
capitalized, net
|
|
|
|
|
|
(182,611
|
)
|
|
(178,991
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
U.S. GAAP adjustments
|
|
|
|
|
|
(1,658,749
|
)
|
|
(2,288,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity under U.S. GAAP
|
|
|
Ps.
|
|
|
7,969,932
|
|
|
9,613,080
|
|
A
summary
of changes in stockholders’ equity, after the approximate U.S. GAAP adjustments
described above, is as follows:
|
|
|
|
Capital
Stock
and
Paid-in
Capital
|
|
Retained
Earnings
|
|
Fair
Value of
Derivative
Financial
Instruments
|
|
Cumulative
Restatement
Effect
|
|
Total
Stockholders’
Equity
|
|
Balances
as of December
31,
2005
|
|
|
Ps.
|
|
|
3,780,909
|
|
|
3,219,274
|
|
|
40,354
|
|
|
929,395
|
|
|
7,969,932
|
|
Increase
in capital stock
|
|
|
|
|
|
122,170
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
122,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
comprehensive
income
|
|
|
|
|
|
-
|
|
|
1,386,105
|
|
|
(26,010
|
)
|
|
160,883
|
|
|
1,520,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
as of June 30,
2006
|
|
|
Ps.
|
|
|
3,903,079
|
|
|
4,605,379
|
|
|
14,344
|
|
|
1,090,278
|
|
|
9,613,080
|
|
The
cumulative difference between the amounts included under Capital Stock and
Paid-in Capital for U.S. GAAP and Capital Stock and Paid-in Capital for Mexican
GAAP arise from the following items:
Issuance
of capital stock:
During
1993 and 1994 the Company recorded Ps. 92,601 and Ps. 29,675, respectively,
corresponding to expenses related to the issuance of shares in a simultaneous
public offering in the United States and Mexico as a reduction of the proceeds
from the issuance of capital stock. In 1993 and 1994, these expenses were
deducted for tax purposes resulting in a tax benefit of Ps. 32,180 and Ps.
10,091. These tax benefits were included in the statement of operations for
Mexican
GAAP purposes. For U.S. GAAP purposes these items were shown as a reduction
of
cost of issuance of the shares, thereby increasing the net proceeds from the
offering.
Maritime
operations and amortization of negative goodwill:
In
1993,
Grupo Simec disposed of its maritime operations by spinning-off the two entities
acquired in 1992 to Grupo Sidek (former parent company of Grupo Simec) and
transferring its remaining maritime subsidiary to Grupo Sidek for its
approximate book value.
The
operations sold had a tax loss carryforward of approximately Ps. 197,117 which
were related to operations prior to the date the entities were acquired by
the
Company. During 1994, Ps. 4,608 of these tax loss carryforwards were realized
(resulting in a tax benefit of Ps. 1,587).
For
U.S.
GAAP purposes, the retained tax benefit of Ps. 1,587 realized in 1994, had
been
reflected as an increase to the corresponding paid-in capital rather than in
net
earnings as done for Mexican GAAP purposes.
Gain
on extinguishment:
On
February 7, 2001, the Company’s Board of Directors approved the issuance of
492,852,025 shares of Series “B” variable capital stock in exchange for the
extinguishment of debt amounting to USD 110,257,012. Under Mexican GAAP, the
increase in stockholders’ equity resulting from the conversion or extinguishment
of debt is equal to the carrying amount of the extinguished debt. The Company
assigned a value of USD 110,257,012 to the Series “B” capital stock and,
therefore, no difference existed between the equity interest granted and the
carrying amount of the debt extinguished. Under U.S. GAAP, the difference
between the fair value of equity interest granted and the carrying amount of
extinguished debt is recognized as a gain or loss on extinguishment of debt
in
the statement of operations. For U.S. GAAP purposes, the fair value of the
Series “B” capital stock was determined by reference to the quoted market price
on March 29, 2001, the date the transaction was effected, and the difference
between the fair value of the Series “B” capital stock and the carrying amount
of the extinguished debt was recognized as a gain in the statement of
operations. The related restated effect as of December 31, 2005 is Ps.
584,466.
Reconciliation
of Net Income and Stockholders’ Equity:
The
Company’s consolidated financial statements are prepared in accordance with
Mexican GAAP, which differ in certain significant respects from U.S. GAAP.
The
explanations of the related adjustments included in the Reconciliation of net
income and the
Reconciliation
of stockholders’ equity are explained below:
Inventory:
As
permitted by Mexican GAAP, some inventories are valued under the direct cost
system, which includes material, direct labor and other direct costs. For
purposes of complying with U.S. GAAP, inventories have been valued under the
full absorption cost method, which includes the indirect costs.
Under
Mexican GAAP, inventories include prepaid advances to suppliers. For U.S. GAAP
purposes, the prepaid advances to suppliers are considered as prepaid
expenses.
Restatement
of property, machinery and equipment -
As
explained in note 1(d), in accordance with Mexican GAAP, imported machinery
and
equipment has been restated during the six months periods June 30, 2005 and
June
30, 2006, by applying devaluation and inflation factors of the country of
origin.
Under
U.S. GAAP, during the six months periods June 30, 2005 and June 30, 2006 the
restatement of all machinery and equipment, both domestic and imported, has
been
done in constant units of the reporting currency, the Mexican peso, using the
inflation rate of Mexico.
Accordingly,
a reconciling item for the difference in methodologies of restating imported
machinery and equipment is included in the reconciliation of net income and
stockholders’ equity.
Deferred
income taxes and employee profit sharing:
Under
Mexican GAAP, the Company accounts for deferred income tax following the
guidelines of Mexican Bulletin D-4. The main differences between SFAS No. 109
and Bulletin D-4, as they relate to the Company, which are included as
reconciling items between Mexican and U.S. GAAP are:
·
|
the
income tax effect of gain from monetary position and exchange loss
capitalized that is recorded as an adjustment to stockholders’ equity for
Mexican GAAP purposes,
|
·
|
the
income tax effect of capitalized pre-operating expenses which for
U.S.
GAAP purposes, are expensed when
incurred,
|
·
|
the
effect on income tax of the difference between the indexed cost and
the
restatement through use of specific indexation factors of fixed assets
which is recorded as an adjustment to stockholders’ equity for Mexican
GAAP, and,
|
·
|
the
income tax effect of the inventory cost which for Mexican GAAP some
inventories are valued under the direct cost system and for U.S.
GAAP
inventories have been valued under the full absorption cost
method.
|
The
cumulative deferred income tax for U.S. GAAP purposes is included under Retained
Earnings. Under Mexican GAAP such effect is included under the cumulative
deferred income taxes caption.
In
addition, the Company is required to pay employee profit sharing in accordance
with Mexican labor law. Deferred employee profit sharing under U.S. GAAP has
been determined following the guidelines of SFAS N0. 109. Under Mexican GAAP,
the deferred portion of employee profit sharing is determined on temporary
non-recurring differences with a known turnaround time.
To
determine operating income under U.S. GAAP, deferred employee profit sharing
and
employee profit sharing expense (under Mexican GAAP included under the caption
provisions in the income statement) are considered as operating
expenses.
The
effects of temporary differences giving rise to significant portions of the
deferred tax assets and liabilities at June 30, 2005 and 2006, under U.S. GAAP
are presented below:
|
|
|
|
December
31,
2005
|
|
June
30,
2006
|
|
Deferred
tax assets:
Allowance
for doubtful receivables
|
|
|
Ps.
|
|
|
60,864
|
|
|
58,117
|
|
Accrued
expenses
|
|
|
|
|
|
117,975
|
|
|
130,373
|
|
Advances
from customers
|
|
|
|
|
|
11,186
|
|
|
17,626
|
|
Net
operating loss carryforwards
|
|
|
|
|
|
316,796
|
|
|
7,141
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Tax
|
|
|
|
|
|
103,931
|
|
|
126,040
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
gross deferred tax assets
|
|
|
|
|
|
610,752
|
|
|
339,297
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
valuation allowance
|
|
|
|
|
|
68,329
|
|
|
26,564
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
|
|
|
|
542,423
|
|
|
312,733
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
Inventories,
net from the balance as of
December
31, 1986 not yet deducted
|
|
|
|
|
|
402,654
|
|
|
417,603
|
|
Derivative
financial instruments
|
|
|
|
|
|
11,145
|
|
|
6,487
|
|
Property,
plant and equipment
|
|
|
|
|
|
1,360,718
|
|
|
1,443,554
|
|
Others
|
|
|
|
|
|
35,319
|
|
|
404
|
|
Additional
liabilities resulting from
excess
of book value of stockholders’
equity
over its tax value
|
|
|
|
|
|
303,461
|
|
|
303,461
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deferred liabilities
|
|
|
|
|
|
2,113,297
|
|
|
2,171,509
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax liability
|
|
|
Ps.
|
|
|
1,570,874
|
|
|
1,858,776
|
|
The
total
net deferred tax liability under U.S. GAAP includes a current portion as of
June
30, 2006 of Ps. 213,509 with the remainder being classified as long
term.
The
deferred income taxes on property plant and equipment, of Ps. 1,360,718 and
Ps.
1,443,554 result from differences between the financial reporting and tax bases
of property, plant and equipment at December 31, 2005 and 2006, respectively.
Beginning in 1997 the restatement of property, plant and equipment and the
effects thereof on the statement of operations are determined by using factors
derived from the NCPI or, in the case of imported machinery and equipment,
by
applying devaluation and inflation factors of the country of origin. Until
1996,
for financial reporting purposes, property, plant and equipment were stated
at
net replacement cost based upon annual independent appraisals and depreciation
was provided by using the straight-line method over the estimated remaining
useful lives of the assets. For income tax reporting purposes, property, plant,
and equipment and depreciation are computed by a method which considers the
NCPI.
Domestic
operations accounted for 99% percent of the Company’s pre-tax income and IT
expense in June 30, 2005 and 54% in June 30, 2006.
In
accordance with APB Opinion No. 23 it is the policy of the Company to accrue
appropriate Mexican and foreign income taxes on earnings of subsidiary companies
which are intended to
be
remitted to the parent company in the near future. Unremitted earnings of
subsidiaries which have been, or are intended to be, permanently reinvested,
exclusive of those amounts which if remitted in the near future would result
in
little or no such tax by operation of relevant statutes currently in effect,
aggregated Ps. 11.7 million and Ps. 176 million at December 30, 2006 and June
30, 2006 respectively.
Pre-operating
expenses:
For
Mexican GAAP purposes, the Company capitalized pre-operating expenses related
to
the production facilities at Mexicali, as well as costs and expenses incurred
in
the manufacturing and design of new products. For U.S. GAAP purposes, these
items are expensed when incurred.
Financial
expense capitalized:
Under
Mexican GAAP, financial expense capitalized during the period required to bring
property, plant and equipment into the condition required for their intended
use, includes interest, exchange losses and gains from monetary position. Under
U.S. GAAP when financing is in Mexican pesos, the monetary gain is included
in
this computation; when financing is denominated in U.S. dollars, only the
interest is capitalized and exchange losses and monetary position are not
included.
Minority
interest:
Under
Mexican GAAP, the minority interest in consolidated subsidiaries is presented
as
a separate component within stockholders’ equity on the consolidated balance
sheet. For U.S. GAAP purposes, minority interest is not included in
stockholders’ equity. In addition, minority interest is not deducted in the
income statement under Mexican GAAP; therefore, for U.S. GAAP purposes it has
been excluded in the income statement reconciliation.
U.S.
GAAP adjustments on minority interest
The
U.S.
GAAP inventory indirect cost adjustment is calculated on a consolidated basis.
Therefore, the minority interest effect is presented as a separate line item,
in
order to obtain net income and stockholders’ equity.
Disclosure
about Fair Value of Financial Instruments:
In
accordance with SFAS No. 107, “Disclosures about Fair Value of Financial
Instruments,” under U.S. GAAP it is necessary to provide information about the
fair value of certain financial instruments for which it is practicable to
estimate that value. The carrying amounts of cash and short-term investments,
accounts receivable and accounts payable and accrued liabilities approximate
fair values due to the short term maturity of these instruments.
Pension
and other retirement benefits:
The
Company records seniority premiums based on actuarial computations.
For
purposes of determining seniority premium costs under U.S. GAAP, the Company
utilized SFAS No. 87. Adjustments to U.S. GAAP for seniority premiums were
not
individually or in the aggregate significant for any period.
SFAS
No.
106, “Employers’ Accounting for Post-retirement Benefits Other than Pensions”,
requires accrual of post-retirement benefits other than pensions during the
employment period. The Company does not provide its employees any
post-retirement benefit subject to the provisions of SFAS No. 106.
SFAS
No.
112, “Employers’ Accounting for Post-employment Benefits”, requires employers to
accrue for post-employment benefits that are provided to former or inactive
employees after employment during the employment period. For the purpose of
determining Termination Benefits Obligations for U.S. GAAP, the Company utilized
SFAS No. 112. Adjustments to U.S. GAAP benefit were not individually or in
the
aggregate significant for any period.
Statement
of cash flows:
Under
Mexican GAAP, the Company presents a consolidated statement of changes in
financial position in accordance with Bulletin B-12, which identifies the
generation and application of resources as representing differences between
beginning and ending financial statement balances in constant Mexican pesos.
It
also requires that monetary and unrealized exchange gains and losses be treated
as cash items in the determination of resources generated by
operations.
SFAS
No.
95, “Statement of Cash Flows”, requires presentation of a statement of cash
flows.
The
following presents a statement of cash flows under U.S. GAAP:
|
|
|
|
Six
months ended June 30,
|
|
|
|
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net
Income under U.S. GAAP
|
|
|
Ps.
|
|
|
745,688
|
|
|
1,386,105
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
|
|
|
124,946
|
|
|
197,241
|
|
Deferred
income taxes
|
|
|
|
|
|
28,962
|
|
|
(49,883
|
)
|
Minority
Interest
|
|
|
|
|
|
-
|
|
|
193,426
|
|
U.S.
GAAP Adjustment on minority interest
|
|
|
|
|
|
-
|
|
|
39,494
|
|
Seniority
premiums and termination benefits
|
|
|
|
|
|
686
|
|
|
933
|
|
Trade
receivable, net
|
|
|
|
|
|
(228,339
|
)
|
|
(246,130
|
)
|
Prepaid
expenses
|
|
|
|
|
|
1,408
|
|
|
(6,071
|
)
|
Inventories
|
|
|
|
|
|
134,759
|
|
|
(727,118
|
)
|
Accounts
payable and accrued expenses
|
|
|
|
|
|
(151,051
|
)
|
|
(8,850
|
)
|
Other
long-term liabilities
|
|
|
|
|
|
(2,404
|
)
|
|
(16,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Funds
provided by operating activities
|
|
|
|
|
|
654,655
|
|
|
762,320
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to banks, net
|
|
|
|
|
|
(159,401
|
)
|
|
(17,592
|
)
|
Decrease
in financial debt
|
|
|
|
|
|
-
|
|
|
(391,550
|
)
|
Increase
in Common Stock and Paid-In Capital stock
|
|
|
|
|
|
926
|
|
|
122,170
|
|
Others
|
|
|
|
|
|
8,353
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
resources used in financing activities
|
|
|
|
|
|
(150,122
|
)
|
|
(286,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
Disposition
(Acquisition) of property, plant and equipment
|
|
|
|
|
|
45,668
|
|
|
(285,261
|
)
|
Others
|
|
|
|
|
|
86,911
|
|
|
(496
|
)
|
Increase
of investment in Pav Republic by ICH
|
|
|
|
|
|
-
|
|
|
135,110
|
|
Proceeds
from insurance claim in Pav Republic
|
|
|
|
|
|
-
|
|
|
618,748
|
|
Payment
of insurance proceeds to Predecesor Shareholders
|
|
|
|
|
|
|
|
|
(211,418
|
)
|
Funds
provided by investing activities
|
|
|
|
|
|
132,579
|
|
|
256,683
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects
of inflation accounting
|
|
|
|
|
|
1,248
|
|
|
7,178
|
|
Increase
in cash
|
|
|
|
|
|
638,360
|
|
|
739,209
|
|
Cash
beggining of the year
|
|
|
|
|
|
526,743
|
|
|
209,416
|
|
Cash
end of the year
|
|
|
Ps.
|
|
|
1,165,103
|
|
|
948,625
|
|
Recent
accounting pronouncements in the US:
In
November 2004, Statement of Financial Accounting Standards No. 151, “Inventory
Costs-an amendment of ARB No. 43, Chapter 4” (SFAS No. 151), was issued. This
Statement amends the guidance in Accounting Research Bulletin no. 43, Chapter
4,
“Inventory Pricing,” to clarify the accounting of abnormal amounts of idle
facility expense, freight, handling cost, and wasted material (spoilage). SFAS
No. 151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The effect on the adoption of this bulletin was not
significant
because
prior to the release of SFAS 151, since Mexican GAAP already contains similar
guidance.
In
March
2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations (an interpretation of SFAS Statement No. 143) (FIN 47).
This Interpretation clarifies that the term conditional asset retirement
obligation, as used in SFAS Statement No. 143, Accounting for Asset Retirement
Obligations, refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional
on a
future event that may or may not be within the control of the entity. The
obligation to perform the asset retirement activity is unconditional even though
uncertainty may exist about the timing and (or) method of settlement.
Accordingly, an entity is required to recognize the fair value of a liability
for the conditional asset retirement obligation when incurred and the
uncertainty about the timing and (or) method of settlement should be factored
into the measurement of the liability when sufficient information exists. This
Interpretation is effective for fiscal years ending after December 15, 2005.
The
Company has evaluated the application of SFAS Interpretation No. 47 and
determined it has no effect on the Company’s consolidated financial
statements.
In
May
2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections” which
addresses the accounting and reporting for changes in accounting principles.
SFAS 154 replaces APB 20 and FIN 20. The adoption of SFAS 154 had no effect
on
the Company’s financial position or on its results of operations.
In
September 2005 the FASB issued SFAS 155, “Accounting for Certain Hybrid
Financial Instruments—an amendment of SFAS Statements No. 133 and 140”, that
amends SFAS Statements No. 133, Accounting for Derivative Instruments and
Hedging Activities, and No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This Statement resolves
issues addressed in Statement 133 Implementation Issue No. D1, “Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets.” The
adoption of SFAS 155 had no material effect on the Company’s financial position
or on its results of operations.
In
July
13, 2006 the FASB released an interpretation, FIN 48, Accounting for Uncertainty
in Income Taxes - An Interpretation of FASB Statement 109. This Interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return.
This Interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. The Company has not assessed the impact of this standard on its
financial statements.
Other
pronouncements issued by the FASB or other authoritative accounting standards
groups with future effective dates are either not applicable or not material
to
the Company’s financial statements.
The
Board
of Directors
PAV
Republic, Inc.:
We
have
audited the accompanying consolidated balance sheet of PAV Republic and
subsidiaries as of December 31, 2004, and the related consolidated statements
of
operations, stockholders’ equity and comprehensive income, and cash flows for
the year ended December 31, 2004. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of PAV Republic and
subsidiaries as of December 31, 2004, and the results of their operations and
their cash flows for the year ended December 31, 2004, in conformity with U.S.
generally accepted accounting principles.
Cleveland,
Ohio
March
18,
2005
KPMG
LLP
PAV
Republic, Inc. and subsidiaries
(In
thousands of dollars, except per share information)
|
|
December
31, 2004
|
|
ASSETS
|
|
|
|
|
Current
assets:
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,748
|
|
Accounts
receivable, less allowance of $11,246
|
|
|
140,091
|
|
Inventories
(note 5)
|
|
|
243,351
|
|
Deferred
income taxes (note 11)
|
|
|
2,295
|
|
Prepaid
expenses and other current assets
|
|
|
17,114
|
|
Total
current assets
|
|
|
406,599
|
|
|
|
|
|
|
Property,
plant, and equipment:
|
|
|
|
|
Land
and improvements
|
|
|
683
|
|
Buildings
and improvements
|
|
|
1,669
|
|
Machinery
and equipment
|
|
|
13,947
|
|
Construction-in-progress
|
|
|
3,983
|
|
Total
property, plant, and equipment
|
|
|
20,282
|
|
Accumulated
depreciation
|
|
|
(918
|
)
|
Net
property, plant and equipment
|
|
|
19,364
|
|
|
|
|
|
|
Deferred
costs, net of accumulated amortization of $821 (note 6)
|
|
|
7,975
|
|
Deferred
income taxes (note 11)
|
|
|
1,545
|
|
Other
assets (note 9, 15)
|
|
|
6,143
|
|
|
|
|
|
|
Total
assets
|
|
$
|
441,626
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
668
|
|
Accounts
payable
|
|
|
50,378
|
|
Accrued
compensation and benefits
|
|
|
34,550
|
|
Accrued
interest
|
|
|
540
|
|
Accrued
income taxes (note 11)
|
|
|
21,198
|
|
Other
accrued liabilities
|
|
|
13,101
|
|
Total
current liabilities
|
|
|
120,435
|
|
Long-term
debt (note 8)
|
|
|
77,027
|
|
Revolving
credit facility (note 8)
|
|
|
142,219
|
|
Accrued
environmental liabilities (note 14)
|
|
|
3,647
|
|
Other
long-term liabilities (note 15)
|
|
|
3,644
|
|
Total
liabilities
|
|
|
346,972
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
Common
stock, $0.01 par value. Authorized 60,000 shares, issued, and outstanding
50,000
shares and authorized
|
|
|
1
|
|
Additional
paid in capital
|
|
|
55,923
|
|
Retained
earnings
|
|
|
38,568
|
|
Other
comprehensive income (note 18)
|
|
|
162
|
|
Total
stockholders’ equity
|
|
|
94,654
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
441,626
|
|
See
accompanying notes to consolidated financial statements.
PAV
Republic, Inc. and subsidiaries
(In
thousands of dollars, except per share amounts)
|
|
Year
ended
December
31,
2004
|
|
Net
sales
|
|
$
|
1,190,673
|
|
Cost
of goods sold
|
|
|
1,070,841
|
|
Gross
profit
|
|
|
119,832
|
|
Selling,
general, and administrative expense
|
|
|
53,350
|
|
Depreciation
and amortization expense
|
|
|
910
|
|
Other
operating income
|
|
|
(382
|
)
|
Operating
Income
|
|
|
65,954
|
|
Interest
expense
|
|
|
18,957
|
|
Interest
income
|
|
|
(251
|
)
|
Income
before income taxes
|
|
|
47,248
|
|
Provision
for income taxes (note 11)
|
|
|
18,084
|
|
Net
income before extraordinary gain
|
|
$
|
29,164
|
|
Extraordinary
gain, net of tax, due to purchase price accounting (notes 4,
9)
|
|
|
10,162
|
|
Net
Income
|
|
$
|
39,326
|
|
Basic
net income per share:
|
|
|
|
|
Income
before extraordinary gain
|
|
$
|
688.65
|
|
Extraordinary
gain
|
|
|
239.95
|
|
Basic
net income per share
|
|
$
|
928.60
|
|
Weighted
average shares outstanding
|
|
|
42,350
|
|
Diluted
net income per share:
|
|
|
|
|
Income
before extraordinary gain
|
|
$
|
683.13
|
|
Extraordinary
gain
|
|
|
238.03
|
|
Diluted
net income per share
|
|
$
|
921.16
|
|
Weighted
average diluted shares outstanding
|
|
|
42,692
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
PAV
Republic, Inc. and subsidiaries
(In
thousands of dollars, except per share amounts)
|
|
Common
Shares
|
|
Additional
|
|
Accumulated
|
|
Accumulated
Other
|
|
|
|
|
|
Number
|
|
Par
Value
|
|
Paid-In
Capital
|
|
Retained
Earnings
|
|
Comprehensive
Income
|
|
Total
|
|
Balance,
December 31, 2003
|
|
|
30,000
|
|
$
|
-
|
|
$
|
30,000
|
|
$
|
(758
|
)
|
$
|
-
|
|
$
|
29,242
|
|
Issuance
of 20,000 shares
|
|
|
20,000
|
|
|
-
|
|
|
20,000
|
|
|
-
|
|
|
-
|
|
|
20,000
|
|
Common
Stock, $.01 par value
|
|
|
-
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1
|
|
Compensation
Expense (note 3)
|
|
|
-
|
|
|
-
|
|
|
5,923
|
|
|
-
|
|
|
-
|
|
|
5,923
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
39,326
|
|
|
-
|
|
|
39,326
|
|
Currency
Translation
Adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
162
|
|
|
162
|
|
Total
Comprehensive Income
|
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
39,488
|
|
Balance,
December 31, 2004
|
|
|
50,000
|
|
$
|
1
|
|
$
|
55,923
|
|
$
|
38,568
|
|
$
|
162
|
|
$
|
94,654
|
|
See
accompanying notes to consolidated financial statements.
PAV
Republic, Inc. and subsidiaries
(In
thousands of dollars)
|
|
Year
Ended
December
31,
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
Net
income
|
|
$
|
39,326
|
|
Adjustments
to reconcile net income to net cash provided by (used in)
operating
activities:
|
|
|
|
|
Extraordinary
gain, net of tax, due to purchase price accounting
(notes
4, 9)
|
|
|
(10,162
|
)
|
Depreciation
and amortization
|
|
|
918
|
|
Amortization
of deferred costs
|
|
|
1,332
|
|
Write
off of deferred costs
|
|
|
1,123
|
|
Deferred
income taxes
|
|
|
(3,709
|
)
|
Issuance
of stock options and restricted stock (note 3)
|
|
|
5,924
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
Increase
in accounts receivable
|
|
|
(75,184
|
)
|
Increase
in inventory
|
|
|
(110,411
|
)
|
Decrease
in prepaid and other assets
|
|
|
42,026
|
|
Increase
in accounts payable
|
|
|
41,712
|
|
Increase
in accrued compensation and benefits
|
|
|
14,631
|
|
Increase
in accrued income tax payable
|
|
|
14,571
|
|
Increase
in other current liabilities
|
|
|
2,376
|
|
Decrease
in long-term liabilities
|
|
|
(1,308
|
)
|
Net
cash used in operating activities
|
|
|
(36,835
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
Capital
expenditures
|
|
|
(18,354
|
)
|
Net
cash used in investing activities
|
|
|
(18,354
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
Proceeds
from revolving credit facilities
|
|
|
528,336
|
|
Repayment
of revolving credit facilities
|
|
|
(478,021
|
)
|
Proceeds
from long-term debt
|
|
|
70,165
|
|
Repayments
of long-term debt
|
|
|
(78,418
|
)
|
Equity
contribution
|
|
|
20,000
|
|
Deferred
costs
|
|
|
(8,959
|
)
|
Net
cash provided by financing activities
|
|
|
53,103
|
|
Effect
of exchange rate changes on cash
|
|
|
162
|
|
Net
decrease in cash and cash equivalents
|
|
|
(1,924
|
)
|
Cash
and cash equivalents—beginning of period
|
|
|
5,672
|
|
Cash
and cash equivalents—end of period
|
|
$
|
3,748
|
|
Supplemental
cash flow information:
|
|
|
|
|
Cash
paid for interest
|
|
$
|
16,198
|
|
Cash
paid for income taxes
|
|
$
|
7,244
|
|
See
accompanying notes to consolidated financial statements.
PAV
Republic, Inc. and subsidiaries
(In
thousands of dollars, except as otherwise noted)
(1)
Nature of operations, organization and other related information
PAV
Republic, Inc. (PAV Republic or the Company) is a Delaware corporation, which
owns 100% of the outstanding stock of Republic Engineered Products, Inc.
Republic
Engineered Products, Inc., (Republic Inc.), a Delaware corporation, which was
incorporated on December 15, 2003, produces special bar quality steel products.
Special bar quality steel products are high quality hot-rolled and cold-finished
carbon and alloy steel bars and rods used primarily in critical applications
in
automotive and industrial equipment. Special bar quality steel products are
sold
to customers who require precise metallurgical content and quality
characteristics. Special bar quality steel products generally contain more
alloys, and sell for substantially higher prices, than merchant and commodity
steel bar and rod products. The Company produces a wide range of special bar
quality steel products and supplies a diverse customer base that includes
leading automobile and industrial equipment manufacturers and their first tier
suppliers.
Republic
Machine, LLC and Republic N&T Railroad, Inc. and Republic Canadian Drawn are
wholly owned subsidiaries of Republic Inc. Republic Machine, LLC is a Delaware
limited liability company and its sole assets include all assets associated
with
operations at 4135 Commerce Drive SW, Massillon, Ohio 44646. Republic N&T
Railroad, Inc. is a Delaware corporation and operates the railroad assets
located at the Company’s Canton and Lorain Ohio facilities. Republic Canadian
Drawn, Inc. is an Ontario, Canada corporation which operates the cold-finishing
plant located in Ontario, Canada.
The
Company commenced operations on December 19, 2003 after acquiring substantially
all of the operating assets of REPH LLC (formerly known as Republic Engineered
Products Holdings LLC) in a sale of assets under Section 363 of the United
States Bankruptcy Code. The Company also acquired the following property: assets
located on the premises of REPH LLC’s machine shop located in Massillon, Ohio;
assets located on the premises of REPH LLC’s corporate headquarters located in
Akron, Ohio; all permits used in the business in conjunction with the purchased
assets; all intellectual property used in connection with the business; certain
contracts; books, files and records used in the business; all inventory wherever
located; all accounts receivable; and an option to purchase certain assets
for
nominal consideration and assume certain liabilities associated with Republic
Technologies International LLC’s (RTI or Republic Technologies) cold-finishing
plant located in Ontario, Canada. This option was exercised on January 29,
2004.
The
Company, through a wholly owned subsidiary Republic Inc., incurred significant
indebtedness in connection with the consummation of the acquisition. The
indebtedness included $60.0 million aggregate principal amount, $80.0 million
face amount of 10% Senior Secured Notes (senior notes), $21.0 million aggregate
principal amount of 10% Senior Bank Notes (bank notes), and initial borrowings
of $74.9 million (which included $1.5 million in deferred loan fees) under
Republic Inc.’s revolving working capital agreement.
On
May
20, 2004, Republic Inc. entered into a new $200.0 million revolving credit
facility with General Electric Capital Corporation, as lender and agent for
lenders, (GE Capital), a new $61.8 million senior secured promissory note with
Perry Principals Investments, L.L.C. and a new $8.4
million
senior subordinated promissory note with Perry Principals Investments, L.L.C.
Republic Inc. repaid its outstanding revolving working capital agreement (Perry
credit facility) and exercised its option to redeem its $60.0 million aggregate
principal 10% Senior Secured Notes. On May 20, 2004, Perry Partners LP and
Perry
Partners International, Inc. made a $20.0 million equity contribution to PAV
Republic, Inc. Under the terms and conditions of the General Electric Capital
corporate credit facility (GE credit facility), PAV Republic, Inc. increased
its
equity investment in Republic Inc. by $20.0 million. On November 10, 2004,
Republic, Inc. and GE Capital amended the revolving credit facility to expand
the borrowing capacity under the revolving credit facility from $200.0 million
to $250.0 million.
PAV
Republic’s five largest customers accounted for 33.0% of total sales for the
year ended December 31, 2004. For this period, two customers, on an individual
basis, each accounted for more than 10% of the Company’s total sales. Direct
sales to US Steel and American Axle & Manufacturing accounted for 10.6% and
10.3% of sales, respectively, for the year ended December 31, 2004.
(2)
Basis of presentation and principles of consolidation
In
the
accompanying consolidated financial statements of the Company, transactions
and
balances are presented on a new cost basis reflecting purchase accounting
adjustments. All significant intercompany balances and transactions have been
eliminated in consolidation.
(3)
Summary of significant accounting policies
(a)
Cash and cash equivalents
The
Company considers all short-term investments with maturities at the date of
purchase of three months or less to be cash equivalents.
(b)
Inventories
As
of
December 31, 2004, the Company valued inventories at the lower of cost or market
applied on a last-in, first-out (LIFO) method of inventory costing which was
adopted by the Company as of January 1, 2004. As of December 31, 2004,
approximately 99% of inventories were valued under this method.
(c)
Derivative Instruments
The
Company is exposed to fluctuations in natural gas prices. PAV Republic may
employ the use of call options to manage its exposure to natural gas price
fluctuations when practical. Our policies include establishing a risk management
philosophy and objectives designed to cap our exposure to the extreme price
volatility of natural gas and thereby limiting the unfavorable effect of price
increases on our operating costs. The Company does not enter into call options
for the purpose of speculation. The Company accounts for these derivative
instruments in accordance with FASB Statement of Financial Accounting (SFAS)
No.
133, Accounting for Derivative Instruments and Hedging Activities.
(d)
Property, plant, and equipment
The
Company’s property, plant, and equipment are stated at cost and include
improvements that significantly extend the useful lives of existing plant and
equipment. The Company provides for depreciation of property, plant, and
equipment on the straight-line method based upon the estimated useful lives
of
the assets. The ranges of estimated useful lives of the Company’s assets are as
follows:
Building
and improvements
|
10
- 25 years
|
Land
improvements
|
5
-
25 years
|
Machinery
and equipment
(the
vast majority of lives are from 10 - 20 years)
|
5
-
20 years
|
Computer
equipment
|
3-5
years
|
Repairs
and maintenance costs are expensed as incurred. Capital expenditures that cannot
be put into use immediately are included in construction-in-progress. As these
projects are completed, they are transferred to depreciable assets. Net gains
or
losses related to asset dispositions are recognized in the Company’s operating
results in the period in which the disposition occurs.
(e)
Goodwill
Goodwill
represents the excess of costs over fair value of assets of businesses acquired.
Pursuant to SFAS No. 142,
Goodwill
and Other Intangible Assets
,
goodwill and intangible assets acquired in a purchase business combination
and
determined to have an indefinite useful life are not amortized, but instead
tested for impairment at least annually in accordance with the provisions of
Statement 142. Statement 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
Negative
goodwill is created when the fair values of net assets of businesses acquired
exceed the purchase prices. Accordingly, the negative goodwill created should
be
first allocated to the remaining non-current assets acquired which are
principally property, plant and equipment. Any remaining unallocated negative
goodwill is written off as an extraordinary gain.
(f)
Impairment of long-lived assets
Long-lived
assets, consisting of property, plant, and equipment and intangible assets,
are
reviewed by the Company for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered
to be
impaired, the impairment to be recognized is measured by the amount by which
the
carrying amount of the assets exceed the recovery amount or fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less cost to sell and are no longer depreciated.
(g)
Income taxes
The
Company accounts for income taxes under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(h)
Environmental costs
The
Company and other steel companies have in recent years become subject to
increasingly stringent environmental laws and regulations, including
requirements relating to environmental remediation. It is the policy of the
Company to comply with applicable environmental laws and regulations. The
Company
established a liability for an amount which the Company believes is appropriate,
based on information currently available, to cover costs of environmental
remediation it deems probable and reasonably estimable.
The
recorded amounts represent an estimate of the environmental remediation costs
associated with future events triggering or confirming the costs that, in
management’s judgment, are probable. These estimates are based on currently
available facts, existing technology and presently enacted laws and regulations,
and it takes into consideration the likely effects of inflation and other
societal and economic factors. The precise timing of such events cannot be
reliably determined at this time due to the absence of detailed deadlines for
remediation under the applicable environmental laws and regulations pursuant
to
which such remediation costs will be expended; hence we do not discount the
recorded amounts to the present value of estimated future payments. No claims
for recovery are netted against the stated amount.
(i)
Revenue recognition
The
Company recognizes revenue when products are shipped and the customer takes
ownership and assumes risk of loss, collection of the relevant receivable is
probable, persuasive evidence of an arrangement exists and the sales price
is
fixed and determinable. The Company’s customers have no rights to return
product, other than for defective materials. As sales are recognized, reserves
for defective materials are recorded as a percentage of sales. This percentage
is based on historical experience. The adequacy of reserve estimates is
periodically reviewed by comparison to actual experience.
(j)
Allowances for doubtful accounts
Allowances
for doubtful accounts are maintained to provide for estimated losses resulting
from the inability of customers to make required payments. If the financial
condition of these customers deteriorates, resulting in their inability to
make
payments, additional allowances may be required. The Company also records
allowance for accounts receivable for all other customers based on a variety
of
factors, including pricing adjustments, length of time the receivables are
past
due, and historical experience.
(k)
Cost of goods sold
The
Company expenses inbound and outbound freight charges, purchasing and receiving
costs, inspection costs, warehousing costs, and internal transfer costs as
cost
of goods sold.
(l)
Selling, general and administrative expense
The
Company includes overhead expenses not directly associated with the manufacture
or delivery of goods, administrative salaries, rent, utilities, telephone,
travel, property and casualty insurance and expenses related to order taking
and
product sales in selling, general and administrative expense.
(m)
Compensation costs
Incentive
compensation costs are significant expense categories that are highly dependent
upon management estimates and judgments, particularly at each interim reporting
date. In arriving at the amount of expense to recognize, management believes
it
makes reasonable estimates and judgments using all significant information
available. Incentive compensation costs are accrued on a monthly basis, and
the
ultimate determination is made after our year-end results are finalized.
(n)
Use of estimates
The
preparation of consolidated financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The
Company has made significant accounting estimates with respect to the
preliminary allocation of the purchase price of the acquisition of assets from
REPH LLC, the valuation allowances for receivables, inventories, long-lived
assets, deferred income tax assets and liabilities, environmental liabilities,
obligations related to employee health care and incentive and stock based
compensation.
(o)
Income per share
Basic
income per share for PAV Republic is calculated by dividing net income
attributable to common shareholders by the weighted average number of shares
of
common stock outstanding during the period. Diluted earnings per share is
calculated by including the restricted stock and stock options issued using
the
weighted average number of shares outstanding during the period.
On
January 21, 2004, the articles of incorporation were amended to increase the
total number of shares from 100 to 30,000. On January 21, 2004, the Company’s
Board of Directors approved the issuance of a 300 for 1 stock split. All share
information has been adjusted to reflect the 300 for 1 stock split. As of
December 31, 2003, there were 30,000 shares issued and outstanding of PAV
Republic, Inc. stock.
On
May
20, 2004, the articles of incorporation were amended and the Company increased
the total number of shares which the company has the authority to issue to
50,000 shares. On May 20, 2004, Perry Partners LP and Perry Partners
International, Inc. made a $20.0 million equity contribution to PAV Republic,
Inc. and 20,000 shares were issued. As of May 20, 2004, there were 50,000 shares
issued and outstanding.
On
October 1, 2004 the articles of incorporation were amended and the Company
increased the total number of shares which the Company has the authority to
issue to 60,000 shares.
(p)
Stock-based compensation
The
Company accounts for stock based compensation under the fair value method as
permitted under Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock Based Compensation. Compensation expense is measured at
fair value at the grant date using the Black-Scholes option pricing model and
recognized over the vesting period. On October 1, 2004, PAV Republic’s Board of
Directors adopted the 2004 Equity Incentive Plan. The 2004 Equity Incentive
Plan
provides for the grant of incentive stock options, nonqualified stock options,
stock appreciation rights, or ‘‘SARs,’’ restricted stock, and performance awards
based on PAV Republic’s performance, the performance of one of PAV Republic’s
subsidiaries or the performance of the participant. PAV Republic’s directors,
officers and employees, and other individuals performing services for PAV
Republic’s subsidiaries, may be selected by the compensation committee to
receive benefits under the plan. A total of 5,556 shares of our common stock
may
be issued pursuant to the 2004 Equity Incentive Plan. On October 1, 2004,
options to purchase 4,167 shares were issued to key employees and on October
5,
2004, 60 shares of restricted stock were issued to three outside directors.
The
restrictions on the stock issued to the outside directors will lapse upon the
achievement of continued service on May 3, 2005. The following table represents
the equity incentive plan as of December 31, 2004.
|
|
Securities
|
|
Options
granted
|
|
|
4,167
|
|
Restricted
stock
|
|
|
60
|
|
Securities
available for future issuance
|
|
|
1,329
|
|
Total
authorized
|
|
|
5,556
|
|
The
stock
options granted in October 2004 generally become exercisable over a three-year
graded vesting period, provided that the participant remains a director or
employee at such a time. The stock options expire 10 years from the date of
grant. We measure the total cost of each stock option grant at the date of
grant
using the Black Scholes option pricing model. We recognize the cost of each
stock option using straight-line over the stock options vesting period. The
stock option based compensation expense, included in selling general and
administration expense, was $5.9 million for the year ended December 31, 2004.
