numbers worth celebrating 2004 Annual Report operating income Growth: 25% 38% sales EBITDA: $528 149% million pesos stock yield 626 stores Alsea is the leading operator of quick-service restaurants. In Mexico, it operates Domino´s Pizza, Starbucks Coffee and Popeyes, and is the largest Burger King franchisee. In Brazil, it runs Domino’s Pizza. Its multi-unit operation is supported by its distribution division, DIA. 10,483 employees MISSION Our raison d’être is to: Develop, manage and control the businesses of Alsea, by employing a synergy and critical mass model to optimize our human and material resources. “With people for people” VISION Where we want to go Be of the highest quality and the most profitable quick-service restaurant operator. VALUES What makes us great: The values fostered by Alsea among its people are: Customer Service and Orientation Personal Excellence and Comprehensive Development Respect, Integrity and Austerity Supervising Quality and Productivity Innovation and Creativity Responsibility, Commitment and Teamwork CONTENT 3 Financial Highlights 4 Message to the Shareholders 6 Domino’s Pizza 10 Starbucks Coffee 14 Burger King 18 Popeyes 20 DIA 23 Alsea Services 24 Fundación Comprométete 26 Management’s Discussion & Analysis 28 Corporate Governance 33 Consolidated Financial Statements 529 stores 50 stores We are part of the largest specialized pizza home-delivery chain that operates in 55 countries and has over 7,750 stores united through a single mission: “To serve the best pizza in the world”. Burger King guarantees its customers the highest quality in fast food, excellent service, friendliness and a pleasant atmosphere. Alsea is its largest franchisee, with 50 stores in Mexico. 43 stores 4 stores Starbucks is for everyone the best coffee at the best place, the third place. It is an oasis where customers can relax, read or get together with friends. This is the second largest fast-food chicken sale concept in the world. The New Orleans flavor of Popeyes Chicken & Seafood adds a distinctively spicy touch. 5 distribution centers Distribuidor Internacional de Alimentos is the Alsea subsidiary that supplies food to the different brands we manage, and strengthens them so that they can focus on serving the final consumer. CAGR: 9.1% CAGR: 8.2% 3,589 528 2,871 2,764 2,681 2,530 411 415 385 374 CAGR: 8.7% 169 146 121 123 33 00 01 02 03 04 00 01 02 03 04 00 01 02 03 04 Net Sales EBITDA Net Profit CAGR: 7.6% 1,379 1,212 1,137 1,030 1,011 CAGR: 15.9% 156 87 91 66 54 CAGR: 10.6% 626 560 518 437 418 00 01 02 03 04 00 01 02 03 04 00 01 02 03 04 Shareholders’ Equity EVA Number of Stores Figures in thousands of pesos, expressed in purchasing power as of December 31, 2004, except number of stores. 2 Financial Highlights (1) Nets sales Gross Profit Operating Expenses Operating Income EBITDA Consolidated Net Profit Total Assets Cash Liabilities with Cost 2004 3,589,078 2,068,389 % 100 57.6 2003 2,871,491 1,615,325 1,540,514 42.9 1,200,116 350,763 9.8 253,749 527,875 168,513 14.7 4.7 415,209 123,164 2,134,931 142,451 95,526 100 6.7 4.5 1,798,227 205,800 150,322 Majority Shareholders’ Equity 1,379,449 64.6 1,211,948 EVA (2) ROIC (3) ROE (4) Price of Share Earnings per Share Dividend Paid per Share Book Value per Share Shares Outstanding (millions) Number of Stores Employees 156,319 26.2% 12.1% 23.95 1.22 0.59 11.10 124.2 626 10,483 91,130 22.1% 10.2% 9.60 1.09 0.38 10.38 116.8 560 7,336 % 100 56.3 41.8 8.8 14.5 4.3 100 11.4 8.4 67.4 2002 2,764,305 1,543,235 1,132,496 283,918 410,740 146,199 % 100 55.8 41.0 10.3 14.9 5.3 2001 2,681,499 1,475,854 1,102,351 249,964 373,502 32,584 1,737,150 217,834 100 12.5 179,304 10.3 1,613,292 105,777 243,101 % 100 55.0 41.1 9.3 13.9 1.2 100 6.6 15.1 2000 2,529,661 1,419,258 % 100 56.1 1,034,679 40.9 271,811 384,579 121,076 1,750,877 118,859 345,956 10.7 15.2 4.8 100 6.8 19.8 1,136,529 65.4 1,010,884 62.7 1,029,789 58.8 66,441 20.4% 13.1% 7.35 1.23 0.09 9.57 118.8 518 6,950 54,288 19.4% 3.1% 3.50 0.27 0.34 8.37 120.8 437 6,893 86,628 23.1% 12.1% 6.14 1.00 - 8.46 121.7 418 6,834 (1) Figures in thousands of pesos, expressed in purchasing power as of December 31, 2004, except per share data, number of stores and employees. (2) EVA is defined as the operating income – net invested capital times the cost of equity (it considers a shareholder cost of 15%). (3) ROIC is defined as the operating income divided by the invested capital – net (total assets – cash and temporary investments – liabilities without cost). (4) Return on Equity is defined a net profit divided by equity. 