Alsea, S.A.B. de C.V.
Annual Report 2003

Plain-text annual report

More Satisfied Customers A L S E A / A N N U A L R E P O R T 2 0 0 3 ( ) ANNUAL REPORT 2003 = More Quality More Synergies More Stores More Jobs More Brands Higher Profitability (RAISE TO THE POWER) Arithmetical operation consisting in finding the multiplication of a given base and to repeat it as a given factor. It is expressed as “to raise a number to a whole power of ”, “to raise powers”, “to raise to the second, third…power”, or one may also say “to raise to the power of Alsea.” (COMPANY PROFILE) Alsea is the leader in operating quick service restaurants. In Mexico it operates Domino’s Pizza, Starbucks Coffee, and it is the major franchise of Burger King. 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*. (MISSION) 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” (VISION) Where we want to go Be of the highest quality and most profitable quick service restaurant operator. (CONTENTS) Financial Highlights (1) Board of Directors (2) Message to the Shareholders Domino’s Pizza (3) (4) Starbucks Coffee (10) Burger King (14) DIA (18) Shared Services (21) Management’s Discussion & Analysis Corporate Governance (22) (24) Financial Statements (28) (CORPORATE STRUCTURE) Operadora DP de México, S.A. de C.V., manages the brand in Mexico through 472 units of which 304 are owned stores and 168 are sub-franchises. De Libra, Empreendimentos, Comercio e Serviços Ltda. (subsidiary of DoBrasil, S.A. de C.V.) manages the brand in Brazil through 29 stores. Café Sirena, S. de R.L. de C.V., manages the brand in Mexico through 22 owned stores. Operadora West, S.A. de C.V., is a franchisee of Burger King Corporation and manages the brand in Mexico through 37 restaurants. Distribuidor Internacional de Alimentos, S.A. de C.V., dedicated to the specialized distribution of food and the manufacturing of pizza dough, manages five distribution centers with national coverage. (OUR VALUES ) What makes us great S E R V I C E Service and Customer Focus Excellence and Integral Development Respect, Integrity and Austerity Vigilant on Quality and Productivity Innovation and Creativity Efficiency, Commitment and Teamwork (STRATEGIC PLAN 2003-2008) 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, sub-franchisees and associates. Shareholders’ value We increase our shareholders’ equity by striving to reach the highest productivity and profitability levels. FINANCIAL HIGHLIGHTS(1) Net Sales Cost of Goods Sold Gross Profit 2003 $ 2,729,813 1,194,188 1,535,625 % 100.00 43.75 56.25 2002 $ 2,627,916 1,160,823 1,467,093 Operating Expenses 1,140,904 41.79 1,076,619 Depreciation Operating Profit EBITDA Consolidated Net Profit 153,493 241,228 394,721 117,087 5.62 8.84 14.46 4.29 120,564 269,910 390,474 138,986 % 100.00 44.17 55.83 40.97 4.59 10.27 14.86 5.29 2001 $ 2,549,196 1,146,160 1,403,036 % 100.00 44.96 55.04 2000 $ 2,404,849 1,055,616 1,349,233 1,047,962 41.11 117,443 237,631 355,074 30,976 4.61 9.32 13.93 1.22 983,629 107,204 258,400 365,604 115,102 % 100.00 43.90 56.10 40.90 4.46 10.74 15.20 4.79 1999 $ 1,736,744 788,360 948,384 618,102 65,605 264,677 330,282 161,453 % 100.00 45.39 54.61 35.59 3.78 15.24 19.02 9.30 Total Assets Cash Liabilities with Cost Shareholders’ Equity Price of Share Profit per Share Dividend per Share Book Value per Share Employees 1,709,502 100.00 1,651,440 100.00 1,533,693 100.00 1,664,490 100.00 1,349,750 100.00 195,646 142,907 1,152,151 11.44 8.36 67.40 207,086 170,457 1,080,453 12.54 10.32 65.43 100,558 231,107 961,008 6.56 15.07 62.66 112,995 328,887 978,980 6.79 19.76 58.82 89,712 214,263 900,902 6.65 15.87 66.75 9.60 1.04 0.38 9.84 7,336 7.35 1.17 0.09 9.10 6,950 3.50 0.26 0.34 7.96 6,893 6.14 0.95 - 8.04 6,834 11.90 1.33 - 7.42 5,655 (1) Figures in thousands of pesos, except per share data and employees, expressed in purchasing power as of December 31, 2003. (2) The graphs present figures in million pesos expressed in purchasing power as of December 31, 2003. CAGR 03/99 12.0% 10.9% 12.8% 16.6% 23.7% -2.3% 4.6% -7.7% 6.1% 21.5% -9.6% 6.3% -5.2% -6.0% 7.3% 6.7% (NET SALES) CAGR= 12.0% (EBITDA) CAGR= 4.6% (NET PROFIT) CAGR= -7.7% (SHAREHOLDERS’ EQUITY) CAGR= 6.3% . 9 7 2 6 2 , . 1 9 4 5 2 , . 8 4 0 4 2 , 7 . 6 3 7 , 1 8 . 9 2 7 , 2 . 5 0 9 3 7 . 4 9 3 . 6 5 6 3 . 1 5 5 3 . 3 0 3 3 . 0 9 7 9 . 0 1 6 9 . 9 0 0 9 . 5 1 6 1 1 . 5 1 1 . 0 9 3 1 1 . 7 1 1 0 . 1 3 1 . 2 5 1 , 1 . 5 0 8 0 1 , ‘99 ‘00 ‘01 ‘02 ‘03 ‘99 ‘00 ‘01 ‘02 ‘03 ‘99 ‘00 ‘01 ‘02 ‘03 ‘99 ‘00 ‘01 ‘02 ‘03 BOARD OF DIRECTORS (PRESIDENT) Cosme Alberto Torrado Martínez (RELATED DIRECTORS) Alberto Torrado Martínez Alberto Torrado Monge Armando Torrado Martínez Federico Tejado Bárcena (INDEPENDENT DIRECTORS) Francisco Gama Cruz Marcelo Rivero Garza José Manuel Canal Hernando Salvador Cerón Aguilar (STATUTORY EXAMINER) Maximino Manuel Sañudo Bolaños (SECRETARY) Xavier Mangino Dueñas (BOARD OF DIRECTORS COMMITTEES) Audit Committee José Manuel Canal Hernando (PRESIDENT) Cosme Alberto Torrado Martínez (MEMBER) Mario Sánchez Martínez (SECRETARY) Planning and Finance Committee Salvador Cerón Aguilar (PRESIDENT) Cosme Alberto Torrado Martínez (MEMBER) José Rivera Río Rocha (SECRETARY) Assessment and Compensation Committee Francisco Gama Cruz Alberto Torrado Monge (PRESIDENT) (MEMBER) C. Ricardo García Luna y Martínez (SECRETARY) Marketing Committee Marcelo Rivero Garza Federico Tejado Bárcena Diego Cossío Bartón Francisco Rodríguez Lara (PRESIDENT) (MEMBER) (MEMBER) (SECRETARY) (2) MESSAGE TO THE SHAREHOLDERS (SALES MIX*) (NUMBER OF STORES) Domino’s Pizza Mexico 62.3% Domino’s Pizza Brazil 3.2% Starbucks Coffee DIA 2.8% 31.7% * Note: Burger King will be consolidated in Alsea financial statements as of January 2004. Domino’s Pizza Mexico System 472 Domino’s Pizza Brazil System Starbucks Coffee Burger King 29 22 37 To Our Shareholders, Alsea had an exceptional year in 2003, cost and expenses efficiency, to conclude effort to adapt our organization to the best despite a dearth of political agreements and 2003 with an operating margin of 8.8% of practices, with the consistent goal of economic uncertainty in our country. Thanks versus last year’s 10.3%. generating value and security for our to the recognition of our customers, we shareholders. managed to maintain our leading position, Our financial position is sound and operating 560 quick service restaurants permits us to keep growing. Interest-bearing Despite the growth of the number of under trademarks of unquestionable liabilities dropped by 16.2% and trademark units that we operate, we focus international renown. shareholders’ equity showed an increase on the very heart of each of them, of 7.6%; return on equity was 9.8% and ensuring that we offer our customers the At Alsea, we are committed to a mission our cash flow generation places us in best in both products and services, all of upheld by our values and we have achieved better financial condition to maintain this thanks to the more than 7,000 people the goals set out in our Strategic Plan for orderly growth. The combination of all on the Alsea team. 2003 through 2008. The resulting figures of these elements permitted Alsea to and our continuous growth are the products generate an aggregate economic value We are grateful to our staff, customers, of the efforts of our exceptional team that is of $85 million pesos. shareholders and strategic partners for experienced in customer service. their participation in Alsea's success. We Alsea's consolidated sales figures increased brands: Domino’s Pizza in Mexico and be maintained by living everyday with by 3.9% at $2.73 billion pesos compared Brazil, Burger King and Starbucks Coffee conviction in our mission, our vision and with 2002. Earnings before Interest, Taxes, achieving 560 units. our values. In 2003, we opened 42 stores of our are conscious of the fact that this has to Depreciation and Amortization (EBITDA) was up by 1.1% at $394 million pesos. It is These figures reflect a 30% increase in our At Alsea, the best is yet to come. worthwhile noting that Operadora DP, a stock price in the securities markets. Net company operating the Domino's Pizza earnings per share came to $1.04 pesos trademark in Mexico, was affected by a and we declared a $0.3625 peso dividend change in the value added tax rate from 0% per share payment in keeping with our to 15%, when it was decided to tax home- policy in this regard. delivery foods as of January 2003. This is Alsea's main subsidiary, whose share of total Good Corporate Governance and our revenues came to 62.3%. The effect of this compliance with the Code of Best represented 5.7 percentage points in Alsea's Corporate Practices ensure Alsea and its operating margin. Although the task was not subsidiaries of transparent and an easy one, we managed to recover by professional management. We believe means of technical marketing strategies and strongly in these principles and make an (3) COSME A. TORRADO MARTÍNEZ CHAIRMAN OF THE BOARD ALBERTO TORRADO MARTÍNEZ CHIEF EXECUTIVE OFFICER Ana Laura Ocampo CONDESA STORE DOMINO’S PIZZA MEXICO ( ) = 472 Stores. 70.6 million customers served. 26.3 million pizzas sold. 23.5 million orders. “Undoubtedly, our greatest accomplishment in 2003 was the 5.9% growth in same store orders, which is the result of our customer-focus strategy. We continue to show opportunities for growth: we opened 9 stores in 2003.” FEDERICO TEJADO DIRECTOR OF DOMINO'S PIZZA MEXICO What was the impact of the VAT delivery vehicles and store granted in particular cases, such as Amendment? equipment such as Heatwave, a the one in Six Flags, Mexico City. The impact on the same store sales technology that allows for the of this division was 12 percentage delivery of an even hotter pizza to What is the amount paid for points; however, our focusing on our clients. income-generation efforts, through royalties and publicity? Our sub-franchisee holders’ pay marketing strategies, allowed total What is the average investment per 6.5% of their net sales of royalties sales to show a slightly positive store in each one of the formats and 3.2% is paid to Domino’s Pizza variation of 0.3%. Additionally, a managed? International; in addition to 4% of strict control of costs and expenses US$200,000 in stores with home sales for the advertising fund. in the entire organization generated delivery service and US$120,000 in greater efficiency. express format, units mainly How many direct jobs are What was the market share in Mexico City subway system, which We have just over 10,000 people 2003? have no delivery service. participating in the entire system. located in shopping malls and the generated? A 26.4% participation in sales. Do franchises continue to be What is the significance of Where was investment utilized granted? Domino’s Pizza Mexico to Domino’s during the year? No, since the entire territory is Pizza International? We invested 59.1 million pesos in assigned to the 22 current sub- Our country has the highest opening 14 new stores, relocating franchisee holders. Outside of these number of stores after the United 4, remodeling 3, and the closing of entities, Alsea develops its own States. 