The following table summarizes the stock option activity for the year ended
December 31, 2004.
|
|
Shares
subject
to
option
|
|
Exercise
price
|
|
Balance
at December 31, 2003
|
|
|
-
|
|
$
|
-
|
|
Options
granted
|
|
|
4,167
|
|
|
1,000
|
|
Options
exercised
|
|
|
-
|
|
|
-
|
|
Options
terminated
|
|
|
-
|
|
|
-
|
|
Balance
at December 31, 2004
|
|
|
4,167
|
|
$
|
1,000
|
|
The
following table sets forth information about the fair value of each option
grant
on the date of grant using the Black-Scholes option-pricing model and the
weighted average assumptions used for such grants:
Average
fair value of option granted
|
|
$
|
2,521
|
|
Expected
dividend yield
|
|
|
-
|
|
Expected
volatility
|
|
|
40.1
|
%
|
Risk-free
interest rates
|
|
|
2.6
|
%
|
Expected
lives
|
|
|
3
|
|
The
following table summarizes information about stock options outstanding at
December 31, 2004:
Total
unvested shares
|
|
|
2,779
|
|
Total
vested shares
|
|
|
1,388
|
|
|
|
|
|
|
Average
life
|
|
|
10
|
|
Outstanding
average exercise price
|
|
$
|
1,000
|
|
Exercisable
average exercise price
|
|
$
|
1,000
|
|
The
fair
market value of each share of restricted stock on the date of grant was $3,436.
(q)
Foreign currency translation
Asset
and
liability accounts of the Company’s foreign operations are translated into U.S.
dollars using current exchange rates in effect at the balance sheet date and
for
revenue and expense accounts using a weighted average exchange rate during
the
period. Translation adjustments are reflected as a component of other
comprehensive income included in stockholders equity.
(r)
Other postretirement benefits
Accounting
for other postretirement benefits requires the use of actuarial techniques
and
assumptions including, among others, assumptions about employees’ future
retirement decisions, mortality of participants, future increases in wages
and
health care costs, discount and interest rates and plan continuation. Changing
these assumptions would have an impact on our disclosed obligation and annual
expense for other postretirement benefits. Actuarial gains and losses are
deferred and amortized over future periods.
(s)
New accounting pronouncements
In
June
2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations,
which requires recognition of the fair value of liabilities associated with
the
retirement of long-lived assets when a legal obligation to incur such costs
arises as a result of the acquisition, construction, development and/or the
normal operation of a long-lived asset. Upon recognition of the liability,
a
corresponding asset is recorded and depreciated over the remaining life of
the
long-lived asset. SFAS No. 143 defines a legal obligation as one that a party
is
required to settle as a result of an existing or enacted law, statute,
ordinance, or written or oral contract or by legal construction of a contract
under the doctrine of promissory estoppel. SFAS No. 143 is effective for fiscal
years beginning after December 15, 2002. The adoption of SFAS No. 143 did not
have any impact on the Company’s consolidated financial statements.
In
July
2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit
or
Disposal Activities. SFAS No. 146 addresses significant issues regarding the
recognition, measurement and reporting of costs that are associated with exit
and disposal activities, including restructuring activities. The scope of SFAS
No. 146 includes (1) costs to terminate contracts that are not capital leases;
(2) costs to consolidate facilities or relocate employees; and (3) termination
benefits provided to employees who are involuntarily terminated under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement
or
an individual deferred-compensation contract. The provisions of this Statement
became effective for exit or disposal activities initiated after December 31,
2002, with early application encouraged. The adoption of SFAS No. 146 did not
have any impact on the Company’s consolidated financial statements.
In
December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation-Transition and Disclosure—an amendment of FASB Statement No. 123.
SFAS No. 148 provides alternative methods of transition from a voluntary change
to the fair value based 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 about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The adoption
of SFAS No. 148 did not impact the Company’s consolidated financial statements.
In
January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities. Interpretation No. 46, as revised in December 2003, requires
existing unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risk among
parties involved. It is based on the concept that companies that control another
entity through interests other than voting interests should consolidate the
controlled entity. Interpretation No. 46 and its revision did not impact the
Company’s consolidated financial statements.
In
April
2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. SFAS No. 149 amends and clarifies the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149
is
generally effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The adoption
of
SFAS No. 149 did not have an effect on the Company’s consolidated financial
statements.
In
May
2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. SFAS No. 150 requires
that
certain financial instruments, which under previous guidance were accounted
for
as equity, must now be accounted for as liabilities. The financial instruments
affected include mandatory redeemable stock, certain financial instruments
that
require or may require the issuer to buy back some of its shares of stock in
exchange for cash or other assets and certain obligations that can be settled
with shares of stock. SFAS No. 150 is effective for all financial instruments
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. The
adoption of SFAS No. 150 did not have an effect on the Company’s consolidated
financial statements.
In
December 2003, the FASB revised SFAS No. 132 (revised 2003), Employers’
Disclosures about Pensions and Other Postemployment Benefits. SFAS No. 132
(revised 2003) requires additional disclosure on the assets, obligations, cash
flows and net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans in the notes to consolidated financial
statements. The disclosures include describing the types of plan assets,
investment strategy, measurement dates, plan obligations, cash flows, and
components of net periodic benefit cost recognized during interim periods.
The
Company adopted SFAS No. 132 (revised 2003) in the fourth quarter of 2003.
This
Statement requires changes in disclosure only.
In
November 2004, Statement of Financial Accounting Standards No. 151, ‘‘Inventory
Costs-an amendment of ARB No. 43, Chapter 4’’ (SFAS No. 151), was issued. This
Statement amends the guidance in ARB No. 43, Chapter 4, ‘‘Inventory Pricing,’’
to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). SFAS No. 151 is
effective for inventory costs incurred during fiscal years beginning after
June
15, 2005. We do not expect adoption of this standard to have a material impact
on our consolidated financial statements.
In
December 2004, the FASB revised SFAS No. 123 (revised 2004), Share Based
Payment. SFAS No. 123 (revised 2004) requires a public entity to measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which an
employee is required to provide service in exchange for the award—the requisite
service period (usually the vesting period). This statement is effective for
public entities that do not file as small business issuers-as of the beginning
of the first interim or annual reporting period that begins after June 15,
2005;
for public entities that file as small business issuers as of the beginning
of
the first interim or annual reporting period that begins after December 15,
2005; and for nonpublic entities as of the beginning of the first annual
reporting period that begins after December 15, 2005. The Company will adopt
SFAS No. 123 (revised 2004) during the year ended December 31, 2005.
(4)
Acquisitions
On
December 19, 2003, the Company through a wholly owned subsidiary, acquired
all
of the operating assets of REPH LLC and its subsidiaries. The total adjusted
purchase price was $184.4 million (consisting of $101.3 million paid to REPH
LLC, $2.1 million in acquisition fees and expenses, the issuance of $60.0
million in senior secured notes and the issuance of $21.0 million in bank
notes). The total purchase price was allocated to the assets acquired and
liabilities assumed based on their respective fair values.
The
following table summarizes the fair values of the assets acquired and
liabilities assumed at December 19, 2003, as determined based on independent
appraisals and other estimates made by management. The Company adjusted the
initial purchase price allocation during the year ended December 31, 2004.
The
more significant adjustments were a result of an independent appraisal of the
fair value of the senior secured notes issued and the option acquired related
to
the Ontario, Canada location and for $34.2 million in insurance proceeds
received (see Note 10). This resulted in negative goodwill which was initially
allocated to non-current assets and the remainder resulted in the recognition
of
$10.2 million in extraordinary gain, net of tax of $6.5 million.
Current
assets
|
|
$
|
202,964
|
|
Rights
to insurance proceeds
|
|
|
48,273
|
|
Other
assets
|
|
|
1,006
|
|
Total
assets
|
|
|
252,243
|
|
Current
liabilities
|
|
|
40,447
|
|
Long-term
liabilities
|
|
|
10,760
|
|
Total
liabilities
|
|
|
51,207
|
|
Net
assets acquired
|
|
|
201,036
|
|
Adjusted
purchase price
|
|
|
184,377
|
|
Extraordinary
gain, pre-tax
|
|
$
|
16,659
|
|
On
December 19, 2003 the Company purchased an option to acquire certain assets
for
nominal consideration and assume certain liabilities associated with Republic
Technologies International LLC’s cold-finishing plant located in Ontario,
Canada. The Company exercised this option on January 29, 2004. The total value
of the option was $1.3 million. The total value of the option was allocated
to
the assets acquired and the liabilities assumed based on independent appraisals
and other estimates made by management.
The
following table summarizes the estimated fair values of the assets acquired
and
liabilities assumed at January 29, 2004, as determined by independent appraisals
and other estimates made by management.
Current
assets
|
|
$
|
144
|
|
Property,
plant and equipment
|
|
|
1,814
|
|
Total
assets
|
|
|
1,958
|
|
Current
liabilities
|
|
|
643
|
|
Long-term
liabilities
|
|
|
50
|
|
Total
liabilities
|
|
|
693
|
|
Net
assets acquired
|
|
$
|
1,265
|
|
(5)
Inventories
The
components of inventories as of December 31, 2004 are as follows:
|
|
|
|
Raw
materials
|
|
$
|
88,522
|
|
Semi-finished
|
|
|
76,077
|
|
Finished
goods
|
|
|
131,323
|
|
|
|
|
295,922
|
|
LIFO
reserve
|
|
|
(52,571
|
)
|
Total
|
|
$
|
243,351
|
|
The
Company has elected to change its method of accounting for inventory to last-in,
first-out (LIFO) effective January 1, 2004 because the Company has experienced
inflation in raw material prices for the commodities it purchases and uses
to
produce steel products. The Company has adopted the LIFO method to more
accurately match revenues with current costs.
On
December 31, 2004, inventories are valued at the lower of cost or market applied
on a last-in, first-out (LIFO) method of accounting for inventory. This
inventory method is used to value approximately 99% of the Company’s inventory.
The
Company believes the impact of the change in its method of accounting for
inventory from FIFO to LIFO is minimal from the date of acquisition, December
19, 2003 to December 31, 2003. All of the Company’s inventories were valued at
market prices under purchase price accounting at the time of acquisition. The
Company’s inventory carrying values and product mix at December 31, 2003 was
approximately the same as December 19, 2003, indicating only negligible price
fluctuations during that period. The adoption of LIFO as of January 1, 2004
resulted in the reduction of pre-tax income by $52.6 million for the year ended
December 31, 2004.
(6)
Deferred costs
On
December 31, 2004, the Company’s deferred costs consisted of $7.0 million in
deferred loan fees, net of accumulated amortization and $1.0 million in fees
related to our planned initial public offering. The deferred fees were incurred
in relation to the new debt items discussed in note 8 and the planned initial
public offering (IPO) discussed in note 20. The Company amortizes these assets
associated with the debt agreements over their term, which will expire in May
and August of 2009. The Company will net the fees associated with the IPO with
the proceeds of the offering.
The
deferred costs as of December 31, 2003 consisted of $1.5 million in deferred
loan fees; net of accumulated amortization, relating to Republic Inc.’s
revolving working capital credit agreement with Perry Partners L.P. (Perry
credit facility). The asset was to be amortized over the term of the agreement,
which would have expired December 19, 2004, but was extended to March 31, 2005.
However, in May 2004, the Perry credit facility was repaid in full and Republic
Inc. entered into a new agreement with GE Capital (Note 8). Concurrent with
the
repayment of the Perry credit facility, the remaining $1.1 million of these
assets were written off by the Company.
The
components of deferred costs are as follows:
Net
deferred costs as of December 31, 2003
|
|
$
|
1,471
|
|
Amortization
of deferred costs
|
|
|
(1,332
|
)
|
Write-off
of deferred costs
|
|
|
(1,123
|
)
|
Fees
related to new debt items (note 8)
|
|
|
7,998
|
|
Fees
related to IPO (note 20)
|
|
|
961
|
|
Net
deferred costs as of December 31, 2004
|
|
$
|
7,975
|
|
(7)
Goodwill
The
fair
value of identifiable net assets of REPH LLC exceeded the purchase price.
Accordingly, this difference was proportionately allocated to reduce the value
of acquired non-current assets, which were principally property, plant, and
equipment (see Note 4).
(8)
Revolving credit facilities, long-term debt and capital lease obligations
Revolving
credit facility
On
May
20, 2004, the Company, through a wholly owned subsidiary, Republic Inc., entered
into a $200.0 million revolving credit facility with GE Capital. This facility
matures on May 20, 2009. On May 20, 2004, Perry Partners LP and Perry Partners
International, Inc. made a $20.0 million equity contribution to PAV Republic,
Inc. Under the terms and conditions of the General Electric Capital corporate
credit facility (GE credit facility), PAV Republic, Inc. increased its equity
investment in Republic Inc. by $20.0 million. Republic Inc. repaid its
outstanding Perry credit facility. On November 10, 2004, Republic Inc. and
GE
Capital amended the revolving credit facility to expand the borrowing capacity
under the revolving credit facility from $200.0 million to $250.0 million.
At
December 31, 2004, Republic Inc. had $142.2 million outstanding and had issued
$3.3 million in letters of credit under our revolving credit facility. The
Company is required to maintain a borrowing availability of at least $25.7
million. The amount available under the GE credit facility was approximately
$78.7 million in excess of the $25.7 million minimum availability requirement
at
December 31, 2004. Republic Inc. is required to pay an unused facility fee
of
one-half of one percent per annum on the average daily unused total commitment.
Advances under the GE credit facility is limited by the borrowing base, as
defined in the credit facility as the sum of 85% of eligible accounts receivable
plus 65% of eligible inventory.
Borrowings
under the GE credit facility are secured by a first priority perfected security
interest in all of Republic Inc.’s presently owned and subsequently acquired
inventory and accounts receivable. The obligations under the GE credit facility
are secured and are unconditionally and irrevocably guaranteed jointly and
severally by Republic Inc.’s subsidiaries.
Borrowings
under the credit facility bear interest, at Republic Inc.’s option, at either an
index rate equal to the higher of the ‘‘prime rate’’ announced from time to time
by The Wall Street Journal, plus the applicable margin, or the federal funds
rate plus 50 basis points per annum, plus the applicable margin; or a LIBOR
rate, plus the applicable margin. The applicable margin on index rate loans
initially is 1.0% and on LIBOR loans is 2.75%. Commencing on April 1, 2005,
the
margins may be adjusted based on the average availability quarterly on a
prospective basis. The base rate margins may be reduced to an amount between
0.00% and 1.00%, and the LIBOR margins may be adjusted to an
amount
between 1.75% and 2.75%. As of December 31, 2004, borrowings under the GE credit
facility are accruing interest at the rate of 6.25% per year for index rate
loans and 5.11% for LIBOR loans.
The
revolving credit facility contains customary representations and warranties
and
customary covenants restricting Republic Inc.’s and its subsidiaries’ ability
to, among other things and subject to various exceptions, alter the nature
of
its business, engage in mergers, acquisitions and asset sales, permit the
creation of any security interests on any of its assets, incur additional
indebtedness, declare dividends, make distributions or redeem or repurchase
capital stock, prepay, redeem or repurchase other debt, make loans and
investments or conduct transactions with affiliates. Our revolving credit
facility also contains the following covenants:
·
|
restrict
unfinanced capital expenditures during any fiscal year that exceeds
$40.0
million in the aggregate
|
·
|
a
minimum fixed charge coverage ratio not less than 1.25:1.0 for each
12-months most recently ended
|
·
|
minimum
borrowing availability of $25.7 million
|
Events
of
default under the credit agreement include, but are not limited to, failure
to
pay principal, interest, fees or other amounts under the credit agreement when
due or after expiration of a grace period, covenant defaults, any representation
or warranty proving to have been materially incorrect when made, the revocation
or purported revocation of any guarantee by any of the guarantors, unsatisfied
final judgments over a threshold, bankruptcy events, the invalidity or
impairment of any loan document or any security interest, a cross default to
certain other debt, a change of control and certain ERISA defaults. In the
event
of default, there are provisions for remedies from the agent of the revolving
credit facility.
The
Company violated the indebtedness covenant in the GE Credit facility. The
company has incurred $0.4 million in debt relating to a promissory note and
$0.6
million in debt relating to capital lease financing, which it failed to disclose
to GE Capital. On February 25, 2005 the Company was granted a waiver. As of
February 25, 2005, we were in compliance with all covenants under our revolving
credit facility.
Revolving
working capital agreement with Perry Partners L.P.
On
May
20, 2004 Republic Inc. repaid the Revolving working capital agreement with
Perry
Partners L.P. (Perry credit facility). Prior to the repayment, Republic Inc.
maintained the credit facility, which was entered into on December 19, 2003
with
Perry Partners L.P. Under the terms of the agreement, the facility was to mature
on December 19, 2004. The Perry credit facility consisted of a senior secured
credit facility with a commitment of up to $150.0 million. In March 31, 2004
the
facility was amended to increase the commitment to $165.0 million and extend
the
maturity date to March 31, 2005.
Republic
Inc. was required to pay an unused facility fee of one-half of one percent
per
annum on the average daily unused total commitment. The amount available to
be
borrowed at any time was limited by a borrowing base, as defined in the Perry
credit facility as the sum of 85% of eligible accounts receivable plus 60%
of
eligible inventory.
Borrowing
under the Perry credit facility were secured by a first priority perfected
security interest in all of Republic Inc.’s presently owned and subsequently
acquired inventory and accounts receivable.
The
obligations under the Perry credit facility were secured and were
unconditionally and irrevocably guaranteed jointly and severally by Republic
Inc.’s subsidiaries.
Borrowings
under the Perry credit facility bore interest, at Republic Inc.’s option, at
either a base rate equal to the higher of the ‘‘prime rate’’ announced from time
to time by Citibank, N.A. at its principal office in New York, New York or
the
weighted average of rates on overnight federal funds transactions with members
of the Federal Reserve System arranged by federal funds brokers, plus the
applicable margin; or a libor rate on deposits for one or three month periods,
plus the applicable margin. The applicable margin on base rate loans initially
was 1.5% and on Eurodollar loans was 4.5%.
The
Perry
credit facility contained negative covenants and provisions that restricted,
among other things, the ability to incur additional indebtedness or guarantee
the obligations of others, grant liens, make investments, pay dividends,
repurchase stock or make other forms of restricted payments, merge consolidate
and acquire assets or stock, engage in sale and leaseback transactions or
dispose of assets, make capital expenditures in excess of $19.4 million for
2004, engage in transactions with Republic Inc.’s affiliates, and prepay or
amend Republic Inc.’s senior secured notes.
Long-term
debt
11%
Senior Secured Promissory Notes due 2009
On
May
20, 2004, Republic Inc. issued a $61.8 million senior secured promissory note
under a senior secured note purchase agreement among Republic Engineered
Products, Inc., as borrower, and Perry Principals Investments, LLC, as Term
2
Note holder. In the absence of an Event of Default, interest on the notes would
accrue at the rate of 11% per annum and is payable on the last day of each
calendar month until the loan matures on August 20, 2009. The notes require
a 3%
prepayment penalty and are secured by personal property and other assets of
Republic Inc. as set forth by the security agreement to the senior secured
promissory note. The outstanding principal balance of the 11% Senior Secured
promissory notes was $61.8 million as of December 31, 2004.
May
2004 Senior Subordinated Note due 2009
On
May
20, 2004, Republic Inc. issued an $8.4 million senior subordinated promissory
note under a senior secured note purchase agreement among Republic Engineered
Products, Inc., as borrower, and Perry Principals Investments, LLC, as Term
1
Note holder. In the absence of an Event of Default, interest on the notes will
accrue at the rate of 7% per annum and is payable on the last day of each
calendar month until the loan matures on August 20, 2009. This debt was repaid
during July of 2004. The note was secured by personal property and other assets
of Republic Inc. as set forth by the security agreement to the senior secured
promissory note.
10%
Senior Secured Notes due 2009
On
December 19, 2003, in connection with the acquisition, Republic Inc. issued
$21.0 million of 10% senior secured bank notes (bank notes). Republic Inc.’s
bank notes require quarterly interest payments on March 31, June 30, September
30 and December 31 of each year. The note purchase agreement in respect to
the
bank notes requires Republic Inc. to redeem the notes with certain proceeds
from
asset sales of any collateral that secures the notes. The note purchase
agreement also contains significant affirmative and negative covenants including
separate provisions imposing restrictions on additional borrowings, certain
investments, certain payments, sale or disposal of assets, payment of dividends
and change of control provisions, in each case subject to certain exceptions.
As
of December 31, 2004, Republic Inc. was in compliance with all of these
covenants. The bank notes are secured, subject to
exceptions
and limitations, by (1) a first priority lien on, and security interest in
real
estate and fixtures related to the Canton C-RTM facility and (2) fifty percent
of any proceeds greater than $5.0 million but less than $25.0 million received
by the Company after December 5, 2003 for business interruption coverage
relating to the loss events experienced by REPH LLC at the Lorain, Ohio facility
in 2003; provided that such security interests in business interruption
insurance proceeds shall in no event exceed $10.0 million in the aggregate.
During the year ended December 31, 2004 Republic Inc. received $34.2 million
in
insurance proceeds. As of October, 2004 Republic Inc. had fulfilled this
repayment requirement. Republic Inc. was required, on December 31, 2003 and
on
the last day of each calendar quarter until maturity or until a maximum amount
of $1.0 million in the aggregate is paid, to prepay 0.25% of the original
principal amount or such lesser principal amount as shall then be outstanding.
This requirement was discharged for all future periods during June 2004 as
a
result of the payment from insurance proceeds discussed above. Republic Inc.’s
obligations under the bank notes are unconditionally and fully guaranteed
jointly and severally by each of Republic Inc.’s subsidiaries. The outstanding
principal balance of the bank notes as of December 31, 2004 was $10.9 million.
Ohio
Department of Development Loan
On
December 19, 2003, in connection with the acquisition, Republic Inc. assumed
from REPH LLC a $5.0 million loan from the Ohio Department of Development.
This
loan accrues interest at the rate of 3% per annum payable on the first day
of
each calendar month until the loan matures in July 2008. Principal payments
are
required in the amount of $0.67 million, $1.64 million, $1.69 million and $1.00
million in the years 2005 to 2008, respectively. As of December 31, 2004 $.67
million is included in current portion of long-term debt. The loan is
collateralized by the 20‰ mill modernization project at Lorain on a pari passu
basis with the 10% senior secured notes.
Long
term debt related to December 2003 acquisition
Prior
to
their early redemption in whole on May 20, 2004, Republic Inc.’s 10% senior
secured notes were senior secured obligations of Republic Inc. and certain
of
its subsidiaries, aggregating $60.0 million of principal amount, $80.0 million
face amount, and were scheduled to mature on December 19, 2009.
On
December 19, 2003, the 10% senior secured notes were issued under an indenture
among Republic Engineered Products, Inc., as issuer, PAV Republic, Inc., PAV
Railroad, Inc., and PAV Machine, LLC, as guarantors, and U.S. Bank National
Association, as trustee and collateral agent. These 10% senior secured notes
were issued in connection with the acquisition of the operating assets of REPH
LLC. The indenture governing these notes required Republic Inc. to redeem the
senior secured notes with certain proceeds from asset sales of any collateral
that secures the notes and contained significant affirmative and negative
covenants including separate provisions imposing restrictions on additional
borrowings, certain investments, certain payments, sale or disposal of assets,
payment of dividends and change of control provisions, in each case subject
to
certain exceptions. The notes were secured, subject to exceptions and
limitations, by a first priority lien on, and secured interest in, substantially
all of Republic Inc.’s existing assets other than the Canton C-RTM facility,
inventory, accounts receivable and intellectual property and related assets,
and
a first priority interest in Republic Inc.’s capital stock and other equity
interests. Republic Inc.’s obligations under the senior secured notes were
unconditionally and fully guaranteed jointly and severally on a senior secured
basis by each of its direct subsidiaries.
The
Bondholders’ priority lien on Republic Inc.’s existing assets, entitled them to
a security interest in the $13.9 million of property insurance proceeds received
by REPH LLC in October 2003. As a result
of
the
redemption on May 20, 2004, this interest was released and the encumbered funds
became available to the Company.
Capital
lease obligations
On
December 31, 2004 the amount included in property, plant and equipment for
various equipment and computer capital leases was $0.8 million, net of $0.2
million of accumulated amortization. These various capital leases require
minimum payments in 2005 of $0.4 million and 2006 of $0.3 million, which is
included in other accrued liabilities and other long-term liabilities,
respectively.
(9)
Insurance proceeds
In
2003,
REPH LLC’s operations were negatively impacted by the loss of one of two blast
furnaces located in Lorain, Ohio. As a result, REPH LLC has filed business
interruption and property damage insurance claims. The Company acquired the
right to reimbursement from insurance claims for damage incurred to the #3
blast
furnace under the terms of the asset purchase agreement. During the year ended
December 31, 2004, the Company received $34.2 million of insurance proceeds.
The
Company recorded the receipt of the insurance proceeds and reduced non current
assets by $16.4 million, and the remainder resulted in the recognition of $10.2
million in extraordinary gain, net of tax of $6.5 million. Reimbursements from
the business interruption insurance claims up to $25.0 million were subject
to
the security interest maintained by Republic Inc.’s bank note holders as
discussed in note 8. The Company, as of October, 2004, paid $10.0 million to
satisfy in full this security interest. The Company will continue to seek
reimbursement on the full amount of the business interruption and property
damage insurance claims.
(10)
Benefit plans
In
August
2002 REPH LLC implemented a new collective bargaining agreement with the United
Steelworkers of America (USWA). The Company assumed this labor agreement in
connection with the acquisition of the operating assets of REPH LLC. The USWA
labor agreement covers the vast majority of our hourly employees. The USWA
supported the acquisition and assumption of the labor agreement. The labor
agreement expires on August 15, 2007.
Wage
and
benefit provisions under this collective bargaining agreement are specified
until expiration of the agreement and will be subject to negotiations at that
time. The labor agreement provides for the creation of a defined contribution
program for retirement healthcare and pension benefits. The Company is required
to make a contribution for every hour worked. The contribution amount was $3.00
for every hour worked through August 16, 2004. At that time, the contribution
amount increased to $3.50 for every hour worked. Effective August 16, 2005
and
until the expiration of the labor contract, the contribution increases to $3.80
for every hour worked. Contributions are directed by the USWA to provide either
pension benefits and/or retiree medical coverage for future eligible employees
of Republic Inc. and for retirees of REPH LLC. (However, no contributions may
be
used for the purpose of providing medical coverage for the retirees of REPH
LLC
if they create, or result in, any liability whatsoever on the part of the
Company for any obligation of REPH LLC, or any independent obligation to the
retirees of REPH LLC.) Republic Inc.’s contributions to the benefits trust
constitute its sole obligation with respect to providing these benefits. The
Company recorded expense of $12.5 million in expense related to this provision
of the labor contract for the year ending December 31, 2004.
The
labor
agreement also establishes a profit sharing plan to which the Company is
required to contribute 15% of its quarterly pre-tax income, as defined in the
labor agreement, in excess of $12.5 million. Twenty-five percent of these
contributions will be divided among USWA-represented employees who are covered
by the labor agreement based on the numbers of hours worked and the remaining
75% will be contributed to the benefits trust described above. Contributions,
if
any, will be distributed to employees and the benefits trust within 45 days
of
the end of each fiscal quarter. The Company recorded expense of $9.7 million
for
the year ending December 31, 2004 for the profit sharing obligation under this
plan.
The
Company has a defined contribution retirement plan that covers substantially
all
salary and nonunion hourly employees. This plan is designed to provide
retirement benefits through company contributions and employee deferrals. The
Company funds contributions to this plan each pay period based upon the
participants age and service as of January 1st of each year. The amount of
the
Company’s contribution is equal to the monthly base salary multiplied by the
appropriate percentage based on age and years of service. The contribution
becomes 100% vested upon completion of 5 years of service. In addition,
employees are permitted to make contributions into a 401(k) retirement plan
through payroll deferrals. The Company provides a 25% matching contribution
for
the first 5% of an employee’s contributions. Employees are 100% vested in both
their and the Company’s matching contributions. The Company recorded expense of
$2.4 million under this plan for the year ending December 31, 2004.
In
2004,
Republic Inc. adopted a profit sharing plan for salary and non-union hourly
employees excluding a select group of managers and executives. The Company
is
required to contribute 3% of its quarterly pre-tax income, as defined in the
plan, in excess of $12.5 million. During the year-ended December 31, 2004 the
Company incurred a $2.0 million profit sharing obligation under this plan.
In
2004,
Republic Inc. adopted a management incentive plan for a select group of managers
and executives. Incentives are based upon achievement of specific corporate
and
individual objectives which include financial results, product yield
improvement, energy utilization, quality, safety, and delivery reliability.
During the year ended December 31, 2004 the Company recorded a liability and
expense of $2.5 million in connection with this plan. In addition, the Board
of
Directors approved incentive compensation for Joseph F. Lapinsky, Chief
Executive Officer, of $1.1 million for the year ended December 31, 2004, which
we expensed and accrued in 2004.
In
2004,
the Company assumed a deferred compensation plan covering certain key employees.
This plan was adopted by REPH LLC and became effective on August 1, 2003. The
plan allows for the employee to make annual deferrals of base salary and
provides for a fixed annual contribution by the Company based on a percentage
of
salary. The Company incurred $0.3 million of expense associated with this plan
for the year ended December 31, 2004.
(11)
Income taxes
The
components of the income tax provision (benefit) for the Company for the year
ended December 31, 2004 are as follows (in thousands):
|
|
|
|
Current:
|
|
|
|
|
Federal
|
|
$
|
17,996
|
|
State
and local
|
|
|
3,183
|
|
Foreign
|
|
|
614
|
|
Total
current
|
|
|
21,793
|
|
Deferred:
|
|
|
|
|
Federal
|
|
|
(3,328
|
)
|
State
and local
|
|
|
(381
|
)
|
Total
deferred
|
|
|
(3,709
|
)
|
Total
|
|
$
|
18,084
|
|
The
following is a reconciliation of the Company’s effective income tax rate to the
Federal statutory rate for the year ended December 31, 2004:
|
|
|
|
Statutory
rate
|
|
|
35.0
|
%
|
Provision
for state and local taxes, net of federal effect
|
|
|
4.0
|
%
|
Valuation
allowance and other
|
|
|
(0.7
|
)%
|
Effective
income tax rate
|
|
|
38.3
|
%
|
Deferred
tax assets and liabilities as of December 31, 2004 are presented below (in
thousands):
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
Capitalized
inventory costs
|
|
$
|
8,562
|
|
Compensation
and benefits
|
|
|
6,026
|
|
Accrued
expenses
|
|
|
3,271
|
|
Allowance
for doubtful accounts
|
|
|
299
|
|
Total
deferred tax assets
|
|
|
18,158
|
|
Deferred
tax liabilities:
|
|
|
|
|
Inventory
|
|
|
(9,114
|
)
|
Property,
plant, and equipment
|
|
|
(2,871
|
)
|
Prepaid
expenses
|
|
|
(2,333
|
)
|
Total
deferred tax liabilities
|
|
|
(14,318
|
)
|
Net
deferred tax assets
|
|
$
|
3,840
|
|
The
fair
values of the net assets of REPH LLC acquired by the Company on December 19,
2003 exceeded the purchase price. Accordingly, this difference was
proportionately allocated to reduce the tax values otherwise assigned to prepaid
expenses, property, plant, equipment, and other assets. The deferred tax assets
and liabilities as of December 31, 2004 reflect adjustments to the original
purchase price allocation.
Deferred
taxes are provided on the differences between the tax basis of assets and
liabilities and their reported amounts in the Company’s consolidated financial
statements. As of the date of acquisition there were differences between the
tax
basis of certain assets and liabilities and their reported amounts.
The
differences between the tax basis of the acquired assets and their reported
amounts were equal to the differences between the tax basis of the liabilities
assumed and their reported amounts. Therefore, the net deferred tax assets
and
liabilities at the date of acquisition were zero.
During
the period from January 1, 2004 to December 31, 2004, certain deferred tax
assets and liabilities reversed, resulting in a net deferred tax asset at
December 31, 2004 of $3.8 million. Management believes it is more likely than
not that all of the deferred tax assets will be realized due to generating
sufficient amounts of taxable income in the future, and accordingly, no
valuation allowance is required at December 31, 2004.
(12)
Related party transactions
PAV
Republic, Inc. and certain of its stockholders have entered into a stockholders
agreement. Under the terms of such stockholders’ agreement, if Perry and Perry
International propose to transfer any shares of stock, each stockholder of
PAV
Republic may participate in such transfer on a pro rata basis. In the event
Perry and Perry International propose and the Board of PAV Republic approves
of
a transfer of a majority of assets or a majority of the Company’s outstanding
stock to an unaffiliated third party, each stockholder will be obligated to
sell
its shares in connection with such transaction.
On
May
20, 2004, the Company agreed to pay a transaction fee of $1.8 million to Perry
Principals Investments, L.L.C, an affiliate of Perry, in connection with its
$61.8 million senior secured promissory note and guaranty agreement between
Republic Engineered Products, Inc. and Perry Principals Investments, L.L.C.
(see
Note 8)
On
May
20, 2004, the Company agreed to pay a transaction fee of $0.2 million to Perry
Principals Investments, L.L.C., an affiliate of Perry, in connection with its
$8.4 million senior subordinated promissory note and guaranty agreement between
Republic Engineered Products, Inc. and Perry Principals Investments, L.L.C.
(see
Note 8). This note was repaid in full in July 2004.
During
the year ended December 31, 2004, the Company made a payment of $0.3 million
to
Perry Partners LP to reimburse Perry Partners LP for expenses it incurred in
connection with the acquisition in December 2003 and other expenses.
On
December 31, 2004, Perry Principals, L.L.C., an affiliate of Perry Capital,
the
Company’s principal stockholder, was the holder of $1.3 million of the
outstanding 10% Senior Secured Notes due August 31, 2009.
On
December 31, 2004, Contrarian Funds LLC, a stockholder of the Company, was
the
holder of $1.9 million of the outstanding 10% Senior Secured Notes due August
31, 2009.
(13)
Commitments and contingencies
The
Company, in the ordinary course of business, is the subject of or party to
various pending or threatened legal and environmental actions. The Company
provides for the costs related to these matters when a loss is probable and
the
amount is reasonably estimable. Based on information presently known to the
Company, management believes that any ultimate liability resulting from these
actions will not have a material adverse affect on its consolidated financial
position, results of operations or cash flows.
US
Steel
is the Company’s primary supplier of iron ore and coke. The Company was informed
by US Steel that it did not intend to renew its current supply agreement, which
expired at the end of December 2004. On October 22, 2004, the Company and U.S.
Steel finalized transition supply agreements which will provide iron ore and
a
portion of the Company’s coke requirements from January 1, 2005 through June 30,
2005. The Company is working to develop additional sources for these raw
materials.
On
October 11, 2004 our Board of Directors approved the installation of a new
five-strand combination billet/bloom caser and associated equipment at our
Canton facility. We began the preparation for installation of the new equipment
in December 2004. We anticipate the project to cost approximately $50.0 million
to complete and will become fully operational by the fourth quarter of 2005.
At
December 31, 2004 the Company had executed contracts relating to this project
in
the amount of $24.2 million. The anticipated expenditures associated with this
project are expected to be funded using cash from operations and borrowings
under our revolving credit facility.
The
Company leases certain equipment, office space and computer equipment under
non-cancelable operating leases. These leases expire at various dates through
2012. Rental expense on operating leases amounted to $8.9 million for the year
ended December 31, 2004. At December 31, 2004, total minimum lease payments
under noncancelable operating leases are $2.9 million in 2005, $1.3 million
in
2006, $1.0 million in 2007, $0.8 million in 2008 and $1.2 million thereafter.
(14)
Environmental matters
As
is the
case with most steel producers, the Company could incur significant costs
related to environmental issues in the future, including those arising from
environmental compliance activities and remediation stemming from historical
waste management practices at the Company’s facilities acquired in December 2003
from REPH LLC. The reserve to cover environmental remediation liabilities that
the Company considers probable and reasonably estimable, based on current
information and existing laws and regulations, was $4.9 million as of December
31, 2004. The reserve includes estimated costs associated with (i) the current
investigation and cleanup underway at our Canton plant pursuant to an
administrative order on consent with EPA, issued pursuant to the federal
agency’s corrective action authority under the Resource Conservation and
Recovery Act (RCRA); (ii) the potential for similar investigation/cleanup
obligations associated with historic operations and on-site waste management
practices at our Lorain, Lackawanna and Massillon plants; and (iii) several
smaller environmental remediation items, each less than $100,000. The Company
is
not otherwise aware at this time of any material environmental remediation
liabilities or contingent liabilities relating to environmental matters with
respect to our facilities for which the establishment of an additional reserve
would be appropriate at this time. To the extent the Company incurs any such
additional future costs, these costs will most likely be incurred over a number
of years. However, future regulatory action regarding historical waste
management practices at the Company’s facilities and future changes in
applicable laws and regulations may require the Company to incur significant
costs that may have a material adverse effect on the Company’s future financial
performance.
(15)
Obligation to administer USWA benefits
In
2004
the Company entered into an agreement with the USWA to administer health
insurance benefits to the Company’s USWA employees while on layoff status and to
administer payment of monthly contributions to the Steelworker’s Pension Trust
on behalf of local union officials while on
union
business. To fund this program the USWA provided a cash contribution of $3.0
million. As of December 31, 2004, the balance of this cash account totaled
$2.8
million. Expenditures from this account were used to provide health insurance
to
laid off USWA employees. The Company has agreed to continue to administer this
program until the fund is exhausted. The Company will provide the USWA with
periodic reports regarding the financial status of the fund. The cash account
of
$2.8 million is recorded as an other asset and the related liability is recorded
as an other long-term liability.
(16)
Disclosures about fair value of financial instruments and significant group
concentration of credit risk
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value:
(a)
Cash and cash equivalents
The
carrying amount approximates fair value because of the short maturity of these
investments.
(b)
Revolving credit facilities
Since
these borrowings are based on short-term interest notes available to the
Company, the estimated fair values of these financials instruments approximate
their recorded carrying amounts.
(c)
Long-term debt
The
fair
value of the Company’s long-term debt obligations are estimated based upon
quoted market prices for the same or similar issues or on the current rates
offered for debt of the same remaining maturities.
The
estimated fair values of the Company’s financial instruments as of
December 31, 2004 are as follows:
|
|
|
|
|
|
|
|
Carrying
amount
|
|
Fair
Value
|
|
Cash
and cash equivalents
|
|
$
|
3,748
|
|
$
|
3,748
|
|
Revolving
credit facilities
|
|
|
142,219
|
|
|
142,219
|
|
Long-term
debt
|
|
|
77,027
|
|
|
77,027
|
|
(17)
Derivative instruments and hedging activities
The
Company purchases natural gas under short term supply contracts. In an effort
to
manage the risks associated with fluctuations in market prices, we periodically
use hedging instruments including options on natural gas. We purchase options
for a portion of our natural gas requirements. These options are designed to
cap
our exposure to extreme price volatility thereby limiting the unfavorable effect
of price increases on our operating costs. Changes to the fair value of the
premiums paid for these option contracts are recorded as a change in the value
of prepaid assets and as an increase or offset to cost of goods sold.
(18)
Comprehensive income
Other
comprehensive income consists of foreign currency translation adjustments.
At
December 31, 2004, the Company recognized $0.2 million in other comprehensive
income relating to foreign currency translation adjustments.
(19)
Other Postretirement Benefits
In
connection with the acquisition of the operating assets of REPH LLC, the Company
assumed a defined retiree health care plan covering approximately 14 union
hourly employees. These benefits are provided under the terms of the collective
bargaining agreement with the Bricklayers & Allied Craftsman International
Union and are based upon years of service and age. Health care benefits that
are
provided include comprehensive hospital, surgical, major medical and drug
benefit provisions. Participation in the plan requires the retiree to contribute
50% of the cost of the benefit plan. Currently there are no plan assets and
the
Company funds the benefits as claims are paid.
The
postretirement benefit obligation was determined by application of the terms
of
the health care provided together with relevant actuarial assumptions and
healthcare cost trends. The Company uses a December 31 measurement date.