3 Domino’s Pizza Mexico had another wonderful year of growth and positive performance in 2004, thanks to Alsea’s commitment, experience and passion for our brand. We are very pleased and proud of the continued success of Domino’s Pizza Mexico. What also made this year special was Domino’s Pizza Mexico’s opening its 500th store. Mexico is our largest and most successful international market. I recently toured stores in the country to celebrate the 15th anniversary of Domino’s Pizza Mexico, and I was once again impressed with the energy, attitude and quality of Alsea’s and Domino’s team. They are providing great products, wonderful service and tremendous value to their customers. Domino’s Pizza will continue its growth of stores, sales and market share, innovating with new and exciting products while also providing prompt, accurate delivery service throughout Mexico. David A. Brandon Chairman and Chief Executive Officer, Domino’s Pizza, Inc. Message to the Shareholders To our Shareholders: We wish to share with you the various celebrations that took place in Alsea during 2004. Domino’s Pizza commemorated its 15th anniversary, and not only was the natural passage of time a reason to be festive, but also the opening of the 500th store of the Domino’s Pizza system in Mexico crowned this event. We recognize the effort and commitment of all the people whose work enabled us to achieve this remarkable goal. Thanks to the experience gained in these last few years, we are convinced of the fact that a long road lies ahead for this great and young Domino’s Pizza system. We likewise celebrated the opening of our 50th Burger King store, 43rd Starbucks Coffee shop and 4th Popeyes Chicken & Seafood unit—a brand we purchased precisely this year to develop the concept in Mexico. Sixty-six opening celebrations in all our brands during 2004 made it possible for Alsea to reach a total of 454 corporate stores and 172 franchises in Mexico and Brazil, thereby posting record sales of 3.6 billion pesos, 25.0% more than last year. We are no doubt experiencing the materialization of our vision that was outlined four years back: “The leader in operating brands with proven success”. We celebrated Alsea’s 5th anniversary in the Mexican Stock Exchange with extraordinary results for our shareholders; our share price increased 149.5% during 2004; and Alsea’s share float in the market accounted for 20.1% of its total shares. At the same time, the volume of shares traded by Alsea grew 255.0% compared with 2003, thereby reaching an average level of marketability. 4 I want to send a heartfelt congratulation to our partner Alsea for a wonderful year of growth and exceptional results in the Starbucks business. From opening our first store in 2002 in Mexico City, to the 43 stores we have today, the Starbucks brand is becoming one of the most recognized brands and delivers the highest quality coffee, customer service and coffee-house experience. Without the hard work and dedication of all of you, this would not have been possible. I want to thank you for your passion for coffee and people, and I look forward to many more years of incredible growth. I want to congratulate our franchisee, Operadora West, for its excellent results in 2004. Its effort and dedication to the Burger King“ system determinedly contributed to our growth in Latin America. Operadora West offers quality service and products to the Mexican market, making the Burger King system the best food option for consumers. I am certain that, thanks to the passion and commitment of our franchisee, we can look forward to many more years of outstanding results. Howard Schultz Chairman, Starbucks Corporation Julio Ramirez Chairman, Burger King Corporation Profitability results in 2004 also reflect the trust bestowed upon us; we declared dividends of 0.59 pesos per share, equivalent to an annualized yield of 3.5% based on the share price at the time the dividends were declared. The generation of Economic Value Added (EVA) amounted to 156.3 million pesos, 71.6% higher than that of 2003, and the Return on Invested Capital (ROIC) was 26.2% or 410 base points higher than last year’s. In recent years, Alsea has been undergoing a serious and formal process of institutionalization supported by our Board of Directors, which places ethical principles first and encourages experiencing the values of our strategic plan throughout the organization. We are rapidly approaching our 1,000-store goal and greater shareholder profitability, an equation that will be the basis for our future growth. We have learned that goals are attained when they are clear, well