8 units. In addition, we invested in stores. However, sub-franchisees are (5) Owned Sub-franchises Total 2003 304 168 472 2002 310 153 463 2001 283 142 425 2000 277 132 409 1999 221 114 CAGR 99/03 8.3% 10.2% 335 8.9% FUTURE SCENARIO: DOMINO’S PIZZA MEXICO We will open around 90 stores, split between franchisees and owned to conclude in 2008 with 560 units. What is the profitability of a store leader means better opportunities in Mexico compared to that of one in purchase volume, brand name in the United States? recognition, service and product Mexico is four times more profitable guarantees, advertising due to the cost and expense investment, as well as in our structure. operations, logistics, distribution, and geographical coverage How will future growth unfold? capabilities. We will open around 90 stores, split between franchisees and owned, in What are the main challenges to be the next 5 years to conclude in tackled? 2008 with 560 units. There are Our own people: covering vacant cities with at least 50,000 positions and reducing personnel inhabitants where we have no turnover in the stores. stores. On another front, we envision growth in cities we are Where will investment be directed actually covering. In addition, in the next years? shopping malls offer important To establishing new stores and expansion opportunities. maintaining current ones, upgrading technology and training Which are the main barriers of personnel at all levels. entry? Undoubtedly, the size of Domino’s Are store sites rented? Pizza, as well as that of its current Yes, of the 304 corporate stores, competition. Being the market only five are owned. (6) DOMINO’S PIZZA BRAZIL ( ) = 29 stores. A growth of 26% in the number of units vs. 2002. We are leaders in Rio de Janeiro. “Our accomplishments: Being the leader in Rio de Janeiro with 16 more stores than our closest competitor upon proving the success of the business model in this city.” EDUARDO GÁNDARA DIRECTOR OF DOMINO’S PIZZA BRAZIL. How has the quick service industry How was consumer performance? What is the average investment per evolved in Brazil? The Brazilian economy in general store? A great deal of competition has displayed a reduced consumption US$160,000 for stores with home unfolded. Local brands operating and Domino’s Pizza showed a 9.1% delivery service and US$90,000 for as franchises have improved their decline in same store sales. express format. image, technology and operations so as to prepare for the entry of What modifications have been How have food distribution matters international brands to the market. introduced to adapt the flavor to been resolved for that South the taste of the Brazilian American country? What is the position of Domino’s consumer? We have two distribution centers in Pizza in Brazil? Ingredients from the region were Rio de Janeiro and Sao Paulo. We We are positioned with high-quality introduced, as was the production also manage small supply stores pizza focused on home delivery and of thin-crust pizza, gourmet pizza, behind the stores in four different providing a 30-minute delivery and sweet flavors with a wider- cities, in addition to having local guarantee or it will be free. In Rio ranging menu focused on suppliers that distribute the de Janeiro, we are leaders with 16 specialties. Personalized service is products directly to the units. more stores than our closest offered with in-store dining areas. competitor. There are great growth How many direct jobs are opportunities in Sao Paulo since it Where was investment utilized generated by Domino’s Pizza is the second city in the world in during the year? Brazil? pizza consumption, after New York. 17.0 million pesos were invested, in Around 400. net openings six stores, relocating three and remodeling ten units. (7) Total 2003 29 2002 23 2001 12 2000 5 1999 9 CAGR 99/03 34.0% FUTURE SCENARIO: DOMINO’S PIZZA BRAZIL The main challenge is to position ourselves as the “best delivery pizza” and test out the business model to penetrate the Sao Paulo market. What does Domino’s Pizza What are the main barriers of entry What will Domino’s Pizza invest in International expect with the for new participants in Domino’s and where will these resources go development of the brand in Brazil? Pizza’s sector in Brazil? in the next few years? The expectation is to duplicate the An exacting consumer and a highly We have a long-term vision, so we results obtained in Mexico since it fragmented market as a result of will make sure that the business is the largest market in Latin an economy looking for low prices, model in Brazil is a satisfactory America. an audience that reacts to one. We will therefore keep a investments in advertising. An conservative position with regard to How do you picture the growth of economy with complex labor and investment, as we are not planning the quick service industry in Brazil tax legislation. on opening any stores. Investment over the next few years? in technology, training and New local brands will arise, there Where is Domino’s Pizza’s best distribution will be moderate. will be growth in other cities and opportunity in Brazil? there will be the arrival and In home delivery, where young Why are there no sub-franchisees consolidation of several international chains. people are more receptive to high in Brazil? quality products. Small Because we will offer our sub- participants tend to disappear in a franchisees a successful model How do you envision the growth of highly competitive market. that will generate high profitability Domino’s Pizza Brazil for the for their investment once it has future? What are the main challenges to be been tested. We are working on the business faced? model for developing stores in Sao Position ourselves as the “best Paulo. home delivery pizza” and test out the business model to penetrate the Sao Paulo market. (8) Iván Romero OPERATIONS STARBUCKS COFFEE ( ) = 22 stores. Mexico is the second country in opening stores, after Germany. More than 300 direct jobs generated. “Our greatest accomplishment in 2003 was opening 18 stores in one year, operating under a successful business model. Likewise, constructing the foundations of the structure and the talent of our people will ensure the growth of Starbucks Coffee in our country.” GERARDO ROJAS DIRECTOR OF STARBUCKS COFFEE MEXICO How has growth performed in this range from gazebo-type kiosks to How many jobs did Starbucks first year of operations? outlets of approximately 200 m2. We Coffee contribute in the generation At a brisk pace and solid (more are committed to adapting to the of direct employment in Mexico? than one store per month); surroundings of each one of the Over 300, which we estimate will a sprightly increase, with new communities where we are double in 2004. learning experiences that can be established. capitalized upon in the coming What is Mexico’s position regarding years. The Mexican consumer has What market niche is Starbucks Starbucks Coffee International? shown acceptance and enjoyment Coffee aimed at in Mexico? Mexico is a key market with solid of living “The Starbucks Starbucks is for everyone; it economic foundations that Experience”. represents the “Third Place,” after represent the launching pad for the home and the office, Starbucks is rest of the Latin American market. How has Starbucks Coffee where our clients can relax, read a In addition, Mexico is one of the positioned itself in our country’s book or meet with friends. We wish five main coffee-producing coffee sector? to offer the best coffee in the best countries in the world. “As coffee lovers, with a grand place, with the best service. commitment to the quality and What elements were decisive in service we provide our customers: Are franchises granted? agreeing to the joint-venture? one cup at a time.” No, all stores are owned. We develop Alsea's focus on the quick service the outlets under a joint-venture industry, and its experience in the What is the format of the stores? scheme with Starbucks Coffee management of multiplex units Abbreviated, core, and flagship, International. strengthened by its distribution and which are classified by size and logistics network. (11) Number of stores Dec 2003 22 Dec 2002 4 FUTURE SCENARIO: STARBUCKS COFFEE Fostering the coffee culture in Mexico to live “The Starbucks Experience”; we plan to have around 200 stores by 2008. How will Starbucks Coffee growth What are the main barriers of entry growth and becoming a large unfold in Mexico in the next few of new participants in the sector in company in number of stores and years? which Starbucks Coffee sales volume, while still We picture having around 200 participates? maintaining an efficient structure stores by 2008. The backing we receive from our and organizational culture. We are international partner, who is dynamic, sprightly, non-bureaucratic, What is Mexico’s per capita coffee knowledgeable of the coffee culture productive, innovative, and very consumption? and has experience in much in touch with the operation. Between 700 to 800 grams; understanding the preferences of however, Mexico is the fifth largest the consumer and offers quality When will expansion outside of the coffee-producing country in the products with a brand name of Federal District