Fiscal
year ending:
|
|
December
31, 2004
(dollars
in thousands)
|
|
Change
in Accumulated Postretirement Benefit Obligation
|
|
|
|
|
Accumulated
postretirement benefit obligation at beginning of year
|
|
$
|
537
|
|
Service
cost
|
|
|
14
|
|
Interest
cost
|
|
|
33
|
|
Actuarial
loss/(gain)
|
|
|
26
|
|
Benefits
paid
|
|
|
(21
|
)
|
Accumulated
postretirement benefit obligation at end of year
|
|
|
591
|
|
Change
in Plan Assets
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
|
—
|
|
Employer
contribution
|
|
|
21
|
|
Benefits
paid
|
|
|
(21
|
)
|
Fair
value of assets at end of year
|
|
|
—
|
|
Information
on Funded Status
|
|
|
|
|
Funded
status
|
|
|
(591
|
)
|
Unrecognized
net actuarial loss (gain)
|
|
|
26
|
|
Net
amount recognized
|
|
|
(564
|
)
|
Components
of Net Periodic Postretirement Benefit Cost
|
|
|
|
|
Service
cost
|
|
$
|
14
|
|
Interest
cost
|
|
|
33
|
|
Net
periodic postretirement benefit cost
|
|
|
47
|
|
Assumptions
|
|
|
|
|
Weighted-average
assumptions used to determine accumulated postretirement
benefit
obligation as of December 31
|
|
|
|
|
a.
Discount rate
|
|
|
6.00
|
%
|
b.
Rate of compensation increase
|
|
|
N/A
|
|
Weighted-average
assumptions used to determine net periodic postretirement
benefit
cost for years ended December 31
|
|
|
|
|
a.
Discount rate
|
|
|
6.25
|
%
|
b.
Rate of compensation increase
|
|
|
N/A
|
|
c.
Expected return on plan assets
|
|
|
N/A
|
|
Assumed
health care cost trend rates at end of year
|
|
|
|
|
a.
Assumed health care cost trend rate for the coming year
|
|
|
10.00
|
%
|
b.
Rate that the cost trend gradually declines to
|
|
|
5.00
|
%
|
c.
Year that the rate reaches the rate it is assumed to remain
at
|
|
|
2009
|
|
|
|
|
|
|
Sensitivity
Analysis
|
|
|
1-percentage
point
Increase
|
|
Effect
on total of service and interest cost components
|
|
$
|
11
|
|
Effect
on postretirement benefit obligation
|
|
|
131
|
|
Estimate
Future Benefit Payments
|
|
|
|
|
2005
|
|
$
|
22
|
|
2006
|
|
|
22
|
|
2007
|
|
|
19
|
|
2008
|
|
|
20
|
|
2009
|
|
|
18
|
|
2010
- 2014
|
|
$
|
108
|
|
In
December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act
of 2003 (the Act) became law in the United States. The Act introduces a
prescription drug benefit under Medicare as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that is
at
least actuarially equivalent to the Medicare benefit. In accordance with FASB
Staff Position (FSP) FAS 106-1 (issued January 2004), ‘‘Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003,’’ the Company elected to defer
recognition
of the effects of the Act in any measures of the benefit obligation or cost
in
2003 and 2004. FSP FAS 106-2 (issued May 2004), ‘‘Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003’’ will require the Company to determine whether its
plan is at least actuarially equivalent to the Medicare benefit as at January
1,
2005 and account for the effects of the Act, if any, beginning in 2005. The
Company is currently assessing whether the benefits provided by its plan are
actuarially equivalent to the Medicare benefit.
(20)
Subsequent event
The
Company announced in November 2004 its intent for an initial public offering
(IPO) of PAV Republic Inc. The Company plans to sell approximately 30% to 35%
of
its equity in the IPO and expects to complete the IPO in the first half of
2005,
subject to market conditions and receipt of various regulatory approvals.
On
March
15, 2005, the Company amended its 2004 Equity Incentive Plan in order to bring
it into compliance with new Section 409A of the Internal Revenue Code. In
addition, outstanding stock options issued to certain executives were also
amended in response to new Section 409A of the Code. As amended, the stock
options are exercisable only on the earliest of (i) a fixed date or pursuant
to
a fixed schedule, (ii) death, (iii) disability, or (iv) in certain
circumstances, the executive’s separation from employment with the Company
and/or its subsidiaries. The repurchase provisions with respect to shares
received on the exercise of the outstanding options were also modified so that
after this offering (i) the Company will have no contractual right to repurchase
shares held by Mr. Lapinsky upon termination of his employment with the Company
and (ii) the Company’s right to repurchase shares held by the other executives
shall be limited to a contractual repurchase right entitling the Company to
repurchase shares held by executives only if that executive’s employment is
terminated for Cause for a price per share equal to the lesser of its original
cost or fair market value. The Company has granted to each executive in 2005
an
additional grant exercisable for a number of shares of the Company equal to
five
percent of the shares of the Company executive would have received upon exercise
in full of his or her 2004 grant, assuming such 2004 grant had been exercisable
in full at the time of the subsequent 2005 grant.
(21)
Segment information
The
Company is primarily engaged in one line of business that produces and sells
engineered steel bars. Our products include hot rolled bars, cold finished
bars,
semi-finished seamless tube rounds and other semi-finished trade products.
On
December 19, 2003, Republic Engineered Products, Inc., our wholly-owned
subsidiary, acquired substantially all of the operating assets and assumed
certain liabilities of REPH LLC. Upon completion of the acquisition the company
implemented a strategy to manage our product mix by focusing on higher
value-added bar product with more engineering content and metallurgical
specificity, which command premium margins. Our product lines are marketed
to a
common customer base. Our customers include automotive and industrial equipment
manufacturers, first tier suppliers to automotive, forgers and tubular and
pipe
product manufacturers. We differentiated the Company from its predecessor by
exiting the lower commodity business. The transition to a single segment
culminated in the fourth quarter of 2004.
The
manufacturing process for all our engineered products begins with steel being
melted in either Canton or Lorain, Ohio. The molten steel is then poured into
either a four, five or six-strand continuous caster through which the steel
flows and cools. The cooled blooms or billets solidify, then are cut to
length
before further processing. The casters produce round blooms and billets that
are
feedstock for hot-rolled seamless tube products or rectangular blooms or square
billets that are transported to one of three bar rolling mills.
At
the
rolling mill, blooms and billets are converted to hot rolled bars by reheating,
then rolling the products through a series of continuous roll stands. The steel
is reduced in cross-section and elongates through this process. The completed
hot-rolled products are either coiled or are placed on a cooling bed and then
cut into required lengths. The items are then stacked into coils or bundles
and
placed in warehouses from which they are shipped directly to the customer or
to
one of our cold finishing mills for further processing.
Our
product lines include:
Hot
rolled bar products
.
Hot
rolling changes the internal physical properties, size, and shape of the steel.
As a direct cast billet or bloom is reduced in size, the strength and integrity
of the resulting bar or rod product is increased. Since blooms have larger
cross-sectional area than billets, a greater reduction to finished size occurs.
Accordingly, a bar or rod product rolled from a cast bloom is generally stronger
than a direct cast billet product of the same size and metallurgical content.
Typically customers concerned about product quality and strength as related
to
reduction of area require bloom based hot-rolled bar products. Direct cast
billet products are generally used for smaller bar product sizes and for less
demanding end-use applications.
Cold
finished bar products
.
Cold
finishing improves the physical properties of hot-rolled products through
value-added processes. Cold finishing processes generate products with more
precise size and straightness tolerances as well as a surface finish that
provides customers with a more efficient means of producing a number of end
products by often eliminating the first processing step in the customer’s
process.
Semi-Finished
Seamless Tube Rounds
.
In
connection with our current supply arrangement with US Steel Corporation, we
produce semi-finished seamless rounds at our Lorain, Ohio facility for purchase
by US Steel’s Lorain, Ohio and Fairfield, Alabama facilities. Seamless tubes are
used in oil and gas drilling and exploration applications.
Other
Semi-Finished Trade Products
.
We also
sell semi-finished trade products to trade customers that are cast or rolled
into round cornered squares. These products are typically sold for forging
applications or to rolling mills operated by competitors that do not have melt
shop facilities or to steel service centers or distributors, for further
processing before they reach the ultimate end user.
The
following table presents the sales of our product lines as a percentage of
our
total sales, for the year ended December 31, 2004.
Product
|
|
|
|
|
Hot-rolled
bars
|
|
|
70.1
|
%
|
Cold-finished
bars
|
|
|
13.8
|
%
|
Semi-finished
seamless tube rounds
|
|
|
10.8
|
%
|
Other
semi-finished trade products
|
|
|
5.3
|
%
|
Total
|
|
|
100.0
|
%
|
Foreign
sales for all product lines were 6.3% of the Company’s total sales for the year
ended December 31, 2004. The Company’s foreign long-lived assets, located in
Ontario, Canada, represent 0.5% of the Company’s total assets. The Company did
not own any foreign long-lived assets until the acquisition of Republic Canadian
Drawn, Inc. on January 29, 2004.
Board
of
Directors and Stockholders
PAV
Republic, Inc. and Subsidiaries
Akron,
Ohio
We
have
audited the accompanying consolidated balance sheet of PAV Republic, Inc. and
Subsidiaries (the “Company”) as of July 22, 2005 and the related
consolidated statements of operations, stockholders’ equity and comprehensive
income, and cash flows for the period January 1, 2005 through July 22,
2005. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting.
Our
audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
as
well as evaluating the overall financial statement presentation. We believe
that
our audit provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of PAV Republic, Inc. and
Subsidiaries at July 22, 2005, and the results of its operations and its
cash flows for the period January 1, 2005 through July 22, 2005 in
conformity with accounting principles generally accepted in the United States
of
America.
September
15, 2006
BDO
SEIDMAN LLP
PAV
Republic, Inc. and Subsidiaries
As
of July 22, 2005
(in
thousands of dollars)
|
|
Assets
|
|
|
|
|
Current
assets:
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,398
|
|
Accounts
receivable, less allowance of $21,735
|
|
|
108,281
|
|
Inventories
(note 4)
|
|
|
213,733
|
|
Deferred
income taxes (note 9)
|
|
|
6,951
|
|
Prepaid
expenses and other current assets
|
|
|
4,631
|
|
Total
current assets
|
|
|
334,994
|
|
Property,
plant and equipment
|
|
|
|
|
Land
and improvements
|
|
|
827
|
|
Buildings
and improvements
|
|
|
1,750
|
|
Machinery
and equipment
|
|
|
16,610
|
|
Construction-in-progress
(note 11)
|
|
|
43,977
|
|
Total
property, plant and equipment
|
|
|
63,164
|
|
Accumulated
depreciation
|
|
|
(2,288
|
)
|
Net
property, plant and equipment
|
|
|
60,876
|
|
Intangible
assets and deferred costs, net of accumulated amortization (note
5)
|
|
|
6,207
|
|
Other
assets (notes 7 and 13)
|
|
|
4,891
|
|
Total
assets
|
|
$
|
406,968
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
Current
portion of long-term debt (note 6)
|
|
$
|
1,617
|
|
Accounts
payable
|
|
|
78,515
|
|
Accrued
compensation and benefits
|
|
|
31,048
|
|
Accrued
interest
|
|
|
418
|
|
Accrued
income taxes (note 9)
|
|
|
7,994
|
|
Other
accrued liabilities
|
|
|
7,392
|
|
Total
current liabilities
|
|
|
126,984
|
|
Long-term
debt (note 6)
|
|
|
65,183
|
|
Revolving
credit facility (note 6)
|
|
|
70,200
|
|
Accrued
environmental liabilities (note 12)
|
|
|
3,315
|
|
Deferred
income taxes (note 9)
|
|
|
1,329
|
|
Other
long-term liabilities (notes 6 and 13)
|
|
|
3,465
|
|
Total
liabilities
|
|
|
270,476
|
|
Stockholders’
equity:
|
|
|
|
|
Common
stock, $0.01 par value, 60,000 shares authorized, 50,074 issued and
outstanding
|
|
|
1
|
|
Additional
paid-in capital
|
|
|
61,495
|
|
Retained
earnings
|
|
|
74,839
|
|
Accumulated
other comprehensive loss (note 15)
|
|
|
157
|
|
Total
stockholders’ equity
|
|
|
136,492
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
406,968
|
|
See
accompanying notes to consolidated financial statements.
PAV
Republic, Inc. and Subsidiaries
For
the Period January 1, 2005 to July 22, 2005
(in
thousands of dollars)
|
|
|
|
|
|
Net
sales
|
|
$
|
858,694
|
|
Cost
of goods sold
|
|
|
747,023
|
|
Gross
profit
|
|
|
111,671
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
|
47,948
|
|
Depreciation
and amortization expense
|
|
|
1,330
|
|
Other
operating income, net
|
|
|
(768
|
)
|
Operating
income
|
|
|
63,161
|
|
Interest
expense
|
|
|
8,521
|
|
Interest
income
|
|
|
(96
|
)
|
Income
before income taxes
|
|
|
54,736
|
|
|
|
|
|
|
Provision
for income taxes (note 9)
|
|
|
20,526
|
|
|
|
|
|
|
Net
income before extraordinary gain
|
|
|
34,210
|
|
|
|
|
|
|
Extraordinary
gain, net of tax (note 17)
|
|
|
2,061
|
|
|
|
|
|
|
Net
income
|
|
$
|
36,271
|
|
See
accompanying notes to consolidated financial statements.
PAV
Republic, Inc. and Subsidiaries
For
the Period January 1, 2005 to July 22, 2005
(in
thousands of dollars)
|
|
|
|
Common
Shares
Par
Value
|
|
Additional
Paid-in Capital
|
|
Accumulated
Retained Earnings
|
|
Accumulated
Other Comprehensive Loss
|
|
Total
|
|
Balance,
December 31, 2004
|
|
$
|
1
|
|
$
|
55,923
|
|
$
|
38,568
|
|
$
|
162
|
|
$
|
94,654
|
|
Stock-based
compensation
expense
(note 7)
|
|
|
-
|
|
|
5,572
|
|
|
-
|
|
|
-
|
|
|
5,572
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
36,271
|
|
|
-
|
|
|
36,271
|
|
Currency
translation
adjustment
(note 15)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5
|
)
|
|
(5
|
)
|
Total
comprehensive income
|
|
|
|
|
|
-
|
|
|
36,271
|
|
|
(5
|
)
|
|
36,266
|
|
Balance,
July 22, 2005
|
|
$
|
1
|
|
$
|
61,495
|
|
$
|
74,839
|
|
$
|
157
|
|
$
|
136,492
|
|
See
accompanying notes to consolidated financial statements.
PAV
Republic, Inc. and Subsidiaries
For
the Period January 1, 2005 to July 22, 2005
(in
thousands of dollars)
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
Net
income
|
|
$
|
36,271
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,330
|
|
Amortization
of deferred financing costs
|
|
|
807
|
|
Write
off of deferred costs
|
|
|
2,027
|
|
Stock-based
compensation expense
|
|
|
5,572
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
Decrease
in accounts receivable
|
|
|
31,810
|
|
Decrease
in inventory
|
|
|
29,618
|
|
Decrease
in prepaid and other assets
|
|
|
13,735
|
|
Increase
in accounts payable
|
|
|
28,137
|
|
Decrease
in accrued compensation and benefits
|
|
|
(3,502
|
)
|
Decrease
in accrued interest
|
|
|
(122
|
)
|
Decrease
in accrued income tax - accrued and deferred
|
|
|
(14,986
|
)
|
Decrease
in other accrued liabilities
|
|
|
(5,888
|
)
|
Decrease
in accrued environmental liabilities
|
|
|
(332
|
)
|
Net
cash provided by operating activities
|
|
|
124,477
|
|
Cash
flows from investing activities:
|
|
|
|
|
Capital
expenditures
|
|
|
(42,842
|
)
|
Net
cash used in investing activities
|
|
|
(42,842
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
Proceeds
from revolving credit facilities
|
|
|
184,290
|
|
Repayment
of revolving credit facilities
|
|
|
(256,309
|
)
|
Repayments
of long-term debt
|
|
|
(10,895
|
)
|
Deferred
financing costs
|
|
|
(1,066
|
)
|
Net
cash provided by financing activities
|
|
|
(83,980
|
)
|
Effect
of exchange rate
|
|
|
(5
|
)
|
Net
decrease in cash and cash equivalents
|
|
|
(2,350
|
)
|
Cash
and cash equivalents - beginning of period
|
|
|
3,748
|
|
Cash
and cash equivalents - end of period
|
|
$
|
1,398
|
|
Supplemental
cash flow information:
|
|
|
|
|
Cash
paid for interest
|
|
$
|
8,130
|
|
Cash
paid for income taxes
|
|
$
|
37,153
|
|
See
accompanying notes to consolidated financial statements.
PAV
Republic, Inc. (the Company or PAV) commenced operation on December 19, 2003
after acquiring substantially all of the operating assets of REPH LLC (formerly
known as Republic Engineered Products Holdings LLC) in a sale of assets under
Section 363 of the United States Bankruptcy Code. PAV also acquired assets
located on the premises of REPH LLC’s machine shop located in Massillon, Ohio;
assets located on the premises of REPH LLC’s corporate headquarters located in
Akron, Ohio.
PAV
is a
Delaware corporation, which owns 100% of the outstanding stock of Republic
Engineered Products, Inc. (Republic Inc). PAV has no substantial operations
or
assets, other than its investment in Republic Inc. Republic Inc, a Delaware
corporation, produces special bar quality steel products. Special bar quality
steel products are high quality hot-rolled and cold-finished carbon and alloy
steel bars and rods used primarily in critical applications in automotive and
industrial equipment. Special bar quality steel products are sold to customers
who require precise metallurgical content and quality characteristics. The
Company’s products include hot-rolled bars, cold-finished bars, semi-finished
seamless tube rounds and other semi-finished trade products. The Company’s
customers include automotive and industrial equipment manufacturers, first
tier
suppliers to automotive, forgers, and tubular and pipe product
manufacturers.
Republic
Machine, LLC, Republic N&T Railroad, Inc. and Republic Canadian Drawn, Inc.
are wholly owned subsidiaries of Republic Inc. Republic Machine, LLC is a
Delaware limited liability company which operates the machine shop located
in
Massillon, Ohio. Republic N&T Railroad, Inc. is a Delaware corporation and
operates the railroad assets located at the Company’s Canton and Lorain, Ohio
facilities. Republic Canadian Drawn, Inc. is an Ontario, Canada corporation
which operates the cold-finishing plant located in Ontario, Canada.
The
manufacturing process for the Company’s products begins with steel melted in
either the Canton or the Lorain, Ohio facilities. The molten steel is then
poured into a four, five or six-strand continuous caster through which the
steel
flows and cools. The cooled blooms or billets solidify, and then are cut to
length before further processing. The casters produce round blooms and billets
that are feedstock for hot-rolled seamless tube products or rectangular blooms
or square billets that are transported to one of three bar rolling
mills.
At
the
rolling mill, blooms and billets are converted to hot-rolled bars by reheating,
then rolling the products through a series of continuous roll stands. The steel
is reduced in cross-section and elongates through this process. The completed
hot-rolled products are either coiled or are placed on a cooling bed and then
cut into required lengths. The bars are bundled and banded, then placed in
warehouses from which they are shipped directly to the customer or to one of
the
Company’s cold-finishing plants for further processing.
The
Company’s product lines include:
Hot-rolled
bar products
.
Hot-rolling changes the internal physical properties, size, and shape of the
steel. As a direct cast billet or bloom is reduced in size, the strength and
integrity of the resulting bar or rod product is increased. Since blooms have
larger cross-sectional area than billets, a greater reduction to finished size
occurs. Accordingly, a bar or rod product rolled from a cast bloom is generally
stronger than a direct cast billet product of the same size and metallurgical
content. Typically customers
concerned
about product quality and strength as related to reduction of area require
bloom
based hot-rolled bar products. Direct cast billet products are generally used
for smaller bar product sizes and for less demanding end-use
applications.
Cold-finished
bar products
.
Cold-finishing improves the physical properties of hot-rolled products through
value-added processes. Cold-finishing processes generate products with more
precise size and straightness tolerances as well as a surface finish that
provides customers with a more efficient means of producing a number of end
products by often eliminating the first processing step in the customer’s
process.
Semi-Finished
Seamless Tube Rounds
.
In
connection with the Company’s current supply arrangement with United States
Steel Corporation (US Steel), the Company produces semi-finished seamless rounds
at the Company’s Lorain, Ohio facility for purchase by US Steel’s Lorain, Ohio
and Fairfield, Alabama facilities. Seamless tubes are used in oil and gas
drilling and exploration applications.
Other
Semi-Finished Trade Products
.
We also
sell semi-finished trade products to trade customers that are cast or rolled
into round cornered squares. These products are typically sold for forging
applications or to rolling mills operated by competitors that do not have melt
shop facilities or to steel service centers or distributors, for further
processing before they reach the ultimate end user.
The
following table presents the sales of the Company’s product lines as a
percentage of the Company’s total sales for the periods indicated:
Hot-rolled
bars
|
|
|
63.7
|
%
|
Cold-finished
bars
|
|
|
13.4
|
%
|
Semi-finished
seamless tube rounds
|
|
|
14.9
|
%
|
Other
semi-finished trade products
|
|
|
8.0
|
%
|
|
|
|
100.0
|
%
|
(2)
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements include the accounts of PAV
Republic, Inc. and Subsidiaries for period from January 1, 2005 to July 22,
2005. All significant intercompany balances and transactions have been
eliminated in consolidation.
(3)
Summary
of Significant Accounting Policies
(a)
Cash
and Cash Equivalents
For
purposes of the consolidated statement of cash flows, the Company considers
all
short-term investments with maturities at the date of purchase of three months
or less to be cash equivalents.
(b)
Inventories
The
Company values inventories at the lower of cost or market applied on a last-in,
first-out (LIFO) method of inventory costing.
(c
)
Derivative
Instruments
The
Company is exposed to fluctuations in natural gas prices. The Company has a
hedging policy to manage its exposure to natural gas price fluctuations when
practical. The Company’s policy includes establishing a risk management
philosophy and objectives designed to cap the Company’s exposure to the extreme
price volatility of natural gas and thereby limiting the unfavorable effect
of
price increases on the Company’s operating costs. The Company does not enter
into contracts for the purpose of speculation. The Company accounts for these
derivative instruments in accordance with Statement of Financial Accounting
Standards (SFAS) No. 133, “Accounting for Derivative Instruments and
Hedging Activities.”
(d)
Property,
Plant, and Equipment
The
Company’s property, plant, and equipment are stated at cost and include
improvements that significantly increase productive capacity or extend the
useful lives of existing plant and equipment. The Company provides for
depreciation of property, plant, and equipment on the straight-line method
based
upon the estimated useful lives of the assets. The range of estimated useful
lives of the Company’s assets is as follows:
Buildings
and improvements
|
10-25
years
|
Land
improvements
|
5-25
years
|
Machinery
and equipment (the vast majority of lives are
from
10-20 years)
|
5-20
years
|
Computer
equipment
|
3-5
years
|
Repair
and maintenance costs that significantly increase productive capacity or extend
the useful lives of existing plant and equipment are capitalized. All other
repair and maintenance costs are expensed as incurred. Capital expenditures
for
projects that cannot be put into use immediately are included in
construction-in-progress. As of July 22, 2005, PAV estimated $13.5 million
of
costs associated with completion of current approved projects, excluding the
five-strand combination billet/bloom caster and associated equipment discussed
in note 12. Interest is capitalized in connection with major capital projects.
The capitalized interest is recorded as part of the asset to which it relates
and is amortized over the asset’s estimated useful life. During the period
January 1, 2005 to July 22, 2005, interest costs of $0.5 million were
capitalized. When construction-in-progress projects are completed, they are
transferred to depreciable assets. Net gains or losses related to asset
dispositions are recognized in the Company’s operating results in the period in
which the disposition occurs.
(e)
Impairment
of Long-Lived Assets
Long-lived
assets, consisting of property, plant, and equipment, are periodically reviewed
by the Company for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset, or related group of assets,
may
not be recoverable. Recoverability of assets to be held and used is measured
by
a comparison of the carrying amount of an asset to future undiscounted net
cash
flows expected to be generated by the asset. If such assets are considered
to be
impaired, the impairment to be recognized is
measured
by the amount by which the carrying amount of the assets exceeds the lesser
of
the recovery amount or the fair value of the assets. Measurement of fair value
may be based upon appraisals, market values of similar assets or discounted
cash
flows. Assets to be disposed of are reported at the lower of the carrying amount
or the fair value less cost to sell and are no longer depreciated.
(f)
Income
Taxes
The
Company accounts for income taxes under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases and operating
losses and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
(g)
Environmental
Costs
The
Company and other steel companies have, in recent years, become subject to
increasingly stringent environmental laws and regulations. It is the policy
of
the Company to endeavor to comply with applicable environmental laws and
regulations. The Company established a liability for an amount which the Company
believes is appropriate, based on information currently available, to cover
costs of environmental remediation it deems probable and estimable.
The
recorded amounts represent estimates of the environmental remediation costs
associated with future events triggering or confirming the costs that, in
management’s judgment, are probable. These estimates are based on currently
available facts, existing technology and presently enacted laws and regulations,
and take into consideration the likely effects of inflation and other societal
and economic factors. The precise timing of such events cannot be reliably
determined at this time due to the absence of any deadlines for remediation
under the applicable environmental laws and regulations pursuant to which such
remediation costs will be expended. No claims for recovery are netted against
the stated amount.
(h)
Revenue
Recognition
The
Company recognizes revenue when products are shipped and the customer takes
ownership and assumes risk of loss, collection of the relevant receivable is
probable, persuasive evidence of an arrangement exists and the sales price
is
fixed and determinable. The Company’s customers have no rights to return
product, other than for defective materials. As sales are recognized, reserves
for defective materials are recorded as a percentage of sales and are charged
against such sales. This percentage is based on historical experience. The
adequacy of reserve estimates is periodically reviewed by comparison to actual
experience and adjusted as appropriate.
(i)
Allowances
for Doubtful Accounts
Allowances
for doubtful accounts are maintained to provide for estimated losses resulting
from the inability of customers to make required payments. If the financial
condition of these customers deteriorates, resulting in their inability to
make
payments, additional allowances may be required. Actual losses could differ
from
these estimates. The Company also records an allowance for accounts receivable
for customers based on a variety of factors, including pricing adjustments,
length of time receivables are past due, and historical experience. After all
attempts to collect a receivable have failed, the receivable is written off
against the allowance.
(
j
)
Cost
of Goods Sold
The
Company expenses outbound freight charges, purchasing and receiving costs,
inspection costs, warehousing costs, and internal transfer costs as cost of
goods sold.
(k)
Selling,
General and Administrative Expense
The
Company includes overhead expenses not directly associated with the manufacture
or delivery of goods, administrative salaries, rent, utilities, telephone,
travel, property and casualty insurance and expenses related to order taking
and
product sales in selling, general and administrative expense.
(l)
Incentive
Compensation Costs
Incentive
compensation costs are significant expense categories that are highly dependent
upon management estimates and judgments. In arriving at the amount of expense
to
recognize, management believes it makes reasonable estimates and judgments
using
all significant information available. Incentive compensation costs are accrued
on a monthly basis, and the ultimate determination is made after the Company’s
year-end results are finalized.
(m)
Use
of Estimates
The
preparation of consolidated financial statements, in conformity with U.S. GAAP,
requires the Company’s management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The
Company has made significant accounting estimates with respect to the valuation
allowances for receivables, inventories, long-lived assets, deferred income
tax
assets and liabilities, environmental liabilities and obligations related to
employee health care.
(n)
Stock-based
Compensation
The
Company accounted for stock based compensation under the fair value method
as
permitted under Statement of Financial Accounting Standard No. 123,
“Accounting for
Stock
Based Compensation.” Compensation expense was measured at fair value at the
grant date using the Black-Scholes option pricing model and is recognized over
the vesting period.
(o)
Foreign
Currency Translation
Asset
and
liability accounts of the Company’s foreign operations are translated into U.S.
dollars using current exchange rates in effect at the balance sheet date and
for
revenue and expense accounts using a weighted average exchange rate during
the
period. Translation adjustments are reflected as a component of other
comprehensive income included in stockholders’ equity.
(p)
Other
Post-Retirement Benefits
Accounting
for other post-retirement benefits requires the use of actuarial methods and
assumptions including, among others, assumptions about employees’ future
retirement decisions, mortality of participants, future increases in health
care
costs, discount and interest rates and plan continuation. Changing these
assumptions would have an impact on the Company’s disclosed obligation and
annual expense for other post-retirement benefits. Actuarial gains and losses
are deferred and amortized over future periods.
(q
)
New
Accounting Pronouncements
In
November 2004, Statement of Financial Accounting Standards No. 151,
“Inventory Costs-an amendment of ARB No. 43, Chapter 4” (SFAS
No. 151), was issued. This Statement amends the guidance in Accounting
Research Bulletin No. 43, Chapter 4, “Inventory Pricing,” to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). SFAS No. 151 is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
The Company does not expect any financial statement implications related to
the
adoption of this Statement.
In
March
2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 47, “Accounting for Conditional Asset Retirement Obligations, an
interpretation of FASB Statement No. 143.” This Interpretation clarifies that an
entity is required to recognize a liability for the fair value of a conditional
asset retirement obligation if the fair value of the liability can be reasonably
estimated. Uncertainty about the timing and (or) method of settlement of a
conditional asset retirement obligation should be factored into the measurement
of the liability when sufficient information exists. This Interpretation is
to
be effective no later than December 31, 2005, with early adoption encouraged.
The Company has evaluated the application of FASB Interpretation No. 47 and
determined it has no effect on the Company’s consolidated financial statements.
In
June
2005, the FASB issued Statement of Financial Accounting Standards No. 154,
“Accounting Changes and Error Corrections
”
(SFAS
No.
154
).
SFAS
No.
154
replaces
APB Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting
Changes in Interim Financial Statement.”
SFAS
No.
154
requires
that a voluntary change in accounting principle be applied retrospectively
with
all prior period financial statements presented as if the new accounting
principle had always been used unless it is impractical to
do
so.
SFAS
No.
154
also
requires that a change in method of depreciating or amortizing a long-lived
nonfinancial asset be accounted for prospectively as a change in estimate,
and
correction of errors in previously issued financial statements should be termed
a “restatement”.
SFAS
No.
154
is
effective for accounting changes and correction of errors made in fiscal years
beginning after December 15, 2005. The Company does not expect any financial
statement implications related to the adoption of this Statement.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments - and amendment of FASB Statements No. 133 and 140.” This
Statement resolves issues addressed in Statement 133 Implementation Issue No.
D1, “Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets,” and is effective for all financial instruments acquired or
issued after the beginning of an entity’s first fiscal year that begins after
September 15, 2006. The Company does not expect any financial statement
implications related to the adoption of this Statement.
In
December 2004, the FASB issued Statement No. 123 (R) (revised 2004) “Share-Based
Payment”, which is a revision of SFAS No. 123, “Accounting for Stock-Based
Compensation”. Statement 123 (R) supersedes APB No. 25, and amends SFAS
No. 95, Statement of Cash Flows. Generally, the approach to accounting in
Statement 123 (R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on their fair values. Statement 123 (R) is effective for the Company
beginning January 1, 2006. The Statement offers several alternatives for
implementation. The Company does not expect any financial statement
implications related to the adoption of this Statement due to the subsequent
termination of the plan due to the acquisition of PAV Republic by SimRep (note
20).
(4)
Inventories
The
components of inventories as of July 22, 2005 are as follows:
Raw
materials
|
|
$
|
87,431
|
|
Semi-finished
|
|
|
75,518
|
|
Finished
goods
|
|
|
109,924
|
|
|
|
|
272,873
|
|
Reduction
to LIFO value
|
|
|
(59,140
|
)
|
Total
inventories at LIFO
|
|
$
|
213,733
|
|
On
July
22, 2005, inventories are valued at the lower of cost or market applied on
a
last-in, first-out (LIFO) method of accounting for inventory. This inventory
method is used to value approximately 98% of the Company’s
inventory.
(5)
Deferred
Financing Costs
As
of
July 22, 2005, the Company’s deferred financing fees relating to the revolving
credit facility with General Electric Capital Corporation were $1.0 million,
net
of accumulated amortization of $0.2 million.
The
Company uses the effective interest method to amortize the costs associated
with
its debt agreements over their term. The current revolving credit facility
loan
agreement will expire in May 2009.
The
components of deferred financing costs are as follows:
Net
deferred financing costs as of December 31, 2004
|
|
$
|
7,975
|
|
Amortization
|
|
|
(807
|
)
|
Fees
related to IPO incurred in 2005
|
|
|
1,066
|
|
Write-off
of IPO fees
|
|
|
(2,027
|
)
|
Net
deferred financing costs as of July 22, 2005
|
|
$
|
6,207
|
|
During
the period January 1, 2005 through July 22, 2005, the Company incurred initial
public offering (IPO) fees of $1.1 million. In June 2005, the IPO was abandoned
and $2.0 million of associated fees were charged to expense.
(6)
Revolving
credit facility, long-term debt and capital lease
obligations
Revolving
credit facility
On
May
20, 2004, PAV, through its wholly-owned subsidiary Republic Inc, entered into
a
$200.0 million Senior Secured Credit with General Electric Capital Corporation
(GE capital). This facility matures on May 20, 2009. The termination date of
the
facility can be extended until May 20, 2010 at the option of the Company upon
providing timely written notice. On November 10, 2004, Republic Inc and GE
Capital amended the revolving credit facility to expand the borrowing capacity
from $200.0 million to $250.0 million.
At
July
22, 2005, Republic Inc had $70.2 million in outstanding borrowings and had
issued $3.34 million in letters of credit under the GE credit facility. The
amount available under the facility was approximately $176.5 million at July
22,
2005. The Company is required to maintain a borrowing availability of at least
$25.7 million. The amount available under the GE credit facility was
approximately $150.8 million in excess of the $25.7 million minimum
availability requirement at July 22, 2005. Republic Inc is required to pay
an
unused facility fee of 0.50% per annum. The advances under the GE credit
facility are limited by the borrowing base, as defined in the GE credit facility
as the sum of 85% of eligible accounts receivable plus 65% of eligible
inventory.
Borrowings
under the GE credit facility are secured by a first priority perfected security
interest in all of Republic Inc’s presently owned and subsequently acquired
inventory and accounts receivable. The obligations under the GE credit facility
are secured and are unconditionally and irrevocably guaranteed jointly and
severally by Republic Inc’s subsidiaries.
Borrowings
under the GE credit facility bear interest, at Republic Inc’s option, at an
index rate equal to the higher of the “prime rate” announced from time to time
by The Wall Street Journal, plus the applicable margin, or the federal funds
rate plus 50 basis points per annum, plus the applicable margin; or LIBOR plus
the applicable margin. The applicable margin on index rate loans initially
was
1.0% and on LIBOR loans was 2.75%. On April 1, 2005, the margins were
adjusted based on the average availability quarterly on a prospective basis.
The
base rate margins are adjusted to a rate between 0.00% and 1.00%, and the LIBOR
margins are adjusted
to
a rate
between 1.75% and 2.75%. As of July 22, 2005, $65.0 million of the Company’s
revolving credit facility balance was accruing interest at a rate of 7.25%
per
year as an index rate loan and $5.2 million was accruing interest at a rate
of
5.43% per year as a LIBOR loan.
The
GE
credit facility contains customary representations and warranties and covenants
including restrictions on the amount of capital expenditures, maintenance of
a
minimum fixed charge coverage ratio. Capital expenditures for any fiscal year
are limited under the GE credit facility to $40.0 million, excluding capital
expenditures financed by proceeds of any insurance recoveries received. The
Company was in compliance with all its covenants under the GE credit facility
as
of July 22, 2005.
Long-term
debt
A
summary
of long-term debt outstanding as of July 22, 2005 is as follows:
Senior
Secured Promissory Note due 2009
|
|
$
|
61,800
|
|
Ohio
Department of Development Loan
|
|
|
5,000
|
|
|
|
|
66,800
|
|
Less
current portion of long-term debt - Ohio
Department
of Development Loan
|
|
|
1,617
|
|
Debt
classified as long-term
|
|
$
|
65,183
|
|
11%
Senior Secured Promissory Note due 2009
On
May
20, 2004, Republic Inc issued a $61.8 million senior secured promissory note
under a senior secured note purchase agreement among Republic Engineered
Products, Inc., as borrower, and Perry Principals Investments, LLC, as note
holder. In the absence of an Event of Default, interest on the notes would
accrue at the rate of 11% per annum and is payable on the last day of each
calendar month until the loan matures on August 20, 2009. The notes require
a 3%
prepayment penalty and are secured by personal property and other assets of
Republic Inc as set forth by the security agreement to the senior secured
promissory note.
10%
Senior Secured Notes
On
December 19, 2003, Republic Inc issued a $21.0 million of 10% senior secured
bank notes (Bank Notes). Republic Inc’s Bank Notes require quarterly interest
payments on March 31, June 30, September 30 and December 31 of each year. The
note purchase agreement in respect to the Bank Notes requires Republic Inc
to
redeem the notes with certain proceeds from asset sales of any collateral that
secures the notes. The note purchase agreement also contains significant
affirmative and negative covenants including separate provisions imposing
restrictions on additional borrowings, certain investments, certain payments,
sale or disposal of assets, payment of dividends and change of control
provisions, in each case, subject to certain exceptions. The Bank Notes are
secured, subject to exceptions and limitations, by (1) a first priority lien
on,
and security interest in real estate and fixtures related to the Canton
C-R
TM
facility
and (2) fifty percent of any proceeds greater than $5.0 million but less than
$25.0 million received by PAV after December 5, 2003 for business interruption
coverage relating to the loss events experienced by PAV at the Lorain Ohio
facility in 2003; provided that such security interests in business interruption
insurance proceeds shall in no event exceed $10.0 million in the aggregate.
As
of October, 2004 Republic Inc had fulfilled this repayment
requirement.
The note purchase agreement in respect of the Bank Notes contained significant
affirmative and negative covenants. This note was repaid early by PAV in July
2005.
Ohio
Department of Development Loan
Republic
Inc has a loan outstanding from the Ohio Department of Development which was
utilized to modernize the Lorain, Ohio facility. The project was completed
in
2003. The initial amount of the loan was $5.0 million and it accrues interest
at
the rate of 3% per annum payable on the first day of each calendar month until
the loan matures in July 2008. Principal payments are required in the amount
of
$1.6 million, $1.7 million and $1.0 million during the years
2006, 2007 and 2008, respectively. The loan is collateralized by the 20" mill
modernization project at Lorain.
Capital
lease obligations
On
July
22, 2005, the amount included in property, plant and equipment for various
equipment and computer capital leases was $0.4 million. The Company’s capital
leases at July 22, 2005 require future minimum payments of $0.1 million in
the
period from July 22, 2005 to December 31, 2005 and $0.3 million in 2006. The
current and noncurrent portions of the capital lease obligations are included
in
other accrued liabilities and other long-term liabilities, respectively, in
the
accompanying consolidated balance sheet.
(7)
Stock-based
Compensation
The
Company’s Board of Directors adopted the 2004 Equity Incentive Plan on October
1, 2004. The 2004 Equity Incentive Plan provides for the grant of incentive
stock options, nonqualified stock options, stock appreciation rights or “SARs,”
restricted stock, and performance awards based on PAV Republic’s performance,
the performance of one of the PAV Republic’s subsidiaries or the performance of
the participant. PAV Republic’s directors, officers and employees, and other
individuals performing services for PAV Republic’s subsidiaries, may be selected
by the compensation committee to receive benefits under the plan. A total of
5,556 shares of our common stock may be issued pursuant to the 2004 Equity
Incentive Plan. On October 1, 2004, options to purchase 4,167 shares were issued
to key employees and on October 5, 2004, 60 shares of restricted stock were
issued to three outside directors. The restrictions on the stock issued to
the
outside directors lapsed upon the achievement of continued service on May 3,
2005. On March 14, 2005, options to purchase 208 shares were issued to key
employees.
