Alsea, S.A.B. de C.V.
Annual Report 2002

Plain-text annual report

With people for people Annual Report 2002 Company Profile Alsea is a leader in developing and operating quick service restaurants. In Mexico it operates Domino’s Pizza, Starbucks Coffee, and it is a stockholder of Operadora West, a Burger King franchisee. In Brazil it operates Domino’s Pizza. The operation of its multi-units is supported by its distribution division, DIA. The stock is traded in the Mexican Stock Exchange under the symbol ALSEA*. Contents Strategic Plan Financial Highlights Message to our Shareholders Domino’s Pizza Starbucks Coffee Burger King Shared Services Management’s Discussion and Analysis Corporate Governance Board of Directors Committees Code of Conduct Board of Directors Main Officers Consolidated Financial Statements 1 2 4 6 8 10 12 13 17 21 22 23 24 25 Mission and Vision Raison d’être To develop, manage and control the businesses of Alsea by employing a synergy and critical mass model to improve our human and material resources. “With people for people” Where we want to go Be of the highest quality and most profitable quick service restaurant operator. Corporate Structure Operadora DP de México, S.A. de C.V. develops and manages the brand in Mexico through 463 units, of which 310 are owned stores and 153 are subfranchises. De Libra, Empreendimentos, Comércio e Serviços Ltda. (subsidiary of Dobrasil, S.A. de C.V.) develops and manages the brand in Brazil through 23 owned stores. Café Sirena, S. de R.L. de C.V. develops and manages the brand in Mexico through four owned stores, signing a joint venture with Starbucks Coffee International, Inc. Operadora West, S.A. de C.V., an associated company of Alsea, is a franchisee of Burger King Corporation and manages the brand in Mexico through 28 owned stores. Distribuidor Internacional de Alimentos, S.A. de C.V., dedicated to the specialized distribution of food and the manufacturing of pizza dough, operates five distribution centers with national coverage. Our Values What makes us great Service and Customer Focus All our activities are focused on identifying and meeting our customers’ needs: they are the reason of our efforts. Excellence and Integral Development We encourage the development of our people and their families to expand their knowledge, skills and capabilities as we strive for excellence. Respect, Integrity and Austerity Our people are required to respect ethical and moral principles, being congruent in thoughts, words and actions. Our motto “work and savings” comes to life with austerity, which is understood as the rational and efficient use of company resources. Vigilant on Quality and Productivity Our definition of quality is to do things well with the first try, using our resources fully with the best processes, and state-of-the-art technology in order to exceed our customers’ expectations and be nationally and internationally competitive. Innovation and Creativity We encourage creativity, as it is an important part of the foundations needed for development and ongoing improvement. We particularly want to be known as a company with innovating capabilities and superior results. Efficiency, Commitment and Teamwork We call for responsible, committed people capable of making things happen, who are at all times promoting collaboration and teamwork. S E R V I C E Strategic Plan 2002-2006 Customer satisfaction and operating excellence Customers always come first for us. We meet their needs and go beyond their expectations and the competition’s through product, service, and appearance, giving them great value for their money. Our quality, efficiency and productivity abide by international performance standards. Marketing leadership We are leaders in our industry, by operating brands and concepts that have proven successful in order to consolidate our position. Preferred employer We promote a comprehensive development of our human resources by offering integral remuneration that encourages retention. We want to be the preferred employer of our market. Strategic partners We jointly grow with our suppliers and commercial partners. We strive to maximize benefits for our franchisers, franchisees and associates. Shareholders’ value We increase our shareholders’ equity by striving to reach the highest productivity and profitability levels. ALSEA / 2002 ANNUAL REPORT [1] Financial Highlights(1) 2002 2001 2000 1999 1998 02/98 CAGR Net Sales $ 2,580,012 $ 2,474,687 $ 2,308,602 $ 1,670,370 $ 1,117,494 Operating Profit EBITDA Net Profit 235,973 355,890 133,192 219,391 248,035 254,567 166,300 335,684 341,136 320,694 212,660 29,750 106,358 155,284 91,552 23% 9% 14% 10% Shareholder’s Equity 1,061,206 971,520 941,012 866,471 473,213 22% Earnings per Share (2) Dividends per Share Book Value (2) Employees Total Stores (3) 1.20 0.09 8.72 6,860 518 0.26 0.36 7.65 6,562 437 0.87 1.34 0.88 8% - - 0.20 -19% 7.74 7.14 4.53 18% 6,746 418 5,655 343 3,835 265 16% 18% (1) Figures in thousands of pesos, except data per share, employees, and total stores, information expressed in purchasing power as of December 31, 2002. (2) Calculated on majority figures. (3) Includes stores from Domino's Pizza System in Mexico and Brazil, Starbucks Coffee stores in our country, as well as those of Burger King owned by Operadora West. WITH PEOPLE FOR PEOPLE [2] Financial Highlights Graphs Figures expressed in thousands of pesos as of December, 2002. Net Sales CAGR= 23% 7 . 4 7 4 , 2 0 . 0 8 5 , 2 6 . 8 0 3 , 2 . 4 0 7 6 1 , 1 . 1 4 3 7 . 5 3 3 7 . 0 2 3 9 . 5 5 3 EBITDA CAGR= 14% . 7 2 1 2 . 5 7 1 1 1 , 8 9 ’ 9 9 ’ 0 0 ’ 1 0 ’ 2 0 ’ 8 9 ’ 9 9 ’ 0 0 ’ 1 0 ’ 2 0 ’ Net Profit CAGR= 10% 3 . 5 5 1 4 . 6 0 1 6 . 1 9 Shareholder’s Equity CAGR= 22% 2 1 0 , 1 4 9 0 2 5 , 1 7 9 1 7 4 , 6 6 8 . 2 3 3 1 3 1 2 , 3 7 4 , 6 0 2 1 6 0 1 , 8 9 ’ 9 9 ’ 0 0 ’ . 8 9 2 1 0 ’ 2 0 ’ 8 9 ’ 9 9 ’ 0 0 ’ 1 0 ’ 2 0 ’ ALSEA / 2002 ANNUAL REPORT [3] Message to our Shareholders To our Shareholders: The year 2002 has been especially significant for us at Alsea. We can grade the performance of all of the members of the organization in the implementation of the Strategic Plan as more than successful. During this year we have consolidated our growth strategy. In addition to Domino´s Pizza, Alsea now has two additional brands for development in Mexico: Starbucks Coffee and Burger King. The incorporation of these two global brands with a clear leadership in their sectors opens unlimited opportunities for Alsea. The growth expectation that this represents is fundamental to achieving our vision since we can manage, altogether, more than 1,000 stores in Mexico. Our goal is to double sales over the next five years. To achieve this, we are totally focused on reaching our strategic objectives based on achieving aligned, sustained growth. For the purpose of focusing on our strategic businesses, we unincorporated Alysa in 2002, and in 2003 will do the same with El Pan Caliente and Exim del Caribe. Domino’s Pizza in Mexico maintained its market leadership during 2002. The System reached 463 stores, of which 310 are owned and 153 are subfranchised. We have opened 38 stores in the past 12 months. In Brazil, Domino’s Pizza has a presence in the cities of Río de Janeiro, Brasilia, Goiania, Sao Paulo, Belo Horizonte and Porto Alegre; we ended the year 2002 with 23 owned stores. Starbucks Coffee opened its first store in Mexico in September 2002, and by December, we had four stores in operation. Expectation of the arrival of this brand in our country has caused the results obtained so far to surpass our estimates. Operadora West is a franchisee of Burger King Corporation with 28 stores in operation. Alsea initially owned 28.5% of the capital stock and has the investment commitment to accelerate growth and reach 59 stores in 2005. WITH PEOPLE FOR PEOPLE [4] Our consolidated sales amounted to $2,580 million pesos, which meant a compound annual growth of 23% since 1998. Likewise, consolidated net income showed a compound annual increase of 10%, reaching $133 million pesos in 2002. Alsea continues improving its financial position, since during the year, interest-bearing debt decreased 25.6%. The net cash flow generated was $102 million pesos, with which our cash on hand doubled, to end the year at $201 million pesos. With this solid financial structure, we will be able to carry out the Expansion Program for our brands. Alsea achieved a return on equity of 14.3%, generated an economic value added of $58.3 million pesos in the year 2002, equivalent to 6.2 times more than the previous year, and paid $10 million pesos in dividends. One of the important challenges that the year 2003 presents to us is a change to the VAT law, which stipulates that, as of January 1, home delivery food will be taxed. Although application of the amendment will affect our operational margins, we are convinced that the strategies we are implementing, will allow us to counteract that effect and, furthermore, strengthen our leadership in the market. Our committed and enthusiastic people are still the most valuable asset we have. In order to encourage their development, we have implemented a plan of competitive incentives that fits our philosophy, “With people for people.” All of these elements lead us toward the achievement of our mission of providing incentives for a virtuous circle of value creation among our stockholders, clients, strategic associates, employees, and our society. Alberto Torrado Martínez Cosme Torrado Martínez Chairman of the Board of Directors Chief Executive Officer ALSEA / 2002 ANNUAL REPORT [5] exceptional people making the world’s best pizza Domino’s Pizza is recognized as the world leader in pizza home delivery. It operates a network of 7,230 stores in 50 countries. In the year 2002, worldwide sales were $3.9 billion dollars, and it delivered