defined and are periodically evaluated by a well motivated and compensated work team. This is Alsea’s greatest challenge in the years to come, and we will busy ourselves to make this success formula materialize and meet our goals. We wish to thank all of you for your trust. At Alsea, our accomplishments encourage excellence. Alberto Torrado Martínez Cosme A. Torrado Martínez Chief Executive Officer Chairman of the Board of Directors 5 growth: 7% 61% operating income sales 500stores in Mexico 37.6 million pizzas sold during the year 6 Sales: $1,995 million 8 CUSTOMER SATISFACTION 105,952,643 customers served per year. MARKET LEADERSHIP 500 stores in only 15 years in Mexico, and 29 stores in Brazil. Service in 124 cities throughout the Mexican Republic.. We revolutionized the market by launching our Pizza Double Decker. PREFERRED EMPLOYER 951 sources of employment were generated in 2004, totaling 7,690 employees in Mexico and Brazil. STRATEGIC PARTNER SHAREHOLDER VALUE Domino’s Pizza, Inc. has 7,750 stores in 55 countries. We deliver 1,000,000 pizzas a day worldwide. Joint venture agreement with Spoleto, Ltd. to operate Domino’s Pizza Brazil Historical record EBITDA $297 million pesos EVA $92 million pesos ROIC 28.6% Did you know that: • We used 296 million pepperoni sausages in 2004, equal to 48 times the height of Mexico City’s tower, “Torre Mayor”. • We used 7,500 tons of cheese, equal to the weight of 100 Boeing 727 airplanes. Without a doubt, 2004 was a great year for concept, which guarantees that Domino’s Domino’s Pizza; we celebrated our 15th Pizza still has a long road ahead in terms of anniversary as the leader in Mexico, we growth and consolidation. opened our 500th store, and the business grew in same-store sales, showing unquestionable signs of health both in the brand as well as in the operation. It also is proof of the fact that the habits and customs of the Mexican market increasingly embrace Federico Tejado the home-delivery and in particular the pizza Director of Domino’s Pizza Mexico 9 140% growth in sales 130,000 5.6 million coffees sold in 2004 customers served per week 10 Sales: $192 million 12 CUSTOMER SATISFACTION Number of customers served per month: 560,000. 5.6 million coffees sold. MARKET LEADERSHIP PREFERRED EMPLOYER STRATEGIC PARTNER SHAREHOLDER VALUE A total of 43 stores in Mexico. 21 stores were opened in 2004, a growth of 95.4%. 5 stores were opened in 3 locations outside Mexico City. 203 sources of direct employment were generated, totaling 440 employees. 40 Coffee Masters Certified Employees were trained in 2004. Starbucks Corporation has 8,569 stores in 34 countries. 30 million customers served per week worldwide. EBITDA $22 million pesos. EBITDA margin 11.3%. Did you know that: • Mexico is the world’s 5th coffee producer and one of the main suppliers of coffee for Starbucks Coffee worldwide. • The coffees sold by Starbucks Coffee during 2004 could fill an Olympic swimming pool. At Starbucks, we have a passion for coffee, experience—will allow us to continue our quality is superior, and our customer growing rapidly and successfully, our aim service is excellent. As a result, only two years being to total 70 stores at year-end 2005. after having opened our first store in Mexico City, Starbucks is already widely accepted among Mexican consumers, and we obtained positive operating income results—one year earlier , in fact, than what we estimated. I am convinced of the fact that the talent of Gerardo Rojas our people—combined with Alsea’s Director of Starbucks Coffee Mexico 13 openings in the year 13 37%growth in sales 8.7 million hamburgers sold 14 Sales: $481 million 16 CUSTOMER SATISFACTION 245,239 customers served per week. Hamburgers sold: 8.7 million. MARKET LEADERSHIP 13 openings in 2004, a growth of 35%. Presence in 2 of the country’s 3 most important cities. PREFERRED EMPLOYER We generated 471 direct jobs, totaling 1,519 employees. STRATEGIC PARTNER Burger King Corporation has 11,220 stores in 61 countries. SHAREHOLDER VALUE EBITDA $85 million. 