The
following table represents the 2004 Equity Incentive Plan as of July 22,
2005:
|
|
Securities
|
|
Options
granted
|
|
|
4,375
|
|
Restricted
stock
|
|
|
60
|
|
Securities
available for future issuance
|
|
|
1,121
|
|
Total
authorized
|
|
|
5,556
|
|
The
stock
options granted in October 2004 and March 2005 generally become exercisable
over
a three-year graded vesting period, provided that the participant remains a
director or employee
at
such
time. The stock options expire 10 years from the date of grant. The Company
measures the total cost of each stock option grant at the date of grant using
the Black Scholes option pricing model. The Company recognizes the cost of
each
stock option using the straight-line method over the stock option vesting
period. The stock option based compensation expense, included in selling,
general and administrative expense was $5.6 million for the period January
1,
2005 to July 22, 2005. The following table summarizes the stock option activity
for the period from January 1, 2005 to July 22, 2005 (in actual
amounts):
|
|
Shares
subject
to
option
|
|
Exercise
price
|
|
Balance
at December 31, 2004
|
|
|
4,167
|
|
$
|
1,000
|
|
Options
granted
|
|
|
208
|
|
|
1,000
|
|
Options
exercised
|
|
|
-
|
|
|
-
|
|
Options
terminated
|
|
|
-
|
|
|
-
|
|
Balance
at July 22, 2005
|
|
|
4,375
|
|
$
|
1,000
|
|
The
following table summarizes information about the fair value of each option
grant
on the date of grant using the Black-Scholes option-pricin
g
model
and the weighted average assumptions used for such grants:
Average
fair value of option granted
|
|
$
|
3,744
|
|
Expected
dividend yield
|
|
|
-
|
|
Expected
volatility
|
|
|
40.1
|
%
|
Risk-free
interest rates
|
|
|
2.6
|
%
|
Expected
lives
|
|
|
3
|
|
The
following table summarizes information about stock options outstanding at July
22, 2005:
Total
unvested shares
|
|
|
2,431
|
|
Total
vested shares
|
|
|
1,944
|
|
Average
life
|
|
|
10
|
|
Outstanding
average exercise price
|
|
$
|
1,000
|
|
Exercisable
average exercise price
|
|
$
|
1,000
|
|
(8)
Benefit
Plans
The
vast
majority of the Company’s production workers are covered by a collective
bargaining agreement with the United Steelworkers of America (USWA). The
collective bargaining agreement expires on August 15, 2007 (labor
agreement).
The
labor
agreement provides for a defined contribution program for retirement healthcare
and pension benefits. The Company is required to make a contribution for every
hour worked. The contribution amount was $3.50 for every hour worked through
August 16, 2005 and $3.80 for every hour worked thereafter until the expiration
of the labor agreement. For the period from January 1, 2005 to July 22, 2005,
the Company recorded expense of $8.1 million.
The
labor
agreement includes a profit sharing plan to which the Company is required to
contribute 15% of its quarterly pre-tax income, as defined in the labor
agreement, in excess of $12.5 million. For the period from January 1, 2005
to July 22, 2005, the Company recorded expense of $7.4 million.
The
Company has a defined contribution retirement plan that covers substantially
all
salary and nonunion hourly employees. This plan is designed to provide
retirement benefits through company contributions and voluntary deferrals of
employees’ compensation. The Company funds contributions to this plan each pay
period based upon the participants age and service as of January first of each
year. The amount of the Company’s contribution is equal to the monthly base
salary multiplied by the appropriate percentage based on age and years of
service. The contribution becomes 100% vested upon completion of five years
of
service. In addition, employees are permitted to make contributions into a
401(k) retirement plan through payroll deferrals. The Company provides a 25%
matching contribution for the first 5% of payroll that an employee elects to
contribute. Employees are 100% vested in both their and the Company’s matching
401(k) contributions. For the period from January 1, 2005 to July 22, 2005,
the
Company recorded expense of $1.4 million.
In
2004,
Republic Inc adopted a profit sharing plan for salary and non-union hourly
employees excluding a select group of managers and executives. The Company
is
required to contribute 3% of its quarterly pre-tax income, as defined in the
plan, in excess of $12.5 million. For the period from January 1, 2005 to
July 22, 2005, the Company recorded expense of $1.5 million.
In
2004,
Republic Inc also approved a management incentive plan for a select group of
managers and executives. Incentives are based upon achievement of specific
corporate and individual objectives which include financial results, product
yield improvement, energy utilization, quality, safety, and cash flow. For
the
period from January 1, 2005 to July 22, 2005, the Company recorded expense
of
$0.9 million. In addition, the Company’s Board of Directors approved incentive
compensation for Joseph F. Lapinsky, Chief Executive Officer, of $0.5 million
for the period January 1, 2005 to July 22, 2005. The incentives, totaling $1.4
million, were paid during February 2006.
The
Company has a deferred compensation plan covering certain key employees. The
plan allows for the employee to make annual deferrals of base salary and
provides for a fixed annual contribution by the Company based on a percentage
of
salary. For the period from January 1, 2005 to July 22, 2005, the Company
recorded expense of $0.2 million.
(9)
Major
Customers
The
Company is primarily engaged in one line of business that produces and sells
engineered steel bars. The Company’s products include hot-rolled bars,
cold-finished bars, semi-finished seamless tube rounds and other semi-finished
trade products. The Company’s product lines are marketed to a common customer
base. The Company’s customers include automotive and industrial equipment
manufacturers, first tier suppliers to automotive, forgers and tubular and
pipe
product manufacturers.
For
the
period January 1, 2005 to July, 22, 2005, the five largest customers accounted
for 37.7% of the Company’s total sales. During this period one customer, on an
individual basis, accounted for 15.1% of total sales.
(10)
Income
Taxes
The
components of the income tax provision are presented below for the period
January 1, 2005 to July 22, 2005:
Current:
|
|
|
|
|
Federal
|
|
$
|
20,027
|
|
State
and local
|
|
|
1,998
|
|
Foreign
|
|
|
282
|
|
Total
current
|
|
|
22,307
|
|
Deferred:
|
|
|
|
|
Federal
|
|
|
(1,619
|
)
|
State
and local
|
|
|
(162
|
)
|
Total
deferred
|
|
|
(1,781
|
)
|
Total
|
|
$
|
20,526
|
|
The
following is a reconciliation of the Company’s effective income tax rate to the
Federal statutory rate for the period January 1, 2005 to July 22,
2005:
Statutory
rate
|
|
|
35.0
|
%
|
Provision
for state and local taxes,
net
of federal effect
|
|
|
3.5
|
%
|
Federal
manufacturing deduction
and
other
|
|
|
(1.0
|
)%
|
Effective
income tax rate
|
|
|
37.5
|
%
|
Deferred
tax assets and liabilities as of July 22, 2005 are presented below:
Deferred
tax assets:
|
|
|
|
|
Capitalized
inventory assets
|
|
$
|
7,761
|
|
Allowance
for doubtful accounts
|
|
|
4,943
|
|
Compensation
and benefits
|
|
|
4,401
|
|
Accrued
expenses
|
|
|
2,793
|
|
Total
deferred tax assets
|
|
|
19,898
|
|
Deferred
tax liabilities:
|
|
|
|
|
Inventory
|
|
|
(8,998
|
)
|
Property
and equipment
|
|
|
(2,780
|
)
|
Prepaid
expenses and other
|
|
|
(2,498
|
)
|
Total
deferred tax liabilities
|
|
|
(14,276
|
)
|
Net
deferred tax assets
|
|
$
|
5,622
|
|
Deferred
taxes are provided on the difference between the tax basis of assets and
liabilities and their reported amounts in the Company’s consolidated financial
statements.
During
the period from January 1, 2005 to July 22, 2005 certain deferred tax assets
and
liabilities reversed. The net result is a deferred tax asset at July 22, 2005
of
$5.6 million.
(11)
Related
party transactions
Perry
Principals, L.L.C., an affiliate of Perry Capital, was the holder of $1.3
million of the Company’s outstanding 10% senior secured notes that were repaid
in July 2005.
Contrarian
Funds LLC, a stockholder of PAV, was the holder of $1.9 million of the
outstanding 10% senior secured notes that were repaid in July 2005.
(12)
Commitments
and contingencies
The
Company, in the ordinary course of business, is the subject of, or party to,
various pending or threatened legal and environmental actions. The Company
provides for the costs related to these matters when a loss is probable and
the
amount is reasonably estimable. Based on information presently known to the
Company, management believes that any ultimate liability resulting from these
actions will not have a material adverse affect on its consolidated financial
position, results of operations or cash flows.
United
States Steel Corporation (U.S. Steel) is the Company’s primary supplier of iron
ore and coke. On March 8, 2006, the Company and U.S. Steel entered into an
agreement which extends the supply agreements to provide iron ore and a portion
of the Company’s coke requirements through September 30, 2006. The Company also
purchases coke in the domestic and foreign markets and is working to develop
additional sources for both coke and iron ore.
On
October 11, 2004, the installation of a new five-strand combination
billet/bloom caster and associated equipment at the Company’s Canton, Ohio
facility was approved. Republic Inc began the preparation for installation
of
the new equipment in December 2004. Republic Inc anticipates the project to
cost
approximately $58 million, exclusive of capitalized interest costs. At July
22, 2005, the Company has outstanding purchase contracts in the amount of $13.8
million. The caster was put into production during June 2006. The caster was
installed to allow flexibility in melt capability to take advantage of volatile
raw material prices and to capture potential semi-finished business. On June
30,
2006, it was decided to temporarily idle the caster based on sufficient
alternative melt capacity.
The
Company leases certain equipment, office space and computer equipments under
noncancelable operating leases. These leases expired at various dates through
2012. During the period January 1, 2005 to July 22, 2005, rental expense
relating to operating leases amounted to $4.6 million. At July 22, 2005, total
minimum lease payments under non-cancelable operating leases were $1.9 million
for the period from July 22 to December 31, 2005, $3.7 million in 2006, $1.2
million in 2007, $1.0 million in 2008, $0.8 million in 2009, $0.7 million in
2010 and $0.4 million thereafter.
In
2003,
REPH, LLC’s (the predecessor to PAV) operations were negatively impacted by the
loss of one of two blast furnaces located in Lorain, Ohio. As a result, REPH,
LLC filed business interruption and property damage insurance claims. See Note
17.
(13)
Environmental
matters
As
is the
case with most steel producers, the Company could incur significant costs
related to environmental issues in the future, including those arising from
environmental compliance activities and remediation stemming from historical
waste management practices at the Company’s facilities. The reserve to cover
probable environmental liabilities as well as anticipated compliance activities
totaling $4.6 million was recorded as of July 22, 2005. The current and
noncurrent portions of the environmental reserve are included in other accrued
liabilities and accrued environmental liabilities, respectively in the
accompanying consolidated balance sheet. The Company is not otherwise aware
at
this time of any material environmental remediation liabilities or contingent
liabilities relating to environmental matters with respect to the Company’s
facilities for which the establishment of an additional reserve would be
appropriate at this time. To the extent the Company incurs any such additional
future costs, these costs will most likely be incurred over a number of years.
However, future regulatory action regarding historical waste management
practices at the Company’s facilities and future changes in applicable laws and
regulations may require the Company to incur significant costs that may have
a
material adverse effect on the Company’s future financial
performance.
(14)
Obligation
to administer USWA benefits
The
Company has an agreement with the USWA to administer health insurance benefits
to the Company’s USWA employees while on layoff status and to administer payment
of monthly contributions to the Steelworker’s Pension Trust on behalf of local
union officials while on union business. In February 2004, to fund this program,
the USWA provided an initial cash contribution of $2.5 million to be used to
provide health insurance benefits and $0.5 million to provide steelworkers
pension benefits. As of July 22, 2005, the balance of this cash account totaled
$2.8 million. The Company has agreed to continue to administer these programs
until the fund is exhausted. The Company will provide the USWA with periodic
reports regarding the financial status of the fund. At July 22, 2005, the cash
account balance is included in other assets and the related liability is
included in other long-term liabilities in the accompanying consolidated balance
sheet. The Company has no liability beyond the administration of the funds
in
the cash account.
(15)
Financial
instruments and concentration of credit risk
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value:
(a)
Cash
equivalents
The
carrying amount approximates fair value because of the short maturity of these
investments.
(b)
Revolving
credit facilities
Since
these borrowings are based on short-term interest rates available to the
Company, the estimated fair values of these financials instruments approximate
their recorded carrying amounts.
(c)
Long-term
debt
The
fair
values of the Company’s long-term debt obligations are estimated based upon
quoted market prices for the same or similar issues or on the current rates
offered for debt of the same remaining maturities.
(d)
Concentration
of credit risk
The
Company is engaged primarily in the manufacture and sale of special bar quality
steel principally in the United States of America. Trade accounts are stated
at
the amounts management expects to collect from outstanding
balances.
(16)
Derivative
instruments and hedging activities
The
Company uses natural gas cash-flow exchange contracts or swaps to manage
fluctuations in the cost of natural gas. Contracts generally do not extend
beyond one year. The Company recognizes the fair value of these instruments
either as liabilities or assets and records the changes in fair value within
other comprehensive loss as a component of stockholders’ equity. When the
transaction is settled, the realized gain or loss is recognized in the results
of operations as a cost of goods sold. During the period ended July 22, 2005,
all contracts were treated as undesignated hedges and therefore the fair value
adjustment of $0.8 million was recorded as a reduction of cost of goods sold
in
the period.
(17)
Comprehensive
income
Other
comprehensive income consists of foreign currency translation adjustments and
cash flow hedge valuation. At July 22, 2005, the other comprehensive income
relating to foreign currency translation adjustments was insignificant. Total
comprehensive income for the Company was $36.3 million for the period January
1
to July 22, 2005.
(18)
Other
post-retirement benefits
The
Company has a defined retiree health care plan covering approximately 14 union
hourly employees. These post-retirement benefits are provided under the terms
of
the collective bargaining agreement with the Bricklayers & Allied Craftsman
International Union and are based upon years of service and age. Health care
benefits that are provided include comprehensive hospital, surgical, major
medical and drug benefit provisions. Participation in the plan requires the
retiree to contribute 50% of the cost of the benefits provided. Currently,
there
are no plan assets and the Company funds the benefits as claims are paid. As
of
July 22, 2005, the Company accrued $0.6 million which is included as a component
of other long-term liabilities. The following provides the components of net
periodic benefit cost for the periods indicated.
|
|
Year
Ended
December
31,
2004
|
|
Change
in Accumulated Benefit Obligation:
|
|
|
|
|
Accumulated
postretirement benefit obligation at beginning of period
|
|
$
|
539
|
|
Service
cost
|
|
|
14
|
|
Interest
cost
|
|
|
33
|
|
Actuarial
loss
|
|
|
26
|
|
Benefits
paid
|
|
|
(21
|
)
|
Accumulated
postretirement benefit obligation at end of period
|
|
|
591
|
|
Change
in Plan Assets:
|
|
|
|
|
Fair
value of plan assets at beginning of period
|
|
|
-
|
|
Employer
contributions
|
|
|
21
|
|
Benefits
paid
|
|
|
(21
|
)
|
Fair
value of plan assets at end of period
|
|
|
-
|
|
Funded
Status - (underfunded)
|
|
|
(591
|
)
|
Unrecognized
net actuarial loss
|
|
|
26
|
|
Net
amount recognized
|
|
$
|
(565
|
)
|
|
|
|
|
|
Components
of Net Periodic Postretirement
|
|
|
|
|
Benefit
cost:
|
|
|
|
|
Service
cost
|
|
$
|
14
|
|
Interest
cost
|
|
|
33
|
|
Net
periodic postretirement benefit cost
|
|
$
|
47
|
|
|
|
|
|
|
Assumptions:
|
|
|
|
|
Weighted-average
assumptions used to determine accumulated postretirement benefit
obligations
at period end:
|
|
|
|
|
Discount
rate
|
|
|
6.00
|
%
|
Rate
of compensation increase
|
|
|
N/A
|
|
Expected
return on plan assets
|
|
|
N/A
|
|
Weighted-average
assumptions used to determine accumulated postretirement benefit
costs
during the period:
|
|
|
|
|
Discount
rate
|
|
|
6.25
|
%
|
Rate
of compensation increase
|
|
|
N/A
|
|
Expected
return on plan assets
|
|
|
N/A
|
|
Assumed
health care cost trend rates at end of period:
|
|
|
|
|
Assumed
health care cost trend rate for the year
|
|
|
10.00
|
%
|
Rate
that cost trend gradually declines to
|
|
|
5.00
|
%
|
Year
that the rate reaches the rate it is assumed to remain at
|
|
|
2009
|
|
|
|
|
|
|
Sensitivity
analysis:
|
|
|
|
|
Effect
on total of service and interest cost components
|
|
$
|
11
|
|
Effect
on postretirement benefit obligation
|
|
|
131
|
|
|
|
|
|
|
Estimated
future benefit payments:
|
|
|
|
|
2006
|
|
$
|
22
|
|
2007
|
|
|
22
|
|
2008
|
|
|
19
|
|
2009
|
|
|
20
|
|
2010
|
|
|
18
|
|
2011
and beyond
|
|
|
490
|
|
|
|
$
|
591
|
|
(19)
Extraordinary
gain
In
2003,
REPH LLC’s operations were negatively impacted by the loss of one of two blast
furnaces located in Lorain, Ohio. As a result, REPH LLC filed business
interruption and property damage insurance claims. PAV acquired the right to
reimbursement from insurance claims for damage incurred to the #3 blast furnace
under the terms of the asset purchase agreement in connection with acquisition
of REPH LLC by PAV effective December 19, 2003.
During
the period January 1, 2005 to July 22, 2005, the Company recorded an
extraordinary gain of $2.1 million, net of tax of $1.2 million and associated
fees of $1.1 million. Gross insurance proceeds recorded totaled $4.4
million.
(20)
Subsequent
Events
Effective
July 22, 2005, SimRep Corporation (SimRep) acquired 100% of the outstanding
stock of PAV for a cash purchase price of $229.0 million (the PAV acquisition).
Industrias CH, S.A. de C.V (Industrias CH), Controladora Simec, S.A. de C.V.
(Controladora) and Pacific Steel, Inc. (Pacific) own 49.8%, 47.6% and 2.6%,
respectively, of the stock of SimRep. The stock purchase agreement provides
that, in the event the Company receives future reimbursement
from
the
insurance claim relating to damage incurred to a blast furnace located at the
Lorain, Ohio facility in 2003, a portion will be paid to PAV’s shareholders.
On
April
24, 2006, a Settlement Agreement and Release was reached for approximately
$58.0
million. Approximately $38.4 million, net of the $19.8 million payment to PAV’s
former shareholders, were received by SimRep as a result of the Settlement
Agreement and Release.
The
GE
credit facility (see note 6) was amended, effective during July 2005, to obtain
the lenders consent for the acquisition of PAV by SimRep and for certain other
related changes. Effective November 1, 2005, the GE credit facility was amended
to reduce the borrowing capacity from $250.0 million to $150.0 million to
eliminate unnecessary liquidity and to provide for certain other changes. Also
as part of the November 1, 2005 amendment and through the end of 2005, the
base
rate margins were fixed at 0.00% for Index Margins and 1.00% on LIBOR margins.
Commencing on January 1, 2006, the applicable margins were adjusted from 0.00%
to 0.25% for index rate loans and from 0.875% to 1.25% for LIBOR loans based
on
the average daily availability in the prior quarter. The new agreement also
varied the margins on the unused facility fee from 0.50% to 0.375%. Based on
the
fourth quarter 2005 average daily availability, the initial margins for 2006
are
0.00% for the index margin, 0.875% for the LIBOR margin, 0.500% for the unused
facility fee margin, and 0.875% for the applicable letter of credit margin.
The
capital expenditures limit was increased to $100.0 million with the amendment
dated November 1, 2005.
PAV
Republic, Inc. and Subsidiaries
As
of
June 30, 2004
(unaudited)
(in
thousands of dollars)
Assets
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$
|
-
|
|
Accounts
receivable, less allowance of $12,928
|
|
132,621
|
|
Inventories
(note 4)
|
|
146,998
|
|
Deferred
income taxes (note 8)
|
|
2,327
|
|
Prepaid
expenses and other current assets
|
|
15,917
|
|
Total
current assets
|
|
297,863
|
|
Property,
plant and equipment:
|
|
|
|
Land
and improvements
|
|
300
|
|
Buildings
and improvements
|
|
2,003
|
|
Machinery
and equipment
|
|
9,134
|
|
Construction-in-progress
|
|
2,003
|
|
Total
property, plant and equipment
|
|
13,440
|
|
Accumulated
depreciation
|
|
(520
|
)
|
Net
property, plant and equipment
|
|
12,920
|
|
Deferred
financing costs, net of accumulated amortization (note 5)
|
|
7,430
|
|
Deferred
income taxes (note 8)
|
|
1,574
|
|
Other
assets (note 12)
|
|
5,542
|
|
Total
assets
|
$
|
325,329
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
|
29,945
|
|
Accrued
compensation and benefits
|
|
25,773
|
|
Accrued
interest
|
|
496
|
|
Other
accrued liabilities
|
|
7,854
|
|
Total
current liabilities
|
|
64,068
|
|
Long-term
debt (note 6)
|
|
92,363
|
|
Revolving
credit facility (note 6)
|
|
107,487
|
|
Accrued
environmental liabilities (note 11)
|
|
5,121
|
|
Other
long-term liabilities (notes 6 and 12)
|
|
3,621
|
|
Total
liabilities
|
|
272,660
|
|
Stockholders’
equity:
|
|
|
|
Common
stock, $0.01 par value, authorized 60,000 shares, issued and outstanding
50,000 shares
|
|
1
|
|
Additional
paid in capital
|
|
50,000
|
|
Retained
earnings
|
|
2,668
|
|
Total
stockholders’ equity
|
|
52,669
|
|
Total
liabilities and stockholders’ equity
|
$
|
325,329
|
|
See
accompanying notes to consolidated financial statements.
PAV
Republic, Inc. and Subsidiaries
For
the
Six Months Ended June 30, 2004
(unaudited)
(in
thousands of dollars)
Net
sales
|
$
|
541,111
|
|
Cost
of goods sold
|
|
502,246
|
|
Gross
profit
|
|
38,865
|
|
Selling,
general and administrative expenses
|
|
22,589
|
|
Depreciation
and amortization expense
|
|
286
|
|
Other
operating income, net
|
|
(178
|
)
|
Operating
income
|
|
16,168
|
|
Interest
expense
|
|
10,558
|
|
Interest
income
|
|
(6
|
)
|
Income
before income taxes
|
|
5,616
|
|
Provision
for income taxes (note 8)
|
|
2,190
|
|
Net
income
|
$
|
3,426
|
|
See
accompanying notes to consolidated financial statements.
PAV
Republic, Inc. and Subsidiaries
For
the
Six Months Ended June 30, 2004
(unaudited)
(in
thousands of dollars)
|
Common
Shares
|
|
Additional
Paid-in Capital
|
|
Accumulated
Retained (Deficit) Earnings
|
|
Total
|
|
Number
|
|
Par
Value
|
|
|
|
Balance,
December 31, 2003
|
50,000
|
|
$
|
1
|
|
$
|
50,000
|
|
$
|
(758
|
)
|
|
$
|
49,243
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
-
|
|
|
3,426
|
|
|
|
3,426
|
Total
comprehensive income
|
|
|
|
|
|
|
-
|
|
|
3,426
|
|
|
|
3,426
|
Balance,
June 30,2004
|
50,000
|
|
$
|
1
|
|
$
|
50,000
|
|
$
|
2,668
|
|
|
$
|
52,669
|
See
accompanying notes to consolidated financial statements.
PAV
Republic, Inc. and Subsidiaries
For
the
Six Months Ended June 30, 2004
(in
thousands of dollars)
Cash
flows from operating activities:
|
|
|
|
Net
income
|
$
|
3,426
|
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|
|
|
Depreciation
and amortization
|
|
286
|
|
Amortization
of deferred financing costs
|
|
1,649
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Increase
in accounts receivable
|
|
(68,036
|
)
|
Increase
in inventories
|
|
(14,058
|
)
|
Decrease
in prepaid expenses and other assets
|
|
26,881
|
|
Increase
in accounts payable
|
|
21,841
|
|
Increase
in accrued compensation and benefits
|
|
6,179
|
|
Decrease
in income taxes - accrued and deferred
|
|
(3,236
|
)
|
Decrease
in other current liabilities
|
|
(4,350
|
)
|
Increase
in long-term liabilities
|
|
194
|
|
Net
cash used in operating activities
|
|
(29,224
|
)
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
Capital
expenditures
|
|
(8,574
|
)
|
Net
cash used in investing activities
|
|
(8,574
|
)
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
Proceeds
from revolving credit facilities
|
|
297,276
|
|
Repayment
of revolving credit facilities
|
|
(281,693
|
)
|
Proceeds
from long-term debt
|
|
70,165
|
|
Repayments
of long-term debt
|
|
(63,750
|
)
|
Equity
contribution
|
|
20,000
|
|
Increase
in book overdrafts
|
|
485
|
|
Financing
costs
|
|
(7,608
|
)
|
Net
cash provided by financing activities
|
|
34,875
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
(2,923
|
)
|
|
|
|
|
Cash
and cash equivalents - beginning of period
|
|
2,923
|
|
|
|
|
|
Cash
and cash equivalents - end of period
|
$
|
-
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
Cash
paid for interest
|
$
|
9,071
|
|
Cash
paid for income taxes
|
$
|
7,003
|
|
See
accompanying notes to consolidated financial statements.
PAV
Republic, Inc. (the Company or PAV) commenced operation on December 19,
2003
after acquiring substantially all of the operating assets of REPH LL (formerly
known as Republic Engineered Products Holdings LLC) in a sale of assets
under
Section 363 of the United States Bankruptcy Code. PAV also acquired assets
located on the premises of REPH LLC’s machine shop located in Massillon, Ohio;
assets located on the premises of REPH LLC’s corporate headquarters located in
Akron, Ohio.
PAV
is a
Delaware corporation, which owns 100% of the outstanding stock of Republic
Engineered Products, Inc. (Republic, Inc.). PAV has no substantial operations
or
assets, other than its investment in Republic Inc. Republic Inc, a Delaware
corporation, produces special bar quality steel products. Special bar quality
steel products are high quality hot-rolled and cold-finished carbon and
alloy
steel bars and rods used primarily in critical applications in automotive
and
industrial equipment. Special bar quality steel products are sold to customers
who require precise metallurgical content and quality characteristics.
The
Company’s products include hot-rolled bars, cold-finished bars, semi-finished
seamless tube rounds and other semi-finished trade products. The Company’s
customers include automotive and industrial equipment manufacturers, first
tier
suppliers to automotive, forgers, and tubular and pipe product
manufacturers.
Republic
Machine, LLC, Republic N&T Railroad, Inc. and Republic Canadian Drawn, Inc.
are wholly owned subsidiaries of Republic Inc. Republic Machine, LLC is
a
Delaware limited liability company which operates the machine shop located
in
Massillon, Ohio. Republic N&T Railroad, Inc. is a Delaware corporation and
operates the railroad assets located at the Company’s Canton and Lorain, Ohio
facilities. Republic Canadian Drawn, Inc. is an Ontario, Canada corporation
which operates the cold-finishing plant located in Ontario, Canada.
(2)
|
Basis
of Presentation and Principles of
Consolidation
|
The
accompanying consolidated financial statements include the accounts of
PAV
Republic, Inc. and Subsidiaries for the period from January 1, 2004 to
June 30,
2004. All significant intercompany balances and transactions have been
eliminated in consolidation.
These
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and and footnotes required by
U.S.
generally accepted accounting principles for complete financial statements.
In
the opinion of management, all adjustments (consisting of normal recurring
adjustments and accruals) considered necessary for a fair presentation
of the
financial position of the Company as of June 30, 2004, and the results
of its
operations, cash flows and changes in stockholders’ equity for the six months
ended June 30, 2004 have been included.
(3)
|
Summary
of Significant Accounting
Policies
|
(a)
|
Cash
and Cash Equivalents
|
For
purposes of the consolidated statement of cash flows, the Company considers
all
short-term investments with maturities at the date of purchase of three
months
or less to be cash equivalents.
On
June
30, 2004, the Company valued inventories at the lower of cost or market
applied
on a last-in, first-out (LIFO) method of inventory costing. On June 30,
2004,
this inventory method was used to value 99% of the Company’s
inventories.
(c)
|
Property,
Plant, and Equipment
|
The
Company’s property, plant, and equipment are stated at cost and include
improvements that significantly increase productive capacity or extend
the
useful lives of existing plant and equipment. The Company provides for
depreciation of property, plant, and equipment on the straight-line method
based
upon the estimated useful lives of the assets. The range of estimated useful
lives of the Company’s assets is as follows:
Buildings
and improvements
|
10-25
years
|
Land
improvements
|
5-25
years
|
Machinery
and equipment (the vast majority of lives are from 10-20
years)
|
5-20
years
|
Computer
equipment
|
3-5
years
|
Repairs
and maintenance costs are expensed as incurred. Capital expenditures that
cannot
be put into use immediately are included in construction-in-progress. As
these
projects are completed, they are transferred to depreciable assets. Net
gains
and losses related to asset dispositions are recognized in the Company’s
operating results in the period in which the disposition occurs.
Goodwill
represents the excess of costs over fair values of assets of businesses
acquired. Pursuant to Statement of Financial Accounting Standard No. 142,
“Goodwill and Other Deferred Costs” (SFAS No. 1452), goodwill and deferred costs
acquired in a purchase business combination and determined to have an indefinite
useful life are not amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142
also
requires that deferred costs with estimable useful lives be amortized over
their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144, “Accounting for
Impairment or Disposal of Long-Lived Assets.”
Negative
goodwill is created when the fair values of net assets of businesses acquired
exceed the purchase prices. Accordingly, the negative goodwill created
should be
first allocated to the remaining non-current assets acquired which is
principally property, plant and equipment. Any remaining unallocated negative
goodwill is written off as an extraordinary gain.
(e)
|
Impairment
of Long-Lived Assets
|
Long-lived
assets, consisting of property, plant, and equipment and deferred costs,
are
periodically reviewed by the Company for impairment whenever events or
changes
in circumstances indicate that the carrying amount of an asset, or related
group
of assets, may not be recoverable. Recoverability of assets to be held
and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the
lesser of the recovery amount or the fair value of the assets. Measurement
of
fair value may be based upon appraisals, market values of similar assets
or
discounted cash flows. Assets to be disposed of are reported at the lower
of the
carrying amount or the fair value less cost to sell and are no longer
depreciated.
The
Company accounts for income taxes under the asset and liability method.
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases and operating
losses and tax credit carryforwards. Deferred tax assets and liabilities
are
measured using enacted tax rates expected to apply to taxable income in
the
years in which those temporary differences are expected to be recovered
or
settled. The effect on deferred tax assets and liabilities of a change
in tax
rates is recognized in income in the period that includes the enactment
date.
The
Company and other steel companies have in recent years become subject to
increasingly stringent environmental laws and regulations. It is the policy
of
the Company to endeavor to comply with applicable environmental laws and
regulations. The Company established a liability for an amount which the
Company
believes is appropriate, based on information currently available, to cover
costs of environmental remediation it deems probable and estimable.
The
recorded amounts represent estimates of the environmental remediation costs
associated with future events triggering or confirming the costs that,
in
management’s judgment, are probable. These estimates are based on currently
available facts, existing technology and presently enacted laws and regulations,
and take into consideration the likely effects of inflation and other societal
and economic factors. The precise timing of such events cannot be reliably
determined at this time due to the absence of any deadlines for remediation
under the applicable environmental laws and regulations pursuant to which
such
remediation costs will be expended. No claims for recovery are netted against
the stated amount.
The
Company recognizes revenue when products are shipped and the customer takes
ownership and assumes risk of loss, collection of the relevant receivable
is
probable,
persuasive
evidence of an arrangement exists and the sales price is fixed and determinable.
The Company’s customers have no rights to return product, other than for
defective materials. As sales are recognized, reserves for defective materials
are recorded as a percentage of sales and are charged against such sales.
This
percentage is based on historical experience. The adequacy of reserve estimates
is periodically reviewed by comparison to actual experience and adjusted
as
appropriate.
(i)
|
Allowances
for doubtful accounts
|
Allowances
for doubtful accounts are maintained to provide for estimated losses resulting
from the inability of customers to make required payments. If the financial
condition of these customers deteriorates, resulting in their inability
to make
payments, additional allowances may be required. Actual losses could differ
from
these estimates. The Company also records an allowance for accounts receivable
for customers based on a variety of factors, including pricing adjustments,
length of time receivables are past due, and historical experience. After
all
attempts to collect a receivable have failed, the receivable is written
off
against the allowance.
The
Company expenses outbound freight charges, purchasing and receiving costs,
inspection costs, warehousing costs, and internal transfer costs as cost
of
goods sold.
(k)
|
Selling,
general and administrative
expense
|
The
Company includes overhead expenses not directly associated with the manufacture
or delivery of goods, administrative salaries, rent, utilities, telephone,
travel, property and casualty insurance and expenses related to order taking
and
product sales in selling, general and administrative expense.
(l)
|
Incentive
compensation costs
|
Incentive
compensation costs are significant expense categories that are highly dependent
upon management estimates and judgments, particularly at each interim reporting
date. In arriving at the amount of expense to recognize, management believes
it
makes reasonable estimates and judgments using all significant information
available. Incentive compensation costs are accrued on a monthly basis,
and the
ultimate determination is made after our year-end results are
finalized.
The
preparation of consolidated financial statements, in conformity with U.S.
GAAP,
requires the Company’s management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The
Company has made significant accounting estimates with respect to the valuation
allowances for receivables, inventories, long-lived assets, deferred income
tax
assets
and
liabilities, environmental liabilities, obligations related to employee
health
care and incentive and stock based compensation.
(n)
|
Foreign
currency translation
|
Asset
and
liability accounts of the Company’s foreign operations are translated into U.S.
dollars using current exchange rates in effect at the balance sheet date
and for
revenue and expense accounts using a weighted average exchange rate during
the
period. Translation adjustments are reflected as a component of other
comprehensive income included in stockholders’ equity.
(o)
|
Other
postretirement benefits
|
Accounting
for other postretirement benefits requires the use of actuarial methods
and
assumptions including, among others, assumptions about employees’ future
retirement decisions, mortality of participants, future increases health
care
costs, discount and interest rates and plan continuation. Changing these
assumptions would have an impact on our disclosed obligation and annual
expense
for other postretirement benefits. Actuarial gains and losses are deferred
and
amortized over future periods.
(p)
|
New
accounting
pronouncements
|
In
November 2004, Statement of Financial Accounting Standards No. 151,
“Inventory Costs-an amendment of ARB No. 43, Chapter 4” (SFAS
No. 151), was issued. This Statement amends the guidance in Accounting
Research Bulletin No. 43, Chapter 4, “Inventory Pricing,” to clarify
the accounting for abnormal amounts of idle facility expense, freight,
handling
costs, and wasted material (spoilage). SFAS No. 151 is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
We do not expect the adoption of this standard to have a material impact
on our
consolidated financial statements.
In
December 2004, the Financial Accounting Standards Board (FASB) revised
Statement
of Financial Accounting Standards No. 123 (revised 2004), “Share Based
Payment” (SFAS No. 123R). SFAS No. 123R requires a public entity to measure
the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which
an
employee is required to provide service in exchange for the award—the requisite
service period (usually the vesting period). This statement was to be effective
for public entities that do not file as small business issuers—as of the
beginning of the first interim or annual reporting period that begins after
June 15, 2005; for public entities that file as small business issuers as
of the beginning of the first interim or annual reporting period that begins
after December 15, 2005; and for nonpublic entities as of the beginning of
the first annual reporting period that begins after December 15, 2005. In
April 2005, the Securities and Exchange Commission (SEC) approved a new
rule
that delays the effective date of SFAS 123R. Except for this deferral of
the
effective date, the guidance in SFAS 123R is unchanged. Under the SEC’s
rule, SFAS 123R is now effective for the Company for annual, rather than
interim, periods that begin after June 15, 2005. The
Company
will apply this Statement to all awards granted on or after January 1,
2006 and
to awards modified, repurchased, or cancelled after that date.
In
March
2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional
Asset Retirement Obligations, an interpretation of FASB Statement No. 143.” This
Interpretation clarifies that an entity is required to recognize a liability
for
the fair value of a conditional asset retirement obligation if the fair
value of
the liability can be reasonably estimated. Uncertainty about the timing
and (or)
method of settlement of a conditional asset retirement obligation should
be
factored into the measurement of the liability when sufficient information
exists. This Interpretation is to be effective no later than December 31,
2005,
with early adoption encouraged. The Company is in the process of evaluating
the
effect of this Interpretation.
In
June
2005, the FASB issued Statement of Financial Accounting Standards No. 154,
“Accounting Changes and Error Corrections” (SFAS No. 154). SFAS No. 154 replaces
APB Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting
Changes in Interim Financial Statement.” SFAS No. 154 requires that a voluntary
change in accounting principle be applied retrospectively with all prior
period
financial statements presented as if the new accounting principle had always
been used unless it is impractical to do so. SFAS No. 154 also requires
that a
change in method of depreciating or amortizing a long-lived nonfinancial
asset
be accounted for prospectively as a change in estimate, and correction
of errors
in previously issued financial statements should be termed a “restatement”. SFAS
No. 154 is effective for accounting changes and correction of errors made
in
fiscal years beginning after December 15, 2005. The implementation of
SFAS
No.
154
is not
expected to have a material impact on the Company’s consolidated financial
statements.
The
components of inventories as of June 30, 2004 are as follows:
Raw
materials
|
$
|
31,897
|
|
Semi-finished
|
|
48,560
|
|
Finished
goods
|
|
90,913
|
|
|
|
171,371
|
|
LIFO
reserve
|
|
(24,373
|
)
|
Total
|
$
|
146,998
|
|
On
June
30, 2004, inventories are valued at the lower of cost or market applied
on a
last-in, first-out (LIFO) method of accounting for inventory. This inventory
method is used to value 99% of the Company’s inventories.
(5)
|
Deferred
financing costs
|
As
of
June 30, 2004, the Company’s deferred financing costs were $7.4 million, net of
accumulated amortization of $0.2 million. The Company uses the effective
interest method to amortize the costs associated with its debt agreements
over
their term (see Note 6). For the six months ended June 30, 2004, deferred
financing costs amortized and recognized as interest expense totaled $1.6
million. Concurrent with the repayment of the revolving working capital
agreement with Perry Partners L.P.
in
May
2004, amortization of $1.1 million of deferred financing costs associated
with
the facility was accelerated.
(6)
|
Revolving
credit facilities, long-term debt and capital lease
obligations
|
Revolving
credit facility
On
May
20, 2004, PAV, through a wholly-owned subsidiary, Republic Inc., entered
into a
$200.0 million Senior Secured Credit Agreement with General Electric Capital
Corporation (GE Capital). This facility matures on May 20, 2009. The termination
date of the facility can be extended until May 20, 2010 at the option of
the
Company upon providing timely written notice. Under the terms and conditions
of
the GE credit facility, PAV Republic, Inc. increased its equity investment
in
Republic, Inc. by $20.0 million and Republic Inc. repaid its outstanding
Perry
credit facility primarily with borrowings under the GE credit facility.
On
November 10, 2004, Republic Inc. and GE Capital amended the revolving credit
facility to expand the borrowing capacity from $200.0 million to $250.0
million.
The GE credit facility was also amended effective during July 2005 to obtain
the
lenders consent for the July 2005 stock purchase (see Note 17) and for
certain
other related changes.
At
June
30, 2004, Republic Inc. had $107.5 million outstanding and had issued
$0.1 million in letters of credit under the GE credit facility. The Company
is required to maintain a borrowing availability of at least $25.7 million.
The amount available under the GE credit facility was approximately $92.4
million in excess of the $25.7 million minimum availability requirement at
June 30, 2004. Republic Inc. is required to pay an unused facility fee
of
one-half of one percent per annum on the average daily unused total commitment.
Advances under the GE credit facility are limited by the borrowing base,
as
defined in the GE credit facility as the sum of 85% of eligible accounts
receivable plus 65% of eligible inventory.
Borrowings
under the GE credit facility are secured by a first priority perfected
security
interest in all of Republic Inc.’s presently owned and subsequently acquired
inventory and accounts receivable. The obligations under the GE credit
facility
are secured and are unconditionally and irrevocably guaranteed jointly
and
severally by Republic Inc.’s subsidiaries.
Borrowings
under the GE credit facility bear interest, at Republic Inc.’s option, at an
index rate equal to the higher of the “prime rate” announced from time to time
by The Wall Street Journal, plus the applicable margin, or the federal
funds
rate plus 50 basis points per annum, plus the applicable margin; or LIBOR
plus
the applicable margin. The applicable margin on index rate loans initially
is
1.0% and on LIBOR loans is 2.75%. Commencing on April 1, 2005, the margins
may be adjusted based on the average availability quarterly on a prospective
basis. The base rate margins may be reduced to an amount between 0.00%
and
1.00%, and the LIBOR margins may be adjusted to an amount between 1.75%
and
2.75%. As of June 30, 2004, borrowings under the GE credit facility are
accruing
interest at the rate of 5.25% per year for index rate loans and 4.18% for
LIBOR
loans.