around 400 million pizzas throughout the world. WITH PEOPLE FOR PEOPLE [6] Alsea has developed the largest master franchise of Domino’s Pizza in the world and is the largest quick service restaurant chain in Mexico. It operates 463 stores, of which 310 are owned stores and 153 are subfranchises. Domino’s Pizza has coverage in 117 cities in Mexico and sold 24.2 million pizzas in 2002. In Brazil, Domino’s Pizza has a presence in the cities of Río de Janeiro, Brasilia, Goiania, Sao Paulo, Belo Horizonte and Porto Alegre; we ended the year 2002 with 23 owned stores. Domino’s Pizza has introduced successful concepts such as the guarantee, “30 minutes or it‘s free” “Tuesday 2 for 1”, and “Single Number Dialing”, which have positioned us as leaders in pizza home delivery. ALSEA / 2002 ANNUAL REPORT [7] The Starbucks Experience Starbucks Coffee, at the close of fiscal year 2002, had 5,886 locations in 30 countries around the world. It’s global sales amounted to $3.2 billion dollars, and it serves some 15 million customers per week. WITH PEOPLE FOR PEOPLE [8] On February 26, 2002, Café Sirena, S.A. de C.V., a subsidiary of Alsea, signed a joint venture with Starbucks Coffee International, Inc. to develop the brand in Mexico and operate the stores in our country. We ended the year with four stores in operation. Starbucks Coffee made a difference with regard to coffee consumption around the world. Tasting coffee of excellent quality in a comfortable and pleasant atmosphere, served by an expert team, has converted it into a concept known as “The Starbucks Experience.” In this way, Starbucks Coffee strives to surpass the client’s expectations. “THE THIRD PLACE” Starbucks Coffee works enthusiastically to offer the “Third Place” -- after the home and the office -- since it not only strives to offer the best coffee, but also a comfortable place where one can enjoy memorable moments. It offers the best coffee, served in the best place. ALSEA / 2002 ANNUAL REPORT [9] COMMITMENT AND ENTHUSIASM FOR THE CONSUMER Burger King operates 11,455 restaurants in 58 countries. In 2002 Burger King Corporation’s worldwide sales amounted to $11.3 billion dollars, and it serves 15.7 million customers daily around the world. WITH PEOPLE FOR PEOPLE [10] More than 700 million Whoppers ® are sold each year to customers who can order the world famous hamburger prepared 1,024 different ways. On July 2, 2002, Alsea bought 28.5% of the capital stock of Operadora West, which is a franchisee of Burger King Corporation in Mexico. Alsea’s commitment is to promote the growth of this brand in our country. Operadora West ended the year 2002 with 28 stores in operation. ALSEA / 2002 ANNUAL REPORT [11] Shared Services With the purpose of achieving the Mission and attaining Alsea’s Vision, beginning in 2002, processes began to line up toward a plan of shared services that take advantage of Alsea’s synergy and critical mass, contributing to a more efficient operation and in this way ensure brand development. Area Distribution and Logistics Shared Services Manage the supply chain Alsea’s brands. Benefits for the brands • Allows it to focus on its operation. • Excellent inventory turnover. • Better costs, given Alsea’s critical mass. Human Resources Recruitment and Selection. • Having the best team through Training. continual training. Performance evaluation. • Offer our employees competitive pay. Compensation. General Services. Labor Relations. • Provide an unbeatable working relationship with our partners. Systems and Processes Technological implementation • Transactional systems that will of point-of-sale information, meet our end clients’ needs. processes, communication and • Accurate and timely information for solutions for monitoring operating and financial management. decision making. • Ensure the proper working of our processes. Administration and Finance Financial planning, administration, • Definition of objectives internal control, information and for generating value. financial analysis that will generate • Ensure management control. value for the stockholder. • Focus on the operation in an organized way. • Better information for decision making. Strategic Planning Development of the process of • Organizational alignment to fulfill Alsea’s Strategic Planning, including Mission, Vision, Values and follow-up and evaluation. strategic objectives of each brand. Internal Audit Ensure compliance with internal control. • Strengthen internal control. • Risk analysis and evaluation. • Areas of opportunity. WITH PEOPLE FOR PEOPLE [12] Management’s Discussion & Analysis Alsea had consolidated sales of $2.5 billion pesos, which represented an increase of 4.3% over the previous year, that is, an increase of $105.3 million pesos, which is due to the increase in sales by Domino’s Pizza in Brazil by $41.3 million pesos, recording increases in total sales and same store sales; to an increase of $95.7 million pesos in distribution sales that were due to the addition of a greater number of Burger King stores; to Starbucks Coffee income of $5.8 million pesos, which were incorporated as of the month of September 2002; and to the increase in sales by $9.1 million pesos in Alysa, which had only incorporated its income as of August in fiscal year 2001. The above was compensated by a $44.7 million pesos decrease in sales by Domino’s Pizza in Mexico because of the drop in same store sales, and a decrease of $2.1 million pesos in El Pan Caliente. Gross margin was 53.6%, slightly higher than the 53.3% of the previous year. This increase of $7.7 million pesos is due to the fact that in 2001, costs were higher because of obsolete inventories of non-strategic clients in the distribution division, and an increase in the cost of raw materials not rebounding in the market at that time. Operating expenses were 44.4% of sales, which were in line with those recorded the year before. In this respect, variable expenses to sales went from 20.2% to 19.2%, a $25.8 million peso saving of generated principally by stopping local advertising, as well as a decrease in DIA distribution expenses, thanks to better route management. Likewise, fixed expenses increased by $53.3 million pesos with respect to the previous year. The variance derives principally from an increase above inflation in wages and salaries, as mentioned above, including compensation of executives; from an increase in leases and general services by a greater number of stores; from greater expenditures for maintenance of stores in accordance with a new preventive program; from payments for personnel training programs, such as Organizational Culture and Values, as well as the increase in projects such as Alsea Synergy, Parameterization and Implementation of New Systems. ALSEA / 2002 ANNUAL REPORT [13] Alsea continues improving its financial position; during the year the interest- bearing debt decreased 25.6% With the above, operating income to sales ratio was 9.1%, that is, an increase of 20 basis points with respect to 2001. Excluding all those non-recurring expenses for projects implemented during the year, the operating margin would have been 9.9% and the EBITDA margin 14.5% in comparison with the 13.8% reported. The integral cost of financing represented 0.7% of sales in 2002, that is, a difference of $26.1 million pesos with respect to 2001. This decrease is explained principally by a $21.8 million pesos reduction in interest paid for the drop in interest-bearing debt, including a downward negotiation in the rates of certain bank credits, an increase of $3.1 million pesos of interest gained because of a greater average of cash on hand; an exchange income of $0.6 million pesos; and an income of $1.7 million pesos due to a monetary position. In 2002, we had $14.5 million pesos in other expenses, which correspond principally to the loss from Alysa’s stock sales of $4.7 million pesos, a drop in assets of $11.8 million pesos and an income of $2.4 million pesos from updating balances in favor of VAT, which compares favorably with the $80.4 million pesos reported in 2001 when we closed and relocated several stores and distribution centers; the change of our corporate offices, with the corresponding decrease from improvements in leased locations and installation expenses; to the negative response of our Internet investments for the creation of a B2B portal; to the estimate for uncollectible accounts because of a case of fraud in Tijuana, and the dismissal of non-productive clients in the distribution division; and to the departures related to the reorganization process we were performing in order to improve productivity in the distribution business. Consolidated net income, which includes a benefit from tax consolidation of $17.2 million pesos during the year, increased $103.4 million pesos to end the period at $133.2 million pesos. Alsea continues improving its financial position, since interest-bearing debt during the year decreased 25.6%, equivalent to $56.2 million pesos. The interest-bearing debt represents 81% of available cash resources. Likewise, the company complies with all limitations that it has within its financial structure from debt issues. WITH PEOPLE FOR PEOPLE [14] The net cash flow generated was $102 million pesos, with which our cash on hand doubled, to end the year with $ 201 million pesos. The company continues with an adequate management of its working capital by reducing its inventories by four days, from 29 to 25; reducing its accounts receivable by three days, from 14 to 11; and its accounts payable by five days, from 50 to 45, compared with the close of the year 2001. The balance sheet shows a relation between current assets and short-term liabilities of 1.47 times, with the acid test 1.22 times, total liability to shareholders’ equity 0.49 times, and interest-bearing liabilities