begin? world. We see this as a great renowned prestige. We will open stores in Guadalajara opportunity to capitalize on, in 2004. knowing that we have to contribute What are the main challenges with our two cents’ worth to ensure faced? that the coffee culture spreads and, Fostering the coffee culture in in this way, increase domestic Mexico to live “The Starbucks consumption. Experience”, promoting accelerated (12) Mirna Gavito NAPOLES STORE BURGER KING ( ) = 37 restaurants. A growth of 32% in number of stores vs. 2002. “The most important accomplishment in 2003 was the opening of nine new restaurants, which represent a growth of 32.1% in number of units.” FABIÁN GOSSELIN DIRECTOR OF OPERADORA WEST Who is Operadora West? quick service industry, as well as the What is the market niche targeted Is the largest franchisee which logistics and food distribution services by Burger King in Mexico? operates the brand in Mexico. We rendered by DIA. Before the agreement The mid to mid-high socioeconomic operate the region of Bajio, the state with Alsea we had 24 units, a year level, focusing on children between of Jalisco and the Federal District’s and a half later we already had 37 the ages of 4 and 12, and adults metropolitan area, although there restaurants. between 19 and 44. are other nine franchisees. How was the consumption Where was investment utilized Who is Burger King Corporation? performance in the hamburger during the year? It is our international partner in the market sector? In opening nine new restaurants and United States which grants franchises Consumption remained stable in remodeling four others. to manage the brand in Mexico. 2003 and Operadora West focused on harnessing new customers, using What is the average investment per Does Operadora West grant discounts and promotions. franchises? outlet? US$700,000. No, because we do not operate under What was the participation in the a sub-franchisee scheme. hamburger market sector? How much is paid in royalties to The Burger King system has Burger King Corporation? What has been the advantage of approximately 16% of all the The 5% of net sales and another 5% Alsea’s and Operadora West’s hamburger restaurants in Mexico. for the advertising fund. partnership? Operadora West, being a Alsea has boosted its growth rate and franchisee, participates with 19% Operadora West has benefited from of the Burger King System in Alsea’s in-depth knowledge of the number of units. (15) Number of stores Dec 2003 37 Dec 2002 28 FUTURE SCENARIO: BURGER KING We want to be near our customers, we will open around 70 restaurants between 2004 and 2008. How many jobs does Operadora What will Operadora West’s growth macroeconomic indicators remain West contribute for the generation be in the next few years? stable. There are many small and of direct employment? Around 1,200 employees. 11 restaurants per year. medium-sized chains in the United What are the main barriers for especially appealing, mainly due to States that find the Mexican market How has the brand name performed entry? the success that Burger King and his in Mexico? Undoubtedly, current market competitor have enjoyed in Mexico, Mexico has been one of the countries players have opened up consumer- and they will attempt to gain a that has shown the best results and renowned brands, which constitute foothold domestically. offers greatest growth opportunities a barrier to new participants. for the Burger King Corporation. Additionally, price is a factor that What investments will Operadora especially affects small chains that West make in the next few years As of what date will Operadora are still not able to produce a and where will these resources be West consolidate its financial critical mass. focused? statements with Alsea’s? Investments will center on opening Starting January 1st 2004. What are the prospects for the outlets, with 400.0 million pesos How do you envision the growth in To increase the habit of consuming restaurants between 2004 per capita consumption of hamburgers and achieve greater and 2008. hamburger market niche? earmarked for opening 70 hamburgers in Mexico? market penetration through a larger Consumption will depend on the number of restaurant openings. proximity of the restaurant to the consumer. For this, the opening of Which are the main challenges new restaurants is a key factor, as is faced? the incidence on the habits of the We will have to reckon with greater consumer regarding our products. competition, especially if the (16) Rubén Baena DIA OPERATOR DISTRIBUIDOR INTERNACIONAL DE ALIMENTOS ( ) = Two visits per week to 120 cities. 698 sales points. 320 distribution routes. 1,517 weekly deliveries. “The most important accomplishment in 2003 was being able to offer a complete on-time service, to maintain an efficient distribution operation and to improve our processes with investment in the dough production area. We implemented demand planning models to optimize inventories.” HÉCTOR ORRICO DIRECTOR OF DIA What is DIA? What is the distribution fleet? What are the products with the It is Alsea’s subsidiary dedicated 180 trucks, with three greatest volume? to supply food products to the temperatures to transport dry, Cheese, dough, sausages, pizza different brands, strengthening refrigerated and frozen foods. sauce, potatoes, and hamburger their operations by allowing them meat. to focus on end customer service. What operations does DIA engage in? Do you have supplier How many distribution centers Demand planning, purchasing, development programs? are there? storage, food distribution as well We have a Strategic Partners There are five: Mexico City, as the production of pizza dough. program with two mainstays: the Monterrey, Tijuana, Hermosillo product guarantee and the service and Cancun. Who are its customers? level provided to us. Domino’s Pizza, Starbucks Coffee, What coverage has DIA achieved? Burger King and Cinemark. What is the future of distribution DIA offers services nationwide, in Mexico? covering 120 cities. It visits 698 What is the profile of the clients Nowadays, the leading brands sales points twice every week, it manages? base their success on efficient traveling 141,080 kilometers per week and delivering 232,780 Multiple-unit chain characterized by national geographic dispersion, logistics and distribution since it is the means through which its boxes. which manage large volumes and products reach the consumer. We rely on a standardized products have no doubt that distribution catalogue. will become an even more (19) FUTURE SCENARIO: DIA Distribuidor Internacional de Alimentos will continue to be the key of logistics and food distribution for backing the growth of our brands. important pillar of all consumer What will the investment and product sales organizations. destination of said resources be in the coming years? What will the participation of 19 million pesos mainly for the DIA in Alsea amount to in the areas of information systems, long run? production and, most importantly: DIA will continue to be the key for the training of our people. backing the growth of units for each one of the brands. We will continue focusing on efficiency and continuous improvement in our operations. (20) SHARED SERVICES Alsea, upon embarking on its operations under a Shared Services scheme, seeks to concentrate the resources of similar activities in the entire organization to provide service to the brands it manages. We focus on: • Having a support organization, concentrating on customer satisfaction, efficiency and continuous improvement. • Offering a better service to business operations with common processes and systems. • Emphasizing the creation of value and its measurement through process redesign. • Promoting the evolution of Alsea in some of the procedures to be managed through outsourcing. Alsea is wholly engaged in a transition process to reach the Shared Services Center. The benefits are: 1. Supporting the accelerated growth of the brands we managed. 2. Updating the technological platform. 3. Integrating supply chain operations. 4. Optimizing the efficiency of staff areas. Operating under a Shared Services Center allows the brands to focus on their main activity: eliminating their support functions. With process centralization, Alsea benefits from its critical mass, exploiting economies of scale by reducing its operating expenses, increasing margins and improving Alsea’s level of service. The transition means a change in culture. In Alsea we are focusing attention on clients and quality; that is why we have established service agreements between the different staff areas and business units to implement the technological tool in the next two years. DISTRIBUTION AND LOGISTICS DEVELOPMENT HÉCTOR ORRICO ORNELAS ARMANDO TORRADO MARTÍNEZ HUMAN RESOURCES C. RICARDO GARCÍA LUNA Y M. SYSTEMS AND PROCESSES ADMINISTRATION AND FINANCE SALVADOR ROCHA CITO JOSÉ RIVERA RÍO ROCHA STRATEGIC PLANNING JUAN CARLOS JALLATH H. INTERNAL AUDIT MARIO SÁNCHEZ MARTÍNEZ Manage the Alsea brands Development of points of Recruitment and selection. Technological Financial planning, Development of the process Ensure compliance with supply chain. sale selection. Control of leasing contracts. Training and qualification. implementation of point- administration, internal of Strategic Planning, internal control. Performance evaluation. of-sale information, control, information and including follow-up and Compensation. General services. Labor relations. processes, communication financial analysis that will evaluation. and solutions for generate value for the Corporate Communications. monitoring operating and stockholder. financial management. (21) MANAGEMENT’S DISCUSSION & ANALYSIS Our financial position is sound and permits us to keep growing. Interest-bearing liabilities dropped by 16.2% and shareholders’ equity showed an increase of 7.6%; return on equity was 9.8% and our cash flow generation places us in better financial condition to maintain orderly growth. The combination of all of these elements permitted Alsea to generate an aggregate economic value of $85 million pesos. Sales increased 3.9% in 2003, reaching 2.73 billion decision not to pass on the impact of the