41.4% growth in EBITDA. EVA $36 million pesos. Did you know that: • If we were to tie together our total number of French fries, we could go around the Earth’s equator 1.5 times. • We used 18 million packets of ketchup in the year, equal to the weight of the Statue of Liberty. Without a doubt, the greatest achievement in franchisee in Mexico, and operates business the year was having added 13 branches, a 35% units in more than ten cities. I am totally increase compared with the previous year. As confident that—thanks to our expansion a result, we were awarded the Excellence in plans and market penetration—we will Development award granted by Burger King continue being one of the fastest-growing Corporation to the largest-growing franchise franchises now and in the years to come. in Latin America. In 2005, we plan to purchase and build 25 additional branches, accounting for 50% growth in our operations. At present, Fabian Gosselin Operadora West is the largest Burger King Director of Operadora West CUSTOMER SATISFACTION 4 stores opened in 2004. More than 3,500 customers served per week. 23,375 combos sold in 2004. MARKET LEADERSHIP The first store was opened in a record time of 12 weeks. PREFERRED EMPLOYER 119 employees hired between June and December. STRATEGIC PARTNER 1,824 stores in 26 countries. Popeyes Chicken & Seafood was established in New Orleans in 1972. SHAREHOLDER VALUE $7 million pesos in sales in six months. Did you know that: • Chicken is the most frequently eaten meat in Mexico, more than 20 kilograms per capita a year. • Popeyes is the second largest chicken chain in the world. This year, we began to develop the Popeyes most important Popeyes franchisees, as well Chicken & Seafood system and brand in as our consumers’ preferred food choice. Mexico. Six months after signing the agreement with AFC Enterprises, we already have four stores, and are very well accepted by our clients. We expect to continue growing Salvador Rocha in the years to come, and become one of the Director of Popeyes Mexico 18 19 91,019 orders delivered 771 stores serviced 7.3million kilometers traveled 20 Sales: $1,798 million CUSTOMER SATISFACTION 91,019 orders delivered to 771 stores. 124 cities visited per week. 7,333,577 kilometers traveled MARKET LEADERSHIP 5 distribution centers with national coverage. PREFERRED EMPLOYER 474 employees. STRATEGIC PARTNER DIA purchases, imports, stores, produces and distributes inputs for the four brands: Domino’s Pizza, Burger King, Starbucks Coffee VALOR PARA EL ACCIONISTA and Popeyes. EVA $102 million pesos. ROIC 56.1%. Did you know that: • 7.3 million kilometers traveled, a distance equal to nine trips to the moon and back. Our most remarkable accomplishment was the committed work force that anticipates and more than 91,000 “complete and on time” meets the supply needs of the Alsea deliveries we made to 771 stores in Mexico, companies”. at an average of two deliveries a week. This was possible, thanks to our focus on operating efficiency and control, as well as increasingly committed people. We have in Héctor Orrico this way reiterated our Mission: “To be a Director of DIA 22 Alsea Services ALSEA REAL-ESTATE SERVICES SHARED ALSEA SERVICES CUSTOMER SATISFACTION CUSTOMER SATISFACTION Develop and implement the opening plan for each of Processing recurrent, high-volume transactions in the Alsea’s brands. Accounting, Income, Disbursements and Payroll MARKET LEADERSHIP Departments. Follow the plan to open each brand, obtaining the MARKET LEADERSHIP best locations and creating synergy in the Implementing Oracle and Alsea Shared Services. negotiations of these properties. PREFERRED EMPLOYER PREFERRED EMPLOYER Specialization of our employees’ functions and Higher degree of specialization in the functions and responsibilities. responsibilities of each of our employees. Ongoing improvement of the Performance Evaluation STRATEGIC PARTNER System. Services agreements with all of Alsea’s business units STRATEGIC PARTNER to ensure growth. Service agreements with all of Alsea’s business units Strategic alliances with real estate developers and to ensure growth. power of negotiation. Make sure that our mission is being accomplished by planning, regulating and controlling the adherence to SHAREHOLDER VALUE the Strategic Plan of each business unit. Ongoing improvement in the return on investment by store. SHAREHOLDER VALUE Lowering expenses by store and optimizing resources. 23 Mission: “To encourage and foster actions to improve citizen well-being and quality of life by means of health, human development, educational, cultural and sports programs as well as aid during times of natural disasters, so as to participate in the building of a more balanced Mexico.” In June 2004, Alsea legally incorporated Fundación Programs Comprométete A.C., which is the most visible Socios por México is a non-paternalistic program aimed expression of the social responsibility and commitment at providing well-being to marginal communities of Alsea, S.A de C.V. and of each of its brands (Domino’s through the following family-participation programs and Pizza, Starbucks Coffee, Burger King, Popeyes and DIA) strategies: to Mexico and to a better future for the country. Health: Installing and how to use latrines and/or LOLA Activity Summary ecological stoves. 