The
GE
credit facility contains customary representations and warranties and covenants
including restrictions on the amount of capital expenditures, maintenance
of a
minimum fixed charge coverage ratio and maintenance of a minimum borrowing
availability of $25.7 million. The Company is in compliance with all covenants
under the GE revolving credit facility as of June 30, 2004.
Long-term
debt
A
summary
of long-term debt outstanding as of June 30, 2004 is as follows:
11%
Senior Secured Promissory Note due 2009
|
$
|
70,165
|
10%
Senior Secured Notes due 2009
|
|
17,198
|
Ohio
Department of Development Loan
|
|
5,000
|
|
|
92,363
|
Less
current portion of long-term debt - Ohio Department of Development
Loan
|
|
-
|
Debt
classified as long-term
|
$
|
92,363
|
11%
Senior Secured Promissory Note due 2009
On
May
20, 2004, Republic Inc. issued a $61.8 million senior secured promissory
note under a senior secured note purchase agreement among Republic Engineered
Products, Inc., as borrower, and Perry Principals Investments, LLC, as
Term 2
Note holder. The note, which matures on August 20, 2009, bears interest
at 11%
and requires monthly interest payments. The note requires a 3% prepayment
penalty and is secured by personal property and other assets of Republic
Inc. as
set forth by the security agreement to the senior secured promissory
note.
10%
Senior Secured Notes due 2009
In
December 2003, Republic Inc. issued $21.0 million of 10% senior secured
bank notes (Bank Notes) that were scheduled to mature August 31, 2009.
The
Company repaid the remaining outstanding balance of $10.9 million of the
Bank
Notes in July 2005. The Bank Notes required quarterly interest payments.
The
Bank Notes were secured, subject to exceptions and limitations, by (1) a
first priority lien on, and security interest in real estate and fixtures
related to the Canton C-R™ facility and, (2) fifty percent of any proceeds
greater than $5.0 million but less than $25.0 million received by the
Company after December 5, 2003 for business interruption coverage relating
to the loss events experienced by REPH LLC at the Lorain, Ohio facility
in 2003;
provided that such security interests in business interruption insurance
proceeds shall in no event exceed $10.0 million in the aggregate. As of
October 2004, Republic Inc. had fulfilled this repayment requirement. The
note
purchase agreement in respect of the Bank Notes contained significant
affirmative and negative covenants. As of June 30, 2004, Republic Inc.
complied
with all of these covenants. This note was repaid early by PAV in July
2005.
Ohio
Department of Development Loan
Republic
Inc. has a loan outstanding from the Ohio Department of Development which
was
utilized to modernize the Lorain, Ohio facility. The project was completed
in
2003. The initial amount of the loan was $5.0 million and it accrues interest
at
the rate of 3% per annum payable on the first day of each calendar month
until
the loan matures in July 2008. Principal payments are required in the amount
of
$0.7 million, $1.6 million, $1.7 million and $1.0 million
during the last nine months of 2005 and in the years 2006, 2007 and 2008,
respectively. The loan is collateralized by the 20" mill modernization
project
at Lorain.
Capital
lease obligations
On
June
30, 2004, the amount included in property, plant and equipment for various
equipment and computer capital leases was $0.8 million, net of
$0.2 million of accumulated amortization. These
various
capital leases require minimum payments during the last six months of 2004
of
$0.1 million, $0.2 million during 2005 and $0.2 million during 2006.
The current and noncurrent portions of the capital lease obligations are
included in other accrued liabilities and other long-term liabilities,
respectively, in the accompanying consolidated balance sheet.
The
vast
majority of the Company’s production workers are covered by a collective
bargaining agreement with the United Steelworkers of America (USWA). The
collective bargaining agreement expires on August 15, 2007 (labor
agreement).
The
labor
agreement provides for a defined contribution program for retirement healthcare
and pension benefits. The Company is required to make a contribution for
every
hour worked. The contribution amount was $3.00 for every hour worked through
August 16, 2004, $3.50 for every hour worked through August 16, 2005 and
will be
$3.80 for every hour worked thereafter until the expiration of the labor
agreement. The Company recorded expense of $5.5 million related to this
provision of the labor agreement for the six months ended June 30,
2004.
The
labor
agreement includes a profit sharing plan to which the Company is required
to
contribute 15% of its quarterly pre-tax income, as defined in the labor
agreement, in excess of $12.5 million. During the six months ended June 30,
2004, the Company recorded expense of $0.7 million to recognize the profit
sharing obligation under this plan.
The
Company has a defined contribution retirement plan that covers substantially
all
salary and nonunion hourly employees. The Company recorded expense of
$2.1 million under this plan for the six months ended June 30,
2004.
Republic
Inc. has a profit sharing plan for salary and non-union hourly employees
excluding a select group of managers and executives. The Company is required
to
contribute 3% of its quarterly pre-tax income, as defined in the plan,
in excess
of $12.5 million. During the six months ended June 30, 2004, the Company
recorded expense of $0.2 million to recognize the profit sharing obligation
under this plan.
Republic
Inc. has a management incentive plan for a select group of managers and
executives. Incentives are based upon achievement of specific corporate
and
individual objectives which include financial results, product yield
improvement, energy utilization, quality, safety, and cash flow. During
the six
months ended June 30, 2004, the Company recorded expense of $1.3 million in
connection with this plan.
The
Company has a deferred compensation plan covering certain key employees.
The
plan allows for the employee to make annual deferrals of base salary and
provides for a fixed annual contribution by the Company based on a percentage
of
salary. There was no deferred compensation expense recorded during the
six
months ended June 30, 2004.
The
components of the income tax provision for the Company for the six months
ended
June 30, 2004 is as follows:
Current:
|
|
|
|
Federal
|
$
|
4,702
|
|
State
and local
|
|
889
|
|
Foreign
|
|
369
|
|
Total
current
|
|
5,960
|
|
Deferred:
|
|
|
|
Federal
|
|
(3,170
|
)
|
State
and local
|
|
(600
|
)
|
Total
deferred
|
|
(3,770
|
)
|
Total
|
$
|
2,190
|
|
The
following is a reconciliation of the Company’s effective income tax rate to the
Federal statutory rate for the six months ended June 30, 2004:
Statutory
rate
|
35.0%
|
Provision
for state and local taxes, net of federal effect
|
4.0%
|
Effective
income tax rate
|
39.0%
|
Deferred
tax assets and liabilities as of June 30, 2004 are presented below:
Deferred
tax assets:
|
|
|
|
Compensation
and benefits
|
$
|
4,696
|
|
Accrued
expenses
|
|
1,997
|
|
Capitalized
inventory assets
|
|
338
|
|
Allowance
for doubtful accounts
|
|
260
|
|
Deferred
Costs
|
|
16
|
|
Total
deferred tax assets
|
|
7,307
|
|
Deferred
tax liabilities:
|
|
|
|
Prepaid
expenses and other
|
|
(2,747
|
)
|
Property,
plant and equipment
|
|
(659
|
)
|
Total
deferred tax liabilities
|
|
(3,406
|
)
|
Net
deferred tax assets
|
$
|
3,901
|
|
During
the six months ended June 30, 2004, certain deferred tax assets and liabilities
reversed, resulting in a net deferred tax asset of $3.9 million. Management
believes it is more likely than not that all of the deferred tax assets
will be
realized due to generating sufficient amounts of taxable income in the
future,
and accordingly, no valuation allowance is required at June 30, 2004.
(9)
|
Related
party transactions
|
On
May
20, 2004, the Company agreed to pay a transaction fee of $1.8 million to
Perry
Principals Investments, L.L.C., in connection with $61.8 million senior
secured
promissory note and guaranty agreement between Republic Engineered Products,
Inc. and Perry Principals Investments, L.L.C. Perry Principals Investments,
L.L.C. is an affiliate of Perry Partners LP and Perry Partners International,
Inc. who own substantially all of the Company’s capital stock (Perry Capital).
The note is included in long-term debt as of June 30, 2004 (see Note
6).
On
May
20, 2004, the Company agreed to pay a transaction fee of $0.2 million to
Perry
Principals Investments, L.L.C., an affiliate of Perry Capital, in connection
with its $8.4 million senior subordinated promissory note and guaranty
agreement
between Republic Engineered Products, Inc. and Perry Principals Investments,
L.L.C. This note was repaid in full in July 2004.
On
June
30, 2005, Perry Principals, L.L.C., an affiliate of Perry Capital, was
the
holder of the Company’s $1.3 million of the outstanding 10% Senior Secured Notes
due August 31, 2009 (see Note 6).
On
June
30, 2005, Contrarian Funds LLC, a stockholder of the Company, was the holder
of
$1.9 million of the outstanding 10% Senior Secured Notes due August 31,
2009
(see Note 6).
During
July 2005 it was announced that Industrias CH, S.A. de C.V. (ICH) and its
majority owned subsidiary, Grupo Simec, S.A. de C.V. (Simec) will acquire
49.8%
and 50.2%, respectively, of the stock of the Company (see Note 17).
(10)
|
Commitments
and contingencies
|
The
Company, in the ordinary course of business, is the subject of, or party
to,
various pending or threatened legal and environmental actions. The Company
provides for the costs related to these matters when a loss is probable
and the
amount is reasonably estimable. Based on information presently known to
the
Company, management believes that any ultimate liability resulting from
these
actions will not have a material adverse affect on its consolidated financial
position, results of operations or cash flows.
United
States Steel Corporation (U.S. Steel) is the Company’s primary supplier of iron
ore and coke. On October 22, 2004, the Company and U.S. Steel finalized
supply
agreements which will provide iron ore and a portion of our coke requirements
from January 1, 2005 through June 30, 2005. Effective during June 2005,
the
Company and U.S. Steel executed an agreement which extends the supply agreements
to provide iron ore and a portion of our coke requirements through December
31,
2005. The Company is currently working to develop additional sources for
these
raw materials.
On
October 11, 2004, the Company’s Board of Directors approved the
installation of a new five-strand combination billet/bloom caster and associated
equipment at the Canton, Ohio facility. The Company began the preparation
for
installation of the new equipment in December 2004. The caster was installed
to
allow flexibility in melt capacity to take advantage of volatile raw material
prices and to capture potential semi-finished business. The project was
completed during June 2006, and the caster was put into production. Project
costs of $56.0 million were reclassified from construction-in-progress
to
buildings and improvements and machinery and equipment upon completion.
On June
30, 2006, it was decided to temporarily idle the caster based on sufficient
alternative melt capacity. The cast will restart when commodity prices
and
business conditions warrant.
(11)
|
Environmental
matters
|
As
is the
case with most steel producers, the Company could incur significant costs
related to environmental issues in the future, including those arising from
environmental compliance activities and remediation stemming from historical
waste management practices at the Company’s facilities. The reserve to cover
probable environmental liabilities, as well as anticipated compliance
activities, totaling $5.1 million was recorded as of June 30, 2004. A
portion of the reserve is included in the balance of other accrued liabilities
and the remainder is recorded in accrued environmental reserves. The Company
is
not otherwise aware at this time of any material environmental remediation
liabilities or contingent liabilities relating to environmental matters
with
respect to our facilities for which the establishment of an additional
reserve
would be appropriate at this time. To the extent the Company incurs any
such
additional future costs, these costs will most likely be incurred over
a number
of years. However, future regulatory action regarding historical waste
management practices at the Company’s facilities and future changes in
applicable laws and regulations may require the Company to incur significant
costs that may have a material adverse effect on the Company’s future financial
performance.
(12)
|
Obligation
to administer USWA benefits
|
The
Company has an agreement with the USWA to administer health insurance benefits
to the Company’s USWA employees while on layoff status and to administer payment
of monthly contributions to the Steelworker’s Pension Trust on behalf of local
union officials while on union business. To fund this program the USWA
provided
an initial cash contribution of $3.0 million. As of June 30, 2004, the
balance
of this cash account totaled $2.8 million. Expenditures from this account
are
used to provide health insurance to laid-off USWA employees. The Company
has
agreed to continue to administer this program until the fund is exhausted.
The
Company will provide the USWA with periodic reports regarding the financial
status of the fund. At June 30, 2004, the cash account balance is included
in
other assets and the related liability is included in other long-term
liabilities in the accompanying consolidated balance sheet.
(13)
|
Disclosures
about fair value of financial instruments and significant group
concentration of credit risk
|
The
following methods and assumptions were used to estimate the fair value
of each
class of financial instruments for which it is practicable to estimate
that
value:
(a)
|
Cash
and cash equivalents
|
The
carrying amount approximates fair value because of the short maturity
of these
investments.
(b)
|
Revolving
credit facilities
|
Since
these borrowings are based on short-term interest rates available to
the
Company, the estimated fair values of these financials instruments approximate
their recorded carrying amounts.
The
fair
values of the Company’s long-term debt obligations are estimated based upon
quoted market prices for the same or similar issues or on the current
rates
offered for debt of the same remaining maturities. The estimated fair
values of
the Company’s financial instruments are as follows:
(14)
|
Comprehensive
income
|
Other
comprehensive income consists of foreign currency translation adjustments.
At
June 30, 2005, the other comprehensive income relating to foreign currency
translation adjustments was immaterial. Total comprehensive income was
$3.4 million for the six months ended June 30, 2004.
(15)
|
Other
postretirement benefits
|
In
connection with an acquisition that was consummated on December 19, 2003,
the
Company assumed a defined retiree health care plan covering approximately
14
union hourly employees. These postretirement benefits are provided under
the
terms of the collective bargaining agreement with the Bricklayers & Allied
Craftsman International Union and are based upon years of service and age.
Health care benefits that are provided include comprehensive hospital,
surgical,
major medical and drug benefit provisions. Participation in the plan requires
the retiree to contribute 50% of the cost of the benefits provided. Currently
there are no plan assets and the Company funds the benefits as claims are
paid.
The following provides the components of net periodic benefit cost for
the six
months ended June 30, 2004.
Service
cost
|
$
|
7
|
Interest
cost
|
|
18
|
Net
periodic postretirement benefit cost
|
$
|
25
|
Under
the
terms of an asset purchase agreement executed in December 2003, the Company
acquired the right to reimbursement from insurance claims for damage incurred
to
the #3 blast furnace located at the Lorain, Ohio facility. During the last
six
months of 2004, the Company received $34.2 million of insurance proceeds.
The
Company recorded the receipt of the insurance proceeds and reduced noncurrent
assets by $16.4 million, and the remainder resulted in the recognition
of $10.2
million in extraordinary gain, net of tax of $6.5 million. Insurance proceeds
received during the year ended December 31, 2005 totaled $2.6 million net
of
associated fees. The receipt of insurance proceeds for the year ended December
31, 2005 resulted in the recognition of an extraordinary gain of $1.6 million,
reflected net of tax of $1.0 million. A Settlement Agreement and Release
was
reached on April 24, 2006. As of December 31, 2006, $38.2 million, net
of the
$19.8 million payment to Perry Partners L.P. shareholders and professional
fees,
was received by the Company (see Note 18).
During
July 2005, Industrias CH, S.A. de C.V. (ICH) and its majority owned subsidiary,
Grupo Simec, S.A. de C.V. (Simec) acquired 49.8% and 50.2%, respectively,
of the
stock of the Company. The stock purchased includes that owned by its then
majority shareholder, Perry Capital. The Company will become a subsidiary
of
Simec.
On
July
22, 2005, the Company and Industrias CH acquired the outstanding shares of
PAV
Republic Inc. (Republic) through the Company’s subsidiary SimRep Corporation, a
U.S. company. Such transaction was valued at USD 245 million where USD 229
million corresponds to the purchase price and USD 16 million, to the direct
cost
of the business combination. The Company contributed USD 123 million to acquire
50.2% of the representative shares of SimRep Corporation and Industrias CH,
the
holding company, acquired the remaining 49.8%. SimRep then acquired all the
shares from Republic through a stock purchase agreement. Under the terms of
the
stock purchase agreement, the Company acquired the right to a portion of the
reimbursement from an unresolved insurance claim. On April 24, 2006 a Settlement
Agreement and Release was reached and approximately Ps. 407 million, net of
payment to Predecessor’s shareholders of Ps. 211 and professional fees, has been
received by the Company. Due to the reimbursement, the Company changed the
final
purchase accounting adjustment to reflect the fair value of the assets acquired
and liabilities assumed.
The
unaudited proforma condensed combined statements of income for the six months
ended June 20, 2005, and for the year ended December 31, 2005, give effect
to
Republic’s acquisition as if it had occurred on January 1, 2005. Each are
reconciled from Mexican GAAP to US GAAP.
As
a
result of the acquisition of Republic, an analysis of information regarding
Simec’s results of operations for 2005, including Republic’s six plants, over a
six-month period and for the full year, as if the plants had been incorporated
into the Company since the beginning of the year (unaudited information) is
as
follows:
Unaudited
Pro Forma Condensed Combined Statements of Income
For
the Six Months Ended June 30, 2005
(Thousands
of Constant Mexican pesos as of June 30, 2006,
except
earnings per share figures)
|
|
|
|
Simec
as reported
|
|
PAV
Republic
(1)
|
|
Proforma
adjustments
|
|
|
|
Simec
Pro
Forma
|
|
Net
sales
|
|
|
Ps.
|
|
|
3,573,182
|
|
|
8,815,639
|
|
|
-
|
|
|
|
|
|
12,388,821
|
|
Direct
Cost of Sales
|
|
|
|
|
|
2,326,363
|
|
|
7,660,786
|
|
|
-
|
|
|
|
|
|
9,987,149
|
|
Marginal
Profit
|
|
|
|
|
|
1,246,819
|
|
|
1,154,853
|
|
|
-
|
|
|
|
|
|
2,401,672
|
|
Indirect
overhead, selling, general and administrative expenses
|
|
|
|
|
|
374,630
|
|
|
453,069
|
|
|
23,491
|
|
|
(2)
|
|
|
851,190
|
|
Operating
income
|
|
|
|
|
|
872,189
|
|
|
701,784
|
|
|
(23,491
|
)
|
|
|
|
|
1,550,482
|
|
Comprehensive
financing cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense income , net
|
|
|
|
|
|
8,454
|
|
|
(90,201
|
)
|
|
4,984
|
|
|
(3)
|
|
|
(76,763
|
)
|
Foreign
exchange loss, net
|
|
|
|
|
|
(35,926
|
)
|
|
-
|
|
|
|
|
|
|
|
|
(35,926
|
)
|
Monetary
position loss
|
|
|
|
|
|
(7,601
|
)
|
|
-
|
|
|
|
|
|
|
|
|
(7,601
|
)
|
Comprehensive
financial result, net
|
|
|
|
|
|
(35,073
|
)
|
|
(90,201
|
)
|
|
4,984
|
|
|
|
|
|
(120,290
|
)
|
Other
income, net
|
|
|
|
|
|
7,633
|
|
|
26,583
|
|
|
-
|
|
|
|
|
|
34,216
|
|
Income
before income tax, statutory employee profit sharing and minority
interest
|
|
|
|
|
|
844,749
|
|
|
638,166
|
|
|
(18,507
|
)
|
|
|
|
|
1,464,408
|
|
Income
tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
73,324
|
|
|
245,400
|
|
|
-
|
|
|
|
|
|
318,724
|
|
Deferred
|
|
|
|
|
|
24,160
|
|
|
(12,650
|
)
|
|
(6,940
|
)
|
|
(4)
|
|
|
4,570
|
|
Total
income tax
|
|
|
|
|
|
97,484
|
|
|
232,750
|
|
|
(6,940
|
)
|
|
|
|
|
323,294
|
|
Net
consolidated income
|
|
|
Ps.
|
|
|
747,265
|
|
|
405,416
|
|
|
(11,567
|
)
|
|
(5)
|
|
|
1,141,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
|
|
|
-
|
|
|
201,816
|
|
|
(5,758
|
)
|
|
(6)
|
|
|
196,058
|
|
Majority
interest
|
|
|
Ps.
|
|
|
747,265
|
|
|
203,600
|
|
|
(5,809
|
)
|
|
(6)
|
|
|
945,056
|
|
|
|
|
Ps.
|
|
|
747,265
|
|
|
405,416
|
|
|
(11,567
|
)
|
|
|
|
|
1,141,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
405,209,451
|
|
|
|
|
|
|
|
|
|
|
|
405,209,451
|
|
Earnings
per share (pesos)
|
|
|
|
|
|
Ps.
1.84
|
|
|
|
|
|
|
|
|
|
|
|
2.33
|
|
Unaudited
Pro Forma Condensed Combined Statements of Income
For
the Year Ended December 31, 2005
(Thousands
of Constant Mexican pesos as of June 30, 2006,
except
earnings per share figures)
|
|
|
|
Simec
as reported
|
|
PAV
Republic
(1)
|
|
Proforma
adjustments
|
|
Simec
Pro
Forma
|
|
Net
sales
|
|
|
Ps.
|
|
|
12,966,627
|
|
|
9,414,099
|
|
|
|
|
|
22,380,726
|
|
Direct
Cost of Sales
|
|
|
|
|
|
10,370,940
|
|
|
8,185,160
|
|
|
|
|
|
18,556,100
|
|
Marginal
Profit
|
|
|
|
|
|
2,595,687
|
|
|
1,228,939
|
|
|
|
|
|
3,824,626
|
|
Indirect
overhead, selling, general and administrative expenses
|
|
|
|
|
|
1,018,105
|
|
|
540,268
|
|
|
26,362
(2)
|
|
|
1,584,735
|
|
Operating
income
|
|
|
|
|
|
1,577,582
|
|
|
688,671
|
|
|
(26,362
|
)
|
|
2,239,891
|
|
Comprehensive
financing cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(expense) income , net
|
|
|
|
|
|
(15,728
|
)
|
|
(97,114
|
)
|
|
5,593
(3)
|
|
|
(107,249
|
)
|
Foreign
exchange (loss) gain, net
|
|
|
|
|
|
(75,279
|
)
|
|
-
|
|
|
|
|
|
(75,279
|
)
|
Monetary
position loss
|
|
|
|
|
|
(53,663
|
)
|
|
2,007
|
|
|
|
|
|
(51,656
|
)
|
Comprehensive
financial result, net
|
|
|
|
|
|
(144,670
|
)
|
|
(95,107
|
)
|
|
5,593
|
|
|
(234,184
|
)
|
Other
income (expenses), net
|
|
|
|
|
|
55,489
|
|
|
(10,398
|
)
|
|
|
|
|
45,091
|
|
Income
before income tax, statutory employee profit sharing and minority
interest
|
|
|
|
|
|
1,488,401
|
|
|
583,166
|
|
|
|
|
|
2,050,798
|
|
Income
tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
79,294
|
|
|
152,759
|
|
|
|
|
|
232,053
|
|
Deferred
|
|
|
|
|
|
111,718
|
|
|
54,394
|
|
|
(7,792
(4)
|
)
|
|
158,320
|
|
Total
income tax
|
|
|
|
|
|
191,012
|
|
|
207,153
|
|
|
(7,792
|
)
|
|
390,373
|
|
Net
consolidated income
|
|
|
Ps.
|
|
|
1,297,389
|
|
|
376,013
|
|
|
(12,977
(5)
|
)
|
|
1,660,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
Ps.
|
|
|
17,491
|
|
|
187,179
|
|
|
(6,460
(6)
|
)
|
|
198,210
|
|
Majority
interest
|
|
|
|
|
|
1,279,898
|
|
|
188,834
|
|
|
(6,517
(6)
|
)
|
|
1,462,215
|
|
|
|
|
Ps.
|
|
|
1,297,389
|
|
|
376,013
|
|
|
(12,977
|
)
|
|
1,660,425
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
413,788,797
|
|
|
|
|
|
|
|
|
413,788,797
|
|
Earnings
per share (pesos)
|
|
|
|
|
|
3.09
|
|
|
|
|
|
|
|
|
3.53
|
|
(1)
This
column shows the income statement of Pav Republic for the six-month period
ended
June 30, 2005 and for the period from January 1, 2005 to July 22,
2005.
(2)
The
increase in the expenses is driven by two components; the first one is the
decrease of the stock compensation expense of $60,053 that was recorded during
the period January 1, 2005 through July 22, 2005 and $53,512 during the period
January 1, 2005 through June 30, 2005. The company terminated the stock
compensation plan at the time of the purchase and provided no additional
compensation to employees to replace this lost benefit. The Company made the
assumption that the stock compensation recognized during the period January
1,
2005 - July 22, 2005 would not be recorded if the purchase would have taken
place on January 1, 2005. The second component is an increase in depreciation
and amortization expense of $86,415 and $77,003 for the periods January 1,
2005
through July 22, 2005 and January 1, 2005 through June 30, 2006 respectively,
due to the purchase price allocation to intangibles related to Republic’s Union
Agreement, Kobe Tech, Customer Relationships and Republic trade name being
recorded at the time of purchase, the Company made the assumption that Republic
would have booked this entry as of January 1, 2005 and the Company recorded
an
additional seven months of amortization expense. Also, the depreciation
expense was adjusted as if the allocation of the purchase price would have
taken
place on January 1, 2005. The value of the plant, property and equipment
increased and depreciation expense increased accordingly.
(3)
Due to
the allocation of the purchase price to the deferred financing costs related
to
the Perry Note and the GE revolver (both items were subject to a decrease in
the
cost basis) as of July 22, 2005, the Company adjusted the amortization expense
to reflect the decrease in cost basis as if the purchase would have occurred
on
January 1, 2005.
(4)
The
Company adjusted the income tax expense to reflect the change in net income
due
to the decrease in selling, general and administrative expenses, increase in
depreciation and amortization and decrease in interest expense described above
at a rate of 37.5% which was the effective income tax rate of the
company.
(5)
The
effect in the net income reflects the change due to the decrease in selling,
general and administrative expenses, increase in depreciation and amortization,
decrease in interest expense and decrease in the income tax expense, described
above.
(6)
The
adjustment in the minority interest reflecting Industrias CH’s 49.8% interest in
Republic.
SUPPLEMENTAL
UNAUDITED PRO FORMA CONDENSED RECONCILIATION OF MEXICAN GAAP NET INCOME TO
US
GAAP NET INCOME
For
the Six Months Ended June 30, 2005
(Thousands
of Constant Mexican pesos as of June 30, 2006,
except
earnings per share figures)
|
|
|
|
Simec
as reported
|
|
PAV
Republic
|
|
Proforma
adjustments
|
|
Simec
Pro
Forma
|
|
Net
income as reported under Mexican GAAP
|
|
|
Ps.
|
|
|
747,265
|
|
|
406,416
|
|
|
(11,567
|
)
|
|
1,141,114
|
|
U.S.
GAAP Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
indirect costs
|
|
|
|
|
|
(2,817
|
)
|
|
|
|
|
|
|
|
(2,817
|
)
|
Depreciation
on restatement of machinery and equipment
|
|
|
|
|
|
(11,951
|
)
|
|
|
|
|
|
|
|
(11,951
|
)
|
Deferred
income taxes
|
|
|
|
|
|
(4,802
|
)
|
|
|
|
|
|
|
|
(4,802
|
)
|
Deferred
employee profit sharing
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
47
|
|
Pre-operating
expenses, net
|
|
|
|
|
|
14,326
|
|
|
|
|
|
|
|
|
14,326
|
|
Amortization
of gain from monetary position and exchange loss capitalized under
Mexican
GAAP
|
|
|
|
|
|
3,620
|
|
|
|
|
|
|
|
|
3,620
|
|
Minority
interest
|
|
|
|
|
|
|
|
|
(201,816
|
)
|
|
5,758
|
|
|
(196,058
|
)
|
Total
U.S. GAAP adjustments
|
|
|
|
|
|
(1,577
|
)
|
|
(201,816
|
)
|
|
5,758
|
|
|
(197,635
|
)
|
Net
income under U.S. GAAP
|
|
|
Ps.
|
|
|
745,688
|
|
|
203,600
|
|
|
(5,809
|
)
|
|
943,479
|
|
Weighted
average outstanding basic after split
|
|
|
|
|
|
405,209,451
|
|
|
|
|
|
|
|
|
405,209,451
|
|
Net
earnings per share (pesos) after split
|
|
|
Ps.
|
|
|
1.78
|
|
|
|
|
|
|
|
|
2.25
|
|
SUPPLEMENTAL
UNAUDITED PRO FORMA CONDENSED RECONCILIATION OF MEXICAN GAAP NET INCOME TO
US
GAAP NET INCOME
For
the Year Ended December 31, 2005
(Thousands
of Constant Mexican pesos as of June 30, 2006,
except
earnings per share figures)
|
|
|
|
Simec
as reported
|
|
PAV
Republic
|
|
Proforma
adjustments
|
|
Simec
Pro
Forma
|
|
Net
income as reported under Mexican GAAP
|
|
|
Ps.
|
|
|
1,297,389
|
|
|
376,013
|
|
|
(12,977
|
)
|
|
1,660,424
|
|
U.S.
GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
indirect costs
|
|
|
|
|
|
(3,958
|
)
|
|
|
|
|
|
|
|
(3,958
|
)
|
Depreciation
on restatement of machinery and equipment
|
|
|
|
|
|
(24,820
|
)
|
|
|
|
|
|
|
|
(24,820
|
)
|
Deferred
income taxes
|
|
|
|
|
|
(5,696
|
)
|
|
|
|
|
|
|
|
(5,696
|
)
|
Deferred
employee profit sharing
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
46
|
|
Pre-operating
expenses, net
|
|
|
|
|
|
26,023
|
|
|
|
|
|
|
|
|
26,023
|
|
Amortization
of gain from monetary position and exchange loss capitalized under
Mexican
GAAP
|
|
|
|
|
|
7,239
|
|
|
|
|
|
|
|
|
7,239
|
|
Minority
interest
|
|
|
|
|
|
(17,491
|
)
|
|
(187,179
|
)
|
|
6,460
|
|
|
(198,210
|
)
|
Total
approximate U.S. GAAP adjustments
|
|
|
|
|
|
(18,657
|
)
|
|
(187,179
|
)
|
|
6,460
|
|
|
(199,376
|
)
|
Approximate
net income under U.S. GAAP
|
|
|
Ps.
|
|
|
1,278,723
|
|
|
188,834
|
|
|
(6,517
|
)
|
|
1,461,048
|
|
Weighted
average outstanding basic after split
|
|
|
|
|
|
413,788,797
|
|
|
|
|
|
|
|
|
413,788,797
|
|
Net
earnings per share (pesos) after split
|
|
|
Ps.
|
|
|
3.09
|
|
|
|
|
|
|
|
|
3.53
|
|
SCHEDULE
I
GRUPO
SIMEC, S.A. DE C.V. ( PARENT COMPANY ONLY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005 and 2004
|
|
|
|
|
|
|
|
(Thousands
of constant Mexican pesos as of June 30, 2006)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,864
|
|
|
18,584
|
|
|
|
|
|
|
|
|
|
Accounts
receivable:
|
|
|
|
|
|
|
|
Related
parties
|
|
|
433,110
|
|
|
240,338
|
|
Other
receivables
|
|
|
441
|
|
|
493
|
|
|
|
|
|
|
|
|
|
Total
accounts receivable, net
|
|
|
433,551
|
|
|
240,831
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
435,415
|
|
|
259,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
term account receivables to subsidiary companies
|
|
|
881,114
|
|
|
1,742,189
|
|
|
|
|
|
|
|
|
|
Investment
in subsidiary companies
|
|
|
6,343,251
|
|
|
4,691,414
|
|
|
|
|
|
|
|
|
|
Property,
net
|
|
|
177,975
|
|
|
181,089
|
|
|
|
|
|
|
|
|
|
Deferred
Income Tax
|
|
|
10,445
|
|
|
18,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,848,200
|
|
|
6,892,752
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
installments of long-term debt
|
|
$
|
3,276
|
|
|
3,538
|
|
Other
accounts payable and accrued expenses
|
|
|
19,380
|
|
|
19,917
|
|
Accounts
payable to related parties
|
|
|
4,547
|
|
|
971
|
|
Deferred
revenue for leasing
|
|
|
-
|
|
|
21,356
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
27,203
|
|
|
45,782
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Capital
stock
|
|
|
3,476,499
|
|
|
3,408,488
|
|
Additional
paid-in-capital
|
|
|
845,018
|
|
|
682,066
|
|
Contributions
for future capital stock increases
|
|
|
-
|
|
|
230,310
|
|
Retained
earnings
|
|
|
4,519,677
|
|
|
3,239,778
|
|
Cumulative
deferred income tax
|
|
|
(905,828
|
)
|
|
(905,828
|
)
|
Equity
adjustment for non-monetary assets
|
|
|
(154,723
|
)
|
|
179,309
|
|
Fair
value of derivative financial instruments
|
|
|
40,354
|
|
|
12,847
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
7,820,997
|
|
|
6,846,970
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,848,200
|
|
|
6,892,752
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
SCHEDULE
I
GRUPO
SIMEC, S.A. DE C.V. ( PARENT COMPANY ONLY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
(Thousands
of constant Mexican pesos as of June 30, 2006)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
Equity
in results of subsidiary companies
|
|
$
|
1,186,601
|
|
|
1,390,990
|
|
|
261,005
|
|
For
leasing
|
|
|
21,074
|
|
|
10,821
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
of income
|
|
|
1,207,675
|
|
|
1,401,811
|
|
|
261,005
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
4,759
|
|
|
2,240
|
|
|
-
|
|
Administrative
|
|
|
4,606
|
|
|
1,467
|
|
|
3,401
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
9,365
|
|
|
3,707
|
|
|
3,401
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,198,310
|
|
|
1,398,104
|
|
|
257,604
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
financing result:
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(321
|
)
|
|
(388
|
)
|
|
(719
|
)
|
Interest
income
|
|
|
157,734
|
|
|
170,709
|
|
|
166,682
|
|
Foreign
exchange (loss) gain, net
|
|
|
(167
|
)
|
|
4,606
|
|
|
423
|
|
Monetary
position loss
|
|
|
(60,610
|
)
|
|
(131,048
|
)
|
|
(99,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
financial result, net
|
|
|
96,636
|
|
|
43,879
|
|
|
66,806
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expenses) income, net:
|
|
|
(190
|
)
|
|
7,554
|
|
|
(2,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax
|
|
|
1,294,756
|
|
|
1,449,537
|
|
|
322,407
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax
|
|
|
6,658
|
|
|
0
|
|
|
0
|
|
Deferred
income tax
|
|
|
8,199
|
|
|
(13,134
|
)
|
|
(1,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,279,899
|
|
|
1,462,671
|
|
|
324,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE
I
GRUPO
SIMEC, S.A. DE C.V. ( PARENT COMPANY ONLY)
Years
ended December 31, 2005, 2004 and 2003
(Thousands
of constant Mexican pesos as of June 30, 2006)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,279,899
|
|
|
1,462,671
|
|
|
320,522
|
|
Add
(deduct) items not requiring the use of resources
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
4,759
|
|
|
2,240
|
|
|
-
|
|
Equity
in net results of subsidiary companies
|
|
|
(1,186,601
|
)
|
|
(1,390,990
|
)
|
|
(261,005
|
)
|
Deferred
income tax
|
|
|
8,199
|
|
|
(13,134
|
)
|
|
1,886
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
provided by operations
|
|
|
106,256
|
|
|
60,787
|
|
|
61,403
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Short
term of subsidiaries companies, net
|
|
|
(189,196
|
)
|
|
208,939
|
|
|
67,558
|
|
Other
accounts receivable, net
|
|
|
52
|
|
|
(375
|
)
|
|
(6
|
)
|
Other
accounts payable and accrued expenses
|
|
|
(537
|
)
|
|
5,838
|
|
|
(433
|
)
|
Deferred
revenue for leasing
|
|
|
(21,356
|
)
|
|
21,356
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
(used in) provided by operating activities
|
|
|
(104,781
|
)
|
|
296,545
|
|
|
128,522
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
Increases
in capital stock
|
|
|
0
|
|
|
24,693
|
|
|
392,351
|
|
Contributions
for future capital stock increases
|
|
|
-
|
|
|
230,310
|
|
|
-
|
|
Tax
on assets
|
|
|
-
|
|
|
(1,715
|
)
|
|
170
|
|
Long
term account receivables to subsidiary companies
|
|
|
861,075
|
|
|
548,921
|
|
|
(496,809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Funds
provided by financing activities
|
|
|
861,075
|
|
|
802,209
|
|
|
(104,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of property
|
|
|
(1,645
|
)
|
|
(183,329
|
)
|
|
-
|
|
Investment
in subsidiary companies
|
|
|
(771,369
|
)
|
|
(917,922
|
)
|
|
(3,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Funds
used in investing activities
|
|
|
(773,014
|
)
|
|
(1,101,251
|
)
|
|
(3,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and equivalents
|
|
|
(16,720
|
)
|
|
(2,497
|
)
|
|
20,927
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and equivalents:
|
|
|
|
|
|
|
|
|
|
|
At
beginning of year
|
|
|
18,584
|
|
|
21,081
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
At
end of year
|
|
$
|
1,864
|
|
|
18,584
|
|
|
21,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE
I
GRUPO
SIMEC, S.A. DE C.V. (Parent Company Only)
Years
ended December 31, 2005, 2004 and 2003
(Thousands
of constant Mexican pesos as of June 30, 2006)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Organization
of the Company and certain other information:
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying condensed financial statements reflect the results of
operations of the Company since its incorporation in August
1990.
|
|
|
|
|
|
|
|
|
|
|
Information
with respect to the Company's material contingencies are presented
in note
16 of the consolidated financial
statements.
|
UNAUDITED
FINANCIAL INFORMATION AS OF AND FOR THE NINE MONTH PERIODS ENDED SEPTEMBER
30,
2006 AND 2005
Set
forth
below is our unaudited financial information as of September 30, 2006
and for
the three months and nine months ended September 30, 2006 and 2005. This
financial information has been prepared in accordance with Mexican GAAP
and is
presented in constant pesos with purchasing power as of September 30,
2006. This
unaudited financial information includes all adjustments, consisting
of only
normally recurring adjustments, necessary for a fair presentation of
this
financial information. You should read this unaudited financial information
together with our audited consolidated financial statements as of December
31,
2005 and 2004 and for each of the three years in the period ended December
31,
2005, which are included elsewhere in this prospectus. Since this unaudited
financial information is presented in constant Mexican pesos with purchasing
power as of September 30, 2006, it is not directly comparable to the
financial
information presented elsewhere in this prospectus, which, unless otherwise
stated, is presented in constant Mexican pesos with purchasing power
as of June
30, 2006. The financial information presented elsewhere in this prospectus
stated in constant Mexican pesos with purchasing power as of June 30,
2006 would
require the application of a restatement factor of 1.018 for such financial
information to be comparable with this unaudited financial information.
We do
not believe that the application of such factor represents a material
change in
the purchasing power of the Mexican peso during this period. The NCPI
increased
2.47% from December 31, 2005 to September 30, 2006 and increased 1.8%
from June
30, 2006 to September 30, 2006.
This
information does not contain all the information and disclosures normally
included in interim financial statements prepared in accordance with
Mexican
GAAP. We have not undertaken a U.S. GAAP reconciliation as of September
30, 2006
or the three months or nine months ended September 30, 2006 and 2005.
The
financial information includes the consolidation of Republic from July
22, 2005.
Period to period comparison of our results of operation is made more
difficult
as a result of the inclusion of financial information relating to the
acquisition of Republic only from July 22, 2005.