to shareholders’ equity 0.15 times. On April 29, 2002, a dividend payment was declared in the amount of $10 million pesos, equivalent to $0.0829 Ps. per share. At this same Annual Meeting, there was an increase in the variable portion of Alsea’s capital stock by the issuance of 481,231 ordinary, single series, class II shares, with no nominal value stated. These were offered for subscription and purchase at a value of $2.00 Ps. per share to company stockholders, exercising the right of preference plus a stock subscription premium at the rate of $4.50 Ps. for each subscribed share, so that the total of $6.50 Ps. per share would be exercised through S.D. Indeval, S.A. de C.V. This increase in capital was carried out to liquidate payment in stock to Domino’s Pizza Internacional, for the purchase of 100% of DP6’s capital stock and thus obtain the master franchise for operating Domino’s Pizza in Brazil. As of December 31, 2002, the total subscribed shares by Alsea is 123,428,458 and the repurchase fund has 3.79%. On February 26, 2001, an agreement was signed between Starbucks Coffee International, Inc. and SC de México, a subsidiary of Alsea, at 78.05%, to develop the brand in Mexico. Café Sirena, a subsidiary of SC de México, is the company that manages store operations in our country. We anticipate that the development of this concept in Mexico and the opening of all of the stores will be with Alsea’s own resources, coming from the cash flow of the operation. ALSEA / 2002 ANNUAL REPORT [15] Our national coverage allowed us to reaffirm our leadership in the market. During 2002, the operation of Domino’s Pizza in the north and east of the country was strengthened, because of which, on June 13, eight stores were purchased from the Veracruz subfranchise. On July 2, 2002, we announced an infusion of capital into Operadora West, the latter being an associate company of Alsea, which is one of the franchisees of Burger King Corporation in Mexico. The operation was carried out by subscribing representative shares for 28.5% of the capital stock. In addition, Alsea will increase its participation through successive contributions until reaching 34.12% in 2005. The goal is to support the growth of Burger King in Mexico. Likewise, at year’s end, the total assets of 33 stores that operate in the cities of Guadalajara, Colima and Puerto Vallarta were acquired. This western zone represents a significant growth potential, besides being the second most important region in the country as far as number of units is concerned. We are convinced that the above will allow us greater consolidation in this market. The Board of Directors authorized the initiation of the process of unincorporation of non- strategic subsidiaries. On December 20, 2002, Alsea sold its holdings in Alysa to its partner Puratos de México, which amounted to 50% of the capital stock. With regard to El Pan Caliente and Exim del Caribe, both are in the process of unincorporation. On December 30, 2002, the change to the value added tax law providing for taxing home delivery of prepared food was published in the Daily Bulletin of the Federation. Although the application of this tax reform will affect our operational margins, we are convinced that the strategies we are implementing will allow us to counteract that effect and, furthermore, stregthen our leadership in the market. José Rivera Río Rocha Chief Financial Officer WITH PEOPLE FOR PEOPLE [16] Corporate Governance The institutionalization of Alsea is a commitment we have met: today, adherence to the Code of Best Corporate Practices is a reality. Although this is a continuous process, we will keep this commitment to our shareholders in the future. Audit Committee In accordance with Article 14 of the Securities Market Law and on behalf of the Audit Committee, I hereby inform you of the activities we carried out relative to the fiscal year ending December 31, 2002. As work progressed we have kept in mind the recommendations established in the Code of Best Corporate Practices. The Statutory Examiner of the Company was invited in accordance with the aforementioned law and was present at the meeting we held. In compliance with the fundamental responsibilities related to the effectiveness of the alignment of internal control and the accurateness and reliability of the financial information that Management prepares to be used by the Board of Directors, shareholders, and third parties, we carried out the following important activities: 1. We assured ourselves of the independence of the function of the Internal Audit, and we approved its work program and budget for fiscal year 2002. 2. We received periodic reports from Internal Audit concerning progress of the approved work program and variations it could have had, as well as the causes for them. We also discussed the observations and suggestions they developed and their timely implementation. 3. We recommended contracting the external auditors of the company and subsidiaries. To carry out this recommendation, we assured ourselves of their independence and we discussed with them their focus and work program, as well as their coordination with the Internal Audit department. 4. We maintained constant communication with the external auditors in order to be aware of their progress, as well as any observations they made, especially for finishing their audit and review of annual financial statements. We became aware of their conclusions in a timely manner, and we recommended approval of the annual financial statements to the Board of Directors. ALSEA / 2002 ANNUAL REPORT [17] 5. We reviewed the financial information that Management prepares quarterly to be presented to stockholders and the general public, making sure it was prepared using the same accounting criteria used to prepare the annual information. 6. After carefully discussing the accounting policies followed by the Company, we recommended their approval to the Board of Directors. During the year, there was no change in those accounting policies. 7. Through Internal Audit and with the support of third parties, we reviewed the transactions carried out between the company’s subsidiaries and related entities, making sure that they were carried out in accordance with established contracts, at market value, and that they were clearly stated in the financial statements. 8. We verified the existence of the controls established by the company, to ensure compliance with the different legal stipulations to which it is subject. 9. We held regular Committee meetings and also met with the external and internal auditors, without the presence of the members of the Board, to comment on the development of their work, limitations they might have had, and to facilitate any private communication they might wish to have with the Committee. 10. The work we carried out was duly documented in the minutes prepared for each meeting, which were reviewed and approved in a timely manner by the Committee members. José Manuel Canal Hernando Audit Committee President WITH PEOPLE FOR PEOPLE [18] Planning and Finance Committee In accordance with Article 14 of the Securities Market Law and on behalf of the Committee on Planning and Finance, I hereby inform you of the activities we carried out related to the fiscal year ending December 31, 2002. In the development of our work, we have kept in mind the recommendations established in the Code of Good Corporate Practices. The Statutory Examiner of the Company was invited in accordance with the aforementioned law and was present at the meetings we held. In order to comply with the responsibilities of this Committee, we carried out the following activities: 1. The Committee’s commitments with respect to its responsibilities, functions, and structure were updated and confirmed. 2. General outlines were established for the development of Alsea’s Strategic Plan 2003-2007. 3. The system of strategic control was followed up, defined and authorized. 4. The Stock Option Plan for Executives was evaluated and ordered. 5. General premises were established for drawing up the budget for fiscal year 2003. 6. The budgets for 2003 for each of the companies that make up Alsea were reviewed with the purpose of validating them before their presentation to the Board of Directors. Those budgets were authorized by the Board of Directors on December 11, 2002. 7. We reviewed the adjustment to the 2003 budget as a result of the additions to Article 2A of the VAT law by the authorities. 8. Financial projections for 2007 were reviewed, which by recommendation by this same Committee, are to be presented and reviewed by the Board quarterly with the pertinent adjustments or modifications. 9. The policies of investment in liquid assets and investments in store openings were defined. 10. Very conservative follow-up was performed on financial decisions and commitments that the group has been acquiring in this same period. 11. A model was authorized for evaluating the criteria in investment projects applicable to all Alsea companies. All the investment alternatives that the president and the Alsea’s Board generated in 2002 were evaluated, issuing their opinion in each case. Salvador Cerón Aguilar Planning and Finance Committee President ALSEA / 2002 ANNUAL REPORT [19] Assessment and Compensation Committee In accordance with Article 14 of the Securities Market Law and on behalf of the Committee on Evaluation and Compensation, I hereby inform you of the activities we carried our relating to the fiscal year ending December 31, 2002. In the conduct of our work, we have kept in mind the recommendations established in the Code of Best Corporate Practices. The Statutory Examiner was invited in accordance with the aforementioned law and was present at the meetings we held. 1. In several meetings with the Human Resources Department, review was made to continue the policies fixed by this Committee and authorized by the Board of Directors, with reference to the following: • Evaluation and compensation of the Chief Executive Officer and high-level officers. • Evaluation criteria in accordance with the general outlines established by the Board of Directors. • Amount of remuneration to principal executives. • Evaluate regularly the performance of the Chief Executive Officer and high-level officers. • Policies of remuneration of strategic employees. 