2004 was a year of remarkable achievements during which Fundación Comprométete A.C. received Nutrition: Poultry farms. Sheep farms economic resources from sources such as the Founding Partners, Sub-franchisees of Domino’s Pizza, the These programs help curb respiratory and Advertising Fund and the Domino’s Pizza stores. gastrointestinal infections that are common among the During the year, Fundación Comprométete A.C. economic well-being through the sale and breeding of marginal population, as well as support nutritional and established an alliance with Fondo para la Paz I.A.P.—a animals. solid and reliable institution that carries out social programs—and an exclusivity agreement was signed for Socios por México is developed in nine communities in the Socios por México (Partners for Mexico) program. the states of Veracruz and Oaxaca, benefiting more than 205 indigenous low-income families, or more During the 2004 Christmas season, Fundación accurately around 1,250 Mexicans. Comprométete A.C. maintained a sound alliance with Starbucks Coffee, DIA, Ministerios de Amor I.A.P., Alsea Outlook employees and customers, as a result of which toys were 2005 will be a year full of challenges and consolidation collected for and donated to homeless children and the for Fundación Comprométete A.C., during which time children of DIA employees. we will reinforce our social-aid commitment in the fields of health, human development and education. “We donated over 3,000 toys which were delivered on December 24 and January 6.” 24 25 Managament’s Discussion & Analysis Net sales in 2004 grew 25%, totaling 2.9 billion pesos. Excluding depreciation, operating expenses totaled This 717.6-million-peso gain is due to several factors, 1.54 billion pesos which, as a proportion of total including: income, went from 41.8% to 42.9%. This effect was largely due to the consolidation of Operadora West, i) The inclusion of 481.4 million pesos in Burger King’s as well as to the larger number of Starbucks Coffee income, which were consolidated in Alsea starting in and Popeyes stores. This was partially offset by January 2004. Burger King’s income went up 36.7%, savings in Distribuidor Internacional de Alimentos mainly due to the opening of thirteen stores. produced by greater efficiency in transportation ii) The increase of 130.8 million pesos in the income routes. of Domino’s Pizza Mexico, equal to 7.4%, attributable to a larger number of stores as well as to the positive The 15.7-million-peso increase in depreciation and growth in same-store sales. amortization was due to a larger number of iii) An increase of 112.2 million pesos in the income of Starbucks stores, as well as to the Operadora West Starbucks Coffee, equal to 140.4%, due to the stores which were not consolidated during the year opening of 21 stores, as well as to the positive growth ended December 31, 2003. in same-store sales; iv) The increase of 7.0 million pesos in the income of The expense related to the comprehensive cost of Popeyes, as a result of the opening of four stores; and financing dropped from 2.7 million pesos to 2.0 v) The year that ended December 31, 2004 having million pesos during the year ended December 31, considered 53 weeks compared with 52 weeks the 2004 compared to 4.7 million pesos during the year previous year. ended December 31, 2003. This decline mainly reflects the 1.9-million-peso decrease in interests paid These increases were partially offset by the 12.6 – net, and the positive variation of 1.7 million pesos in million-peso decrease in the income of Distribuidor exchange rate results. These variations were partially Internacional de Alimentos (DIA), due to the drop in offset by a negative variation of 1.0 million pesos in the number of clients, this being part of the strategy the monetary position result. to exclusively serve the company’s brands. Gross profit went up to 2.1 billion pesos, a 28.0% during the year ended December 31, 2004 compared increase, reflecting the increases in gross profit in to 32.9 million pesos of the same period last year. most of the business units, including Domino’s Pizza, This amount mainly reflects: Other expenses – net totaled 72.0 million pesos Starbucks Coffee, Burger King, Popeyes and Distribuidor Internacional de Alimentos. These The 28.1-million-peso estimate for the deterioration of increases were partially offset by the decrease in long-term assets at Delibra (Domino’s