VAT to distribution expenses of 8.6 million pesos. pesos. This increase in 101.9 million pesos was the the clients. result of: • An increase of 5.2 million pesos for Domino’s Pizza The 39.0 million peso increase in Fixed Costs is • A slight increase in net sales of 4.3 million pesos Brazil, mainly due to improvements in operations. mainly the result of: or 0.3% for Domino’s Pizza Mexico, mainly • Starbucks Coffee positive contribution of 45.8 • An increase of 27.8 million pesos in salaries and supported by a significant growth in same store million pesos. compensation for providing 4.3 million pesos for orders of 5.9% and by the greater number of • An increase in the gross profit of DIA in the amount the Stock Option Plan, the 11.6 million peso stores. The former is compensated by the impact of of 23.7 million pesos, as a result of passing on increase for the opening of new Domino’s Pizza the 15% VAT in our home delivery sales, and by the exchange rate variations to the clients, improved and Starbucks Coffee stores in Mexico and Brazil, difference of 3 sales days due to calendar purchasing management, including the negotiation an increase of 7.4 million pesos in employment considerations. of discounts for prompt payment, compensated by termination settlements resulting from the fusion • Domino’s Pizza Brazil increase of 7.7 million pesos, the combination of sales per brand. of several regions, transfer bonuses, salary mainly boosted by the opening of 6 units in the last standardization, and the hiring of regional sales 12 months. The gross margin climbed 50 base points, moving managers. • Starbucks Coffee increase of 69.8 million pesos as from 55.8% to 56.3%. • An increase of 13.6 million pesos in general a result of opening 18 new stores in the last 12 services for the opening of 33 stores, as well as months. Variable Expenses with respect to sales were greater increases in electric, water and gas services • The increase of 13.4 million pesos for DIA, based by 7.9 million pesos as a result of: expenses, which exceeded the rate of inflation. upon a greater number of units served, and the • An increase of 6.7 million pesos for Starbucks • An increase of 8.4 million pesos in leasing growth in sales of the brands to which it caters. Coffee work force expenses. expenses resulting from the opening of 33 stores. • An increase of 7.3 million pesos over the previous • An increase of 4.8 million pesos for the repair Gross Profit grew 4.7%, jumping to 1.536 billion year in work force expenses, royalties paid to the and maintenance of Domino’s Pizza units in pesos. This increase of 68.5 million pesos in 2003 United States, and contributions made to the Mexico and Brazil. resulted from: advertising fund supporting Domino’s Pizza Mexico • All of the above compensated with a savings of • A decrease of 12.9 million pesos for Domino’s end-of-year sales campaigns. 15.2 million pesos in professional services for Pizza Mexico, which reflected a 1.7 percentage • An increase of 2.5 million pesos in the consumption projects carried out in 2002. point slump with respect to sales following the of some DIA supplies, compensated by savings in (22) (PRICE OF SHARE) (PROFIT PER SHARE) 0 9 1 1 . 0 6 9 . 5 3 7 . 4 1 6 . 0 5 3 . 3 3 1 . 5 9 0 . 7 1 1 . 4 0 1 . 6 2 0 . ‘99 ‘00 ‘01 ‘02 ‘03 ‘99 ‘00 ‘01 ‘02 ‘03 An increase of 32.9 million pesos in Depreciation and • The 16.7 million pesos expense incurred in the un- same from 17 to 11 times; the company also Amortization due to the change in amortization policy incorporation of a subsidiary in Brazil. increased its client base in 5 days, moving up from 8 from 20 to 13 years for the amortization of • The sale of “Para Servirle a Usted” shares, which to 13 days, and accounts payable to suppliers were “improvements to rented locations” in Domino’s Pizza generated a 3.5 million pesos loss. reduced by 9 days, decreasing from 46 to 37 days. Mexico and DIA, as well as the increase in the number • Earnings in the amount of 5.2 million pesos upon of units to 33, which is consolidated with respect to obtaining a favorable verdict related to the lawsuit Interest-bearing liabilities dropped by 16.2%. the same period for 2002. that we pursued regarding the 2002 Salary Credit Short-term liabilities with cost amounted to Operating profit fell off 10.6% to 241.2 million pesos. Substitutive Tax. 123.9 million pesos, which represents an increase of 87.8 million pesos and reflects the reclassification Likewise, the operating margin decreased from 10.3% to The Effective Income Tax Rate for 2003 was 39.2%, of debt from long to short term, corresponding to the 8.8% in 2003, showing a 1.5 percentage point decrease. mainly increased by the financial estimate for the un- Medium-Term Promissory Note for 100.0 million EBITDA increased 1.1% in 2003, reaching 394.7 as capitalizing on the immediate deduction of fixed million pesos and the EBITDA margin showed a 40 assets in certain regions of the country; while the The consolidated balance sheet shows a current base point decrease dropping from 14.9% in 2002 to 2002 figure of 31.3% reflected financial benefits due assets to short-term liabilities ratio of 1.91 times, incorporation of EXIM del Caribe in Cancun, as well pesos, which comes due in August 2004. 14.5% in 2003. to fiscal consolidation. an acid test of 1.52 times, a total liability to shareholders’ equity ratio of 0.43 times, and The integral cost of financing decreased 75.6% as a Earnings of 9.4 million pesos are presented in the interest-bearing liabilities to shareholders’ equity result of the following: results of Associated Companies for 2003, which of 0.12 times. The company is complying in this • Less interest paid for a lower leverage level of 27.5 corresponds to our participation in Operadora West, manner with all the limitations it holds by reason million pesos, as well as the drop in interest rates and Cool Cargo. of debt issue within its financial structure. in the last 12 months. • An increase in interest earned of 1.0 million pesos A loss of 16.4 million pesos in 2003 belongs to the by reason of a larger cash level. Discontinued Operations of Exim del Caribe, • Reduced exchange rate results by 3.0 million pesos recognizing earnings of 3.0 million pesos in the net since the 2002 exchange rate held greater variations. balance for the period. An expense of 31.2 million pesos is presented in Other Net earnings were 117.1 million pesos, which Expenses and Products, resulting from: represents a 15.7% drop. The net profit margin • An expense of 19.2 million pesos, which corresponds decreased one percentage point from 5.33% to the retirement of obsolete fixed assets resulting to 4.3% in 2003. from the equipment renovation program, as well as for the retirement of improvements of rental locations With respect to Balance Sheet accounts, the company due to remodeling and relocation of 11 stores. reduced its inventory turnover 6 times, reducing the JOSÉ RIVERA RÍO ROCHA CHIEF FINANCIAL OFFICER (23) CORPORATE GOVERNANCE Audit Committee To the Board of Directors of ALSEA, S.A. de C.V. 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 related to the fiscal year ending December 31, 2003. 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 meetings held. In compliance with the fundamental responsibilities of Management 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. With the support of the external and internal auditors, we reviewed internal control general guidelines, following up on Management implementation of the resulting suggestions. 2. We approved the Internal Audit work program and corresponding budget for the 2003 fiscal year. 3. 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 analyzed and followed up on their observations and suggestions and their timely implementation. 4. Based on a careful evaluation, we concluded that we should recommend that the Board of Directors invite a new firm in order to conduct an external audit of the company. Beforehand, we made certain of their independence and reviewed in detail their focus and work program, as well as their coordination with the Internal Audit department. 5. We maintained constant communication with the new 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. 6. We followed up the recommendations presented by the external auditors as a result of the 2002 period audit. All significant suggestions were implemented. 7. We reviewed the financial information that Management prepares quarterly to be presented to the stockholders and general public, making sure it was prepared using the same accounting criteria used to prepare the annual report. 8. Upon careful discussion of the accounting policies adhered to by the Company, we recommended their approval to the Board of Directors. No changes to accounting policies were made during the year. 9. Through Internal Audit and with the support of third parties, we reviewed the transactions carried out between the company’s subsidiaries and related parties, 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. We requested Management to be informed of any unusual transactions which nature and relative importance merited such in a timely manner. 10. We verified the existence of the controls established by the company, to ensure compliance with the different legal stipulations to which it is subject. 11. Systems Management held a presentation involving their respective field, its operation and the controls established. We decided to request a specific review of the internal controls in this area to be conducted by independent experts in 2004. 12. We followed up the distribution process of the Company’s Code of Conduct for all personnel and Directors. 13. 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. 14. We presented to the Board of Directors reports on the activities conducted by the Committee on a quarterly basis. 15. 