2. The compensation program for the year 2003 was discussed, based on tax contingency. 3. A review of the performance and bonus program for the year 2003 was carried out. 4. The stock option plan was presented to the Board of Directors for their approval. All of the above activities are duly documented in minutes prepared for each meeting, which were reviewed and approved by the Committee members. Francisco Gama Cruz Assessment and Compensation Committee President WITH PEOPLE FOR PEOPLE [20] Board of Directors Committees Audit Committee José Manuel Canal Hernando Alberto Torrado Martínez Manuel Sañudo Bolaños President Member Statutory Examiner Mario Sánchez Martínez Secretary Planning and Finance Committee Salvador Cerón Aguilar Alberto Torrado Martínez Manuel Sañudo Bolaños President Member Statutory Examiner José Rivera Río Rocha Secretary Assessment and Compensation Committee Francisco Gama Cruz Alberto Torrado Monge President Member Manuel Sañudo Bolaños Statutory Examiner Carlos Ricardo García Luna y Martínez Secretary ALSEA / 2002 ANNUAL REPORT [21] Code of Conduct The Board of Directors and Administrative Offices adopted criteria that have been convincing for personal and professional realization inside Alsea and which are expressed in our Code of Conduct in order to make known the duties that govern our acts in accordance with our values. The importance of our code is rooted in the fact that Alsea is a company that develops around people. “With People for People” Our code of conduct considers the following aspects: • • • • Compliance with the law in the countries where we operate Compliance with Alsea’s laws and regulations Conduct inside and outside of Alsea Conflict of interests • Use and care of resources • • • Information management Activities abroad Compliance Code WITH PEOPLE FOR PEOPLE [22] Board of Directors Alberto Torrado Martínez Chairman Public Accountant Cosme Torrado Martínez Related Director Law Degree Chief Executive Officer Alsea Federico Tejado Bárcena Related Director Industrial Engineer Domino’s Pizza Brazil Francisco Gama Cruz Independent Director Public Accountant Administración Bajo Control, CEO José Manuel Canal Hernando Independent Director Public Accountant Consultant Alberto Torrado Monge Related Director Law Degree Armando Torrado Martínez Related Director Degree in Business Administration Domino’s Pizza Mexico Marcelo Rivero Garza Independent Director Degree in Business Administration Grupo Jumex, CEO Salvador Cerón Aguilar Independent Director Degree in Economics STF Consulting Group, CEO Maximino M. Sañudo Bolaños Statutory Examiner Public Accountant Xavier Mangino Dueñas Secretary Law Degree ALSEA / 2002 ANNUAL REPORT [23] Main Officers Cosme Torrado Martínez Alsea Armando Torrado Martínez Domino’s Pizza Mexico Federico Tejado Bárcena Domino’s Pizza Brazil Gerardo Rojas Blasquez Starbucks Coffee Mexico Fabián Gosselin Castro Operadora West (Burger King) Héctor Orrico Ornelas Distribution and Logistics Carlos Ricardo García Luna y Martínez People Come First Salvador Rocha Cito Information and Technology José Rivera Río Rocha Administration and Finance Juan Carlos Jallath Hernández Strategic Planning Mario Sánchez Martínez Internal Audit WITH PEOPLE FOR PEOPLE [24] Consolidated Financial Statements Alsea S. A. de C. V. and Subsidiaries December 31, 2002 and 2001 Report of Independent Accountants Statutory Auditor’s Report Consolidated Financial Statements: Balance Sheet Statement of Income Statement of Changes in Financial Position Statement of Changes in Stockholders’ Equity Notes to the Consolidated Financial Statements 26 27 28 30 31 32 34 ALSEA / 2002 ANNUAL REPORT [25] Report of Independent Accountants Alsea S. A. de C. V. and Subsidiaries (Translation from the original issued in Spanish) Mexico City, February 4, 2003 To the Stockholders of Alsea, S. A. de C. V. 1. We have examined the consolidated balance sheets of Alsea, S. A. de C. V. and subsidiaries as of December 31, 2002 and 2001, and the related statements of income, of changes in stockholders’ equity and of changes in financial position for the years then ended. Such financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Mexico. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and that they were prepared in accordance with accounting principles generally accepted in Mexico. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures contained 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. 2. In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the financial position of Alsea, S. A. de C. V. and subsidiaries as of December 31, 2002 and 2001, and the consolidated results of its operations and the changes in its stockholders’ equity and in its financial position for the years then ended, in conformity with accounting principles generally accepted in Mexico. PricewaterhouseCoopers Manuel Leyva Vega AUDIT PARTNER WITH PEOPLE FOR PEOPLE [26] Statutory Auditor’s Report Alsea S. A. de C. V. and Subsidiaries (Translation from the original issued in Spanish) Mexico City, February 4, 2003 To the General Stockholders Meeting of Alsea, S. A. de C. V. In my capacity as Statutory Auditor, and in compliance with the provisions of Article 166 of the Corporations Law and of the company’s by-laws, I hereby submit my report on the veracity, sufficiency and reasonability of the financial information presented to you by the Board of Directors concerning the company’s operations for the year ended December 31, 2002. I have attended all shareholders’ and Board of Directors’ meetings to which I have been summoned, and I have obtained from directors and administrators all information and documentation that I considered it necessary to examine. My review was carried out in accordance with generally accepted auditing standards. In my opinion, the accounting and reporting policies and procedures followed by the company and its subsidiaries and considered by management in preparing the financial information to be submitted to the stockholders are adequate and sufficient, and were applied on a basis consistent with that of the previous year. Therefore, said information accurately, reasonably and sufficiently reflects the financial position of Alsea, S. A. de C. V. and its subsidiaries at December 31, 2002, the consolidated results of its operations and the changes in stockholders’ equity and in its financial position for the year then ended, in conformity with accounting principles generally accepted in Mexico. Maximino Manuel Sañudo Bolaños STATUTORY AUDITOR ALSEA / 2002 ANNUAL REPORT [27] Consolidated Balance Sheet Alsea S. A. de C. V. and Subsidiaries Thousands of Mexican pesos of December 31, 2002 purchasing power Assets CURRENT ASSETS: Cash and investments in securities Accounts receivable: Customers, less reserve for doubtful accounts of Ps4,862 in 2002 and Ps11,111 in 2001 Related parties (Note 3) Value added tax, income tax recoverable Others Inventories (Note 4) Prepaid advertising Other advance payments Total current assets PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Net (Note 6) OTHER ASSETS: Patents and trademarks, less amortization of Ps62,211 in 2002 and Ps53,267 in 2001 (Note 1g.) Installation expenses, less amortization of Ps7,676 in 2002 and Ps9,261 in 2001 (Note 1h.) Expenses for placement of promissory notes - Net (Note 1i.) Others Intangible assets for retirement compensation (Note 9) EXCESS OF COST OVER NET BOOK VALUE OF THE SHARES OF SUBSIDIARIES (Note 7) Investment in associated companies (Note 5) December 31, 2002 2001 Ps 201,520 Ps 99,130 79,661 45,438 53,320 94,322 5,104 93,630 15,969 178,419 209,025 76,276 88,174 177 4,944 480 7,367 461,336 404,176 797,528 822,977 148,692 142,130 37,002 756 17,610 23 74,511 45,113 38,230 1,301 10,439 56 53,679 The accompanying fourteen notes are an integral part of these financial statements. Ps 1,582,571 Ps 1,472,988 WITH PEOPLE FOR PEOPLE [28] Liability and Stockholders’ Equity SHORT-TERM LIABILITIES: Documents payable (Note 8) Suppliers Accounts payable and accrued expenses Taxes payable Employees’ statutory profit sharing Related parties (Note 3) Current portion of long-term note payable (Note 8) December 31, 2002 2001 Ps 34,570 216,070 40,087 23,132 2,416 1,705 Ps 36,726 160,542 27,906 19,192 2,944 591 Total short-term liabilities 317,980 247,901 LONG-TERM LIABILITIES: Medium-term promissory note payable (Note 8) Documents payable (Note 8) Deferred income tax (Note 11) Income tax payable on reinvestment earnings Advance payments from customers Retirement compensation reserve (Note 9) Total long-term liabilities Total liabilities STOCKHOLDERS’ EQUITY (Note 10): Capital stock Legal reserve Net premium of shares Retained earnings Reserve for acquisition of own shares Effects of converting the foreign entity 100,000 28,782 51,296 15,299 7,216 793 203,386 521,366 372,184 6,835 222,585 410,610 40,011 (16,814) 105,550 79,093 60,096 8,364 467 253,570 501,471 376,231 5,311 220,356 279,765 52,038 (10,788) Total majority stockholders’ equity 1,035,411 922,913 Total minority interest Total stockholders’ equity COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENT (Notes 6, 8, 12 and 14) 25,794 48,604 1,061,205 971,517 Ps 1,582,571 Ps 1,472,988 Mr. José Rivera Río Rocha Mr. Cosme A. Torrado Martínez GENERAL