Summary
Consolidated Unaudited Financial Information
|
Three
months ended September 30,
|
Nine
months ended
September
30,
|
|
2005
|
2006
|
%
Change
|
2005
|
2006
|
%
Change
|
|
(Millions
of constant pesos with purchasing power as of September 30,
2006)
(except
per share data, percentages and ratios)
|
Income
Statement Data:
|
|
|
|
|
|
|
Mexican
GAAP:
|
|
|
|
|
|
|
Net
sales
|
4,677
|
5,561
|
18.9%
|
8,315
|
17,688
|
112.7%
|
Direct
cost of sales
|
3,890
|
4,420
|
13.6%
|
6,259
|
14,276
|
128.1%
|
Marginal
profit
|
787
|
1,141
|
45.0%
|
2,056
|
3,412
|
65.9%
|
Indirect
manufacturing, selling, general and administrative
expenses
|
214
|
200
|
(6.5%)
|
463
|
671
|
44.9%
|
Depreciation
and amortization
|
94
|
109
|
15.9%
|
227
|
314
|
38.3%
|
Operating
income
|
479
|
832
|
73.7%
|
1,366
|
2,427
|
77.7%
|
Comprehensive
financing (cost) income
|
(53)
|
(55)
|
3.8%
|
(89)
|
(9)
|
(89.9%)
|
Other
income (expense), net
|
8
|
(6)
|
(175.0%)
|
16
|
27
|
68.7%
|
Income
before taxes and employee profit sharing
|
434
|
771
|
77.6%
|
1,293
|
2,445
|
89.1%
|
Income
tax expense and employee profit
sharing
|
56
|
236
|
321.4%
|
155
|
343
|
121.3%
|
Net
income
|
378
|
535
|
41.5%
|
1,138
|
2,102
|
84.7%
|
Allocation
of net income:
|
|
|
|
|
|
|
Minority
interest
|
31
|
56
|
80.6%
|
31
|
253
|
716.1%
|
Majority
interest
|
347
|
479
|
38.0%
|
1,107
|
1,849
|
67.0%
|
Net
income per share
|
0.84
|
1.14
|
35.7%
|
2.71
|
4.40
|
62.4%
|
Net
income per ADS
(1)
|
2.52
|
3.41
|
35.3%
|
8.14
|
13.20
|
62.2%
|
Weighted
average shares outstanding (thousands)
(2)
|
413,789
|
421,215
|
|
408,101
|
420,045
|
|
Weighted
average ADSs
Outstanding
(thousands)
|
137,930
|
140,405
|
|
136,034
|
140,015
|
|
Operational
information:
|
|
|
|
|
|
|
Annual
installed
capacity (thousands of tons)
|
2,847
|
2,902
|
|
2,847
|
2,902
|
|
Tons
shipped (thousands of tons)
|
592
|
680
|
|
1,115
|
2,050
|
|
Mexico
|
248
|
250
|
|
697
|
712
|
|
United
States, Canada and others
|
344
|
430
|
|
418
|
1,338
|
|
SBQ
steel
|
385
|
488
|
|
554
|
1,485
|
|
Structural
and other steel products
|
207
|
192
|
|
561
|
565
|
|
Per
ton (Ps.):
|
|
|
|
|
|
|
Net
sales price per ton
|
7,900
|
8,178
|
|
7,457
|
8,628
|
|
Cost
of sales per ton
|
6,571
|
6,500
|
|
5,613
|
6,964
|
|
Operating
income per ton
|
809
|
1,224
|
|
1,225
|
1,184
|
|
Adjusted
EBITDA per ton
(3)
|
968
|
1,384
|
|
1,429
|
1,337
|
|
Number
of employees
|
4,433
|
4,303
|
|
4,433
|
4,303
|
|
|
|
|
|
|
|
|
_____________
(1)
Following
our three-for-one stock split effective May 30, 2006, one ADS represents
three
series B shares; previously one ADS represented one series B share.
(2)
For
U.S.
GAAP and Mexican GAAP purposes, the weighted average shares outstanding
were
calculated to give effect to the stock split described in Note 13(a)
to the
audited financial statements
at
December 31, 2005.
(3)
Adjusted
EBITDA is not a financial measure computed under Mexican or U.S. GAAP.
Adjusted
EBITDA derived from our Mexican GAAP financial information means Mexican
GAAP
net income (loss) excluding (i) depreciation and amortization, (ii) financial
income (expense), net (which is composed of net interest expense, foreign
exchange gain or loss and monetary position gain or loss), (iii) other
income
(expense) and (iv) income tax expense and employee statutory profit-sharing
expense.
We
believe that adjusted EBITDA can be useful to facilitate comparisons
of
operating performance between periods and with other companies in our
industry
because it excludes the effect of (i) depreciation and amortization,
which
represents a non-cash charge to earnings, (ii) certain financing costs,
which
are significantly affected by external factors, including interest rates,
foreign currency exchange rates, and inflation rates, which have little
or no
bearing on our operating performance, (iii) other income (expense) that
are not
constant operations and (iv) income tax expense and employee statutory
profit-sharing expense. However, adjusted EBITDA has certain material
limitations, including that (i) it does not include taxes, which are
a necessary
and recurring part of our operations; (ii) it does not include depreciation
and
amortization,
which, because we must utilize property, equipment and other assets in
order to
generate revenues in our operations, is a necessary and recurring part
of our
costs; (iii) it does not include comprehensive cost of financing, which
reflects
our cost of capital structure and assisted us in generating revenue;
and (iv) it
does not include other income and expenses that are part of our net income.
Therefore, any measure that excludes any or all of taxes, depreciation
and
amortization, comprehensive cost of financing and other income and expenses
has
material limitations.
Adjusted
EBITDA does not represent, and should not be considered as, an alternative
to
net income, as an indicator of our operating performance, or as an alternative
to cash flow as an indicator of liquidity. We believe that adjusted EBITDA
provides a useful measure for investors and analysts to evaluate our
performance
and compare it with other companies. In making such comparisons, however,
you
should bear in mind that adjusted EBITDA is not defined and is not a
recognized
financial measure under Mexican GAAP or U.S. GAAP and that it may be
calculated
differently by different companies and must be read in conjunction with
the
explanations that accompany it. Adjusted EBITDA as presented in this
table does
not take into account our working capital requirements, debt service
requirements and other commitments.
Adjusted
EBITDA should not be considered in isolation or as a substitute for net
income,
net cash flow from operating activities or net cash flow from investing
and
financing activities. Reconciliation of net income to adjusted EBITDA
is as
follows:
|
Three
months ended
September
30, 2006
|
Nine
Months ended
September
30, 2006
|
|
2005
|
2006
|
2005
|
2006
|
Net
income
|
378
|
535
|
1,138
|
2,102
|
Depreciation
and amortization
|
94
|
109
|
227
|
314
|
Financial
income (expense)
|
(53)
|
(55)
|
(89)
|
(9)
|
Income
tax expense and employee profit sharing
|
56
|
236
|
155
|
343
|
Other
income (expense)
|
8
|
(6)
|
16
|
27
|
Adjusted
EBITDA
|
573
|
941
|
1,593
|
2,741
|
.
Comparison
of Nine Months Ended September 30, 2006 and 2005
Net
Sales
Our
net
sales increased 113% to Ps. 17,688 million in the nine-month period ended
September 30, 2006 (including net sales of Ps. 11,942 million generated
by
Republic), compared to Ps. 8,315 million in the same period of 2005 (including
net sales of Ps. 2,943 million generated by Republic from July 22 to
September
30, 2005). Net sales, excluding sales of Republic increased 7% from Ps.
5,372
million to Ps. 5,746 million due to higher prices for our basic steel
products
(the average price increased 10% in real terms in the nine-month period
ended
September 30, 2006 compared to the same period in 2005). Sales in metric
tons of
steel products increased 84% to 2,049,646 metric tons in the nine-month
period
ended September 30, 2006 (including 1,258,429 metric tons generated by
Republic)
compared to 1,115,054 metric tons in the same period of 2005 (including
308,719
metric tons generated by Republic since its acquisition). Sales outside
of
Mexico (including sales by U.S. subsidiaries) of basic steel products
increased
220% to 1,338,025 metric tons in the nine-month period ended September
30, 2006
(including 1,258,429 metric tons generated by Republic) compared to 418,380
metric tons in the same period of 2005 (including 308,719 metric tons
generated
by Republic since its acquisition). We sell billet only when we cannot
use it in
our steel production process. We sold 1,388 metric tons of billet in
the
nine-month period ended September 30, 2006, compared to 13,305 tons of
billet in
the same period of 2005. The average price of steel products increased
17% in
real terms in the nine-month period ended September 30, 2006 compared
to the
same period in 2005. We attribute this increase to higher prices prevailing
in
the Mexican steel markets.
Direct
Cost of Sales
Our
direct cost of sales increased 128% to Ps. 14,276 million in the nine-month
period ended September 30, 2006 (including Ps. 10,731 million relating
to
Republic) compared to Ps. 6,259 million in the same period of 2005 (including
Ps. 2,726 million relating to Republic since its acquisition). Direct
cost of
sales, excluding Republic, remain substantially unchanged reflecting
Ps. 3,545
million in the nine-month period ended September 30, 2006 compared to
Ps. 3,533
million in the same period of 2005. The average cost of raw materials
used to
produce a ton of steel products increased 3% in real terms in the nine-month
period ended September 30, 2006 compared to the same period of 2005.
Direct cost
of sales as a percentage of net sales was 81% in the nine-month period
ended
September 30, 2006 compared to 75% in the same period of 2005. We attribute
the
higher cost of sales in the nine-month period ended September 30, 2006
primarily
to additional direct cost of sales at Republic. The average cost of raw
materials used to produce a ton of steel products increased 25% in real
terms in
the nine-month period ended September 30, 2006 compared to the same period
of
2005, primarily resulting from increased raw materials costs at
Republic.
Marginal
Profit
Our
marginal profit increased 66% to Ps. 3,412 million in the nine-month
period
ended September 30, 2006 (including Ps. 1,211 million relating to Republic)
compared to Ps. 2,056 million in the same period of 2005 (including Ps.
217
million relating to Republic since its acquisition). As a percentage
of net
sales, marginal profit was 19% in the nine-month period ended September
30, 2006
compared to 25% in the same period of 2005. This decrease is the result
of the
higher cost of sales prevailing at our Republic facilities.
Indirect
Manufacturing, Selling, General and Administrative Expenses
Our
indirect manufacturing, selling, general, and administrative expenses
(which
include depreciation and amortization) increased 43% to Ps. 985 million
in the
nine-month period ended September 30, 2006 (including Ps. 439 million
relating
to Republic) from Ps. 690 million in the
same
period of 2005 (including Ps. 120 million relating to Republic since
its
acquisition). Republic’s indirect manufacturing, selling, general and
administrative expenses (which include depreciation and amortization)
included
in our consolidated results increased 266% from Ps. 120 million to Ps.
439
million, due to the consolidation of Republic’s results for the full nine-month
period ended September 30, 2006, whereas in the same period of 2005 we
consolidated Republic’s results from July 22 to September 30, 2005. Depreciation
and amortization expense, in the nine-month period ended September 30,
2006
increased to Ps. 314 million (including Ps. 113 million relating to Republic)
compared to Ps. 227 million in the same period of 2005 (including Ps.
29 million
relating to Republic). We attribute this increase to operating expenses
from our
Republic facilities, which we acquired in July of 2005.
Operating
Income
Our
operating income increased 78% to Ps. 2,427 million in the nine-month
period
ended September 30, 2006 (including Ps. 771 million relating to Republic)
compared to Ps. 1,366 million in the same period of 2005 (including Ps.
97
million relating to Republic). Republic’s operating income included in our
consolidated results increased 695% to Ps. 771 million from Ps. 97 million
reflecting the consolidation of Republic’s results for the full nine-month
period ended September 30, 2006, whereas in the same period of 2005 we
consolidated Republic’s results only from July 22 to September 30, 2005. As a
percentage of net sales, operating income decreased from 16% in the nine-month
period ended September 30, 2005 to 14% in the nine-month period ended
September
30, 2006. We attribute the decrease as a percentage of net sales to the
higher
cost of sales prevailing at our Republic facilities.
Financial
Income (Expense)
We
recorded financial expense of Ps. 9 million in the nine-month period
ended
September 30, 2006 compared to financial expense of Ps. 89 million in
the same
period of 2005. We recorded an exchange loss of approximately Ps. 16
million in
the nine-month period ended September 30, 2006 compared to an exchange
loss of
Ps. 72 million in the same period of 2005, reflecting a 2.2% decrease
in the
value of the peso compared to the dollar in the nine-month period ended
September 30, 2006 compared to a 3.7% increase in the value of the peso
versus
the dollar in the same period of 2005. Net interest income was Ps. 28
million in
the nine-month period ended September 30, 2006 versus net interest income
of Ps.
1 million in the same period of 2005. We recorded a loss from monetary
position
of Ps. 21 million in the nine-month period ended September 30, 2006 compared
to
a loss from monetary position of Ps. 18 million in the same period of
2005,
reflecting the domestic inflation rate of 2.47% in the nine-month period
ended
September 30, 2006 as compared to a 1.72% inflation rate in the same
period of
2005. We attribute the decrease in financial income less exchange loss
due to a
decrease in the value of the Mexican peso relative to the dollar and
to higher
net interest income due in part to our low level of debt.
Other
Income (Expense), Net
We
recorded other income, net, of Ps. 27 million in the nine-month period
ended
September 30, 2006 compared to other income, net, of Ps. 16 million in
the same
period of 2005.
Income
Tax and Employee Profit Sharing
We
recorded an income tax provision of Ps. 343 million for income tax and
employee
profit sharing in the nine-month period ended September 30, 2006 (including
a
decrease in the provision of Ps. 160 million with respect to deferred
income
tax) compared to a provision of Ps. 155 million in the same period of
2005
(including an increase in the provision of Ps. 91 million with respect
to
deferred income tax). This provision increased due to higher net sales,
operating income and financial income.
Our
effective tax rate was 12% and 14% for the nine-month periods ended September
30, 2005 and 2006, respectively. For the nine month period ended September
30,
2005, our effective tax rate was lower than the 30% applicable tax rate
in
Mexico. Our effective tax rate was lower mainly because in 2005 we recognized
a
tax benefit from future non-accumulation of our inventory balance at
December
31, 2004 due to the spin-off of our subsidiary, COSICA. In addition,
our 2005
effective tax rate was lower due to a decrease in our deferred assets
valuation
allowance resulting from an improved recovery of these assets. For the
nine
month period ended September 30, 2006, our effective tax rate was lower
than the
29% and 35% tax rates applicable in Mexico and the United States, respectively,
mainly because in 2006 we amortized all of our deferred tax credit which
constituted non-taxable income.
Net
Income
As
a
result of the foregoing, we recorded net income of Ps. 1,849 million
in the
nine-month period of 2006 compared to net income of Ps. 1,108 million
in the
same period of 2005. We attribute this increase primarily to net income
from our
Republic facilities and higher net income at our facilities in
Mexico.
Liquidity
and Capital Resources
Net
resources provided by operations were Ps. 1,359 million in the nine-month
period
ended September 30, 2006 versus Ps. 1,242 million of net resources provided
by
operations in the same period of 2005. Net resources used in financing
activities were Ps. 114 million in the nine-month period ended September
30,
2006 (which amount includes the prepayment of Ps. 399 million (U.S. $37.7
million) of Republic’s bank debt and a capital contribution of certain of our
minority shareholders of Ps. 124 million) versus Ps. 1,604 million of
net
resources provided by financing activities in the same period of 2005.
Net
resources provided by investing activities (to acquire property, plant
and
equipment, other non-current assets and liabilities and proceeds from
insurance
claim) were Ps. 190 million in the nine-month period ended September
30, 2006
versus net resources used in investing activities of Ps. 2,816 million
in the
same period of 2005 including the acquisition of Republic
facilities.
The
following pages contains Condensed Consolidated Financial Information
of Grupo
Simec, S.A.B. de C.V. and Subsidiaries as of December 31, 2005 and September
30,
2006 and for the three-month and nine-month periods ended September 30,
2005 and
2006.
GRUPO
SIMEC, S.A.B. DE C.V. AND SUBSIDIARIES
|
Unaudited
Condensed Consolidated Balance Sheets
|
(Thousands
of constant Mexican Pesos with purchasing power as of September
30,
2006)
|
|
|
|
|
|
|
|
Audited
|
|
Unaudited
|
|
|
December
31,
|
|
September
30,
|
Assets
|
|
2005
|
|
2006
|
Current
assets:
|
|
|
|
|
Cash
and cash equivalents
|
Ps.
|
213,185
|
|
1,648,802
|
Accounts
receivable, net
|
|
2,667,544
|
|
2,673,682
|
Inventories,
net
|
|
3,726,390
|
|
4,652,439
|
Derivative
financial instruments
|
|
58,512
|
|
20,831
|
Prepaid
expenses and other current assets
|
|
234,370
|
|
142,306
|
Total
current assets
|
|
6,900,001
|
|
9,138,060
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
7,243,066
|
|
7,289,715
|
Other
assets and deferred charges, net
|
|
708,084
|
|
579,373
|
Total
Assets
|
Ps.
|
14,851,151
|
|
17,007,148
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
Current
portion of long-term debt
|
Ps.
|
21,413
|
|
181,790
|
Accounts
payable and accrued liabilities
|
|
2,742,752
|
|
2,704,831
|
Total
current liabilities
|
|
2,764,165
|
|
2,886,621
|
|
|
|
|
|
Long-term
debt
|
|
398,598
|
|
-
|
Other
long-term liabilities
|
|
346,077
|
|
105,177
|
Deferred
taxes
|
|
1,540,314
|
|
1,773,359
|
Total
long-term liabilities
|
|
2,284,989
|
|
1,878,536
|
Total
liabilities
|
|
5,049,154
|
|
4,765,157
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
Capital
stock
|
|
3,539,076
|
|
3,575,911
|
Additional
paid-in-capital
|
|
860,228
|
|
947,917
|
Retained
earnings
|
|
4,601,031
|
|
6,449,767
|
|
|
9,000,335
|
|
10,973,595
|
Other
accumulated comprehensive (loss) income items
|
|
(1,038,561)
|
|
(967,668)
|
Majority
stockholders' equity
|
|
7,961,774
|
|
10,005,927
|
Minority
interest
|
|
1,840,223
|
|
2,236,064
|
|
|
|
|
|
Total
stockholders' equity
|
|
9,801,997
|
|
12,241,991
|
Total
liabilities and stockholders' equity
|
Ps.
|
14,851,151
|
|
17,007,148
|
GRUPO
SIMEC, S.A.B. DE C.V. AND SUBSIDIARIES
|
Unaudited
Condensed Consolidated Statements of Income
|
(Thousands
of constant Mexican Pesos with purchasing power as of September
30, 2006,
except earnings per share figures)
|
|
|
|
|
|
|
|
Unaudited
|
|
|
Three
months ended September 30,
|
|
|
2005
|
|
2006
|
Net
sales
|
Ps.
|
4,677,464
|
|
5,561,063
|
Direct
cost of sales
|
|
3,890,433
|
|
4,420,046
|
Marginal
profit
|
|
787,031
|
|
1,141,017
|
|
|
|
|
|
Indirect
overhead, selling, general and administrative expenses
|
|
308,391
|
|
308,587
|
Operating
income
|
|
478,640
|
|
832,430
|
|
|
|
|
|
Comprehensive
financing result:
|
|
|
|
|
Interest
(expense) income, net
|
|
(6,972)
|
|
13,298
|
Foreign
exchange loss, net
|
|
(35,240)
|
|
(35,245)
|
Monetary
position loss
|
|
(10,782)
|
|
(33,217)
|
Comprehensive
financing cost, net
|
|
(52,994)
|
|
(55,164)
|
|
|
|
|
|
Other
income (expense), net
|
|
7,955
|
|
(6,238)
|
Income
before income tax and employee profit sharing
|
|
433,601
|
|
771,028
|
|
|
|
|
|
Income
tax:
|
|
|
|
|
Current
|
|
(10,503)
|
|
331,597
|
Deferred
|
|
66,252
|
|
(95,174)
|
Total
income tax
|
|
55,749
|
|
236,423
|
Net
consolidated income
|
Ps.
|
377,852
|
|
534,605
|
|
|
|
|
|
Allocation
of net income
:
|
|
|
|
|
Majority
interest
|
Ps.
|
346,929
|
|
478,641
|
Minority
interest
|
|
30,923
|
|
55,964
|
|
Ps.
|
377,852
|
|
534,605
|
Earnings
per share:
|
|
|
|
|
Weighted
average shares outstanding
|
|
413,788,797
|
|
421,214,706
|
Earnings
per share
|
Ps.
|
0.84
|
|
1.14
|
|
|
|
|
|
GRUPO
SIMEC, S.A.B. DE C.V. AND SUBSIDIARIES
|
|
Unaudited
Condensed Consolidated Statements of Income
|
(Thousands
of constant Mexican Pesos with purchasing power as of September
30, 2006,
except earnings per share figures)
|
|
|
|
|
|
|
|
Unaudited
|
|
|
Nine
months ended
September
30,
|
|
|
2005
|
|
2006
|
Net
sales
|
Ps.
|
8,314,963
|
|
17,687,953
|
Direct
cost of sales
|
|
6,258,671
|
|
14,276,220
|
Marginal
profit
|
|
2,056,292
|
|
3,411,733
|
|
|
|
|
|
Indirect
overhead, selling, general and administrative expenses
|
|
689,764
|
|
984,634
|
Operating
income
|
|
1,366,528
|
|
2,427,099
|
|
|
|
|
|
Comprehensive
financing result:
|
|
|
|
|
Interest
income, net
|
|
1,634
|
|
28,407
|
Foreign
exchange loss, net
|
|
(71,813)
|
|
(16,312)
|
Monetary
position loss
|
|
(18,520)
|
|
(21,435)
|
Comprehensive
financing (cost) income, net
|
|
(88,699)
|
|
(9,340)
|
|
|
|
|
|
Other
income, net
|
|
15,725
|
|
27,099
|
Income
before income tax and employee profit
sharing
|
|
1,293,554
|
|
2,444,858
|
|
|
|
|
|
Income
tax:
|
|
|
|
|
Current
|
|
64,141
|
|
502,853
|
Deferred
|
|
90,847
|
|
(159,602)
|
Total
income tax
|
|
154,988
|
|
343,251
|
Net
income
|
Ps.
|
1,138,566
|
|
2,101,607
|
|
|
|
|
|
Allocation
of net income
:
|
|
|
|
|
Majority
interest
|
Ps.
|
1,107,643
|
|
1,848,736
|
Minority
interest
|
|
30,923
|
|
252,871
|
|
Ps.
|
1,138,566
|
|
2,101,607
|
Earnings
per share:
|
|
|
|
|
Weighted
average shares outstanding
|
|
408,100,659
|
|
420,045,057
|
Earnings
per share
|
Ps.
|
2.71
|
|
4.40
|
|
|
|
|
|
EXHIBIT
I
Unaudited
Pro Forma Condensed Combined Statements of Income
The
unaudited proforma condensed combined statements of income for the nine
months
and three months ended September 30, 2005, give effect to Republic’s acquisition
as if it had occurred on January 1, 2005.
|
Three
months-ended September 30,
|
Nine
months ended September 30,
|
|
Pro
Forma
|
|
|
Pro
Forma
|
|
|
|
2005
|
2006
|
%
Change
|
2005
|
2006
|
%
Change
|
|
|
Income
Statement Data:
|
|
|
|
|
|
|
Mexican
GAAP:
|
|
|
|
|
|
|
Net
sales
|
5,412
|
5,561
|
2.8%
|
18,024
|
17,688
|
(1.9%)
|
Direct
cost of sales
|
4,574
|
4,420
|
(3.4%)
|
14,741
|
14,276
|
(3.2%)
|
Marginal
profit
|
838
|
1,141
|
36.2%
|
3,283
|
3,412
|
3.9%
|
Indirect
manufacturing, selling, general and administrative
expenses
|
316
|
200
|
(36.7%)
|
1,036
|
671
|
(35.2%)
|
Depreciation
and amortization
|
96
|
109
|
13.5%
|
243
|
314
|
29.2%
|
Operating
income
|
426
|
832
|
95.3%
|
2,004
|
2,427
|
21.1%
|
Financial
(expense)
|
(47)
|
(55)
|
17.0%
|
(170)
|
(9)
|
(94.7%)
|
Other
income (expense), net
|
11
|
(6)
|
(154.5%)
|
46
|
27
|
(41.3%)
|
Income
before taxes employee profit sharing
|
390
|
771
|
97.7%
|
1,880
|
2,445
|
30.1%
|
Income
tax expense and employee profit
sharing
|
29
|
236
|
713.8%
|
358
|
343
|
(4.2%)
|
Net
income
|
361
|
535
|
48.2%
|
1,523
|
2,102
|
38.0%
|
Minority
interest
|
30
|
56
|
86.7%
|
230
|
253
|
10.0%
|
Majority
interest
|
331
|
479
|
44.7%
|
1,293
|
1,849
|
43.0%
|
Net
income per share
|
0.80
|
1.14
|
42.5%
|
3.17
|
4.40
|
38.8%
|
Net
income per ADS
(1)
|
2.40
|
3.41
|
42.1%
|
9.50
|
13.20
|
38.9%
|
Weighted
average shares outstanding (thousands)
(2)
|
413,789
|
421,215
|
|
408,101
|
420,045
|
|
Weighted
average ADSs
Outstanding
(thousands)
|
137,930
|
140,405
|
|
136,034
|
140,015
|
|
|
|
|
|
|
|
|
Operational
information:
|
|
|
|
|
|
|
Annual
installed
capacity
|
2,847
|
2,902
|
|
2,847
|
2,902
|
|
Tons
shipped
|
678
|
680
|
|
2,078
|
2,050
|
|
Mexico
|
248
|
250
|
|
697
|
712
|
|
United
States, Canada and others
|
430
|
430
|
|
1,381
|
1,338
|
|
SBQ
steel
|
471
|
488
|
|
1,517
|
1,485
|
|
Structural
and other steel products
|
207
|
192
|
|
561
|
565
|
|
Per
ton:
|
|
|
|
|
|
|
Net
sales per ton
|
7,982
|
8,178
|
|
8,674
|
8,628
|
|
Cost
of sales per ton
|
6,746
|
6,500
|
|
7,094
|
6,964
|
|
Operating
income per ton
|
628
|
1,224
|
|
964
|
1,184
|
|
Adjusted
EBITDA per ton
(3)
|
770
|
1,384
|
|
1,081
|
1,337
|
|
Number
of employees
|
4,433
|
4,303
|
|
4,433
|
4,303
|
|
|
|
|
|
|
|
|
(1)
|
Following
our stock split effective May 30, 2006, one ADS represents
three series B
shares; previously one ADS represented one series B
share.
|
(2)
|
For
U.S. GAAP and Mexican GAAP purposes, the weighted average shares
outstanding were calculated to give effect to the stock split
described in
Note 13(a) to the audited financial statements at December
31,
2005.
|
(3)
|
Adjusted
EBITDA is not a financial measure computed under Mexican or
U.S. GAAP.
Adjusted EBITDA derived from our Mexican GAAP financial information
means
Mexican GAAP net income (loss) excluding (i) depreciation and
amortization, (ii) financial income (expense), net (which is
composed of
net interest expense, foreign exchange gain or loss and monetary
position
gain or loss), (iii) other income (expense) and (iv) income
tax expense
and employee statutory profit-sharing
expense.
|
We
believe that adjusted EBITDA can be useful to facilitate comparisons
of
operating performance between periods and with other companies in our
industry
because it excludes the effect of (i) depreciation and amortization,
which
represents a non-cash charge to earnings, (ii) certain financing costs,
which
are significantly affected by external factors, including interest rates,
foreign currency exchange rates, and inflation rates, which have little
or no
bearing on our operating performance, (iii) other income (expense) that
are not
constant operations and (iv) income tax expense and employee statutory
profit-sharing expense. However, adjusted EBITDA has certain material
limitations, including that (i) it does not include taxes, which are
a necessary
and recurring part of
our
operations; (ii) it does not include depreciation and amortization, which,
because we must utilize property, equipment and other assets in order
to
generate revenues in our operations, is a necessary and recurring part
of our
costs; (iii) it does not include comprehensive cost of financing, which
reflects
our cost of capital structure and assisted us in generating revenue;
and (iv) it
does not include other income and expenses that are part of our net income.
Therefore, any measure that excludes any or all of taxes, depreciation
and
amortization, comprehensive cost of financing and other income and expenses
has
material limitations.
Adjusted
EBITDA does not represent, and should not be considered as, an alternative
to
net income, as an indicator of our operating performance, or as an alternative
to cash flow as an indicator of liquidity. We believe that adjusted EBITDA
provides a useful measure of our performance that is widely used by investors
and analysts to evaluate our performance and compare it with other companies.
In
making such comparisons, however, you should bear in mind that adjusted
EBITDA
is not defined and is not a recognized financial measure under Mexican
GAAP or
U.S. GAAP and that it may be calculated differently by different companies.
Adjusted EBITDA as presented in this table does not take into account
our
working capital requirements, debt service requirements and other
commitments.
Adjusted
EBITDA should not be considered in isolation or as a substitute for net
income,
net cash flow from operating activities or net cash flow from investing
and
financing activities. Reconciliation of operating income to adjusted
EBITDA is
as follows:
|
|
Three
months ended
September
30, 2006
|
|
Nine
Months ended
September
30, 2006
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
Net
income
|
|
|
378
|
|
|
535
|
|
|
1,138
|
|
|
2,102
|
|
Depreciation
and amortization
|
|
|
94
|
|
|
109
|
|
|
227
|
|
|
314
|
|
Financial
income (expense)
|
|
|
(53
|
)
|
|
(55
|
)
|
|
(89
|
)
|
|
(9
|
)
|
Income
tax expense and employee profit sharing
|
|
|
56
|
|
|
236
|
|
|
155
|
|
|
343
|
|
Other
income (expense)
|
|
|
8
|
|
|
(6
|
)
|
|
16
|
|
|
27
|
|
Adjusted
EBITDA
|
|
|
573
|
|
|
941
|
|
|
1,593
|
|
|
2,741
|
|
.
Unaudited
Pro Forma Condensed Combined Statements of Income
On
July
22, 2005, the Company and Industrias CH acquired the outstanding shares
of PAV
Republic Inc. (Republic) through the Company’s subsidiary SimRep Corporation, a
U.S. company. Such transaction was valued at $245 million where $229
million
corresponds to the purchase price and $16 million, to the direct cost
of the
business combination. The Company contributed $123 million to acquire
50.2% of
the representative shares of SimRep Corporation and Industrias CH, the
Company’s
parent, acquired the remaining 49.8%. SimRep then acquired all the shares
from
Republic through a stock purchase agreement. Under the terms of the sock
purchase agreement, the Company acquired the right to a portion of the
reimbursement from an unresolved insurance claim. On April 24, 2006 a
Settlement
Agreement and Release was reached and approximately Ps. 414 millions,
net of
payment to the predecessor’s shareholders of Ps. 215 million and professional
fees, has been received by the Company. Due to the receipt, the Company
changed
the final purchase accounting adjustment to reflect the fair value of
the assets
acquired and liabilities assumed.
The
unaudited proforma condensed combined statements of income for the nine
months
ended September 30, 2005, give effect to Republic’s acquisition as if it
occurred on January 1, 2005.
Unaudited
Pro Forma Condensed Combined Statements of Income
For
the Nine Months Ended September 30, 2005
(Thousands
of Constant Mexican pesos as of September 30, 2006, except earnings per
share
figures)
|
|
Simec
as
reported
|
|
PAV
Republic
(1)
|
|
Proforma
adjustments
|
|
Simec
Pro
Forma
|
Net
sales
|
Ps.
|
8,314,963
|
Ps
|
9,708,973
|
Ps.
|
-
|
Ps.
|
18,023,936
|
Direct
Cost of Sales
|
|
6,258,671
|
|
8,481,988
|
|
-
|
|
14,740,659
|
Marginal
Profit
|
|
2,056,292
|
|
1,226,985
|
|
-
|
|
3,283,277
|
Indirect
overhead, selling, general and administrative expenses
|
|
689,764
|
|
562,363
|
|
26,836
|
(2)
|
1,278,963
|
Operating
income
|
|
1,366,528
|
|
664,622
|
|
(26,836)
|
|
2,004,314
|
Comprehensive
financing cost:
|
|
|
|
|
|
|
|
|
Interest
(expense) income , net
|
|
1,634
|
|
(102,615)
|
|
5,694
|
|
(95,287)
|
Foreign
exchange (loss) gain, net
|
|
(71,813)
|
|
16,077
|
|
|
|
(55,736)
|
Monetary
position loss
|
|
(18,520)
|
|
-
|
|
|
|
(18,520)
|
Comprehensive
financial result, net
|
|
(88,699)
|
|
(86,538)
|
|
5,694
|
(3)
|
(169,543)
|
Other
income (expenses), net
|
|
15,725
|
|
30,399
|
|
-
|
|
46,124
|
Income
before income tax, statutory employee profit sharing and minority
interest
|
|
1,293,554
|
|
608,483
|
|
(21,142)
|
|
1,880,895
|
Income
tax
|
|
|
|
|
|
|
|
|
Current
|
|
64,141
|
|
148,777
|
|
-
|
|
212,918
|
Deferred
|
|
90,847
|
|
62,290
|
|
(7,932)
|
(4)
|
145,205
|
Total
income tax
|
|
154,988
|
|
211,067
|
|
(7,932)
|
|
358,123
|
Net
consolidated income
|
|
1,138,566
|
|
397,416
|
|
(13,210)
|
|
1,522,772
|
|
|
|
|
|
|
|
|
|
Allocation
on net income
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
30,923
|
|
197,834
|
|
(6,576)
|
|
222,181
|
Majority
interest
|
|
1,107,643
|
|
199,582
|
|
(6,634)
|
|
1,300,591
|
|
Ps.
|
1,138,566
|
|
397,416
|
|
(13,210)
|
(5)
|
1,522,772
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
408,100,659
|
|
|
|
|
|
408,100,659
|
Earnings
per share (pesos)
|
|
2.71
|
|
|
|
|
|
3.19
|
(1)
|
This
column shows the income statement of Pav Republic for period
from January
1, 2005 to July 22, 2005.
|
(2)
|
The
increase in the expenses is driven by two components; the first
one is the
decrease of the stock compensation expense of $61,134. The
company
terminated the stock compensation plan at the time of the purchase
and
provided no additional compensation to employees to replace
this lost
benefit. The company made the assumption that the stock compensation
recognized during the period January 1, 2005 - July 22, 2005
would not be
recorded if the purchase would have taken place on January
1, 2005. The
second component is an increase in depreciation and amortization
expense
of $87,970, due to the purchase price allocation to intangibles
related to
Republic’s Union Agreement, Kobe Tech, Customer relationships and Republic
trade name being recorded at the time of purchase. The Company
made the
assumption that Republic would have booked this entry as of
January 1,
2005 and the Company recorded an additional seven months of
amortization
expense. Also the depreciation expense was adjusted as if the
allocation
of the purchase price would have taken place on January 1,
2005. The value
of the plant, property and equipment increased and depreciation
expense
increased accordingly.
|
(3)
|
Due
to the allocation of the purchase price to the deferred financing
costs
related to the Perry Note and the GE revolver (both items were
subject to
a decrease in the cost basis) as of July 22, 2005, the Company
adjusted
the amortization expense to reflect the decrease in cost basis
as if the
purchase would have occurred on January 1,
2005.
|
(4)
|
The
company adjusted the income tax expense to reflect the change
in net
income due to the decrease in selling, general and administrative
expenses, increase in depreciation and amortization and decrease
in
interest expense described above at a rate of 37.5% which was
the
effective income tax rate of
Republic.
|
(5)
|
The
decrease in the net income reflects the change due to the decrease
in
selling, general and administrative expenses, increase in depreciation
and
amortization, decrease in interest expense and decrease in
the income tax
expense, described above.
|
(6)
|
The
adjustment in the minority interest reflecting Industrias CH’s interest in
Republic.
|
Grupo
Simec, S.A.B. de C.V.
˜
Series B shares
Grupo
Simec, S.A.B. de C.V.
_______
PROSPECTUS
l
, 2007
_______
Citigroup
Co-Manager
Morgan
Stanley
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
6.
Indemnification
of Directors and Officers.
Under
Mexican law, when an officer or director of a corporation acts within
the scope
of his authority, the corporation will be responsible for any resulting
liabilities or expenses. In addition, the stockholders of the Registrant
have
expressly resolved that the Registrant will indemnify and hold harmless
each
director and officer of the Registrant against liabilities incurred in
connection with the offering of the securities registered under this
Registration Statement. The Registrant also maintains a directors’ and officers’
insurance policy covering all its directors and certain of its executive
officers.
Item
7.
Recent
Sales of Unregistered Securities.
During
the past three years, the Registrant has not issued or sold any securities
that
were not registered under the Securities Act.
Item
8.
Exhibits
and Financial Statement Schedules.
(a)
Exhibits.
Exhibit
No.
|
|
Description
|
|
|
|
1.1
|
|
Form
of Underwriting Agreement
|
3.1
|
|
Amended
and Restated By-laws (
Estatutos
Sociales
)
of the registrant, English translation**
|
4.1
|
|
Specimen
certificate of series B shares, English translation
|
4.2
|
|
Form
of Deposit Agreement among the Registrant, The Bank of New
York, and all
Holders and Beneficial Owners from time to time of any American
depositary
receipts, including the form of American depositary
receipt**
|
5.1
|
|
Opinion
of Mijares, Angoita, Cortés y Fuentes, S.C., Mexican counsel to the
registrant, as to the validity of the series B shares
|
10.1
|
|
Stock
Purchase Agreement by and among PAV Republic, Inc., The Shareholders
of
PAV Republic, Inc. and Industrias CH, S.A. de C.V.**
|
10.2
|
|
2007
- 2008 Rounds Supply Agreement by and between Republic Engineered
Products, Inc. and United States Steel Corporation
|
23.1
|
|
Consent
of Mancera, S.C., a member of Ernst & Young Global
|
23.2
|
|
Consent
of KPMG Cardenas, Dosal, S.C.
|
23.3
|
|
Consent
of BDO Hernández Marrón y Cia, S.C., a member of BDO Seidman,
LLP
|
23.4
|
|
Consent
of KPMG LLP with respect to PAV Republic, Inc.
|
23.5
|
|
Consent
of BDO International with respect to PAV Republic, Inc.
|
23.6
|
|
Consent
of Mijares, Angoita, Cortés y Fuentes, S.C. (included in exhibit
5.1)
|
24.1
|
|
Powers
of Attorney**
|
*
To be filed by amendment.
**
Previously filed.
|
(b)
Financial Statement Schedules:
All
supplementary schedules relating to the Registrant are attached beginning
at
page F-142.
Item
9.
Undertakings.
The
undersigned registrant hereby undertakes that:
(1)
For
purposes of determining any liability under the Securities Act of 1933,
the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2)
For
the purpose of determining any liability under the Securities Act of
1933, each
post-effective amendment that contains a form of prospectus shall be
deemed to
be a new registration statement relating to the securities offered therein,
and
the offering of such securities at that time shall be deemed to be the
initial
bona
fide
offering
thereof.
(3)
Insofar as indemnification for liabilities arising under the Securities
Act of
1933 may be permitted to directors, officers and controlling persons
of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses
incurred or paid by a director, officer or controlling person of the
registrant
in the successful defense of any action, suit or proceeding) is asserted
by such
director, officer or controlling person in connection with the securities
being
registered, the registrant will, unless in the opinion of its counsel
the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public
policy as expressed in the Act and will be governed by the final adjudication
of
such issue.
(4)
The
Registrant will provide to the Underwriters at the closing specified
in the
Underwriting Agreement ADRs in such denominations and registered in such
names
as required by the Underwriters to permit prompt delivery to each
purchaser.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant certifies
that
it has reasonable grounds to believe that it meets all of the requirements
for
filing on Form F-1 and has duly caused this registration statement or
amendment
thereto to be signed on its behalf by the undersigned, thereunto duly
authorized, in Guadalajara on January 8, 2007.
|
|
|
|
Grupo
Simec, S.A.B. de C.V.
|
|
|
|
|
By:
|
/s/ Luis
García Limón
|
|
Luis
García Limón
|
|
Director
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities
indicated
on January 8, 2007:
Signatures
|
Title
|
|
|
/s/
Luis
García
Limón
Luis
García Limón
|
Director
and Chief Executive Officer
(Principal
Executive Officer)
|
|
|
/s/
José
Flores
Flores
José
Flores Flores
|
Chief
Financial Officer
(Principal
Financial Officer and Principal Accounting
Officer)
|
|
|
*
_______________________________________
Rufino
Vigil González
|
Chairman
and Director
|
|
|
*
_______________________________________
Raúl
Arturo Pérez Trejo
|
Director
|
|
|
*
_______________________________________
Eduardo
Vigil González
|
Director
|
|
|
*
_______________________________________
Raúl
Vigil González
|
Director
|
|
|
*
_______________________________________
José
Luis Rico Maciel
|
Director
|
|
|
*
_______________________________________
Rodolfo
García Gómez de Parada
|
Director
|
|
|
*
_______________________________________
Gerardo
Arturo Avendaño Guzmán
|
Director
|
|
|
*
_______________________________________
Jaime
Vigil Sánchez Conde
|
Authorized
Representative in the United States
|
|
|
*
By:
/s/
Luis
García Limón
Luis
García Limón
Attorney-in-Fact
Exhibit
1.1
Grupo
Simec, S.A.B. de C.V.
[ ]
Series B Common Shares
In
the
form of Series B Common Shares or American Depositary Shares
each
representing three Series B Common Shares
Plus
an
option to purchase from the Company up to
[ ]
additional
Series B Common Shares or American Depositary Shares
each
representing three Series B Common Shares to cover over-allotments
Underwriting
Agreement
New
York,
New York
,
2007
Citigroup
Global Markets Inc.