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. Sincerely, C.P.C. JOSÉ MANUEL CANAL PRESIDENT (24) Planning and Finance Committee To the Board of Directors of ALSEA, S.A. de C.V. Pursuant to Article 14 of the Securities Market Law and on behalf of the Committee on Planning and Finance, I hereby inform of the activities we carried out related to the fiscal year ending December 31, 2003. In the development of our work, we have kept in mind the recommendations established by the Code of Good Corporate Practices. The Statutory Examiner of the Company was invited in accordance with the aforementioned law and was present at most of the Committee meetings 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. Committee on Planning and Finance regulations were authorized. 3. General outlines were established for the development of Alsea’s Strategic Plan 2004-2008. 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 2004 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 are expected to be authorized by the Board of Directors during the present session. 7. Financial projections for 2007 were followed up on. 8. The methodology for determining the opportunity cost of shareholder capital was precisely defined. 9. The optimum Capital structure for Alsea was defined as a combination of 85% Capital and 15% Debt. 10. Investment policies for Treasury Surpluses as well as for Dollar Investments were defined and authorized, and were presented in their corresponding formats. 11. Assessments conducted on each pertinent occasion for removal from the company were reviewed. 12. The comparative profitability model of the different Alsea brands was presented. (Benchmark) 13. Investment alternatives generated by Alsea’s Chairman of the Board and CEO in 2003 were evaluated with an opinion issued in each case. Sincerely, SALVADOR CERON AGUILAR PRESIDENT (25) Assessment and Compensation Committee Pursuant to Article 14 of the Securities Market Law and on behalf of the Committee on Assessment and Compensation, I hereby inform you of the activities we carried out relating to the fiscal year ending December 31, 2003. 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. In several meetings with the Human Resources Department, review was made to continue the policies established by this Committee and authorized by the Board of Directors, with reference to the following: 1. Evaluation and compensation of the Chief Executive Officer and high-level officers. 2. Evaluation criteria in accordance with the general outlines established by the Board of Directors. 3. Amount of remuneration to principal executives. 4. Regular evaluation of the performance of the Chief Executive Officer and high-level officers. 5. Policies of remuneration of strategic employees. A review of the performance and bonus program for the year 2004 was carried out. All of the above activities are duly documented in minutes prepared for each meeting, which were reviewed and approved by the Committee members. Sincerely, FRANCISCO GAMA PRESIDENT (26) Marketing Committee Pursuant to Article 14 of the Capital Markets Law and on behalf of the Marketing Committee, I hereby report on the activities conducted during the year ended December 31, 2003. In the development of our work, we have taken into account the recommendations set out in the Best Corporate Practices Code. Furthermore, the Company’s Statutory Auditor was sent a call to the Committee meetings upon the terms of the aforementioned law and was in attendance thereat. Over the course of several meetings, general guidelines were laid down for the marketing area, focusing on the following items, authorized by the Board of Directors, namely: 1. Focus on flavor. 2. Pricing policy that ensures a suitable profit considering the 2003 fiscal emergency. 3. Refocusing strategy towards innovation. 4. Analysis and approval of advertising campaigns launched by Domino’s Pizza during the year. All the aforementioned work has been duly documented in minutes to each meeting, which were reviewed and approved by the members of the Committee. Sincerely, MARCELO RIVERO GARZA PRESIDENT (27) REPORT OF STATUTORY AUDITOR Alsea S. A. de C. V. and Subsidiaries (Translation from original issued in Spanish) México City, February 20, 2004. 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 Mexican General Companies Law and the Company’s by-laws, I hereby submit my report on the veracity, sufficiency and reasonability of the financial information prepared by and under the responsibility of the company’s management, present to you by the Board of Directors concerning the company’s operations for the year ended December 31, 2003. I have attended the Intermediate Committee, the Board of Directors’ and Stockholders’ meeting of which I have been summoned. I have obtained from the Directors and Administrators the operating information, documentation and accounting records that I considered it necessary to examine. I have carefully reviewed the report issued by the company’s external auditors, KPMG Cardenas Dosal, S.C., date February 20, 2004, in connection with the examination which they carried out, in accordance with generally accepted auditing standards, of the financial statements prepared by the company’s management. In my opinion, the accounting and reporting policies and criteria followed by the company and applied by management in preparing the financial information to be submitted to this meeting are appropriate and adequate and have been applied on a basis consistent with that of the previous year; therefore, such information correctly, fairly and adequately present the financial position of Alsea, S. A. de C. V., as an independent legal entity, at December 31, 2003 and the results of its operations, the changes in its stockholders’ equity and the changes in its financial position for the year then ended, in conformity with accounting principles generally accepted in México. MAXIMINO MANUEL SADUÑO BOLAÑOS STATUTORY AUDITOR (28) INDEPENDENT AUDITORS’ REPORT Alsea S. A. de C. V. and Subsidiaries (Translation from Spanish Language Original) February 20, 2004 The Board of Directors and Stockholders Alsea, S. A. de C. V.: We have examined the accompanying consolidated balance sheet of Alsea, S. A. de C. V. and Subsidiaries as of December 31, 2003 and the related consolidated statements of income, 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. The consolidated financial statements as of and for the year ended December 31, 2002 were audited by other independent public accountants whose report thereon dated February 4, 2003 expressed an unqualified opinion. We conducted our audit 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 are prepared in accordance with accounting principles generally accepted in Mexico. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 Alsea, S. A. de C. V. and Subsidiaries as of December 31, 2003, and the results of their operations, the changes in their stockholders’ equity and the changes in their financial position for the year then ended in conformity with accounting principles generally accepted in Mexico. KPMG CARDENAS DOSAL, S. C. JAVIER MORALES RÍOS PARTNER (29) CONSOLIDATED BALANCE SHEETS Alsea S. A. de C. V. and Subsidiaries December 31, 2003 and 2002 (Thousands of constant Mexican pesos as of December 31, 2003) Assets Current assets: Cash Accounts receivable: Clients, less allowance for doubtful of $5,977 in 2003 and $4,404 in 2002 Recoverable taxes Other Associated company (note 5) Inventories, net (note 6) Prepaid expenses Total current assets Investment in shares of associated companies (note 7) Goodwill of subsidiaries and associated companies 2003 2002 $ 195,646 207,086 109,260 48,826 17,442 34,095 107,859 16,285 66,033 44,965 55,527 4,233 69,955 14,974 529,413 462,773 70,770 53,314 47,076 77,753 Property, equipment and leasehold improvements, net (note 8) 832,306 832,294 Other assets: Patents and trademarks, less accumulated amortization of $76,993 in 2003 and $64,917 in 2002 Preoperating expenses, less accumulated amortization of $15,426 in 2003 and $8,010 in 2002 Other assets, net Assets from discontinued operations (note 2c.) See accompanying notes to the consolidated financial statements. 156,890 155,160 37,541 10,426 18,842 38,612 9,426 28,346 $ 1,709,502 1,651,440 (30) Liability and Stockholders' Equity 2003 2002 Short-term liability: Bank loans (note 9) Short-term maturity of medium-term promissory note (note 9) Suppliers Accounts payable and accrued liabilities Accruals Tax payables and employee statutory profit sharing Total short-term liability Bank loans, without short-term maturaty (note 9) Medium-term promissory note (note 9) Seniority premium, other benefits and other liabilities (note 10) Deferred income tax and long-term payable on retained earnings (note 12) Liability from discontinued operations (note 2c.) Total liability Stockholders' equity (note 13): Capital stock Additional paid-in capital Retained earnings Reserve for acquisition of own shares Translation effect from foreign entity Majority stockholders' equity Minority interest Total stockholders' equity Commitment and contingent liabilities (note 14) Subsequent events (note 16) $ 23,957 100,000 186,355 29,137 29,772 36,073 - 227,286 36,570 16,598 8,380 9,073 377,601 325,600 18,950 - 8,254 101,853 10,453 30,034 104,350 10,861 68,241 4,985 517,111 544,071 383,007 231,437 507,855 33,827 (3,975) 386,959 231,437 434,560 41,590 (14,093) 1,152,151 1,080,453 40,240 26,916 1,192,391 1,107,369 $ 1,709,502 1,651,440 LIC. JOSÉ RIVERA RÍO ROCHA FINANCING CORPORATIVE DIRECTOR C.P. ALBERTO TORRADO MARTÍNEZ GENERAL DIRECTOR C.P. ABEL BARRERA FERMÍN CORPORATIVE COMPTROLLER (31) CONSOLIDATED STATEMENTS OF INCOME Alsea S. A. de C. V. and Subsidiaries Years ended December 31, 2003 and 2002 (Thousands of constant Mexican pesos as of December 31, 2003) Net sales Cost of sales Gross profit Operating expenses Operating income Comprehensive financial results (note 11) Other expenses, net Income from continuing operations, before income taxes and employee statutory profit sharing Income tax and employee statutory profit sharing (note 12): Income tax Employee statutory profit sharing Total income tax and employee statutory profit sharing Income from continuing operations, before equity in the income of associated companies Equity in the income of associated companies (note 7) Income from continuing operations Loss from discontinued operations, net of taxes (note 2c.) Net consolidated income Minority interest Net majority income Net earnings per share (note 3t.) See accompanying notes to the consolidated financial statements. 