FINANCE DIRECTOR GENERAL DIRECTOR Mr. Abel Barrera Fermín CORPORATE CONTROLLER ALSEA / 2002 ANNUAL REPORT [29] Consolidated Statement of Income Alsea S. A. de C. V. and Subsidiaries Thousands of Mexican pesos of December 31, 2002 purchasing power Year ended December 31, 2001 2002 Ps 2,580,012 (1,197,839) Ps 2,474,654 (1,156,671) 1,382,173 1,317,983 (1,146,201) (1,098,595) 235,972 219,388 (16,426) (2,987) 2,406 (17,007) (14,522) 204,443 (72,826) (1,780) (74,606) 129,837 3,355 133,192 142,719 (9,527) 133,192 1.18 Ps Ps Ps Ps (41,397) (2,312) 622 (43,087) (80,444) 95,857 (64,390) (1,718) (66,108) 29,749 29,749 31,014 (1,265) 29,749 0.24 Ps Ps Ps Ps Net sales Cost of sales Gross profit Operating expenses Operating income Comprehensive financing cost: Interest paid - Net Exchange loss - Net Gain on monetary position Other expenses - Net Income before the following items Provisions for (Note 11): Income tax Employees’ statutory profit sharing Income before equity in income of associated companies Equity in income of associated companies (Note 5) Consolidated net income for the year Income of majority interest Loss of minority interest Consolidated net income for the year Net income per ordinary share (Note 1r.) The accompanying fourteen notes are an integral part of these financial statements. Mr. José Rivera Río Rocha Mr. Cosme A. Torrado Martínez GENERAL FINANCE DIRECTOR GENERAL DIRECTOR Mr. Abel Barrera Fermín CORPORATE CONTROLLER WITH PEOPLE FOR PEOPLE [30] Consolidated Statement of Changes in Financial Position Alsea S. A. de C. V. and Subsidiaries Thousands of Mexican pesos of December 31, 2002 purchasing power Operations: Consolidated net income Charges (credits) to income not affecting resources: Depreciation and amortization Amortization of the excess of book value over the cost of shares of subsidiary companies Equity of associate companies Deferred income tax Retirement compensation reserve Net variation in working capital, except cash and notes payable Year ended December 31, 2001 2002 Ps 133,192 Ps 29,749 113,619 111,178 5,841 (3,355) (8,800) 359 133,886 5,113 (4,202) 232 79,549 Resources generated by operations 374,742 221,619 Financing: Capital stock increase Repurchase of own shares Promissory note and documents payable Minority interest - Net Dividends paid 3,220 (17,065) (58,608) (13,283) (10,350) (4,190) (93,914) 33,780 (43,343) Resources used in financing activities (96,086) (107,667) Investment: Acquisition of equipment and leasehold improvements - Net Acquisition of patents and trademarks, installation expenses and other assets - Net Excess of cost over book value of shares of subsidiary companies Incorporation of Associated companies Withdrawal (inclusion) of subsidiary companies Effects of conversion of financial statements of foreign subsidiaries Excess of book value over cost of shares of subsidiary companies (161,556) (40,587) (26,673) (41,758) 100,334 (6,026) (91,853) (3,629) (151) (29,078) (1,581) 3,123 Resources used in investment activities (176,266) (123,169) Increase (decrease) in cash and investments in securities Cash and investments in securities at beginning of year 102,390 99,130 (9,217) 108,347 Cash and investments in securities at end of year Ps 201,520 Ps 99,130 The accompanying fourteen notes are an integral part of these financial statements. Mr. José Rivera Río Rocha Mr. Cosme A. Torrado Martínez GENERAL FINANCE DIRECTOR GENERAL DIRECTOR Mr. Abel Barrera Fermín CORPORATE CONTROLLER ALSEA / 2002 ANNUAL REPORT [31] Consolidated Statement of Changes in Stockholders Equity (Note 10) Alsea S. A. de C. V. and Subsidiaries Thousands of Mexican pesos of December 31, 2002 purchasing power Capital stock Legal reserve Net premium of shares Holding company Balance as of January 1, 2001 Ps 378,206 Ps 220,356 Ps 34,762 Variation in 2001: Net income for the year Effects of conversion of financial statemets of foreign subsidiaries Comprehensive income (Note 1p.) Legal reserve creation Dividends paid (4,686) (4,686) (5,311) Ps 5,311 Repurchase of own shares (1,975) Effect in capital stock increase in a subsidiary Balances as of December 31, 2001 376,231 5,311 220,356 24,765 Variation in 2002: Net income for the year Effects of conversion of financial statements of foreign subsidiaries Comprehensive income (Note 1p.) Capital stock increase Legal reserve increase Dividends paid 991 2,229 1,524 13,134 13,134 (1,524) (10,350) Repurchase of own shares (5,038) Effect in capital stock increase in a subsidiary Balances as of December 31, 2002 Ps 372,184 Ps 6,835 Ps 222,585 Ps 26,025 The accompanying fourteen notes are an integral part of these financial statements. WITH PEOPLE FOR PEOPLE [32] Retained earnings Subsidiaries companies Total Reserve for acquisition of own shares Effects of converting the foreign entity Total mayority interest Minority interest Total Ps 262,600 Ps 297,362 Ps 54,253 (Ps 9,164) Ps 941,013 Ps 16,089 Ps 957,102 35,700 31,014 31,014 (1,265) 29,749 43 35,743 (43,343) 43 31,057 (5,311) (43,343) (1,624) (1,624) (1,581) 29,433 (43,343) (4,190) (2,215) 255,000 279,765 52,038 (10,788) 922,913 (1,265) 33,780 48,604 (1,581) 28,168 (43,343) (4,190) 33,780 971,517 129,585 142,719 142,719 (9,527) 133,192 129,585 142,719 (6,026) (6,026) (1,524) (10,350) (12,027) (6,026) 136,693 3,220 (10,350) (17,065) (6,026) (9,527) 127,166 27,856 31,076 (10,350) (17,065) (41,139) (41,139) Ps 384,585 Ps 410,610 Ps 40,011 (Ps 16,814) Ps 1,035,411 Ps 25,794 Ps1,061,205 Mr. José Rivera Río Rocha Mr. Cosme A. Torrado Martínez GENERAL FINANCE DIRECTOR GENERAL DIRECTOR Mr. Abel Barrera Fermín CORPORATE CONTROLLER ALSEA / 2002 ANNUAL REPORT [33] Notes to the Consolidated Financial Statements Alsea S. A. de C. V. and Subsidiaries December 31, 2002 and 2001 (Monetary amounts expressed in thousands of Mexican pesos of December 31, 2002 purchasing power) Note 1 - Summary of Significant Accounting Policies: Alsea, S. A. de C. V. (ALSEA) is mainly engaged in investing in shares of companies involved in the production and distribution of pizzas of the Domino’s Pizza brand, the sale of Starbucks Coffee and Burger King products and the distribution of food stuffs in general. The accompanying consolidated financial statements include those of ALSEA and those of the following subsidiaries and associates: Company Operation Domino’s Pizza Division Operadora D.P. de México, S. A. de C. V. Shareholding percentage 2001 2002 (OPERADORA DP) Parent company under which the 99.99% 99.99% Domino’s Pizza stores are grouped and owner of Master Franchise Holds the shares of the following subsidiaries: Sistema Integral de Administración, S. A. de C. V. (SIA) Renders administrative services, mainly to affiliated companies 99.99% 99.99% Asesores de Franquicias Profesionales, S. A. de C. V. (ASESORES) Renders administrative services, mainly to affiliated companies Coframet, S. A. de C. V. (COFRAMET) Holding company mainly engaged in producing and distributing fast food Holds the shares of the following subsidiaries: 99.99% 99.99% 99.99% 99.99% Pizza Jal, S. A. de C. V. (PIZZAJAL) Corporative company under which the Domino’s Pizza stores are grouped (desincorporated as from December 2, 2002) - 50% Grupo Franja, S. A. de C. V. (FRANJA) Corporative company under which the Domino’s Pizza stores are grouped 99.99% 99.99% Dobrasil, S. A. de C. V. (DOBRASIL) Holding company which holds the 99.99% 99.99% shares of companies engaged in the production and distribution of fast food Holds the shares of the following subsidiaries: DP6, LTDA (DP6) A company established in Brazil 99.99% 99.99% which the Domino’s Pizza stores are grouped De Libra, Ltda (DE LIBRA) A company established in Brazil which the 99.99% 99.99% Domino’s Pizza stores are grouped WITH PEOPLE FOR PEOPLE [34] Company Operation Shareholding percentage 2001 2002 Adue, Ltda. (ADUE) A company established in Brazil which the 60% 60% Domino’s Pizza stores are grouped Distribution Division Distribuidor Internacional de Alimentos, S. A. de C. V. (DIA) Distributes and sells food products 99.99% 99.99% Holds the shares of the following subsidiaries: Optimización de Recursos Administrativos, S. A. de C. V. (ORA) Renders administrative services, mainly to affiliated companies and related parties 99.99% 99.99% Cool Cargo, S. A. de C. V. (COOL) Distributes food products 50% 50% Exim del Caribe, S. A. de C. V. (EXIM) Imports, exports, stores, sells and distributes all types of goods and services 99.99% 99.99% Other business Para Servirle a Usted, S. A. de C. V. (SERVIRLE) Sells homemade bread (acquired 99.99% 99.99% on October 2, 2001) Operadora West, S. A. de C. V. (WEST) Company under which Burger King 28.50% - stores are grouped (as from July 2, 2002) Alsea, Lys, Asociados, S. A. de C. V. Produces, sells and distributes frozen - 50% (ALYSA) bread (desincorporated as from December 20, 2002) SC de México, S. A. de C. V. (SC) Holding Company which holds the 78.05% shares of companies engaged in sales of Starbucks Coffee products (incorporated on February 21, 2002) Holds the shares of the following subsidiary: Café Sirena, S. de R. L. de C. V. (CAFE) Company under which Starbucks Coffee 82% stores are grouped (incorporated on February 26, 2002) - - ALSEA / 2002 ANNUAL REPORT [35] On February 26, 2002 ALSEA entered into an agreement with Starbucks Coffee International, Inc. to promote and develop the Starbucks Coffee brand in Mexico through a subsidiary company. On July 2, 2002, ALSEA acquired 28.5% of the capital stock of Operadora West, S. A. de C. V., a franchise of Burger King Corporation. On December 2, 2002, COFRAMET and a third party entered into an agreement for the sale of PIZZAJAL shares; therefore, as from that date, PIZZAJAL is not a direct subsidiary of COFRAMET and consequently not a subsidiary of ALSEA, giving rise to a charge to income of Ps3,949 