As
Representative of the several Underwriters,
c/o
Citigroup Global Markets Inc.
388
Greenwich Street
New
York,
New York 10013
Ladies
and Gentlemen:
Grupo
Simec, S.A.B. de C.V., a corporation (
sociedad
anónima bursátil de capital variable
)
duly
organized and validly existing under the laws of Mexico (the “
Company
”),
proposes to sell to the several underwriters named in
Schedule
I
hereto
(the “
Underwriters
”),
for
whom you (the “
Representative
”)
are
acting as representative, an aggregate of [ ] Series B Common Shares, no
par value (“
Series
B Shares
”),
of
the Company (said shares to be issued and sold by the Company being hereinafter
called the “
Underwritten
Shares
”).
The
Company also proposes to grant to the Underwriters an option to purchase up
to
[ ]
additional Series B Shares solely to cover over-allotments, if any (the
“
Option
Shares
”
and,
together with the Underwritten Shares, the “
Shares
”).
It
is
understood that the Company is concurrently entering into an underwriting
agreement (the “
Mexican
Underwriting Agreement
”
and,
together with this Underwriting Agreement, the “
Global
Underwriting Agreements
”)
providing for the sale
to
Acciones y Valores Banamex, S.A. de C.V., Casa de Bolsa, Integrante del Grupo
Financiero Banamex, and IXE Casa de Bolsa, S.A. de C.V., IXE Grupo Financiero
(the “
Mexican
Underwriters
”)
by the
Company of an aggregate of [ ] Series B Shares (the Series B
Shares to be sold by the Company pursuant to the Mexican Underwriting Agreement
being hereinafter called the “
Mexican
Underwritten Shares
”)
and
providing for the grant to the Mexican Underwriters of an option to purchase
from the Company up to [ ] additional Series B Shares (the
“
Mexican
Option Shares
”,
together with the Option Shares, the “
Global
Option Shares
”;
the
Mexican Option Shares together with the Mexican Underwritten Shares, the
“
Mexican
Shares
”
and
together with the Shares, the “
Global
Shares
”).
You
have
advised the Company that the Underwriters may elect to cause the Company to
deposit on their behalf all or any portion of the Series B Shares to be
purchased by them hereunder pursuant to the Deposit Agreement, dated as
of June 30, 1993, as amended and restated as of February 20, 2003 (the
“
Deposit
Agreement
”),
entered into among the Company, The Bank of New York, as depositary (the
“
Depositary
”)
and
all Holders and Beneficial Owners from time to time of the ADSs (as hereinafter
defined) issued thereunder. Upon deposit of any Series B Shares with Nacional
Financiera, S.N.C., as Mexican custodian for the Depository (the “Mexican
Custodian”), the Depositary will issue American depositary shares (the
“
ADSs
”)
representing the Shares so deposited. The ADSs will be evidenced by American
depositary receipts (the “
ADRs
”).
Each
ADS will represent three Series B Shares and each ADR may represent any
number of ADSs. Unless the context otherwise requires, the terms “Underwritten
Shares”, “Global Underwritten Shares”, “Option Shares”, “Global Option Shares”,
“Shares”, “Mexican Underwritten Shares,” “Mexican Option Shares,” “Mexican
Shares” and “Global Shares,” shall be deemed to refer, in each case, to any ADSs
representing such securities and the ADRs evidencing such ADSs.
It
is
further understood and agreed that the Mexican Underwriters and the Underwriters
(collectively, the “
Global
Underwriters
”)
have
entered into an Agreement Between Underwriters and the Mexican Underwriters
dated as of the date hereof (the “Agreement Between Underwriters and Mexican
Underwriters”), pursuant to which, among other things, the Mexican Underwriters
may purchase from the Underwriters a portion of the Securities to be sold
pursuant to this Underwriting Agreement and the Underwriters may purchase from
the Mexican Underwriters a portion of the Mexican Securities to be sold pursuant
to the Mexican Underwriting Agreement.
To
the
extent there are no additional Underwriters listed on
Schedule I
other
than you, the term Representative as used in this Underwriting Agreement shall
mean you, as Underwriter, and the terms Representative and Underwriters shall
mean either the singular or plural as the context requires. The use of the
neuter in this Underwriting Agreement shall include the feminine and masculine
wherever appropriate. Certain terms used in this Underwriting Agreement are
defined in Section 24 hereof.
1.
Representations
and Warranties
.
The
Company represents and warrants to, and agrees with, each Underwriter as set
forth below in this Section 1.
(a)
Registration.
The
Company has prepared and filed with the Commission a registration
statement (file number 333-138239) on Form F-l, including the
related International Preliminary Prospectus, for registration under the Act
of
the offering and sale of the Global Shares. Such Registration Statement,
including any amendments thereto filed prior to the Execution Time, has become
effective. The Company may have filed one or more amendments thereto, including
the related International Preliminary Prospectus, each of which has previously
been furnished to you. The Company will file with the Commission a Final
International Prospectus in accordance with Rule 424(b). As filed, such Final
International Prospectus shall contain all information required by the Act
and
the rules thereunder and, except to the extent the Representative shall agree
in
writing to a modification, shall be in all substantive respects in the form
furnished to you prior to the Execution Time or, to the extent not completed
at
the Execution Time, shall contain only such specific additional information
and
other changes (beyond that contained in the latest International Preliminary
Prospectus) as the Company has advised you, prior to the Execution Time, will
be
included or made therein.
It
is
understood that two forms of prospectus are to be used in connection with the
offering and sale of the Global Shares: one form of prospectus relating to
the
Shares, which are to be offered and sold outside of Mexico, and one form of
prospectus relating to the Mexican Shares, which are to be offered and sold
in
Mexico. The Mexican Prospectus does not and will not, as of the date of the
Mexican Prospectus and any amendment or supplement thereto, contain any untrue
statement of a material fact or omit to state any material fact required to
be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The immediately
preceding sentence does not apply to statements in or omissions from the Mexican
Prospectus based upon written information furnished to the Company by any
Underwriter through the Representative specifically for use therein, in being
understood and agreed that the only such information is that described in
Section 8 hereof.
(b)
No
Material Misstatements or Omissions in Registration Statement.
On the
Effective Date, the Registration Statement did, and when the International
Prospectus is first filed in accordance with Rule 424(b) and the Closing Date
(as defined herein) and on any date on which Global Option Shares are purchased,
if such date is not the Closing Date (a “
Settlement
Date
”),
the
International Prospectus (and any supplements thereto) will, comply in all
material respects with the applicable requirements of the Act and the rules
thereunder; on the Effective Date and at the Execution Time, the Registration
Statement and the ADR Registration Statement did not or will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein not
misleading; and on the date of any filing pursuant to Rule 424(b) and on
the Closing Date and any Settlement Date, the International Prospectus (together
with any supplement
thereto)
will not, include any untrue statement of a material fact or omit to state
a
material fact necessary in order to make the statements therein, in the light
of
the circumstances under which they were made, not misleading;
provided
,
however
,
that
the Company makes no representations or warranties as to the information
contained in or omitted from the Registration Statement, the ADR Registration
Statement, the Disclosure Package or the International Prospectus (or any
supplement thereto) in reliance upon and in conformity with information
furnished in writing to the Company by or on behalf of any Underwriter through
the Representative specifically for inclusion in the Registration Statement,
the
ADR Registration Statement, the Disclosure Package or the International
Prospectus (or any supplement thereto), it being understood and agreed that
the
only such information furnished by any Underwriter consists of the information
described as such in Section 8 hereof.
(c)
ADR
Registration Statement
.
The
Company has filed with the Commission a registration statement (file number
333-48173) on Form F-6 for the registration under the Act of the offering and
sale of the ADSs. The Company may have filed one or more amendments thereto,
each of which has previously been furnished to you. Such ADR Registration
Statement at the time of its effectiveness did or will comply and on the Closing
Date, will comply, in all material respects with the applicable requirements
of
the Act and the rules thereunder and at the time of its Effective Date and
at
the Execution Time, did not and will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
(d)
Deposit
Agreement
.
Upon
issuance by the Depositary of ADSs evidenced by ADRs against deposit of
Underlying Shares in accordance with the provisions of the Deposit Agreement,
including deposit with the Mexican Custodian, such ADRs will be duly and validly
issued and persons in whose names the ADRs are registered will be entitled
to
the rights specified in the ADRs and in the Deposit Agreement; and upon the
sale
and delivery to the Global Underwriters of the Global Shares, and payment
therefor, pursuant to the Global Underwriting Agreements, the Underwriters
will
acquire good, marketable and valid title to such Shares, free and clear of
all
pledges, liens, security interests, charges, claims or encumbrances of any
kind.
(e)
No
Material Misstatements or Omissions in Disclosure Package.
As
of the
date hereof and as of the Closing Date, (i) the Disclosure Package and the
price
to the public, the number of Global Underwritten Shares (defined as the
Underwritten Shares together with the Mexican Underwritten Shares) and the
number of Global Option Shares, to be included on the cover page of the
prospectus when taken together as a whole, and (ii) each electronic roadshow
when taken together as a whole with the Disclosure Package, and the price to
the
public, the number of Global Underwritten Shares and the number of Global Option
Shares, to be included on the cover page of the prospectus
does
not
contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The preceding sentence
does not apply to statements in or omissions from the Disclosure Package based
upon and in conformity with written information furnished to the Company by
any
Underwriter through the Representative specifically for use therein, it being
understood and agreed that the only such information furnished by or on behalf
of any Underwriter consists of the information described as such in Section
8(b)
hereof.
(f)
Company
not Ineligible Issuer.
(i) At
the time of filing the Registration Statement and (ii) as of the Execution
Time
(with such date being used as the determination date for purposes of this clause
(ii)), the Company was not and is not an Ineligible Issuer (as defined in Rule
405), without taking account of any determination by the Commission pursuant
to
Rule 405 that it is not necessary that the Company be considered an Ineligible
Issuer.
(g)
Conformity
with Registration Statement and ADR Registration Statement.
Any
Issuer Free Writing Prospectus prepared and filed pursuant to Section 5(b)
hereto
does
not
include any information that conflicts with the information contained in the
Registration Statement and the ADR Registration Statement, including any
document incorporated by reference therein that has not been superseded or
modified. The foregoing sentence does not apply to statements in or omissions
from any Issuer Free Writing Prospectus based upon and in conformity with
written information furnished to the Company by any Underwriter through the
Representative specifically for use therein,
it being
understood and agreed that the only such information furnished by any
Underwriter consists of the information described as such in Section 8(b)
hereof
.
(h)
Formation
and Qualification of the Company.
The
Company has been duly incorporated and is a validly existing corporation
(
sociedad
anónima bursátil de capital variable
),
under
the laws of Mexico with full corporate power and authority to own or lease,
as
the case may be, and to operate its properties and conduct its business in
all
material respects as described in the Disclosure Package and the International
Prospectus. The Company does not have operations directly in any jurisdiction
in
which its ownership or leasing of property or the conduct of its business
required it to be in good standing as a foreign corporation.
(i)
Capitalization
.
The
Company’s authorized equity capitalization is as set forth in the International
Preliminary Prospectus and the International Prospectus; the capital stock
of
the Company conforms to the description thereof contained in the Disclosure
Package and the International Prospectus; all outstanding Series B Shares
(including the Global Shares to be sold pursuant to the Global Underwriting
Agreements) have been duly and validly authorized and issued and as of the
date
hereof, except for the Global Shares, are fully subscribed, paid and
non-assessable (liberadas); the Global Shares have been duly and
validly
authorized,
and, when the Global Shares are delivered to and paid for by the Underwriters
pursuant to this Underwriting Agreement or the Mexican Underwriting Agreement,
will conform in all material respects to the descriptions thereof contained
in
the International Preliminary Prospectus and the International Prospectus and
will be validly issued, fully paid and non-assessable (liberadas); the ADSs
are
duly listed, and admitted and authorized for trading, subject to official notice
of issuance, on the American Stock Exchange; the certificates for the Series
B
Shares are in valid and sufficient form; the holders of outstanding shares
of
capital stock of the Company are not entitled to preemptive or other rights
to
subscribe for the Shares; and, except as set forth in the International
Preliminary Prospectus and the International Prospectus (exclusive of any
supplement thereto), no options, warrants or other rights to purchase,
agreements or other obligations to issue, or rights to convert any obligations
into or exchange any securities for, shares of capital stock of or ownership
interests in the Company are outstanding.
(j)
No
Restrictions.
There
are
no restrictions on subsequent transfers of the Global Shares under the laws
of
Mexico.
(k)
Subsidiaries
.
Other
than the subsidiaries listed on Schedule II hereto, the Company has no
“subsidiaries” as such term is defined in Regulation S-X under the Act. Each of
the Company’s subsidiaries has been duly incorporated and is a validly existing
corporation in good standing, where applicable, under the laws of the
jurisdiction in which it is chartered or organized with full corporate power
and
authority to own or lease, as the case may be, and to operate its properties
and
conduct its business in all material respects as described in the Disclosure
Package and the International Prospectus; and , where applicable, each
subsidiary is duly qualified to do business as a foreign corporation in good
standing in all other jurisdictions in which its ownership or leasing of
property or the conduct of its business requires such qualification, except
where the failure so to register or qualify would not reasonably be expected
to
have a Material Adverse Effect. “Material Adverse Effect,” as used throughout
this Underwriting Agreement, means a material adverse effect on the condition
(financial or otherwise), results of operations, earnings, business, properties
or assets or prospects of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of
business.
(l)
Passive
Foreign Investment Company
.
The
Company was not a Passive Foreign Investment Company (“PFIC”) within the meaning
of Section 1296 of the United States Internal Revenue Code of 1986, as
amended, for the year ended December 31, 2006 and does not expect to become
a
PFIC for the year ended December 31, 2007.
(m)
Subsidiary
Capitalization
.
All the
outstanding shares of capital stock of each subsidiary have been duly authorized
and validly issued and are fully paid and non-assessable, and, except as
otherwise set forth in the Disclosure
Package
and International Prospectus, all outstanding shares of capital stock of the
subsidiaries are owned by the Company either directly or through wholly owned
subsidiaries free and clear of any security interest, claim, lien or
encumbrance.
(n)
Contracts
to be Described or Filed.
There is
no franchise, contract or other document of a character required to be described
in the Registration Statement, ADR Registration Statement, the International
Preliminary Prospectus or the International Prospectus, or to be filed as an
exhibit to the Registration Statement or the ADR Registration Statement, which
is not described or filed as required (and the International Preliminary
Prospectus contains in all material respects the same description of the
foregoing matters contained in the International Prospectus); and the statements
in the International Preliminary Prospectus and the International Prospectus
under the headings “Risk Factors,” “Dividends and Dividend Policy,” “Business,”
“Description of Capital Stock,” “Description of American Depositary Receipts”
and “Taxation,” insofar as such statements summarize legal matters, agreements,
by-laws (
estatuto
s),
documents or proceedings discussed therein, are accurate and fair summaries
of
such legal matters, agreements, by-laws (
estatutos
),
documents or proceedings.
(o)
Due
Authorization.
Each of
the Global Underwriting Agreements and the Deposit Agreement has been duly
authorized, validly executed and delivered by the Company. The Mexican
Underwriting Agreement has been duly authorized, executed and delivered by
the
Company and constitutes the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms and constitutes
a
legal valid and binding obligation of the Company, enforceable against it in
accordance with its terms, subject to (A) applicable
concurso
mercantil,
bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws
relating to or affecting creditors’ rights generally and by general principles
of equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law) and (B) public policy, applicable law relating
to fiduciary duties and indemnification and an implied covenant of good faith
and fair dealing.
(p)
Investment
Company
.
The
Company is not and, after giving effect to the offering and sale of the Global
Shares and the application of the proceeds thereof as described in the
Preliminary Prospects and the Prospectus, will not be an “investment company” as
defined in the Investment Company Act of 1940, as amended.
(q)
No
Consents
.
No
consent, approval, authorization, filing with or order (“
Consent
”)
of any
court or governmental agency or body in the United States, Mexico or any other
foreign jurisdiction, is required in connection with the transactions
contemplated herein, or in the Deposit Agreement, except (i) such as have
been obtained under the Act and the Exchange Act, all of which are in full
force
and effect, (ii) and the Ley del Mercado de Valores (the “
Mexican
Securities Law
”)
and
other applicable Mexican securities laws and regulations including
the
rules
and
regulations of the Mexican Stock Exchange (
Bolsa
Mexicana de Valores, S.A. de C.V.
),
including the approval to register the Global Shares in the National Securities
Registry (
Registro
Nacional de Valores
)
conduct
the public offering of the Mexican Shares in Mexico, all of which are in full
force and effect; (iii) such as may be required under the securities laws or
the
blue sky laws of any jurisdiction in connection with the purchase and
distribution of the Shares by the Underwriters in the manner contemplated herein
and in the Disclosure Package and the International Prospectus.
(r)
No
Defaults
.
The
Company is not (i) in violation of any provision of its charter or bylaws,
or similar organizational documents; (ii) in violation or in default under
(and no event that, with notice or lapse of time or both, would constitute
such
a default has occurred or is continuing under) the terms of any indenture,
contract, lease, mortgage, deed of trust, note agreement, loan agreement or
other agreement or instrument to which it is a party or bound or to which its
property is subject; or (iii) in violation of any statute, law, rule,
regulation, judgment, order or decree of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority, as
applicable, which default or violation, in the case of clause (ii) or
(iii), would, if continued, reasonably be expected to have a Material Adverse
Effect, or materially impair the ability of the Company to perform its
obligations under the Global Underwriting Agreements or the Deposit
Agreement.
(s)
No
Conflicts
.
Neither
the issue and sale of the Global Shares nor the consummation of any other of
the
transactions herein contemplated nor the fulfillment of the terms hereof or
of
the Mexican Underwriting Agreement or of the Deposit Agreement will
(i) conflict with, or result in a violation of, the charter or by-laws of
the Company or any of its Subsidiaries; (ii) conflict with, or result in a
breach or violation of, the terms of any indenture, contract, lease, mortgage,
deed of trust, note agreement, loan agreement or other agreement, obligation,
condition, covenant or instrument to which the Company or any of its
Subsidiaries is a party or bound or to which its property is subject, which
will
be obtained on or prior to the Closing Date; (iii) violate any statute,
law, rule, regulation, judgment, order or decree applicable to the Company
or
any of its Subsidiaries of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority; or (iv) result in the
creation or imposition of any lien, charge or encumbrance upon any property
or
assets of the Company or any of its Subsidiaries, which conflicts, breaches,
violations, defaults or liens, in the case of clause (ii), (iii) or
(iv), would, individually or in the aggregate, reasonably be expected to have
a
Material Adverse Effect.
(t)
No
Registration Rights
.
No
holders of securities of the Company have rights to (i) the registration of
such
securities under the Registration Statement, the ADR Registration Statement
or
the registration request filed by the Company with the CNBV, or (ii) require
the
Company to include such securities in the securities registered pursuant to
any
registration filed by the Company
under
the
Mexican Securities Market Law or any other applicable securities
legislation.
(u)
Financial
Statements
.
The
consolidated financial statements of the Company included in the International
Preliminary Prospectus, the International Prospectus and the Registration
Statement present fairly in all material respects the financial condition,
results of operations and changes in financial position of the entities
purported to be shown thereby on the basis stated therein as of the dates and
for the periods indicated, comply as to form in all material respects with
the
applicable accounting requirements of the Act and have been prepared in
conformity with Mexican generally accepted accounting principles, reconciled
as
appropriate to reflect, U.S. generally accepted accounting principles,
applied on a consistent basis throughout the periods involved (except as
otherwise noted therein). The selected financial data set forth under the
caption “Selected Consolidated Financial Information” in the International
Preliminary Prospectus and the International Prospectus fairly present, the
information included therein, on the basis stated. The unaudited pro forma
financial statements of operations included in the International Preliminary
Prospectus and the International Prospectus include assumptions that provide
a
reasonable basis for presenting the significant effects directly attributable
to
the transactions and events described therein, the related pro forma adjustments
give appropriate effect to those assumptions, and the pro forma adjustments
reflect the proper application of those adjustments to the historical financial
statement amounts in the unaudited pro forma condensed combined statements
of
operations included in the International Preliminary Prospectus and the
International Prospectus. The unaudited pro forma condensed combined statements
of operations included in the International Preliminary Prospectus on pages
[
·
]
and the
International Prospectus on pages
[
·
]
comply
as to form in all material respects with the applicable accounting requirements
of Regulation S-X under the Act. The unaudited pro forma condensed consolidated
financial information in Annex I to the Preliminary International Prospectus
and
the International Prospectus does not need to comply with the applicable
accounting requirements of Regulation S-X under the Act. The forward-looking
statements contained under the captions “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in the International Preliminary
Prospectus and the International Prospectus reflect the Company’s good faith
beliefs and/or estimates with respect to the matters described in such
statements and are based upon (A) the Company’s analysis of such factors as
it deemed relevant to such statements and (B) such assumptions as the
Company deemed reasonable with respect to such statements.
(v)
Litigation
.
No
action, suit or proceeding by or before any court or governmental agency,
authority or body, or any arbitrator involving the Company or any of its
Subsidiaries or its or their property is pending or, to the best knowledge
of
the Company, threatened that (i) would reasonably be expected to have a
Material Adverse Effect on the consummation of any of the
transactions
contemplated
by the Global Underwriting Agreements or the Deposit Agreement or
(ii) would reasonably be expected to have a Material Adverse
Effect.
(w)
Assets
.
On or
as of the Closing Date each of the Company and its Subsidiaries will own, lease,
possess or otherwise have the right to all such assets as are necessary to
the
conduct of its operations presently conducted as described in the International
Preliminary Prospectus and the International Prospectus.
(x)
Independent
Accountants
.
KPMG
LLP, Mancera, S.C., KPMG Cárdenas Dosal, S.C., BDO Seidman LLP and BDO Hernández
Marrón y Cía., S.A., all of whom have audited certain financial statements of
each of the Company and its consolidated Subsidiaries and delivered their report
with respect to the financial statements included in the International
Preliminary Prospectus and the International Prospectus as described under
the
caption “Experts” in the International Preliminary Prospectus and the
International Prospectus, were the independent registered public accounting
firms with respect to the Company and its direct and indirect subsidiaries
or
PAV Republic, Inc. and its direct and indirect subsidiaries, as applicable,
within the meaning of the Act and the applicable published rules and regulations
thereunder.
(y)
Tax
Returns
.
Each of
the Company and its Subsidiaries has filed all federal, state and local tax
returns in the United States, Mexico, Canada or any other jurisdiction, as
the
case may be, that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not reasonably be
expected to have a Material Adverse Effect, except as set forth in or
contemplated in the Disclosure Package and the International Prospectus
(exclusive of any supplement thereto)), and has paid all taxes required to
be
paid by it and any other assessment, fine or penalty levied against it, to
the
extent that any of the foregoing is due and payable, except for any such
assessment, fine or penalty that is currently being contested in good faith
and
as to which the Company has set aside adequate reserves in accordance with
Mexican generally accepted accounting principles or as would not reasonably
be expected to have a Material Adverse Effect, except as set forth in or
contemplated in the Disclosure Package and the International
Prospectus.
(z)
No
Labor Dispute
.
No
labor problem or dispute with the employees of the Company or any of its
Subsidiaries exists or, to the knowledge of the Company, is threatened or
imminent, and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers, contractors
or
customers, that would reasonably be expected to have a Material Adverse Effect,
except as set forth in or contemplated in the Disclosure Package and the
International Prospectus.
(aa)
Insurance
.
The
Company and each of its Subsidiaries is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts
as
are reasonably adequate and customary in the businesses in
which
it
is engaged; as of the Closing Date, all policies of insurance and fidelity
or
surety bonds insuring the Company and each of its Subsidiaries or its or their
businesses, assets, employees, officers and directors will be in full force
and
effect; as of the Closing Date, the Company and each of its Subsidiaries will
be
in compliance with the terms of such policies and instruments in all material
respects; and there are no claims by the Company under any such policy or
instrument as to which any insurance company or other institution is denying
liability or defending under a reservation of rights clause; none of the Company
or any of its Subsidiaries has been refused any insurance coverage sought or
applied for; and the Company has no reason to believe that it will not be able
to renew its existing insurance coverage as and when such coverage expires
or to
obtain similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not reasonably be expected to have a Material
Adverse Effect, except as set forth in or contemplated in the Disclosure Package
and the International Prospectus.
(bb)
Permits
.
The
Company and each of its Subsidiaries possess, or at the Closing Date will
possess, all licenses, certificates, permits and other authorizations
(“
Permits
”)
issued
by the appropriate federal, state or foreign regulatory authorities necessary
to
conduct its businesses in the manner described in the Disclosure Package and
the
International Prospectus, subject to such qualifications as may be set forth
in
the Disclosure Package and the International Prospectus and except for
(i) such Permits, that are not customarily obtained or made prior to the
consummation of transactions such as those contemplated by the Global
Underwriting Agreements, the Mexican Underwriting Agreement and the Deposit
Agreement, which (A) if not obtained on or prior to the Closing Date, would
not, individually or in the aggregate, have a material adverse effect on the
operation of the Company’s business and (B) are expected in the reasonable
judgment of the Company to be obtained in the ordinary course of business
subsequent to the consummation of the transactions, and (ii) those permits
that if not obtained, would not reasonably be expected to have a Material
Adverse Effect; and the Company has not received any notice of proceedings
relating to the revocation or modification of any such Permit which, singly
or
in the aggregate, if the subject of an unfavorable decision, ruling or finding,
would have a Material Adverse Effect, except as set forth in or contemplated
in
the Disclosure Package and the International Prospectus.
(cc)
Books
and Records
.
The
Company and each of its Subsidiaries maintain a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions
are executed in accordance with management’s general or specific authorizations;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with Mexican generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management’s general or specific
authorization; and (iv) the recorded accountability for assets is compared
with the
existing
assets at reasonable intervals and appropriate action is taken with respect
to
any differences.
(dd)
Market
Stabilization
.
The
Company has not taken, directly or indirectly, any action designed to or that
would constitute or that might reasonably be expected to cause or result in,
under the Exchange Act or otherwise, stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of the Global
Shares.
(ee)
Disclosure
Controls.
The
Company and each of its Subsidiaries maintain “disclosure controls and
procedures” (as such term is defined in Rule 13a-15(e) under the Exchange Act);
such disclosure controls and procedures are effective.
(ff)
Environmental
Compliance
.
Except
as set forth in or contemplated in the Disclosure Package and the International
Prospectus (exclusive of any supplement thereto), the Company and each of its
Subsidiaries (i) is in compliance with any and all applicable foreign,
federal, state and local laws and regulations relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants (“
Environmental
Laws
”),
(ii) has received and is in compliance with all permits, licenses or other
approvals required of it under applicable Environmental Laws to conduct its
businesses and (iii) has not received notice of any actual or potential
liability under any environmental law, except where such non-compliance with
Environmental Laws, failure to receive required permits, licenses or other
approvals, or liability would not, individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect. Except as set forth in the
Disclosure Package and the International Prospectus (exclusive of any supplement
thereto), the Company has not been named as a “potentially responsible party”
under the Comprehensive Environmental Response, Compensation, and Liability
Act
of 1980, as amended.
(gg)
Effect
of Environmental Laws
.
Each of
the Company and its Subsidiaries has reviewed costs and liabilities associated
with compliance of Environmental Laws on the business, operations and properties
of the Company and its Subsidiaries. On the basis of such review, the Company
has reasonably concluded that such associated costs and liabilities would not,
singly or in the aggregate, reasonably be expected to have a Material Adverse
Effect, except as set forth in or contemplated in the Disclosure Package and
the
International Prospectus.
(hh)
Sarbanes-Oxley
Act of 2002
.
The
Company and its directors and officers, in their capacities as such, are in
compliance in all material respects with all applicable provisions of the
Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated in
connection therewith (the “
Sarbanes-Oxley
Act
”)
that
are effective and applicable to the Company and its directors and
officers,
including
Section 402 related to loans and Sections 302 and 906 related to
certifications.
(ii)
Employee
Retirement Income Security Act of 1974
.
The
minimum funding standard under Section 302 of the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (“
ERISA
”),
has
been satisfied by each “pension plan” (as defined in Section 3(2) of ERISA)
which has been established or maintained by the Company, which is subject to
such minimum funding standards, and the trust forming part of each such plan
which is intended to be qualified under Section 401 of the Code has been
determined by the Internal Revenue Service to be so qualified and each of the
Company and PAV Republic, Inc. and its Subsidiaries have fulfilled their
respective obligations, if any, under Section 515 of ERISA; none of the Company
nor any of its Subsidiaries maintains or is required to contribute to a “welfare
plan” (as defined in Section 3(1) of ERISA) which provides retiree or other
post-employment welfare benefits or insurance coverage (other than “continuation
coverage” (as defined in Section 602 of ERISA)); each pension plan and welfare
plan established or maintained by the Company or any of its Subsidiaries is
in
compliance in all material respects with the currently applicable provisions
of
ERISA; none of the Company or any of its Subsidiaries has not incurred or could
not reasonably be expected to incur any withdrawal liability under
Section 4201 of ERISA, any liability under Section 4062, 4063, or 4064 of
ERISA, or any other liability under Title IV of ERISA.
(jj)
Foreign
Corrupt Practices Act
.
None of
the Company nor any of its Subsidiaries nor, to the knowledge of the Company,
any director, officer, agent, employee or affiliate of the Company or any of
its
Subsidiaries is aware of or has taken any action, directly or indirectly, that
would result in a violation by such persons of the Foreign Corrupt Practices
Act
of 1977, as amended, and the rules and regulations thereunder (the
“
FCPA
”),
including, without limitation, making use of the mails or any means or
instrumentality of interstate commerce corruptly in furtherance of an offer,
payment, promise to pay or authorization of the payment of any money, or other
property, gift, promise to give, or authorization of the giving of anything
of
value to any “foreign official” (as such term is defined in the FCPA) or any
foreign political party or official thereof or any candidate for foreign
political office, in contravention of the FCPA and the Company, its Subsidiaries
and, to the knowledge of the Company, its affiliates have conducted their
businesses in compliance with the FCPA and have instituted and maintain policies
and procedures designed to ensure, and which are reasonably expected to continue
to ensure, continued compliance therewith.
(kk)
Money
Laundering Laws
.
The
operations of the Company and each of its Subsidiaries are and have been
conducted at all times in compliance with applicable financial recordkeeping
and
reporting requirements of the Currency and Foreign Transactions Reporting Act
of 1970, as amended, the money laundering statutes of all jurisdictions,
the rules and regulations thereunder
and
any
related or similar rules, regulations or guidelines, issued, administered or
enforced by any governmental agency (collectively, the “
Money
Laundering Laws
”)
and no
action, suit or proceeding by or before any court or governmental agency,
authority or body or any arbitrator involving the Company or any of its
Subsidiaries with respect to the Money Laundering Laws is pending or, to the
best knowledge of the Company, threatened.
(ll)
OFAC
.
None of
the Company nor any of its Subsidiaries nor, to the knowledge of the Company,
any director, officer, agent, employee or affiliate of the Company or any of
its
Subsidiaries is currently subject to any U.S. sanctions administered by the
Office of Foreign Assets Control of the U.S. Treasury Department
(“
OFAC
”);
and
none of the Company nor any of its Subsidiaries will directly or indirectly
use
the proceeds of the offering, or lend, contribute or otherwise make available
such proceeds to any subsidiary, joint venture partner or other person or
entity, for the purpose of financing the activities of any person currently
subject to any U.S. sanctions administered by OFAC.
(mm)
Intellectual
Property
.
As of
the Closing Date, the Company and each of its Subsidiaries will own, possess,
license or have other rights to use, on reasonable terms, all patents, patent
applications, trade and service marks, trade and service mark registrations,
trade names, copyrights, licenses, inventions, trade secrets, technology,
know-how and other intellectual property (collectively, the “
Intellectual
Property
”)
necessary for the conduct of the Company’s or any of its Subsidiaries'
businesses as presently conducted, except where the failure to possess such
rights would not reasonably be expected to have a Material Adverse Effect,
and
has no reason to believe that the conduct of its businesses will conflict with,
and has not received any notice of any claim of conflict with, any such rights
of others.
(nn)
Taxes
.
No
stamp or other issuance or transfer taxes or duties and no capital gains,
income, withholding or other taxes are payable by or on behalf of the
Underwriters in connection with (A) the delivery of the Global Shares in
the manner contemplated by the Global Underwriting Agreements, (B) the
deposit with the Depositary of the Series B Shares against issuance of the
ADRs
evidencing the ADSs or (C) the sale and delivery by the Global Underwriters
of the Global Shares or the ADSs, as the case may be, as contemplated
herein.
(oo)
Dividends
and Distributions
.
All
dividends and other distributions declared and payable on the Series B Shares
under the current laws and regulations of Mexico and any political subdivisions
thereof, will be paid in the lawful currency of Mexico and may be converted
into
foreign currency and may be freely transferred out of Mexico in accordance
with
the Deposit Agreement, and, except as set forth in the International Preliminary
Prospectus and the International Prospectus, all such dividends and other
distributions will not be subject to withholding or other taxes under the laws
and regulations of Mexico and are otherwise free and clear of any other tax,
withholding or deduction and
without
the necessity of obtaining any consents, approvals, authorizations, orders,
licenses, registrations, clearances and qualifications of or with any
governmental agency or body in Mexico.
(pp)
No
Material Adverse Change
.
Since
the date of the latest audited financial statements included in the Disclosure
Package and the International Prospectus and other than as set forth in or
contemplated by the Disclosure Package and the International Prospectus,
(i) none of the Company nor any of its Subsidiaries has sustained any
material loss or interference with its business from fire, explosion, flood
or
other calamity, whether or not covered by insurance, or from any labor dispute
or court or governmental action, investigation, order or decree, (ii) there
has not been, any material change in the capitalization or material increase
in
the short-term debt or long-term debt of the Company or any of its Subsidiaries
or any material adverse change, or any development involving or which could
reasonably be expected to involve, individually or in the aggregate, a
prospective material adverse change in or affecting the general affairs,
condition (financial or otherwise), results of operations, business, properties
or assets or prospects of the Company or any of its Subsidiaries, taken as
a
whole, and (iii) none of the Company nor any of its Subsidiaries has
incurred any liability or obligation, direct, indirect or contingent, or entered
into any transactions, whether or not in the ordinary course of business, that,
individually or in the aggregate, are material to the Company, or otherwise
than
as set forth or contemplated in the Disclosure Package and the International
Prospectus (exclusive of any supplement thereto).
(qq)
Prohibition
on Dividends
.
Except
as set forth in the Disclosure Package and the International Prospectus, neither
the Company, nor any of its Subsidiaries, are prohibited, directly or
indirectly, from paying any dividends, from making any other distribution,
from
repaying any loans or advances or from transferring any of its property or
assets.
(rr)
Statistical
and Market Data
.
The
statistical and market-related data included in the International Preliminary
Prospectus and the International Prospectus are based on or derived from sources
which the Company believes to be reliable and accurate.
(ss)
Immunity
.
Neither
the Company nor any of its Subsidiaries nor any of its or their properties
or
assets has any immunity from the jurisdiction of any court or from any legal
process (whether through service or notice, attachment prior to judgment,
attachment in aid of execution or otherwise) under the laws of the United
States, Mexico or any political subdivisions thereof.
(tt)
Enforceability
of Deposit Agreement
.
The
Deposit Agreement has been duly authorized, validly executed and delivered
by
the Company and The Bank of New York and is a valid and binding agreement of
the
Company enforceable against it in accordance with its terms, subject to
(A) applicable
concurso
mercantil,
bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws
relating to or affecting creditors’ rights generally and by general principles
of equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law) and (B) public policy, applicable law relating
to fiduciary duties and indemnification and an implied covenant of good faith
and fair dealing.
(uu)
Except
as
disclosed in the Registration Statement, the Disclosure Package and the
International Prospectus, the Company does not have any material lending or
other relationship with any entity, which to the knowledge of the Company,
is a
bank or lending affiliate of any Global Underwriter.
Any
certificate signed by any officer of the Company and delivered to the
Representative or counsel for the Representative in connection with the offering
of the Shares shall be deemed a representation and warranty by the Company,
as
to matters covered thereby, to each Underwriter.
2.
Purchase
and Sale
.
(a)
Subject
to the terms and conditions and in reliance upon the representations and
warranties set forth in this Underwriting Agreement, the Company agrees to
sell
to each Underwriter, and each Underwriter agrees, severally and not jointly,
to
purchase from the Company, at a purchase price of
$[ ] per Share, the amount of the Underwritten
Shares set forth opposite such Underwriter’s name in
Schedule I
to this
Underwriting Agreement.
(b)
Subject to the terms and conditions and in reliance upon the representations
and
warranties set forth in this Underwriting Agreement, the Company hereby grants
an option to the several Underwriters to purchase, severally and not jointly,
up
to [ ] Option Shares at the same purchase price per Share as the
Underwriters shall pay for the Underwritten Shares. Said option may be exercised
only to cover over-allotments in the sale of the Global Underwritten Shares
by
the Global Underwriters. Said option may be exercised in whole or in part at
any
time on or before the 30th day after the date of the International Prospectus
upon written or telegraphic notice by the Representative to the Company setting
forth the number of shares of the Option Shares as to which the several
Underwriters are exercising the option and the settlement date. The number
of
Option Shares to be purchased by each Underwriter shall be the same percentage
of the total number of shares of the Option Shares to be purchased by the
several Underwriters as such Underwriter is purchasing of the Underwritten
Shares, subject to such adjustments as you in your absolute discretion shall
make to eliminate any fractional Shares.
3.
Delivery
and Payment
.
Delivery of and payment for the Underwritten Shares and the Option Shares (if
the option provided for in Section 2(b) hereof shall have been exercised on
or before the third Business Day prior to the Closing Date) shall be made at
10:00 AM, New York City time, on [ ], 2007, or at such time on
such later date not more than three Business Days after the foregoing date
as
the Representative shall designate, which date and time may be postponed by
agreement among the
Representative
and the Company or as provided in Section 9 hereof (such date and time of
delivery and payment for the Shares being called in this Underwriting Agreement
the “
Closing
Date
”).
Delivery of Shares shall be made to Mexican Custodian in the case of the ADSs
and to the Custodian of the Representative in the case of the Series B Shares
against payment by the several Underwriters through the Representative of the
respective aggregate purchase prices of the Shares being sold by the Company
to
or upon the order of the Company by wire transfer payable in same-day funds
to
the accounts specified by the Company.
If
the
option provided for in Section 2(b) hereof is exercised after the third
Business Day prior to the Closing Date, the Company will deliver (at the expense
of the Company) to the Representative, at 388 Greenwich Street, New York,
New York, on the date specified by the Representative (which shall be
within three Business Days after exercise of said option), certificates for
the
Option Shares through the facilities of Indeval, in the case of the Series
B
Shares, and through the facilities of DTC, in the case of the ADSs, in such
names and denominations as the Representative shall have requested for the
respective accounts of the several Underwriters, against payment by the several
Underwriters through the Representative of the purchase price thereof to or
upon
the order of the Company by wire transfer payable in same-day funds to the
accounts specified by the Company. If settlement for the Option Shares occurs
after the Closing Date, the Company will deliver to the Representative on the
settlement date for the Option Shares, and the obligation of the Underwriters
to
purchase the Option Shares shall be conditioned upon receipt of, supplemental
opinions, certificates and letters confirming as of such date the opinions,
certificates and letters delivered on the Closing Date pursuant to
Section 6 hereof.
Delivery
of Series B Shares and Option Shares on the Closing Date shall be made through
the facilities of S.D. Indeval, S.A. de C.V., Instituto para el Depósito de
Valores (“
Indeval
”),
and
delivery of ADSs shall be made through the facilities of DTC.
It
is
understood and agreed that the Closing Date shall occur simultaneously with
the
purchase and sale of the Mexican Underwritten Shares under the Mexican
Underwriting Agreement, and that the settlement date for any Option Shares
occurring after the Closing Date, shall occur simultaneously with the settlement
date under the Mexican Underwriting Agreement for any Mexican Option Shares
occurring after the Closing Date.
4.
Offering
by Underwriters
.
It is
understood that the several Underwriters propose to offer the Shares for sale
to
the public as set forth in the International Prospectus.
5.
Agreements
.