2003 2002 $ 2,729,813 1,194,188 2,627,916 1,160,823 1,535,625 1,467,093 1,294,397 1,197,183 241,228 269,910 (4,448) (18,219) (31,270) (9,074) 205,510 242,617 80,613 764 81,377 75,919 1,857 77,776 124,133 164,841 9,411 3,501 133,544 168,342 (16,457) 117,087 (29,356) 138,986 (4,739) (9,941) 121,826 148,927 1.04 1.24 $ $ LIC. JOSÉ RIVERA RÍO ROCHA FINANCING CORPORATIVE DIRECTOR C.P. ALBERTO TORRADO MARTÍNEZ GENERAL DIRECTOR C.P. ABEL BARRERA FERMÍN CORPORATIVE COMPTROLLER (32) CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION Alsea S. A. de C. V. and Subsidiaries Years ended December 31, 2003 and 2002 (Thousands of constant Mexican pesos as of December 31, 2003) Operating activities: Net income Add charges (deduct credits) to income not requiring (providing) funds: Depreciation and amortization Amortization of goodwill of subsidiaries and associated companies Write-down of investment and cancellation of goodwill of subsidiaries companies Seniority premium and other benefits Equity in the results of associated companies Deferred income tax and employee statutory profit sharing Funds provided by operations Net financing from (investing in) operating accounts: Clients Other accounts receivable and prepaid expenses Inventories Associated company Suppliers, accounts payable, accrued liabilities and other accounts payable Taxes payable and employee statutory profit sharing 2003 2002 $ 117,087 138,986 141,629 11,864 37,129 348 (9,411) 37,289 335,935 (43,227) 32,913 (37,904) (29,862) (38,692) (4,370) 113,993 6,572 - 376 (3,501) 7,405 263,831 25,906 8,831 16,464 (2,788) 79,425 6,568 Funds (used in) provided by operating activities (121,142) 134,406 Financing activities: Increase in capital stock and minority interest Repurchase of own shares Payment of loans, net Seniority premium and other benefits payments Dividends declared Funds used in financing activities Investing activities: Acquisition of property, equipment and leasehold improvements Discontinued operations, net Effect of desincorporation of subsidiaries Investment in shares of associated companies, net of dividends collected Translation effect from foreign entity Patents, trademarks, pre-operating expenses and other assets Goodwill of subsidiaries and associated companies, net Funds used in investing activities (Decrease) increase in cash Cash: At beginning of year At end of year See accompanying notes to the consolidated financial statements. 18,063 (15,627) (27,550) (121) (44,619) (69,854) (89,281) (4,202) - (14,283) 10,118 (54,019) (4,712) 32,430 (17,752) (60,650) (34) (10,761) (56,767) (117,674) 48,727 (42,928) (43,575) (4,630) (46,430) (28,433) (156,379) (234,943) (11,440) 106,527 $ 207,086 195,646 100,559 207,086 LIC. JOSÉ RIVERA RÍO ROCHA FINANCING CORPORATIVE DIRECTOR C.P. ALBERTO TORRADO MARTÍNEZ GENERAL DIRECTOR C.P. ABEL BARRERA FERMÍN CORPORATIVE COMPTROLLER (33) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Alsea S. A. de C. V. and Subsidiaries Years ended December 31, 2003 and 2002 (Thousands of constant Mexican pesos as of December 31, 2003) Retained earnings Capital stock Additional paid-in capital Statutory reserve Retained earnings Balances as of December 31, 2001 $ 391,167 229,104 5,522 290,872 Increase in capital stock and minority interest (note 13) Repurchase of own shares (note 13) Transfer to the statutory reserve Dividends declared ($0.0829 per share) (note 13) Effect of desincorporation of subsidiaries (note 2c.) Comprehensive income 1,030 (5,238) - - - - 2,333 - - - - - - - - - 1,585 (1,585) - - - (10,761) - 148,927 Balances as of December 31, 2002 386,959 231,437 7,107 427,453 Increase in minority interest (note 13) Repurchase of own shares (note 13) Transfer to the statutory reserve Dividends declared ($0.3625 per share) (note 13) Comprehensive income - (3,952) - - - - - - - - - - 7,334 - - - (3,912) (7,334) (44,619) 121,826 Balances as of December 31, 2003 $ 383,007 231,437 14,441 493,414 See accompanying notes to the consolidated financial statements. (34) Reserve for acquisition of own shares Total Translation effect from foreign entity Total majority stockholders' equity Minority interest Total stockholders' equity 296,394 54,104 (11,217) 959,552 50,718 1,010,270 - - - (10,761) - 148,927 - (12,514) - - - - - - - - - 3,363 29,067 (17,752) - (10,761) - - - 32,430 (17,752) - (10,761) - (42,928) (42,928) (2,876) 146,051 (9,941) 136,110 434,560 41,590 (14,093) 1,080,453 - - (3,912) (7,763) - (44,619) 121,826 - - - - - - - - (15,627) - (44,619) 26,916 18,063 - - - 1,107,369 18,063 (15,627) - (44,619) 10,118 131,944 (4,739) 127,205 507,855 33,827 (3,975) 1,152,151 40,240 1,192,391 LIC. JOSÉ RIVERA RÍO ROCHA FINANCING CORPORATIVE DIRECTOR C.P. ALBERTO TORRADO MARTÍNEZ GENERAL DIRECTOR C.P. ABEL BARRERA FERMÍN CORPORATIVE COMPTROLLER (35) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Alsea S. A. de C. V. and Subsidiaries December 31, 2003 and 2002 (Thousands of constant Mexican pesos as of December 31, 2003) Note 1. Description of business- Alsea, S. A. de C. V. and Subsidiaries (“Alsea” or “the Company”) is mainly engaged in operating fast-food stores and restaurants. In Mexico, Alsea operates Domino’s Pizza, Starbucks Coffee and Burger King. In Brazil, it operates Domino’s Pizza. The operation of its multi-units is supported by its distribution division (“DIA”). Note 2. Principles of consolidation and equity method- (a) The consolidated financial statements include the financial statements of Alsea, S. A. de C. V. and those subsidiary companies in which it holds a majority interest (over 50%) and/or has control. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidation was based on the audited financial statements of the issuing companies, which were prepared in accordance with Accounting Principles Generally Accepted in México (Mexican GAAP). The principal operating Subsidiaries and Associated companies are the following: Operating Operadora DP de México, S. A. de C. V. Café Sirena, S. de R. L. de C. V. De Libra, Ltda. (in Brazil) Distribuidor Internacional de Alimentos, S. A. de C. V. Associated Operadora West, S.A. de C. V. Cool Cargo, S. A. de C. V. OWNERSHIP ACTIVITY 99.99% 82.00% 99.99% 99.99% 31.56% 50.00% Domino’s Pizza stores Starbucks Coffee stores Domino’s Pizza stores Food distribution Burger King restaurants Transportation services The Company’s investment in shares of associated companies has been accounted under the equity method of accounting, based on audited financial statements prepared under the same accounting policies as those of the holding company (see note 7). (b) Significant transactions- - Value-added Tax (VAT) Law amendments in force since January 2003 consider take out sales food taxable. These amendments had a significant effect on the Company’s operations. However, the implementation of several strategies allowed the Company to continue operating at its regular profit margins. - During 2003 and through consecutive contributions, the Company increased its shareholding at Operadora West, S. A. de C. V. from 28.50% to 31.56%. In February 2002, the Company entered into an association agreement with Starbucks Coffee International Inc. for promoting and developing the Starbucks - Coffee trademark in Mexico. At the end of 2003 and 2002 the Company operated 22 and 4 stores, respectively. (c) Discontinued operations- In January 2003 the Board of Directors resolved to desincorporate the subsidiaries: Exim del Caribe, S. A. de C. V. (Exim) and Para Servirle a Usted, S. A. de C. V. (PSU) as they were deemed no strategic. As a result, the Company recognized its investment in Exim at estimated selling value and charged $19,174 to income in 2003. Also in 2003, the Company sold PSU, recognizing a loss of $3,513 in the income statements. (See note 3a). Note 3. Summary of significant accounting policies - (a) Financial statement presentation The accompanying consolidated financial statements have been prepared under Mexican GAAP and are expressed in Mexican pesos of constant purchasing power, based on the Mexican National Consumer Price Index (NCPI), except for the matter referred to in paragraph (b) below. (36) The financial statements for the year ended December 31, 2002 include certain reclassifications to conform to the classifications used in 2003. Also, the financial statements for 2002 have been restructured for presenting the net result of discontinued operations and the balance sheet balances in a specific caption without identifying current and non-current amounts, due to their immateriality. (b) Presentation of prior year amounts- The figures of previously reported financial statements are stated in Mexican pesos of the same purchasing power, using a common restatement factor of 1.0435 and 1.0555 in 2003 and 2002, respectively, for asset, liability and results captions. Stockholders’ equity is restated using a factor derived from the NCPI, which was 1.0397 and 1.0570 in those same years. The common factor was calculated using a weighted average of sales and considering inflation and fluctuations in the exchange rate. (c) Foreign currency translation adjustment of subsidiaries The financial statements of consolidated foreign subsidiaries have been adjusted for inflation in the respective country (Brazil) and, subsequently, translated into Mexican pesos at the exchange rate prevailing at year end (balance sheet and income statement accounts). The exchange rate of the peso to the dollar used by the Company is based on a weighted average of market exchange rates available for the settlement of transactions denominated in foreign currencies. The “Effects of translating foreign currency financial statements” in stockholders’ equity represents the translation into pesos of financial information of foreign subsidiaries. (d) Cash- Includes all checking accounts, foreign currency and other highly liquid instruments. Interest income and expense and foreign exchange gains and losses are included in the results of operations, under comprehensive financial results. (e) Inventories and cost of sales- Originally valued using the last-in, first-out