recorded in other expenses, as well as to the withdrawal of the minority interest in the consolidated statement of changes in stockholder’s equity. Additionally, OPERADORA DP acquired from said third party the totality of its fixed assets amounting to Ps63,300. On December 20, 2002, ALSEA and a third party entered into an agreement for the sale of ALYSA shares; therefore, as from that date, ALYSA is not a direct subsidiary of ALSEA, giving rise to a charge to income of Ps4,872, recorded in other expenses, and to the withdrawal of the minority interest in the consolidated statement of changes in stockholder’s equity. On December 31, 2001, ALSEA and OPERADORA DP entered into an agreement for the sale of DOBRASIL shares, therefore, as from that date, DOBRASIL is not a direct subsidiary of ALSEA now to be controlled by OPERADORA DP, recording a benefit of Ps11,417 (See Note 11). The accompanying consolidated financial statements were prepared in accordance with generally accepted accounting principles, and are expressed in thousands of Mexican pesos of December 31, 2002 purchasing power denoted by the symbol Ps. Below is a summary of the most significant accounting policies followed in preparing the consolidated financial statements, including the concepts, methods and criteria used in recognizing the effects of inflation on the financial information: a. All important consolidated intercompany balances and operations have been eliminated in consolidation. b. Investments in securities are stated at market value. c. Inventories and cost of sales are originally valued by the last-in first-out method, and are restated to replacement cost applying factors derived from the National Consumer Price Index (NCPI); values so determined do not exceed market value (See Note 4). d. Expenses incurred in registering and placing shares in stock markets are recorded as prepaid expenses when placements are made, are applied to the premium on the placement of shares net of income tax, which forms part of contributed capital. e. The excess of cost over the net book value of the shares of subsidiary companies is amortized over a period of nine years (See Note 7). f. Property, equipment and leasehold improvements are expressed at restated value, determined by applying NCPI factors to the acquisition cost. The company capitalizes in construction in process the comprehensive financing cost of loans used to finance constructions in process. Depreciation and amortization are calculated by the straight-line method, based on the estimated useful lives of the assets, on both acquisition and on restatement increases (See Note 6). g. Patents and trademarks represent payments made for the rights to use the Domino’s Pizza brand name, effective up to 2025 and the rights to use the Starbucks Coffee brand name, effective for 20 years, and are restated to Mexican pesos of December 31, 2002 purchasing power, by applying factors derived from the NCPI. These payments are amortized against income at the annual rate of 5%. WITH PEOPLE FOR PEOPLE [36] h. Installation expenses are expressed at their restated value, determined by applying NCPI factors to acquisition cost, and correspond basically to costs and expenses pertaining to the opening of new sales outlets in different areas. Domino’s Pizza expenses are amortized by the straight-line method at the annual rate of 5% and the Starbucks Coffee amortization expense is recognized over the minimum lease term. At December 31, 2002 and 2001, the Domino’s Pizza division has 310 and 283 corporate stores in Mexico, respectively, and with 4 Starbucks Coffee stores in Mexico. i. Expenses incurred in placing medium-term notes in the securities markets are amortized over the lifetime of the notes. j. Income Tax, (IT) Asset Tax (AT) and Employees’ Statutory Profit Sharing (ESPS) are recorded under the full-scope method of assets and liabilities, which recognizes deferred income taxes for all differences between accounting and tax values of assets and liabilities [temporary differences] (See Note 11). k. Compensation upon retirement (seniority premiums and pension plans) to which employees are entitled upon termination of employment after 15 years of service and when they reach the age of 65, respectively, are recognized as costs of the years in which their services are rendered, based on actuarial studies under the projected unit cost method (See Note 9). Other compensations based on seniority to which employees are entitled in the event of dismissal or death, in accordance with the Federal Labor Law, are charged to income in the year in which they become payable. l. Transactions in foreign currencies are recorded at the rates of exchange in effect on the dates on which transactions are entered into. Assets and liabilities in foreign currency are stated in local currency at the rates of exchange in effect at the balance sheet date. Differences arising from fluctuations in exchange rates between the dates on which transactions are entered into and those on which they are settled, or the balance sheet date, are charged to income (See Note 2). m. Capital stock, legal reserve, reserve for acquisition of own shares and retained earnings represent the value of said items in terms of purchasing power at the end of the most recent period, and are determined by applying the NCPI to historical figures. n. The net premium on placement of shares (see point d. above) represents the excess of the payment for subscribed shares over their normal price, and is restated by applying NCPI factors. o. The result on monetary position represents the effects of inflation, measured in terms of the NCPI, on net monthly monetary assets and liabilities, expressed in constant pesos at year-end. p. Comprehensive income includes net income for the year plus the result from holding non monetary assets, the effect of conversion of financial statements of foreign subsidiaries and those items that for specific disposition of certain statements should be shown in the stockholders’ equity and are not paid in capital, capital reduction or capital distribution and it is restated by applying NCPI. q. Conversion to Mexican pesos of the financial information of subsidiaries abroad, the base for recognition of the consolidation or the equity method, was carried out in accordance with the guidelines of Statements B-15 “Transactions in Foreign Currency and Conversion of Financial Statements of Foreign Operations” issued by the Mexican Institute of Public Accountants following the Foreign Entity Method. The exchange rate of $3.33 to the Brazilian real was used in 2002 ($3.96 in 2001) in the conversion of subsidiary assets and liabilities (monetary and non monetary). Furthermore, in accordance with the provisions of this statement, the financial statement figures previously reported are stated in constant pesos, under this pronouncement, whereas the figures of the prior period are stated in monetary units of one same purchasing power, for which the company used a common restatement factor of 1.0555. This factor was calculated using a weighted average with respect to sales, considering inflation variables and of changes in the exchange rate. The inflationary effects in Brazil for the year ended December 31, 2002, as per the National Consumer Price Index of that country, was 12.53%. ALSEA / 2002 ANNUAL REPORT [37] r. The income per share is the result of dividing the net income for the year by the weighted average of current shares in the period. At December 31, 2002 and 2001, the weighted average of current shares was 120,426,867 and 121,176,981, respectively. s. New accounting pronouncements: During 2002, the Mexican Institute of Public Accountants issued following pronouncements. l. Statement C-8 “Intangible Assets”, which supersedes the current Statement C-8, effective since 1976. The provisions of this statement are effective for years commencing on or after January 1, 2003. The significant provisions of this revised statement are: (i) it establishes rules and criteria for accounting for research and development costs; (ii) pre-operating cost identified with research activities are charged to expenses during the period; (iii) preoperating cost identified with development activities (or in the development phase of a project) that could be recognized as an intangible asset, must comply with certain criteria for capitalization; any other pre-operating costs will not be subject to capitalization; and (iv) valuation rules are based on a logical sequence of the assets' useful life, considering initial recognition and valuation of the intangible asset, recognition of an expense, additional payments and valuation after the initial recognition. 