Pizza Brazil); gross profit of Domino’s Pizza Brazil. The 22.9-million-peso expense which resulted from Gross profit margin went up 130 base points, going companies purchased from the Telepizza Group; and from 56.3% to 57.6%. The 21.0-million-peso write off of assets which recognizing in the results the goodwill of the 26 resulted from the closing, remodeling and relocation inventory turnover two times, going from 11 to 9 of stores and the Monterrey distribution center. times. It lowered its client portfolio by three days, going from 13 to 10 days, and accounts payable to The income tax rate and tax on assets rate in effect suppliers dropped five days, going from 37 to 32 days dropped from 36.4% to 33.5% in the year ended at the close of the fourth quarter of 2004. December 31, 2004—excluding the operations of Domino’s Pizza Brazil, as well as the expense from Return on Invested Capital (ROIC) was 26.2% during recognizing the goodwill of the companies purchased the year ended December 31, 2004, reflecting an from the Telepizza Group, while considering that increase of 4.1 percentage points compared to 22.1% starting in fiscal year 2004 the company will obtained in 2003. The generation of Economic Value recognize an asset from deferred income taxes, in Added (EVA) grew 71.6%, totaling 156.3 million pesos view of the high probability of recovering the tax in the year ended December 31, 2004 compared to losses of one of its subsidiaries. 91.1 million pesos obtained in the previous year. Consolidated net profit went up 36.8%, totaling 168.5 million pesos in the year ended December 31, 2004. Net margin climbed from 4.3% in the year ended December 31, 2003 to 4.7% in the same period of 2004. In 2004, Alsea invested approximately 382.7 million pesos in property, plant and equipment, of which over 279.6 million pesos correspond to the opening, relocation and remodeling of the different brand stores operated by the company. As of December 31, 2004, the company’s long-term debt amounted to 25.1 million pesos, and its short- term debt 70.5 million pesos, compared with 19.9 million pesos and 130.4 million pesos, respectively, as of December 31, 2003. At the close of 2004, the entire debt was in pesos. The company presents a solid financial structure, even after having paid off the Medium-term Promissory Note with company funds. The current assets to short-term liabilities ratio was 1.2 times, an acid test of 0.8 times. The company decreased its 27 Corporate Governance Audit Committee To the Board of Directors of Alsea, S.A. de C.V.: conducted according to market conditions and properly disclosed to third parties. In accordance with Article 14 of the Securities Market 7. We analyzed transactions that were either out of the Law and on behalf of the Audit Committee, I hereby ordinary or that accounted for important acquisitions of inform you of the activities we carried out related to the assets. In concluding, we recommended to the Board of fiscal year ending December 31, 2004. As work Directors that these transactions be approved. progressed, we kept in mind the recommendations 8. With the support of external and internal auditors, we established in the Code of Best Corporate Practices. The revised the general internal control guidelines, following Statutory Examiner of the company was invited in up on the implementation of the resulting recommendations. accordance with the aforementioned law and was 9. Proper procedures were established to help the Audit present at the meetings held. Committee review and approve the financial information issued by the company that is used by third parties. 1. We recommended the hiring of external auditors. In 10. The Systems and Information Technology Division order to carry out this recommendation, we verified their informed us of its operations, established internal control independence, analyzed their work program and procedures and the development of new systems. evaluated their performance during the previous year. 11. We verified the existence of controls established by 2. We maintained constant communication with the the company to guarantee the compliance with the external auditors, so as to be informed of the progress in different legal provisions it is subject to, and to make their work and any observations on their part. We were sure that significant contingencies are properly disclosed. informed of their comments in a timely manner and 12. Through the Internal Audit Department, we verified followed up on them. the proper dissemination of and compliance with the 3. We reviewed the financial