method and adjusted for inflation to replacement cost based on factors derived from the NCPI. Inventory values thus determined do not exceed market values. (f) Goodwill of subsidiaries and associated companies Represents the excess of cost over the fair value of assets of the investment in shares of subsidiaries and associated companies, is adjusted using NCPI factors and amortized straight-line during the time the benefit of the investment is likely to materialize. (g) Property, equipment and leasehold improvements- There are initially recorded at acquisition cost and adjusted for inflation by applying NCPI factors. Depreciation on property, equipment and leasehold improvements is calculated on the straight-line method over the estimated useful lives of the assets, at the following annual rates: Buildings Store equipment Leasehold improvements Transportation equipment Computer equipment Production equipment Office furniture and equipment 5% 10% 7.7% to10% 25% 30% 10% 10% During 2003, the management of Operadora DP, S. A. de C. V. and Café Sirena, S. de R. L. de C. V. decided to change the amortization rate of leasehold improvements from 5% to 7% and from 20% to 10%, respectively in order to adjust their useful life to their current operations. The net effect of this change resulted in a charge to income of approximately $8,750 in 2003. (h) Intangible assets- Represent payments for the right to use the trademarks “Domino’s Pizza” and “Starbucks Coffee” up to 2025 and 2021, respectively, and adjusted for inflation based on NCPI factors applied to historical costs. Patents and trademarks are amortized straight-line at the annual rate of 5%. During 2003 the Company acquired patents and trademarks for $13,806. Expenses incurred in placing medium-term promissory notes in the securities markets are amortized over the maturing of the notes. (i) Other assets- Include mainly pre-operating and installation expenses relating to the opening of new stores in different areas and are stated at cost, adjusted for inflation based on NCPI factors. Amortization is computed on adjusted asset values using the straight-line method, at the annual rate of 5%. (37) (j) Accruals- The Company recognizes accruals for present obligations in which the transfer of assets or the rendering of services is virtually unavoidable and arises as a consequence of past events, principally salaries and other amounts payable to employees. (k) Seniority premium and other post retirement plans- Pension and seniority premium benefits to which employees are entitled in accordance with the law are charged to operations for the year based on actuarial computations of the present value of this obligation. Amortization of prior service cost, not yet recognized, is based on the estimated service lives of existing personnel. Other compensation to which employees may be entitled, mainly severance, is charged to operations as incurred. (l) Income (IT) and asset (AT) taxes, and employee statutory profit sharing (ESPS)- Provisions for IT and ESPS are recorded in the year in which they are due. 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 (AT) carryforwards. Deferred tax assets are only recorded when it is likely to be recovered. Deferred ESPS is recognized only for timing differences arising from the reconciliation of book income to income for profit sharing purposes, on which it may be reasonably estimated that a future liability or benefit will arise and there is no indication that the liabilities or benefits will not materialize. (m) Restatement of capital stock, other stockholder contributions and retained earnings- This adjustment is determined by multiplying stockholder contributions and retained earnings by factors derived from the NCPI, which measure accumulated inflation from the dates contributed or generated toward the most recent year end. The resulting amounts represent the constant value of stockholders’ equity. (n) Additional paid-in capital- Represents the excess of the payments for subscribed shared over their normal price. (o) Comprehensive financial results (CFR)- Include all interest income and expense, foreign exchange gains and losses, and monetary position gains and losses, reduced by the amounts capitalized. Transactions in foreign currency are recorded at the exchange rate prevailing on the date of execution or settlement. Foreign currency assets and liabilities are translated at the exchange rate in force at the balance sheet date. Exchange differences arising from assets and liabilities denominated in foreign currencies are reported in operations for the year. Monetary position gains and losses are determined by multiplying the difference between monetary assets and liabilities at the beginning of each month, including deferred taxes, by inflation factors toward year end. The resulting amount represents the monetary gain or loss for the year arising from inflation, which is reported in operations for the year. (p) Revenue recognition- Revenue from product sales is recognized at the time of delivering the products to the customers. (q) Contingencies- Liabilities for loss contingencies are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. When a reasonable estimation cannot be made, qualitative disclosure is provided in the notes to the consolidated financial statements. Contingent revenues, earnings and assets are not recognized until their realization is virtually assured Also, the Company considers the rules for disclosing commitments arising in the ordinary course of business. (r) Impairment of long-lived assets property, equipment, leasehold improvements, goodwill and other intangible assets- The Company evaluates periodically the adjusted values of long-lived assets, property, equipment, leasehold improvements, goodwill and other intangible assets to determine whether there is an indication of potential impairment. 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 fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or realizable value. (s) Use of estimates- The preparation of financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. (t) Earnings per share- Earnings per share equal the year’s net income divided by the weighted average of outstanding shares during the year. (38) (u) New pronouncements- The Company adopted the new accounting pronouncements issued by the Mexican Institute of Public Accountants (IMCP) in Bulletins C-8 “Intangibles”, C- 9 “Liabilities, Accruals, Contingent Assets and Liabilities, and Commitments” and B-5 “Segment information”, effective for fiscal years beginning on or after January 1, 2003 as well as in Bulletin C-15 “Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of”, which adoption is encouraged for 2003. The adoption of these Bulletins had no significant effect on the presentation of the Company’s financial information. Note 4. Foreign currency exposure- Monetary assets and liabilities denominated in U.S. dollars (dollars) as of December 31, 2003 and 2002 were as follows: Assets Liabilities Net liabilities THOUSANDS OF DOLLARS 2003 4,741 5,615 874 2002 1,092 2,779 1,687 The exchange rate of the peso to the dollar, as of December 31, 2003 and 2002, was $11.22 and $10.36, respectively. At February 20, 2004, the exchange rate was $10.84. At December 31, 2003, the Company did not have foreign exchange hedge instruments. At December 31, 2003 and 2002, the Company foreign origin non-monetary asset and liability position or which replacement cost may only be determined in dollars was immaterial. Below is a summary of transactions carried out with foreign entities, for the years ended December 31, 2003 and 2002: Food purchases Equipment purchases Royalties THOUSANDS OF DOLLARS 2003 2002 52,860 1,818 7,154 47,543 1,433 6,727 Note 5. Balances and transactions with associated company- At December 31, 2003 and 2002, accounts receivable from Operadora West, S. A. de C. V. amounted to $34,095 and $4,233, respectively. During the years ended December 31, 2003 and 2002, sales of food and supplies to Operadora West, S. A. de C. V. amounted to $91,019 and $65,914, respectively. Note 6. Inventories- Comprise the following: Food and beverages Containers and packaging Other Less allowance for obsolete items 2003 2002 $ 74,466 13,125 24,262 (3,994) 56,576 4,404 12,270 (3,295) $ 107,859 69,955 (39) Note 7. Investment in shares of associated companies- Comprise the direct ownership in the capital stock of the companies listed as follows: Cool Cargo, S. A. de C. V. Operadora West, S. A. de C. V. Total investment in shares EQUITY 2003 2002 $ $ 2,024 68,746 1,382 45,694 70,770 47,076 EQUITY IN THE RESULTS OF OPERATIONS FOR THE YEAR 2003 648 8,763 9,411 2002 (196) 3,697 3,501 Note 8. Property, equipment and leasehold improvements- Comprise the following: Buildings Store equipment Leasehold improvements Transportation equipment Computer equipment Production equipment Office furniture and equipment Less accumulated depreciation Land Installations in progress 2003 2002 $ 77,768 338,340 437,481 90,396 87,966 108,728 24,463 83,872 333,769 401,551 120,079 89,220 92,757 19,724 1,165,142 1,140,972 384,503 340,511 780,639 31,589 20,078 800,461 31,703 130 $ 832,306 832,294 Certain of the loans mentioned in note 9 are secured by some of the properties and equipment. Note 9. Bank loans and medium-term promissory note- Bank loans: Comprise of the following: Unsecured loans Secured loan (note 8) Less current installments Long-term debt MATURITY IN 2004-2005 2003-2005 AVERAGE ANNUAL INTEREST RATE 2003 2002 1.7%-3.5% 2.0%-2.5% $ 32,375 10,532 42,907 23,957 42,175 23,932 66,107 36,073 $ 18,950 30,034 (40) Medium-term promissory note: In August, 2000, Alsea executed a medium-term promissory note for $100,000, bearing interest at the TIIE rate plus 2 to 4 points, maturing in August 2004. Bank loans and the medium-term promissory note establish certain covenants, the most significant of which refer to limitations on dividend payments, maintaining certain financial ratios, not selling, pledging or disposing of fixed assets without reinvesting the sales proceeds for purchasing other new assets in the same or immediately succeeding year. At the date of the financial statements, the