(i)
The
Company agrees with the several Underwriters that:
(a)
Preparation
of International Prospectus, Registration Statement and ADR Registration
Statement.
The
Company will use its best efforts to cause the Registration Statement and the
ADR Registration Statement, if not effective at the Execution Time, and any
amendment thereof, to become effective. Prior to the termination of the offering
of the Global Shares, the Company will not file any amendment of the
Registration Statement or the ADR Registration Statement or supplement to the
Disclosure Package or the International Prospectus or any Rule 462(b)
Registration Statement unless the Company has furnished the Representative
a
copy for review by the Representative prior to filing and will not file any
such
proposed amendment or supplement to which the Representative reasonably objects.
Subject to the foregoing sentence, if the Registration Statement or the ADR
Registration Statement has become or becomes effective pursuant to
Rule 430A, or filing of the Disclosure Package or the International
Prospectus is otherwise required under Rule 424(b), the Company will cause
the
Disclosure Package and the International Prospectus, properly completed, and
any
supplement thereto to be filed in a form approved by the Representative with
the
Commission pursuant to the applicable paragraph of Rule 424(b) within the
time period prescribed and will provide evidence satisfactory to the
Representative of such timely filing. The Company will promptly advise the
Representative (1) when the Registration Statement and the ADR Registration
Statement, if not effective at the Execution Time, shall have become effective,
(2) when the Disclosure Package or the International Prospectus, and any
supplement thereto, shall have been filed (if required) with the Commission
pursuant to Rule 424(b) or when any Rule 462(b) Registration Statement or ADR
Registration Statement shall have been filed with the Commission, (3) when,
prior to termination of the offering of the Global Shares, any amendment to
the
Registration Statement or the ADR Registration Statement shall have been filed
or become effective, (4) of any request by the Commission or its staff for
any amendment of the Registration Statement, or any Rule 462(b)
Registration Statement or the ADR Registration Statement, or for any supplement
to the Disclosure Package or the International Prospectus or for any additional
information, (5) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the ADR
Registration Statement or the institution or threatening of any proceeding
for
that purpose and (6) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Global Shares for sale
in
any jurisdiction or the institution or threatening of any proceeding for such
purpose. The Company will use its best efforts to prevent the issuance of any
such stop order or the suspension of any such qualification and, if issued,
to
obtain as soon as possible the withdrawal thereof.
(b)
Disclosure
Package
.
If,
at
any time prior to the filing of the Prospectuses pursuant to Rule 424(b), any
event occurs as a result of which the Disclosure Package would include any
untrue statement of a material fact or omit to state any material fact necessary
to make the statements therein in the light of the circumstances under which
they were made, the Company will (i) notify
promptly
the Representatives so that any use of the Disclosure Package may cease until
it
is amended or supplemented; (ii) amend or supplement the Disclosure Package
to
correct such statement or omission; and (iii) supply any amendment or supplement
to you in such quantities as you may reasonably request.
(c)
Filing
of Amendment or Supplement.
If, at
any time when a prospectus relating to the Global Shares is required to be
delivered under the Act (including in circumstances where such requirement
may
be satisfied pursuant to Rule 172), any event occurs as a result of which the
Prospectus as then supplemented would include any untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it shall be necessary to amend the Registration Statement
or
the ADR Registration Statement or supplement the Prospectus to comply with
the
Act or the rules thereunder, the Company promptly will (1) notify the
Representative of any such event; (2) prepare and file with the Commission,
subject to the second sentence of paragraph (i)(a) of this Section 5,
an amendment or supplement which will correct such statement or omission or
effect such compliance; and (3) supply any amendment or supplement to you
in such quantities as you may reasonably request.
(d)
Selling
Materials.
The
Company will furnish to the Representative and to each other Underwriter, so
long as delivery of a prospectus by an Underwriter or dealer may be required
by
the Act, as many copies of each International Preliminary Prospectus,
International Prospectus and any Issuer Free Writing Prospectus and any
supplement thereto as the Representative may reasonably request.
(e)
Qualification
of Global Shares.
The
Company will arrange, if necessary, for the qualification of the Global Shares
for sale under the laws of such jurisdictions as the Representative may
designate and will maintain such qualifications in effect so long as required
for the distribution of the Global Shares;
provided
that in
no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action that would
subject it to service of process in suits, other than those arising out of
the
offering or sale of the Shares, in any jurisdiction where it is not now so
subject.
(f)
Lock-Up
Period; Lock-Up Letters.
The
Company will not, without the prior written consent of the Representative,
offer, sell, contract to sell, pledge, or otherwise dispose of, (or enter into
any transaction which is designed to, or might reasonably be expected to, result
in the disposition (whether by actual disposition or effective economic
disposition due to cash settlement or otherwise) by the Company or any
affiliate of the Company or any person in privity with the Company or any
affiliate of the Company) directly or indirectly, including the filing (or
participation in the filing) of a registration statement with the
Commission
in respect of, or establish or increase a put equivalent position or liquidate
or decrease a call equivalent position within the meaning of Section 16 of
the
Exchange Act, any Series B Shares or ADSs or any securities convertible into,
or
exercisable, or exchangeable for, Series B Shares or ADSs; or publicly announce
an intention to effect any such transaction, for a period of 180
days
after the date of this Underwriting Agreement,
provided
,
however
,
that
the Company may issue and sell Series B Shares pursuant to any employee stock
option plan, stock ownership plan or dividend reinvestment plan of the Company
in effect at the Execution Time and the Company may issue Series B Shares
issuable upon the conversion of securities or the exercise of warrants
outstanding at the Execution Time. Notwithstanding the foregoing, if (x) during
the last 17 days of the 180-day restricted period the Company issues an earnings
release or material news or a material event relating to the Company occurs,
or
(y) prior to the expiration of the 180-day restricted period, the Company
announces that it will release earnings results during the 16-day period
beginning on the last day of the 180-day period, the restrictions imposed in
this clause shall continue to apply until the expiration of the 18-day period
beginning on the issuance of the earnings release or the occurrence of the
material news or material event. The Company will provide the Representatives
and any co-managers and each individual subject to the restricted period
pursuant to the lockup letters described in Section 6(m) with prior notice
of
any such announcement that gives rise to an extension of the restricted
period.
(g)
Compliance
with Laws.
The
Company will comply with all applicable securities and other applicable laws,
rules and regulations, including, without limitation, the Sarbanes Oxley Act,
and to use its best efforts to cause the Company’s directors and officers, in
their capacities as such, to comply with such laws, rules and
regulations.
(h)
Price
Manipulation.
The
Company will not take, directly or indirectly, any action designed to or that
would constitute or that might reasonably be expected to cause or result in,
under the Exchange Act or otherwise, stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of the Series
B
Shares or the ADSs.
(i)
Expenses.
The
Company agrees to pay the costs and expenses relating to the following matters:
(i) the preparation, printing or reproduction and filing with the
Commission of the Registration Statement (including financial statements and
exhibits thereto), each International Preliminary Prospectus, the International
Prospectus and any Issuer Free Writing Prospectus, and each amendment or
supplement to any of them; (ii) the deposit of the Shares under the Deposit
Agreement, the issuance thereunder of ADSs representing such deposited Shares,
the issuance of ADRs evidencing such ADSs and the fees of the Depositary; (iii)
the printing (or reproduction) and delivery (including postage, air freight
charges and charges for counting and packaging) of such copies of the
Registration Statement, the ADR Registration Statement, each International
Preliminary
Prospectus, the International Prospectus and each Issuer Free Writing
Prospectus, and all amendments or supplements to any of them, as may, in each
case, be reasonably requested for use in connection with the offering and sale
of the Shares; (iv) the preparation, printing, authentication, issuance and
delivery of certificates for the Global Shares, including any stamp or transfer
taxes in connection with the original issuance and sale of the Global Shares;
(v) the registration of the Global Shares under the Exchange Act and the listing
of the ADSs on the American Stock Exchange and the listing of the Series B
Shares on the Mexican Stock Exchange; (vi) any registration or
qualification of the Global Shares for offer and sale under the securities
or
blue sky laws of the several states (including filing fees and the reasonable
fees and expenses of counsel for the Underwriters relating to such registration
and qualification); (vii) any filings required to be made with the National
Association of Securities Dealers, Inc. (including filing fees and the
reasonable expenses of counsel for the Underwriters relating to such filings);
(viii) the transportation and other expenses incurred by or on behalf of Company
representatives in connection with presentations to prospective purchasers
of
the Global Shares; (ix) the fees and expenses of the Company’s accountants
and the fees and expenses of counsel (including local and special counsel)
for
the Company; and (x) all other costs and expenses incident to the
performance by the Company of their obligations under the Global Underwriting
Agreements. [In addition, the Company has agreed to pay or reimburse the
Underwriters (to the extent incurred by them) for all ordinary expenses of
the
Underwriters, incurred in connection with the roadshow and printing of roadshow
materials and all other ordinary out-of-pocket expenses of the Underwriters,
excluding the fees and disbursements of their international and local legal
counsel.]
(j)
Use
of Proceeds.
The
Company will use the net proceeds received by it from the sale of the Global
Shares in the manner specified in the International Preliminary Prospectus
and
the International Prospectus under the heading “Use of Proceeds.”
(k)
Representative
Consent to Free Writing Prospectus.
The
Company agrees that, unless it has obtained or will obtain the prior written
consent of the Representative, and each Underwriter, severally and not jointly,
agrees with the Company that, unless it has obtained or will obtain, as the
case
may be, the prior written consent of the Company, it has not made and will
not
make any offer relating to the Global Shares that would constitute an Issuer
Free Writing Prospectus or that would otherwise constitute a “free writing
prospectus” (as defined in Rule 405) required to be filed by the Company with
the Commission or retained by the Company under Rule 433,
provided
that the
prior written consent of the parties hereto shall be deemed to have been given
in respect of the Free Writing Prospectuses included in
Schedule
III
hereto
and any electronic road show. Any such free writing prospectus consented to
by
the Representative or the Company is hereinafter referred to as a “
Permitted
Free Writing Prospectus
.”
The
Company agrees that (x) it has treated and will treat, as the case may be,
each
Permitted
Free Writing Prospectus as an Issuer Free Writing Prospectus and (y) it has
complied and will comply, as the case may be, with the requirements of Rules
164
and 433 applicable to any Permitted Free Writing Prospectus, including in
respect of timely filing with the Commission, legending and record
keeping.
6.
Conditions
to the Obligations of the Underwriters
.
The
obligations of the Underwriters to purchase the Underwritten Shares and the
Option Shares, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company contained in this
Underwriting Agreement as of the Execution Time, the Closing Date and any
settlement date pursuant to Section 3 hereof, to the accuracy of the
statements of the Company made in any certificates pursuant to the provisions
hereof, to the performance by the Company of its obligations under this
Underwriting Agreement and to the following additional conditions:
(a)
If
the
Registration Statement has not become effective prior to the Execution Time,
unless the Representative agrees in writing to a later time, the Registration
Statement will become effective not later than (i) 6:00 PM
New York City time on the date of determination of the public offering
price, if such determination occurred at or prior to 3:00 PM New York
City time on such date or (ii) 9:30 AM on the Business Day following
the day on which the public offering price was determined, if such determination
occurred after 3:00 PM New York City time on such date; if filing of
either of the Disclosure Package or the International Prospectus, or any
supplement thereto, is required pursuant to Rule 424(b), the Disclosure
Package and the International Prospectus, and any such supplement, will be
filed
in the manner and within the time period required by Rule 424(b); the ADR
Registration shall be effective and no stop order suspending the effectiveness
of the Registration Statement or the ADR Registration Statement shall have
been
issued and no proceedings for that purpose shall have been instituted or
threatened.
(b)
The
Company shall have requested and caused Thacher Proffitt & Wood LLP, United
States counsel for the Company, to have furnished to the Representative their
opinion, dated the Closing Date and addressed to the Representative, in the
form
of Exhibit B hereto.
(c)
The
Company shall have requested and caused Mijares, Angoitia, Cortes y Fuentes,
S.C., Mexican counsel for the Company, to have furnished to the Representative
their opinion, dated the Closing Date and addressed to the Representative,
in
the form of Exhibit C hereto.
(d)
The
Depositary shall have requested and caused Emmet, Marvin & Martin, LLP,
counsel for the Depositary, to have furnished to the Representative their
opinion dated the Closing Date and addressed to the Representative, in the
form
of Exhibit D hereto.
(e)
The
Representatives shall have received from Milbank, Tweed, Hadley & McCloy LLP
and Creel, García Cuellar y Müggenburg, S.C. counsel for the
Representative,
such opinions, dated the Closing Date and addressed to the Representative,
with
respect to the issuance and sale of the Shares, the Registration Statement,
the
ADR Registration Statement, the Disclosure Package and the International
Prospectus (together with any supplement thereto) and other related matters
as
the Representative may reasonably require, and the Company shall have furnished
to such counsel such documents as they request for the purpose of enabling
them
to pass upon such matters.
(f)
The
Company shall have furnished to the Representative a certificate of the Company,
signed by the Chairman of the Board or the principal executive officer and
the
principal financial or accounting officer of the Company, dated the Closing
Date, to the effect that the signers of such certificate have carefully examined
the Registration Statement, the Disclosure Package and the International
Prospectus, any supplements to the Disclosure Package and the International
Prospectus and this Underwriting Agreement and the Mexican Underwriting
Agreement and that:
(i)
the
representations and warranties of the Company in this Underwriting Agreement
and
the Mexican Underwriting Agreement are true and correct on and as of the Closing
Date with the same effect as if made on the Closing Date and the Company has
complied with all the agreements and satisfied all the conditions on its part
to
be performed or satisfied at or prior to the Closing Date;
(ii)
to
the
Company’s knowledge, no stop order suspending the effectiveness of the
Registration Statement or the ADR Registration Statement has been issued and
no
proceedings for that purpose have been instituted or, threatened;
and
(iii)
since
the
date of the most recent financial statements included in the Disclosure Package
and the International Prospectus (exclusive of any supplement thereto), there
has been no Material Adverse Effect, except as set forth in or contemplated
in
the Disclosure Package and the International Prospectus (exclusive of any
supplement thereto).
(g)
The
Company shall have requested and caused the following audit firms to have
furnished to the Representative letters, dated respectively as of the Execution
Time and as of the Closing Date, in the forms attached as Exhibits E-1 through
E-5 and otherwise covering such matters as the Representative requests.
(i)
Mancera/Ernst & Young,
(ii)
KPMG
Cárdenas Dosal, S.C.,
(iii)
BDO
Seidman LLP,
(iv)
BDO
Hernández Marrón y Cía., S.A., and
(v)
KPMG
LLP.
(h)
Subsequent
to the Execution Time or, if earlier, the dates as of which information is
given
in the Registration Statement (exclusive of any amendment thereof), the
Disclosure Package and the International Prospectus (exclusive of any supplement
thereto), there shall not have been (i) any change or decrease specified in
the letter or letters referred to in paragraph (e) of this Section 6
or (ii) any change, or any development involving a prospective change, in
or affecting the condition (financial or otherwise), earnings, business or
properties of the Company and its subsidiaries, taken as a whole, whether or
not
arising from transactions in the ordinary course of business, except as set
forth in or contemplated in the Disclosure Package and the International
Prospectus (exclusive of any supplement thereto) the effect of which, in any
case referred to in clause (i) or (ii) above, is, in the sole judgment of
the Representative, so material and adverse as to make it impractical or
inadvisable to proceed with the offering or delivery of the Global Shares as
contemplated by the Registration Statement (exclusive of any amendment thereof),
the ADR Registration Statement, the Disclosure Package and the International
Prospectus (exclusive of any supplement thereto).
(i)
The
Deposit Agreement shall be in full force and effect.
(j)
The
Depositary shall have furnished or caused to be furnished to the Representative
certificates satisfactory to the Representative evidencing the deposit with
the
Custodian of the Underlying Shares in respect of which ADSs to be purchased
by
the Underwriters on such Closing Date are to be issued, and the execution,
issuance, countersignature (if applicable) and delivery of the ADRs evidencing
such ADSs pursuant to the Deposit Agreement and such other matters related
thereto as the Representative reasonably requests.
(k)
Prior
to
the Closing Date, the Company shall have furnished to the Representative such
further information, certificates and documents as the Representative may
reasonably request.
(l)
The
ADRs
shall have been listed and admitted and authorized for trading on the American
Stock Exchange, and satisfactory evidence of such actions shall have been
provided to the Representative. The Series B Shares shall have been listed
and
admitted and authorized for trading on the Mexican Stock Exchange, and
satisfactory evidence of such actions shall have been provided to the
Representative.
(m)
Prior
to
the Execution Time, the Company shall have furnished to the Representative
a
letter substantially in the form of
Exhibit
A
hereto
from each of the shareholders identified in the tables entitled “Major
Shareholders” in the International Prospectus and each officer and director of
the Company addressed to the Representative.
(n)
The
delivery of the Mexican Shares pursuant to the Mexican Underwriting Agreement
shall have occurred.
(o)
The
Company shall have, pursuant to Section 17 of the Underwriting Agreement,
validly and irrevocably appointed CT Corporation System as its agent for the
purposes described in such Section 17; and personal service of process effected
on such agent in any manner permitted by applicable law will be effective to
confer valid personal jurisdiction over the Company in any such action. For
such
purposes, the Underwriters shall have received an original instrument
(
escritura
pública
)
issued
by a notary public in Mexico, evidencing an irrevocable power of attorney
granted by the Company in favor of CT Corporation System for the purposes
referred to in Section 17 hereof, together with a letter from CT Corporation
System accepting the appointment conferred on it by the Company.
(p)
All
approvals required under the laws of Mexico at the Closing Time shall have
been
obtained including, where applicable, the registration of the Global Shares
with
the Mexican National Registry of Securities, the approval of the public offering
by the Mexican National Banking and Securities Commission, the listing and
admittance and authorization for trading of the Global Shares by the Mexican
Stock Exchange and the approval of certain special conditions in connection
with
the public offering in Mexico of the Mexican Shares from the Mexican Stock
Exchange.
(q)
Any
Shares to be delivered in the form of Series B Shares shall have been deposited
and credited prior to or at the time of closing to the account designated by
the
Representative with Indeval;
(r)
Such
other matters related thereto as the Representative may reasonably request
shall
have been addressed to the Representative’s satisfaction.
If
any of
the conditions specified in this Section 6 shall not have been fulfilled
when and as provided in this Underwriting Agreement, or if any of the opinions
and certificates mentioned above or elsewhere in this Underwriting Agreement
shall not be reasonably satisfactory in form and substance to the Representative
and counsel for the Representative, this Underwriting Agreement and all
obligations of the Underwriters under this Underwriting Agreement may be
canceled at, or at any time prior to, the Closing Date by the Representative.
Notice of such cancellation shall be given to the Company in writing or by
telephone or facsimile confirmed in writing.
The
documents required to be delivered by this Section 6 shall be delivered at
the
office of Milbank, Tweed, Hadley & McCloy LLP, United States counsel for the
Representative, at One Chase Manhattan Plaza, New York, New York
10005
,
on
the
Closing Date.
7.
Reimbursement
of Underwriters’ Expenses
.
If the
sale of the Shares provided for in this Underwriting Agreement is not
consummated because any condition to the obligations of the Underwriters set
forth in Section 6 hereof is not satisfied, because of any termination
pursuant to Section 10 hereof or because of any refusal, inability or failure
on
the part of the Company to perform any agreement in this Underwriting Agreement
or comply with any provision hereof other than by reason of a
default
by any of the Underwriters, the Company will reimburse the Underwriters
severally through Citigroup Global Markets Inc. on demand for all customary
out-of-pocket expenses (including reasonable fees and disbursements of counsel)
actually incurred by them in connection with the proposed purchase and sale
of
the Shares.
8.
Indemnification
and Contribution
.
(a)
The
Company agrees to indemnify and hold harmless each Underwriter, the directors,
officers, employees and agents of each Underwriter and each person who controls
any Underwriter within the meaning of either the Act or the Exchange Act,
against any and all losses, claims, damages or liabilities, joint or several,
to
which they or any of them may become subject under the Act, the Exchange Act
or
other Federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement as
originally filed or in any amendment thereof, or in the Disclosure Package,
or
in any amendment thereof, or in the ADR Registration Statement as originally
filed or in any amendment thereof, or in any International Preliminary
Prospectus, the International Prospectus, the Mexican Preliminary Prospectus,
the Mexican Prospectus or any Issuer Free Writing Prospectus, or in any
amendment thereof or supplement thereto, or arise out of or are based upon
the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
and
agrees to reimburse each such indemnified party, as incurred, for any legal
or
other expenses reasonably incurred by them in connection with investigating
or
defending any such loss, claim, damage, liability or action;
provided
,
however
,
that
the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished
to
the Company by or on behalf of any Underwriter through the Representative
specifically for inclusion therein. This indemnity agreement will be in addition
to any liability which the Company may otherwise have.
(b)
Each
of
the Underwriters severally and not jointly agree to indemnify and hold harmless
the Company, each of its directors, each of its officers who signs the
Registration Statement, or the ADR Registration Statement, and each person
who
controls the Company within the meaning of either the Act or the Exchange Act,
to the same extent as the foregoing indemnity to each Underwriter, but only
with
reference to written information relating to such Underwriter furnished to
the
Company by or on behalf of such Underwriter through the Representative
specifically for inclusion in the documents referred to in the foregoing
indemnity. This indemnity agreement will be in addition to any liability which
any Underwriter may otherwise have. The Company acknowledges that the statements
set forth in the last paragraph of the cover page regarding delivery of the
Shares and, under the heading “Underwriting”, (i) the list of Underwriters
and their respective participation in the sale of the Shares, (ii) the
sentences related to concessions and reallowances and (iii) the paragraph
related to stabilization, syndicate covering transactions and penalty bids
in
any International Preliminary Prospectus, the International Prospectus and
any
Issuer Free Writing Prospectus
constitute
the only information furnished in writing by or on behalf of the several
Underwriters for inclusion in any International Preliminary Prospectus, the
International Prospectus and any Issuer Free Writing Prospectus.
(c)
Promptly
after receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against the indemnifying party under this Section 8,
notify the indemnifying party in writing of the commencement thereof; but the
failure so to notify the indemnifying party (i) will not relieve it from
liability under paragraph (a) or (b) above unless and to the extent it did
not
otherwise learn of such action and such failure results in the forfeiture by
the
indemnifying party of substantial rights and defenses and (ii) will not, in
any
event, relieve the indemnifying party from any obligations to any indemnified
party other than the indemnification obligation provided in paragraph (a)
or (b) above. The indemnifying party shall be entitled to appoint counsel of
the
indemnifying party’s choice at the indemnifying party’s expense to represent the
indemnified party in any action for which indemnification is sought (in which
case the indemnifying party shall not thereafter be responsible for the fees
and
expenses of any separate counsel retained by the indemnified party or parties
except as set forth below);
provided
,
however
,
that
such counsel shall be satisfactory to the indemnified party. Notwithstanding
the
indemnifying party’s election to appoint counsel to represent the indemnified
party in an action, the indemnified party shall have the right to employ
separate counsel (including local counsel), and the indemnifying party shall
bear the reasonable fees, costs and expenses of such separate counsel if
(i) the use of counsel chosen by the indemnifying party to represent the
indemnified party would present such counsel with a conflict of interest,
(ii) the actual or potential defendants in, or targets of, any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such action or (iv) the indemnifying
party shall authorize the indemnified party to employ separate counsel at the
expense of the indemnifying party. An indemnifying party will not, without
the
prior written consent of the indemnified parties, settle or compromise or
consent to the entry of any judgment with respect to any pending or threatened
claim, action, suit or proceeding in respect of which indemnification or
contribution may be sought under this Underwriting Agreement (whether or not
the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding.
(d)
In
the
event that the indemnity provided in paragraph (a) or (b) of this Section 8
is
unavailable to or insufficient to hold harmless an indemnified party for any
reason, the Company and the Underwriters severally agree to contribute to the
aggregate losses, claims, damages and liabilities (including legal or other
expenses reasonably incurred in connection with investigating or defending
same)
(collectively “
Losses
”)
to
which
the
Company and one or more of the Underwriters may be subject in such proportion
as
is appropriate to reflect the relative benefits received by the Company on
the
one hand and by the Underwriters on the other from the offering of the Shares;
provided
,
however
,
that in
no case shall any Underwriter (except as may be provided in any agreement among
underwriters relating to the offering of the Shares) be responsible for any
amount in excess of the underwriting discount or commission applicable to the
Shares purchased by such Underwriter under this Underwriting Agreement. If
the
allocation provided by the immediately preceding sentence is unavailable for
any
reason, the Company and the Underwriters severally shall contribute in such
proportion as is appropriate to reflect not only such relative benefits but
also
the relative fault of the Company on the one hand and of the Underwriters on
the
other in connection with the statements or omissions which resulted in such
Losses as well as any other relevant equitable considerations. Benefits received
by the Company shall be deemed to be equal to the total net proceeds from the
offering (before deducting expenses) received by them, benefits received by
the
Underwriters shall be deemed to be equal to the total underwriting discounts
and
commissions, in each case as set forth on the cover page of the International
Prospectus. Relative fault shall be determined by reference to, among other
things, whether any untrue or any alleged untrue statement of a material fact
or
the omission or alleged omission to state a material fact relates to information
provided by the Company on the one hand or the Underwriters on the other, the
intent of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission. The Company
and the Underwriters agree that it would not be just and equitable if
contribution were determined by pro rata allocation or any other method of
allocation which does not take account of the equitable considerations referred
to above. Notwithstanding the provisions of this paragraph (d), no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section 8, each
person who controls an Underwriter within the meaning of either the Act or
the
Exchange Act and each director, officer, employee and agent of an Underwriter
shall have the same rights to contribution as such Underwriter, and each person
who controls the Company within the meaning of either the Act or the Exchange
Act, each officer of the Company who shall have signed the Registration
Statement and the ADR Registration Statement and each director of the Company
shall have the same rights to contribution as the Company, subject in each
case
to the applicable terms and conditions of this paragraph (d).
9.
Default
by an Underwriter
.
If any
one or more Underwriters shall fail to purchase and pay for any of the Shares
agreed to be purchased by such Underwriter or Underwriters under this
Underwriting Agreement and such failure to purchase shall constitute a default
in the performance of its or their obligations under this Underwriting
Agreement, the remaining Underwriters shall be obligated severally to take
up
and pay for (in the respective proportions which the amount of Shares set forth
opposite their names in
Schedule I
hereto
bears to the aggregate amount of Shares set forth opposite the names of all
the
remaining Underwriters) the Shares which the defaulting Underwriter or
Underwriters agreed but failed to purchase;
provided
,
however
,
that in
the
event
that the aggregate amount of Shares which the defaulting Underwriter or
Underwriters agreed but failed to purchase shall exceed 10% of the aggregate
amount of Shares set forth in
Schedule I
hereto,
the remaining Underwriters shall have the right to purchase all, but shall
not
be under any obligation to purchase any, of the Shares, and if such
nondefaulting Underwriters do not purchase all the Shares, this Underwriting
Agreement will terminate without liability to any nondefaulting Underwriter
or
the Company. In the event of a default by any Underwriter as set forth in this
Section 9, the Closing Date shall be postponed for such period, not
exceeding five Business Days, as the Representative shall determine in order
that the required changes in the Registration Statement, the ADR Registration
Statement, the Disclosure Package and the Prospectus or in any other documents
or arrangements may be effected. Nothing contained in this Underwriting
Agreement shall relieve any defaulting Underwriter of its liability, if any,
to
the Company and any nondefaulting Underwriter for damages occasioned by its
default under this Underwriting Agreement.
10.
Termination
. This
Underwriting Agreement shall be subject to termination in the absolute
discretion of the Representative, by notice given to the Company prior to
delivery of and payment for the Shares, if at any time prior to such time
(i) trading in the Company’s ADSs or Series B Shares shall have been
suspended by the Commission or the American Stock Exchange or the Mexican Stock
Exchange or trading in securities generally on the American Stock Exchange
or
the Mexican Stock Exchange shall have been suspended or limited or minimum
prices shall have been established on such exchange, (ii) a banking
moratorium shall have been declared by U.S. Federal, New York State or
Mexican authorities or (iii) there shall have occurred any outbreak or
escalation of hostilities, declaration by the United States or Mexico of a
national emergency or war, or other calamity or crisis the effect of which
on
financial markets is such as to make it, in the sole judgment of the
Representative, impractical or inadvisable to proceed with the offering or
delivery of the Global Shares as contemplated by the International Preliminary
Prospectus or the International Prospectus (exclusive of any supplement
thereto).
11.
Representations
and Indemnities to Survive
.
The
respective agreements, representations, warranties, indemnities and other
statements of the Company or its officers and of the Underwriters set forth
in
or made pursuant to this Underwriting Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of the officers, directors or controlling persons referred
to in Section 8 hereof, and will survive delivery of and payment for the
Shares. The provisions of Sections 7 and 8 hereof shall survive the
termination or cancellation of this Underwriting Agreement.
12.
Notices
.
All
communications under this Underwriting Agreement will be in writing and
effective only on receipt, and, if sent to the Representative, will be mailed,
delivered or telefaxed to the Citigroup Global Markets Inc. General Counsel
(fax
no.: (212) 816-7912) and confirmed to such General Counsel at Citigroup
Global Markets Inc., 388 Greenwich Street, New York, New York, 10013, Attention:
General Counsel; or, if sent to the Company, will be mailed, delivered or
telefaxed to (fax no.: (5233)
1057-5710)
and confirmed to it at Calzada Lazaro Cardenas 601, Colonia La Nogalera,
Guadalajara, Jalisco, Mexico 44440, attention of the Legal Department with
a
copy to Thacher Proffitt & Wood LLP, Two World Financial Center, New York,
NY 10281, attention: Marc M. Rossell, Esq.
13.
Successors
.
This Underwriting Agreement will inure to the benefit of and be binding upon
the
parties hereto and their respective successors and the officers and directors
and controlling persons referred to in Section 8 hereof, and no other
person will have any right or obligation under this Underwriting
Agreement.
14.
No
Fiduciary duty
.
The
Company hereby acknowledges that (a) the purchase and sale of the Shares
pursuant to this Underwriting Agreement is an arm’s-length commercial
transaction between the Company, on the one hand, and the Underwriters and
any
affiliate through which it may be acting, on the other, (b) the Underwriters
are
acting as principal and not as an agent or fiduciary of the Company and (c)
the
Company’s engagement of the Underwriters in connection with the offering and the
process leading up to the offering is as independent contractors and not in
any
other capacity. Furthermore, the Company agrees that it is solely responsible
for making its own judgments in connection with the offering (irrespective
of
whether any of the Underwriters has advised or is currently advising the Company
on related or other matters). The Company agrees that it will not claim that
the
Underwriters have rendered advisory services of any nature or respect, or owe
agency, fiduciary or similar duty to the Company in connection with such
transaction or the process leading thereto.
15.
Integration
.
This
Underwriting Agreement supersedes all prior agreements and understandings
(whether written or oral) between the Company and the Underwriters, or any
of
them, with respect to the subject matter hereof.
16.
Applicable
Law
.
This
Underwriting Agreement will be governed by and construed in accordance with
the
laws of the State of New York applicable to contracts made and to be performed
within the State of New York.
17.
Jurisdiction
.
The
parties hereto agree that any suit, action or proceeding against any other
party
hereto, the directors, officers, employees and agents of any such party, or
by
any person who controls any such party, arising out of or based upon this
Underwriting Agreement or the transactions contemplated hereby may be instituted
in any New York Court or in the courts of Mexico, and expressly waives any
objection which it may now or hereafter have to the laying of venue of any
such
proceeding and irrevocably submits to the exclusive jurisdiction of such courts
in any suit, action or proceeding and any right to which it may be entitled
on
account of place of residence or domicile. The Company has irrevocably appointed
CT Corporation System as its authorized agent (the “
Authorized
Agent
”)
upon
whom process may be served in any suit, action or proceeding arising out of
or
based upon this Underwriting Agreement or the transactions contemplated herein
which may be instituted in any New York Court, by any Underwriter, the
directors, officers, employees and agents of any Underwriter, or by any person
who controls any Underwriter, and expressly accepts jurisdiction of any such
court
in
respect of any such suit, action or proceeding. The Company hereby represents
and warrants that the Authorized Agent has accepted such appointment and has
agreed to act as said agent for service of process, and the Company agrees
to
take any and all action, including the filing of any and all documents that
may
be necessary to continue such appointment in full force and effect as aforesaid.
Service of process upon the Authorized Agent shall be deemed, in every respect,
effective service of process upon the Company.
The
provisions of this Section 17 shall survive any termination of this
Underwriting Agreement, in whole or in part.
18.
Currency
.
Each
reference in this Underwriting Agreement to Dollars (the “
relevant
currency
”)
is of
the essence. To the fullest extent permitted by law, the obligations of the
Company in respect of any amount due under this Underwriting Agreement will,
notwithstanding any payment in any other currency (whether pursuant to a
judgment or otherwise), be discharged only to the extent of the amount in the
relevant currency that the party entitled to receive such payment may, in
accordance with its normal procedures, purchase with the sum paid in such other
currency (after any premium and costs of exchange) on the Business Day
immediately following the day on which such party receives such payment. If
the
amount in the relevant currency that may be so purchased for any reason falls
short of the amount originally due, the Company making such payment will pay
such additional amounts, in the relevant currency, as may be necessary to
compensate for the shortfall. Any obligation of any of the Company discharged
by
such payment will, to the fullest extent permitted by applicable law, be due
as
a separate and independent obligation and, until discharged as provided herein,
will continue in full force and effect.
19.
Waiver
of Immunity
.
To the
extent that the Company has or hereafter may acquire any immunity (sovereign
or
otherwise) from any legal action, suit or proceeding, from jurisdiction of
any
court or from set-off or any legal process (whether service or notice,
attachment in aid or otherwise) with respect to itself or any of its property,
the Company hereby irrevocably waives and agrees not to plead or claim such
immunity in respect of its obligations under this Underwriting
Agreement.
20.
Taxes
.
The
Company agrees to make all payments in respect of this Underwriting Agreement
free and clear of and without deduction or withholding for or on account of
any
present or future taxes, duties, assessments, fees or other governmental charges
imposed or levied by or on behalf of Mexico or any political subdivision or
taxing authority thereof or therein (all such duties, assessments, fees or
other
governmental charges being referred to as “
Mexican
Taxes
”),
unless such withholding or deduction is required by law. In that event, the
Company will pay to the Representative, on behalf of the Underwriters, such
additional amounts as may be necessary in order that every net payment made
by
the Company in respect of this Underwriting Agreement after deduction or
withholding for or on account of any such present or future Mexican Taxes will
not be less than the amount then due and payable in respect of this Underwriting
Agreement.
21.
Waiver
of Jury Trial
.
Each of
the parties hereby irrevocably waives, to the fullest extent permitted by
applicable law, any and all right to trial by jury in any legal proceeding
arising out of or relating to this Agreement or the transactions contemplated
hereby.
22.
Counterparts
.
This
Underwriting Agreement may be signed in one or more counterparts, each of which
shall constitute an original and all of which together shall constitute one
and
the same agreement.
23.
Headings
.
The
section headings used in this Underwriting Agreement are for convenience only
and shall not affect the construction hereof.
24.
Definitions
.
The
terms which follow, when used in this Underwriting Agreement, shall have the
meanings indicated.
“
Act
”
shall
mean the United States Securities Act of 1933, as amended, and the rules and
regulations of the Commission promulgated thereunder.
“
ADR
Registration Statement
”
shall
mean the registration statement referred to in paragraph 1(i)(c) above,
including all exhibits thereto, each as amended at the time such part of the
registration statement became effective.
“
Business
Day
”
shall
mean any day other than a Saturday, a Sunday or a legal holiday or a day on
which banking institutions or trust companies are authorized or obligated by law
to close in New York City or Mexico City, Mexico.
“
Commission
”
shall
mean the Securities and Exchange Commission.
“
Disclosure
Package
”
shall
mean (i) the Statutory Prospectus, (ii) the Issuer Free Writing Prospectuses,
if
any, identified in
Schedule
II
hereto,
and (iii) any other Free Writing Prospectus that the parties hereto shall
hereafter expressly agree in writing to treat as part of the Disclosure
Package.
“
Effective
Date
”
shall
mean each date and time that the Registration Statement and the ADR Registration
Statement, any post-effective amendment or amendments thereto and any
Rule 462(b) Registration Statement became or become effective.
“
Exchange
Act
”
shall
mean the United States Securities Exchange Act of 1934, as amended, and the
rules and regulations of the Commission promulgated thereunder.
“
Execution
Time
”
shall
mean the date and time that this Underwriting Agreement is executed and
delivered by the parties hereto.
“
Free
Writing Prospectus
”
shall
mean a free writing prospectus, as defined in Rule 405.
“
Indeval
”
shall
mean S.D. Indeval, S.A. de C.V., Instituto para el Depósito de
Valores.
“
International
Preliminary Prospectus
”
shall
mean any preliminary prospectus which describes the Shares and the offering
thereof, but which omits Rule 430A Information, and is used prior to filing
of
the International Prospectus.
“
International
Prospectus
”
shall
mean the prospectus relating to the Shares that is first filed pursuant to
Rule
424(b) after the Execution Time or, if no filing pursuant to Rule 424(b) is
required, shall mean the form of final prospectus relating to the Shares
included in the Registration Statement at the Effective Date.
“
Issuer
Free Writing Prospectus
”
shall
mean an issuer free writing prospectus, as defined in Rule 433.
“
Mexican
Preliminary Prospectus
”
shall
mean the preliminary prospectus approved for the offering by the Mexican
National Banking and Securities Commission.
“
Mexican
Prospectus
”
shall
mean the final prospectus approved for the offering by the Mexican National
Banking and Securities Commission.
“
New
York Courts
”
shall
mean the U.S. federal or State courts located in the State of New York,
County of New York.
“
Registration
Statement
”
shall
mean the registration statement referred to in paragraph 1(i)(a) above,
including exhibits and financial statements, as amended at the Execution Time
(or, if not effective at the Execution Time, in the form in which it shall
become effective) and, in the event any post-effective amendment thereto or
any
Rule 462(b) Registration Statement becomes effective prior to the Closing
Date, shall also mean such registration statement as so amended or such
Rule 462(b) Registration Statement, as the case may be. Such term shall
include any Rule 430A Information deemed to be included therein at the
Effective Date as provided by Rule 430A.
“
Representative
”
shall
mean the addressee of this Underwriting Agreement.
“
Rule
158
”,
“
Rule
405
”,
Rule 424
”,
“
Rule 430A
”
and
“
Rule 462
”
refer
to such rules under the Act.
“
Rule 430A
Information
”
shall
mean information with respect to the Shares and the offering thereof permitted
to be omitted from the Registration Statement when it becomes effective pursuant
to Rule 430A.
“
Rule 462(b)
Registration Statement
”
shall
mean a registration statement and any amendments thereto filed pursuant to
Rule 462(b) relating to the offering covered by the registration statement
referred to in Section 1(a)(i) hereof.
“
Statutory
Prospectus
”
shall
mean the preliminary prospectus relating to the Shares that is included in
the
Registration Statement immediately prior to the Execution Time, including any
document that is incorporated by reference therein.
“
Underlying
Shares
”
shall
mean the Series B Shares that will be represented by the ADSs.
“
United
States or Canadian Person
”
shall
mean any person who is a national or resident of the United States or Canada,
any corporation, partnership, or other entity created or organized in or under
the laws of the United States or Canada or of any political subdivision thereof,
or any estate or trust the income of which is subject to United States or
Canadian Federal income taxation, regardless of its source (other than any
non-United States or non-Canadian branch of any United States or Canadian
Person), and shall include any United States or Canadian branch of a person
other than a United States or Canadian Person. “U.S.” or “United States” shall
mean the United States of America (including the states thereof and the District
of Columbia), its territories, its possessions and other areas subject to its
jurisdiction.
If
the
foregoing is in accordance with your understanding of our agreement, please
sign
and return to us the enclosed duplicate hereof, whereupon this letter and your
acceptance shall represent a binding agreement among the Company and the several
Underwriters.
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Very
truly yours,
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GRUPO
SIMEC, S.A.B.
de
C.V.
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By:
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Name:
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Title:
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The
foregoing Agreement is hereby
confirmed
and accepted as of the
date
first above written.
Citigroup
Global Markets Inc.
By:
Citigroup Global Markets Inc.
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By:
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Name:
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Title:
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For
itself and the other
several
Underwriters
named
in
Schedule
I
to the
foregoing
Agreement.