2. Statement C-9, “Liabilities, Provisions, Contingent Assets and Liabilities and Commitments”, which supersedes the original Statements C-9 and C-12, both effective since 1974, and Circulars 46, 47 and 48. The provisions of this statement are effective for years commencing on or after January 1, 2003. The significant provisions of this statement, among others, are: (i) establishment of great precision in the concepts relative to provisions, accumulated obligations, contingent assets and liabilities, (ii) detailed rules concerning the recognition of provisions; the use of present values, consideration of future events in estimating the amounts of provisions; accounting treatment of possible reimbursements and changes in the estimated amount of the provisions, and their effect on income, as well as the required disclosure, (iii) establishment of rules for the accounting treatment of early redemption of obligations, and restructuring of debt, and (iv) recognition of provisions to reverse ecological damage caused to the environment. The management of the company considers that the adoption of these statements will not have a significant effect on the accounting records of the company. t. Generally accepted accounting principles require that when preparing the financial statements, management prepare certain accounting estimates that will make it possible to determine, albeit approximately, the future effect of events that are not accurately quantifiable at the date of issuance of the financial statements. Actual transactions could differ from said estimates. WITH PEOPLE FOR PEOPLE [38] Note 2 - Foreing Currency Position: a. At December 31, 2002 and 2001, ALSEA and its subsidiaries had the following monetary assets and liabilities, in thousands of US dollars: Assets Liabilities Dollar exchange rate December 31, 2002 2001 December 31, 2002 February 4, 2003 US 1,092 (2,279) US 2,052 (3,900) Ps 10.3613 Ps 10.8833 Net short position (US 1,187) (US 1,848) b. Below is a summary of the main operations carried out, in thousands of US dollars: Purchase of foodstuffs Purchase of fixed assets Royalties Opening rights Year ended December 31, 2002 2001 US 47,543 1,433 6,727 117 US 51,011 1,690 6,840 55 c. At December 31, 2002, the company had contracted no hedging coverage against exchange risks. Note 3 - Balances and Operations with Related Parties: a. Balances Receivable: Fast Food Road, S. A. de C. V. Payable: Fast Food Road, S. A. de C. V. COOL December 31, 2002 2001 Ps 5,104 Ps 316 1,389 Ps 1,705 b. During the years ended December 31, 2002 and 2001, the main transaction with related parties was the freight expense of Ps84,201 and Ps82,733, respectively. ALSEA awarded two guarantees for the purchase of transportation equipment amounting to Ps14,000 and Ps6,205, respectively. ALSEA obtained said fixed assets from said related parties as guarantee. ALSEA / 2002 ANNUAL REPORT [39] Note 4 - Inventories: Food and beverages Containers and packaging Others Reserve for obsolete inventories Note 5 - Equity in Shares of Associated Companies Abroad: a. Equity in shares of associated companies is analyzed as follows: Investment at cost Equity in results b. Equity in shares of associated companies is as follows: Associated company WEST COOL December 31, 2002 2001 Ps 62,586 4,229 12,619 79,434 (3,158) Ps 74,748 926 14,573 90,247 (2,073) Ps 76,276 Ps 88,174 December 31, 2002 Ps 41,758 3,355 Ps 45,113 December 31, 2002 Ps 43,789 1,324 Ps 45,113 WITH PEOPLE FOR PEOPLE [40] Note 6 - Property, Equipment and Leasehold Improvements: a. Fixed assets are as follows: Building Store equipment Leasehold improvements Transportation equipment Computer equipment Production equipment Office furniture and equipment Accrued depreciation and amortization: Land Advances for the acquisition of fixed assets (1) Fixed assets securing bank loans (See Note 8). b. Operating lease: December 31, Annual depreciation 2002 2001 rate % Ps 80,376 (1) Ps 319,855 (1) 384,741 115,073 85,501 88,890 (1) 18,902 88,733 (1) 292,318 (1) 329,183 120,207 73,923 126,265 (1) 19,069 5 10 5 25 30 10 10 1,093,338 (326,316) 1,049,698 (262,843) 767,022 786,855 30,381 (1) 125 35,602 (1) 520 Ps 797,528 Ps 822,977 The company has signed straight leasing agreements with different lessors for each of its points of sale. Agreements are for renewable periods from one to five years. The lease value increases on the basis of inflation determined by the Banco de Mexico, calculated as per factors pertaining to the prior year’s NCPI. At December 31, 2002, the charge to income for this item was Ps60,955 (Ps56,497 in 2001). Note 7 - Excess of Cost over the Net Book Value of Shares of Subsidiaries: The excess of cost over the net book value of shares of subsidiaries and associates are as follows: Subsidiaries and Associates EXIM WEST DP6 FRANJA (Note 1) SERVIRLE COOL PIZZA JAL Accumulated amortization December 31, 2002 2001 Ps 42,458 23,292 19,865 12,809 640 151 - 99,215 Ps 42,478 15,392 12,815 641 151 1,065 72,542 (24,704) (18,863) Ps 74,511 Ps 53,679 ALSEA / 2002 ANNUAL REPORT [41] Note 8 - Notes and Documents Payable: A. Balances: Notes payable - December 31, 2002 2001 Medium-term notes at the interbank compensation interest rate plus 2.00 to 4.00 points, maturing in August 2004 (ALSEA) (1) Ps 100,000 Ps 106,141 Current portion of medium-term notes payable (591) Medium-term notes payable Documents payable - Ps 100,000 Ps 105,550 Loan secured with store equipment from Scotiabank Inverlat S. A., at the interbank compensation interest rate, plus 2.5 points, maturing in June 2003 (OPERADORA DP) Ps 3,333 Ps 10,664 Loan with mortgage guarantee from Scotiabank Inverlat, S. A. at the interbank compensation interest rate, plus 2.5 points, maturing in July 2005 (OPERADORA DP) 10,617 12,827 Two loans from BBVA Bancomer, S. A. at the interbank compensation interest rate plus 2.5 points, maturing in June 2004 (OPERADORA DP)) 11,250 20,071 Two loans from Scotiabank Inverlat, S. A. with a mortgage, guarantee (the land owned by DIA), at the interbank compensation interest rate, plus 2.5 points, maturing in February and March 2004 (DIA) 6,068 11,863 Loan from Invex, S. A. secured with production equipment, subject to interbank compensation interest rate, plus 2.75 points, maturing in January 2004 (DIA) 2,917 5,278 Two loans from BBVA Bancomer, S. A. at the interbank compensation interest rate, plus 1.75 points, maturing in June and July 2005 (DIA) 24,167 30,610 Loan from Bancrecer, S. A. at the interbank compensation interest rate, plus 1.75 points, maturing in June 2003 (DIA)) 5,000 10,555 Loan from Invex, S. A. at the interbank compensation interest rate, plus 2.75 points, maturing in December 2002 (DIA) Note payable to Activo Financiero, S. A. de C. V., at the interbank compensation interest rate, plus 6 points (PIZZA JAL) 11,610 2,341 Current portion of long-term documents payable (34,570) (36,726) Long-term documents payable Ps 28,782 Ps 79,093 WITH PEOPLE FOR PEOPLE [42] B. Financial limitations and obligations: (1) - The current asset to current liabilities ratio must not be lower than 1.25 times and the short term portion of the medium- term note is not considered a current liability. - The current asset less inventories to current liability ratio must not be less than 1.00, and the short-term portion of the medium-term note is not considered a current liability. - The total liability to stockholders’ equity ratio must not exceed 0.75 times. - The operating income plus depreciation and amortization to gross financial expenses payable should not be less than 3.50 times. The last 12 months should be considered. - The operating income plus depreciation and amortization to short-term cost liability ratio must not be less than 1.25 times. The last 12 months should be considered. Additionally, when the medium-term note payable is classified as short term, it should not be considered in the determination of this ratio. - No dividends may be paid in cash if this affects compliance with the current limitations. Additionally, in the last year this provision is in effect, at least the current balance after paying dividends should be kept in the cash and temporary investment account. - The company may not sell fixed assets without reinvesting the proceeds in the acquisitions of other fixed assets in the same period or the immediately following period. - ALSEA and its present or future subsidiaries may place no liens on their assets, except when: 1) contracting new loans for equipment for new stores, 2) contracting new loans for the acquisition and/or construction of new distribution centers for up to Ps80,000 and 3) for the acquisition of new assets under financial leasing. - The balance of the “Accounts receivable from related parties” account in the balance sheet or any other account holding amounts payable by related parties may not exceed Ps5,000. - Annual ALSEA investments and/or financial support for projects located outside of Mexico, of its own or held through subsidiaries, may not exceed Ps30,000 without the consent of the stockholders. - Certain stockholders must hold at least 51% of the ALSEA, S. A. de C. V. shares. At the date of issuance of these financial statements, all financial limitations and obligations have been complied with. Note 9 - Compensation upon Retirement: Established compensation upon retirement (pension and seniority premium) is mainly based on the years of service rendered and the employee’s age, as well as on his/her salary at the date of retirement. The obligations and costs corresponding to these benefits are recognized based on actuarial studies carried out by independent experts using the projected unit cost method. The company has not set up a trust to cover these benefits, and the amounts and any other financial data of the consolidated actuarial calculations are summarized below: ALSEA / 2002 ANNUAL REPORT [43] Projected benefits obligations Variations in assumptions and experience adjustments Intangible assets Accumulated benefits obligation Plan assets Liability recorded in books Net cost for the period: Labor cost Finance cost Amortizations Discount rate Increase salaries rate December 31, 2002 2001 Ps Ps 928 (158) 507 (96) 770 23 793 - Ps. 793 Ps Ps Ps 295 33 32 Ps 360 Ps 411 56 467 - 467 192 13 27 232 4.5% 1.0% 4.5% 0.5% Note 10 - Stockholders’ Equity: Capital stock - At the April 29, 2002, General Ordinary and Extraordinary Stockholders’ Meetings, the stockholders agreed to: - Pay dividends in the amount of Ps10,350 (Ps10,000 nominal) to be charged to retained earnings. - Increase the capital stock by Ps991 (Ps962 nominal) by issuing 481,231 ordinary shares, of a single series, Class II, with no par value. The stockholders also agreed to declare a premium on the subscription of shares of Ps2,229 (Ps2,165 nominal). At the General Ordinary Stockholders’ meeting held on July 2, 2001, the stockholders agreed to paid dividends of Ps43,343 (Ps40,000 