information issued quarterly company’s Code of Conduct. by Management, making sure that it was prepared using 13. The work we carried out was duly documented in the the same accounting criteria as those of the annual minutes prepared for each meeting, which were information. Based on the foregoing, we recommended reviewed and approved in a timely manner by the to the Board of Directors that this information be Committee members. approved. During the year, there were no changes in the 14. On a quarterly basis, we presented to the Board of accounting policies followed by the company. Directors reports on the activities conducted by the 4. We reviewed the company’s financial statements as of Committee. December 31, 2004, as well as the accounting policies 15. We held executive meetings, without the presence of that were used to prepare them. After having analyzed the representatives of Management and, when applicable, the comments of the external auditors and the Examiner, we made our recommendations to Management. we recommended to the Board of Directors that these statements be approved to be submitted to the We thank the company’s Management for the support it consideration of the Stockholders’ Meeting. gave us in fulfilling our responsibilities. 5. We reviewed and approved the annual work plan of the Internal Audit Department and its corresponding Sincerely, budget. We received quarterly reports on its performance, and made sure that the recommendations being presented were properly followed up on and implemented. 6. With the support of the Internal Audit Department, we made sure that transactions with related parties were José Manuel Canal / Chairman 28 Planning & Finance Committee To the Board of Directors of Alsea, S.A. de C.V.: per the authorized budget and within the established time frame. In accordance with Article 14 of the Securities Market 7. Each quarter, we were presented with an update of Law and on behalf of the Planning & Finance Committee, the Shareholder’s Cost, which was applied at the close of I hereby inform you of the activities we carried out each quarter in 2004, using the methodology authorized related to the fiscal year ending December 31, 2004. As by the Board of Directors. We sustained our work progressed, we kept in mind the recommendations recommendation to maintain this rate at 15%. established in the Code of Best Corporate Practices. The 8. The results of the Securitization Plan were presented Statutory Examiner of the company was invited in quarterly. The most important indicators in a comparison accordance with the aforementioned law and was of 2003 and 2004 were: Float went from 9% to 20%; present at the meetings held in said period. average daily volume traded went from 34,708 to 121,794 shares; and the share price grew from 9.60 to 23.95 To comply with the responsibilities of this Committee, we pesos. carried out the following activities: 1. The general guidelines were established to develop Alsea’s 2005-2009 Strategic Plan. 2. The Control Panel and Strategic Polygon were presented and reviewed on a quarterly basis, and in all cases we recommended that they be authorized. 3. General premises were established to prepare the 2005 budget. Budgets for 2005 of each of Alsea’s companies were reviewed in two extraordinary sessions, and we ultimately recommended to the Board of Directors that they be approved. 4. The CEO’s report was revised with the variations compared to the budget of each quarter of 2004, with the effects of each of the Alsea companies, in order to validate them before being presented to the Board of Directors. 5. The investment alternatives produced by Alsea’s Chairman of the Board and Chief Executive Officer were evaluated, and in each case their opinion was given. These alternatives included, among others, Popeyes, the acquisition of strategic locations through Servicios Inmobiliarios Alsea, the acquisition of Segurápido with nine Domino’s stores in Yucatán, and the merger of Operadora West into Alsea. 