Company was in compliance with all covenants. Note 10. Seniority premiums, other post retirement plans and other liabilities - The Company has a defined seniority premiums plan covering substantially all of its employees. The benefits are based on years of service. The cost of the seniority premium plan have been determined based on computations prepared by independent actuaries. Plan contributions during 2003 and 2002 amounted to $348 and $376, respectively. The actuarial present value of benefit obligations is as follows: Accumulated benefit obligation (ABO) Projected benefit obligation (PBO) Net projected liability Additional liability Seniority premium, other post retirement plans and other liabilities Assumptions used in determining the net periodic cost of the plan are as follows: Rate of compensation increase Discount rate Note 11. Comprehensive financial results- Comprise the following: Interest expense, net Foreign exchange loss, net Monetary position gain $ $ $ $ 2003 994 1,074 1,054 7,200 8,254 2003 0.5% 4.5% 2002 827 968 827 10,034 10,861 2002 1.0% 4.5% 2003 2002 $ (5,022) (137) 711 (16,093) (3,144) 1,018 $ (4,448) (18,219) Note 12. Income (IT) and asset (AT) taxes, employee statutory profit sharing (ESPS) and tax loss carryforwards- The Company consolidates its results for IT and AT purposes. For the years ended December 31, 2003 and 2002 the Company had a consolidated net income of $75,342 and $134,453, respectively. The accounting and taxable income vary because of the different tax and accounting treatment for recognizing the effects of inflation, the deduction of purchases over the cost of sales, different depreciation and amortization rates, nondeductible expenses, accruals and others. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities, at December 31, 2003 and 2002, are presented below: (41) Deferred tax (assets) liabilities: Allowance for doubtful accounts Accruals Advances from customers Seniority premium Net operating tax loss carryforwards Recoverable AT Inventories Property, equipment and leasehold improvements Prepaid expenses Other assets Net deferred tax liability Income tax payable on retained earnings Liability recognized on the balance sheets IT and ESPS charged to income is analyzed as follow: Current IT and ESPS Deferred IT and ESPS Total IT 2003 2002 $ (1,972) (4,266) (2,328) (328) (1,604) (3,822) 34,617 25,534 1,636 41,081 88,548 13,305 (1,600) (3,759) (3,406) (281) (7,343) (7,398) 26,566 11,477 3,299 33,323 50,878 17,363 $ 101,853 68,241 2003 2002 IT ESPS IT $ $ 42,943 37,670 1,145 (381) 77,612 (1,693) 80,613 764 75,919 ESPS 1,857 - 1,857 The Company has tax loss carryforwards of $57,670, which, restated, may be carried forward to offset taxable income of the ten succeeding years. At December 31, 2003 Alsea has paid AT in the amount of $7,680, for which it may request a refund, provided that IT payable in any of the ten succeeding years exceeds the AT of such years. The Mexican IT Law provides that the IT rate will be reduced 1% each year beginning in 2003 to reach 32% in 2005. As a result of the changes in IT rate, in the years ended December 31, 2003 and 2002 the Company recognized a decrease in net deferred tax liabilities of $516 and $5,150, respectively credited income. Note 13. Stockholders’ equity- The principal characteristics of stockholders’ equity are described below: (a) Structure of capital stock - At the General Ordinary and Extraordinary Stockholders’ Meeting held in April 2003, it was agreed to declare dividends in the amount of $44,619 ($42,815 historical). At the General Extraordinary and Ordinary Stockholders’ Meetings held in April 2002, it was resolved to increase the capital stock by $1,030 ($962 historical), through the issue of 481,231 ordinary series, common class II shares, with no par value; also, it was proposed to declare an additional paid-in capital of $2,333 ($2,165 historical). The minimum fixed portion of capital stock is represented by Class I shares while the variable capital stock is represented by Class II shares, which in no event shall exceed ten times the minimum capital stock with no right for withdrawal. (42) At December 31, 2003 the subscribed fixed and variable capital stock is represented by 116,769,017 common, registered shares with no par value, as shown as follows: NUMBER OF SHARES 122,289,370 1,139,088 (6,659,441) DESCRIPTION Fixed capital stock Variable capital stock Repurchased shares reserve 116,769,017 Nominal capital stock Inflation adjustments to remeasure accumulated inflation (note 3m.) Capital stock at December 31, 2003 AMOUNT $ 244,579 2,278 (13,319) 233,538 149,469 $ 383,007 The National Banking and Securities Commission established a procedure which allows companies to purchase its own shares in the market. To this end, a “stock repurchase reserve” is required, which is charged to retained earnings. The Board of Directors agreed to repurchase shares up to $56,400. At December 31, 2003, the available balance is $22,573. The Company’s own available repurchased shares are reclassified to the contributed capital. (b) Restrictions on stockholders’ equity- Dividends paid out of retained earnings in the net tax profit (CUFIN) account shall be tax-free. Otherwise, they shall be subject to income taxes at the rate of 33%, payable on the amount that results from multiplying the dividends paid by the factor 1.4925. Taxes due on the payment of dividends not coming from the CUFIN account shall be paid by the Company and may be credited against corporate IT of the following two years. At December 31, 2003, the tax value of the reinvested CUFIN account is $20,470. Note 14. Commitment and contingent liabilities- Commitment: The Company leases facilities for stores and distribution centers, as well as certain transportation equipment and store equipment, under defined term lease agreements. Total rental expense amounted to $96,475 in 2003 and increases annually based on the NCPI. Contingent liabilities: (a) Alsea and subsidiaries are involved in a number of lawsuits and claims arising in the ordinary course of business. It is expected that the final outcome of these matters will not have significant adverse effects on the Company’s financial position. (b) In accordance with the Income Tax Law, companies carrying out transactions with related parties are subject to certain requirements as to the determination of prices, since such prices must be similar to those that would be used in arm’s-length transactions. Note 15. Segment information- The Company is organized into four large operating divisions comprised by pizza sale services (Domino’s Pizza), coffee sale services (Starbucks Coffee), distribution services and other businesses, all led by the same management. The Company’s segments constitute strategic business units offering various products and handled separately based on different marketing strategies and technology. (43) Segment information is as follows: AMOUNTS IN MILLIONS OF PESOS BUSINESS UNITS DOMINO’S PIZZA STARBUCKS COFFEE DISTRIBUTION OTHER ELIMINATIONS CONSOLIDATED 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 Revenue from: Third parties Inter business unit Operating costs and expenses Depreciation and amortization Operating income Other income statement items Net consolidated income $ 1,819 97 1,916 1,666 111 139 $ 1,799 23 1,822 1,552 92 178 Assets Investment in productive assets: Investment in associated companies Investment in assets 1,152 1,029 – 54 – 124 76 – 76 80 8 (12) 63 – 67 Total assets $ 1,206 1,153 130 6 – 6 11 1 (6) 42 – 38 80 865 643 1,508 1,369 24 115 845 569 1,414 1,302 23 89 6 120 126 106 11 9 17 32 49 37 5 7 (36) (860) (896) (885) 1 (10) (39) (624) (663) (665) – 2 2,730 – 2,730 2,336 153 241 2,628 – 2,628 2,237 121 270 (119) 122 (121) 149 502 439 1,493 1,280 (1,701) (1,384) 1,509 1,406 2 7 1 7 70 – 46 29 – – – – 72 128 47 198 511 447 1,563 1,355 (1,701) (1,384) 1,709 1,651 Total liabilities $ 385 280 19 7 183 178 412 285 (482) (206) 517 544 The “eliminations” caption is included for purposes of presenting each division’s comprehensive results. Domino’s Pizza activities are conducted in Mexico and Brazil. Mexico accounts for approximately 94% of this segment’s total revenues. Note 16. Subsequent events- (a) In January 2004, Alsea increased its equity interest in Operadora West, S. A. de C. V. (OWEST), a franchisee of Burger King Corporation, by 31.49% for a total of 63.05%. Consequently, as of such date the results of operations of OWEST are included in the consolidated financial statements. (b) In order to promote the exchange of the Company’s shares, and in conformity with corresponding securities rules, the Board of Directors agreed with a stock exchange broker the issuance of five million shares out of the repurchase shares stock off the exchange floor. LIC. JOSÉ RIVERA RÍO ROCHA FINANCING CORPORATIVE DIRECTOR C.P. ALBERTO TORRADO MARTÍNEZ GENERAL DIRECTOR C.P. ABEL BARRERA FERMÍN CORPORATIVE COMPTROLLER (44) INFORMATION FOR SHAREHOLDERS (HEADQUARTERS) Alsea S.A. de C.V. Yucatan 23 Hipodromo Condesa, 06170, Mexico D.F. Phone (55) 5241.7100 (INFORMATION ON ALSEA’S STOCK AND (INDEPENDENT AUDITORS) MEDIUM-TERM PROMISSORY NOTE) KPMG Cardenas Dosal, S.C. Alsea, S.A. de C.V., trades its single series shares on the Mexican Bosque de Duraznos 55 P.J. Stock Exchange as of June 25, 1999. Likewise, the Company’s Bosques de las Lomas, public offer of the medium-term promissory note took place on 11700, Mexico D.F. August 25, 2000. Phone (55) 5246.8300 Fax (55) 5596.8060 (REFERENCE SYMBOLS FOR THE STOCK) (CORPORATE GOVERNANCE) BMV ALSEA* Bloomberg ALSEA* Reuters ALSEA.MX Infosel ALSEA* One share, one vote Dividends Policy: 30% of Accumulated Earnings 44% Independent Directors (REFERENCE SYMBOLS FOR THE MEDIUM-TERM PROMISSORY NOTE) BMV ALSEA P00 Bloomberg ALSEA Reuters ALEFL00P=MX Infosel ALSEA (CONTACT) Lizette Chang Investor Relations lchang@alsea.com.mx Phone: (55) 5241.7158 www.alsea.com.mx 9 6 a í V : s h p a r g o t o h P / . x m m o c . 3 o i n e l i m : n g i s e D ALSEA, S.A. de C.V. Yucatán 23, Hipódromo Condesa, 06170, México D.F., Phone (55) 5241.7100 www.alsea.com.mx 

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