nominal) that will be charged to retained earnings. The minimum fixed capital with no withdrawal rights is represented by Class I shares, while the variable portion of capital stock is represented by Class II shares, which at no time should exceed ten times the amount of the minimum capital with no withdrawal rights. At December 31, 2002, the subscribed fixed and variable capital is represented by 118,751,417 common nominative shares, with no par value, as shown below: Number of shares Description 122,289,370 1,139,088 (4,677,041) 118,751,417 Fixed portion of the capital stock Variable portion of the capital stock Acquisition of own shares Nominal capital stock Restatement increase Amount Ps 244,579 2,278 (9,354) 237,503 134,681 Capital stock at December 31, 2002 Ps 372,184 WITH PEOPLE FOR PEOPLE [44] In the event of a capital reduction, the excess of stockholders’ equity over capital contributions, the latter restated as per the procedures established in the Mexican Income Tax Law (ITL), is accorded the same tax treatment as dividends. Retained earnings - Dividends paid are not subject to income tax if paid from the Net Tax Profit Account. Any excess over this account is subject to a tax rate of 34% applied to the amount arrived at by multiplying over the dividend by a factor of 1.5152%, which is payable by the company and may be credited against income tax for the following two years or in the year in which the tax is paid. At December 31, 2001, the restated tax value of Reinvested After Tax Earning Account amounts to Ps122,648. As of December 31, 2002 the company had acquired 4,677,041 own shares temporally which represents 3.9% of capital stock. Below is an analysis of acquisition of own shares at December 31, 2002: Average price of acquisition date Market value December 31, 2002 February 4, 2003 11.59 9.03 4.10 3.41 3.64 4.95 7.32 6.96 6.99 7.00 6.94 7.07 7.33 7.30 7.35 7.35 7.35 7.35 7.35 7.35 7.35 7.35 7.35 7.35 7.35 7.35 7.35 7.35 7.05 7.05 7.05 7.05 7.05 7.05 7.05 7.05 7.05 7.05 7.05 7.05 7.05 7.05 Date of acquisition During 1999 During 2000 During 2001 January 2002 February 2002 April 2002 May 2002 June 2002 July 2002 August 2002 September 2002 October 2002 November 2002 December 2002 Restatement effect Shares 509,000 432,000 1,161,600 164,000 27,100 30,900 219,600 140,000 50,100 889,841 680,500 202,800 135,200 34,400 4,677,041 Par value 1,018 864 2,323 328 54 62 439 280 100 1,780 1,361 406 270 69 9,354 388 Ps 9,742 Available own repurchased shares are reclassified as contributed and earned capital. At December 31, 2002, the company has a balance of Ps40,011 for the temporary repurchase of its own shares. ALSEA / 2002 ANNUAL REPORT [45] Note 11 - Income Tax (IT), Asset Tax (AT) and Employees Statutory Profit Sharing (ESPS): As from 1999, the company and its subsidiaries determine IT and AT under the consolidation regime. For the year ended December 31, 2002 and 2001, the company and its subsidiaries had a consolidated taxable income of Ps128,849 and Ps107,790 (nominal), respectively. Consolidated IT was determined based on the shareholding in each of its subsidiaries. The book result differs from the tax result given the different book/tax treatment of acquisitions and cost of sales, restated depreciation, patents and trademarks and the difference in the recognition of the effects of inflation, which is determined differently for book and tax purposes. The accounting benefit from tax consolidation corresponds to the overstatement of IT and AT provisions recorded by each individual subsidiary and IT arising for the entire group. In accordance with current IT Law, ALSEA determined as individual company a tax income of Ps1,072 in 2002, and a taxable loss of Ps4,906 in 2001. The 2002 taxable income was amortized against tax losses of prior years. At December 31, 2002, ALSEA and its subsidiaries have individual unamortized tax losses amounting to Ps53,212, which can be restated by applying NCPI factors, and can be applied to future taxable income over the next ten years. As of December 31, 2002 the company has paid AT of Ps7,090, which is refundable, provided IT in any of the ten years following exceeds AT for those years. The refund can not exceed the difference between IT and AT, and can be restated by apply NCPI factors. At December 31, 2002 and 2001, the main temporary differences on which deferred IT is recognized are analyzed as follows: December 31, 2002 2001 Ps 74,879 32,349 96,770 9,299 (12,842) (20,697) Ps 89,673 32,274 77,670 6,774 (13,457) (21,231) 179,758 x35% 171,703 x35% 62,915 (4,941) 57,974 (7,090) 50,884 412 60,096 - 60,096 - 60,096 - Ps 51,296 Ps 60,096 Inventories Fixed assets Patents and trademarks Prepaid expenses Provisions Tax loss carryforward Income tax rate Effect on reduction income tax rate AT refundable Valuation reserve Deferred IT payable WITH PEOPLE FOR PEOPLE [46] IT charged to results for the period is analyzed as follows: Current IT Benefit from tax consolidation Tax benefit from acquisition of DOBRASIL shares Deferred IT December 31, 2002 2001 Ps 91,630 Ps 70,623 (5,764) (11,417) (2,031) 74,449 68,592 (1,623) (4,202) Ps 72,826 Ps 64,390 ESPS was determined at 10% of the base, calculated as per the special rules established in the ITL. Note 12 - Commitments and Contingencies: Commitments OPERADORA DP (subsidiary company) signed an irrevocable advertising trust agreement to contract television airtime in the year 2002, amounting to Ps40,000, payable at the time the service is rendered. The trust is known as “Trust F/025 Domino’s Pizza”. “Bankboston, S. A., Institución de Banca Múltiple (Trustee) holds ownership of the capital and with it the administration of the fund and of collections from subfranchises, as per instructions of OPERADORA DP, which is the trustor and which made the initial contribution and appointed and instructed the trustee concerning its duties. Invex, S. A. de C. V., Institución de Banca Múltiple, Grupo Financiero INVEX, as trust beneficiary opened a credit line for the principal amount of up to Ps40,000 for the trustee, in the terms and conditions contained in the aforementioned agreement; and Bankboston S. A., Institución de Banca Múlitple, trust division, as trustee has been handling the funds prior to receiving authorization from the trustor. As of December 31, 2001, the company has an account payable to INVEX of Ps7,399, due to the credit line mentioned above. Contingencies ALSEA and subsidiaries are involved in a number of lawsuits arising from the normal course of their business operations. The company’s management and legal advisors are of the opinion that these matters will be resolved favorably. However, if they are not, this will not substantially affect the consolidated financial situation or the consolidated result of operations of ALSEA and subsidiaries. Note 13 - Business Segments: The company is organized in four major operating divisions; mainly pizzas sales (Domino’s Pizza), distribution services, coffee sales (Starbucks Coffee) and other all headed by the same management. The financial information per business segment is as shown on the following page. ALSEA / 2002 ANNUAL REPORT [47] Alsea, S. A. de C. V. and Subsidiaries Business Segment Information Year ended December 31, 2002 and 2001 Thousands of Mexican pesos of December 31, 2002 purchasing power REVENUE- Sales to third parties Inter-segment sales 2002 2001 Domino’s Starbucks Pizza Distribution Coffee Other division division Distribution business Eliminations Consolidated Consolidated Ps 1,723,445 Ps 788,729 Ps 5,882 Ps 61,956 Ps 2,580,012 Ps2,474,654 22,376 592,391 31,105 (Ps 645,872) 1,745,821 1,381,120 5,882 93,061 (645,872) 2,580,012 2,474,654 COST OF SALES AND OPERATING EXPENSES (1,575,532) (1,297,954) (11,692) (107,711) 648,849 (2,344,040) (2,255,266) OPERATING INCOME Ps 170,289 Ps 83,166 (Ps 5,810) (Ps 14,650) (Ps 2,977) 235,972 219,388 OTHER CONSOLIDATED NET INCOME (102,780) (189,639) Ps 133,192 Ps 29,749 TOTAL ASSETS Ps 1,022,439 Ps 429,222 Ps 76,415 Ps 1,312,330 Ps 1,257,835 Ps 1,582,571 Ps 1,472,988 TOTAL LIABILITIES Ps 234,584 Ps 199,189 Ps 6,759 Ps 276,919 (Ps 196,085) Ps 521,366 Ps 501,471 DEPRECIATION AND AMORTIZATION Ps 85,757 Ps 21,681 Ps 776 Ps 5,405 Ps - Ps 113,619 Ps 111,178 Note 14 - Subsequent Events: a. On December 31, 2002, article 2-A of the Value Added Tax Law was amended, taxing take-out and delivered food stuffs, as a result of which, the company may be affected. b. Company management decided to withdraw in 2003 EXIM and SERVIRLE from consolidation, as these companies are not considered to be strategic in the 2003-2007 business plan. Mr. José Rivera Río Rocha Mr. Cosme A. Torrado Martínez GENERAL FINANCE DIRECTOR GENERAL DIRECTOR Mr. Abel Barrera Fermín CORPORATE CONTROLLER WITH PEOPLE FOR PEOPLE [48] Information for Shareholders Independent Auditors PricewaterhouseCoopers Mariano Escobedo 573 Rincón del Bosque 11580, Mexico, D.F. Phone: 5263.6000 Investor Relations Lizette Chang lchang@alsea.com.mx Phone: 5241.7158 Information on Alsea’s stock and medium-term promissory note Alsea, S.A. de C.V. trades its single series shares in the Mexican Stock Exhange as of June 25, 1999, under the ticker symbol Alsea*. The Company’s promissory note, whose public offer in the Mexican Stock Exchange took place on August 25, 2000, is under the ticker symbol Alsea P00. Reference symbols for the stock Bloomberg ALSEA* Reuters Infosel ALSEA.MX ALSEA* Reference symbols for the medium-term promissory note Bloomberg ALSEA Reuters Infosel ALEFL00P=MX ALSEA g n i t n i r P e r o m t e W : g n i t n i r P • 9 6 í a V : s h p a r g o t o h P • . x m m o c . 3 o n e m l i i i : n g s e D ALSEA, S.A. de C.V. Yucatán 23 Hipódromo Condesa 06170, México, D.F. Phone: 5241.7100 www.alsea.com.mx 

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