6. The General Progress report and the report on Critical Aspects of the ASUL Project (Implementation of Alsea Shared Services, as well as implementation of Oracle for the Finance Department and Supply Chain) were presented quarterly. The project is being carried out as Salvador Cerón Aguilar / Chairman 29 Evaluation & Compensation Committee To the Board of Directors of Alsea, S.A. de C.V.: 4. The 2005 Compensation Strategy was designed and will be applied to the Budget for 2005. In accordance with Article 14 of the Securities Market Law and on behalf of the Evaluation & Compensation 5. The following activities were carried out with regard Committee, I hereby inform you of the activities we to Management Deferred Compensation (SOP): carried out related to the fiscal year ending December • The 2003 Stock Allotment Plan was delivered to the 31, 2004. As work progressed, we kept in mind the participants. recommendations established in the Code of Best • The 2004 Stock Allotment Plan was delivered to the Corporate Practices. The Statutory Examiner of the participants. company was invited in accordance with the • For fiscal year 2005, the Committee recommended aforementioned law and was present at the meetings that the Stock Allotment Plan be converted to a Stock held. Option Plan (SOP), the benefit of which lies in the increase in the registered share value between the plan’s 1. During the first quarter of 2004, Alsea’s Evaluation & underwriting date and the option exercise date. Compensation Committee was audited, with the support of the external firm, Hay Group, the highlights of which 6. The 2005 Performance Evaluation Model was are the following: developed, and will be made up of a quantitative portion • The total compensation package for Senior (evaluation certificates), a qualitative portion (360° by Management is competitive compared with the HAY competences), and a development potential portion (an market survey. Alsea tool – Strategic Equipment). • The benefits package and bonus plan are within market practices. 7. The 2004 performance of the Chief Executive Officer • The value of the stock allotment plan is higher than and Senior Management was evaluated, and the 2004 that of the market in terms of execution time and form bonus was authorized. of granting. 2. During the second quarter of 2004, Mr. Sergio Assistant Directors that will be implemented in 2005 and 8. A Salary Leveling Plan was prepared for Directors and Larraguivel Cuervo was appointed Chairman of Alsea’s managed by the CEO. Evaluation & Compensation Committee. This Committee is made up as follows: 9. The “Proyecto Gente 2005” (“2005 People Project”) Sergio Larraguivel Cuervo Chairman was designed and represents the most important Alberto Torrado Monge Federico Tejado Bárcena Mario Carrillo Villalpando Member Member Examiner forward-looking strategy for Alsea’s human capital. Juan Carlos Jallath Hernández Secretary Sincerely, 3. During the year, the following executive compensation components were established for 2004: • Compensation package and policies • Bonus policies Sergio Mario Larraguivel Cuervo / Chairman • General performance evaluation guidelines 30 Marketing Committee In accordance with Article 14 of the Securities Market Law • Revision and approval of marketing expenses (budgets) and on behalf of the Marketing Committee, I hereby inform • Same-store, low-growth zones will be reviewed you of the activities we carried out related to the fiscal year ending December 31, 2004. As work progressed, we kept in 5. The performance of each brand will be reviewed on a mind the recommendations established in the Code of Best quarterly basis to make sure that the measures being taken Corporate Practices. are aligned with the strategy of the brand in particular and of Alsea in general. Over the course of several meetings, general guidelines were laid down for the Marketing Division, focusing on the 6. The Committee will also take on the activity of following following items, authorized by the Board of Directors, up on agreements, so as to guarantee the application of the namely: decisions made by the Committee. 1. The 2005 Marketing Plan was analyzed. 2. Establish a price strategy to protect margins. 3. The promotions and coupons sales system was analyzed. 4. It was determined that the Marketing Committee would be structured to review the following aspects of each of the brands: • Approval of the strategy to build and position the Alsea brands • Revision and approval of the price and cost structure • Backup and orientation for negotiations with the media • Volume building Marcelo Rivero Garza / Chairman 31 Board of Directors Chairman Cosme A. Torrado Martínez Shareholder Board and Staff Members Alberto Torrado Martínez Armando Torrado Martínez Federico Tejado Bárcena Cosme A. Torrado Martínez Shareholder Board Members Alberto Torrado Monge J. Patrick Doyle Independent Board Members Marcelo Rivero Garza José Manuel Canal Hernando Salvador Cerón Aguilar Sergio Mario Larraguivel Cuervo Secretaries Guillermo Díaz de Rivera Alvarez Xavier Mangino Dueñas Statutory Examiner Mario Carrillo Villalpando Alternate Examiner Luis Gabriel Ortíz Esqueda INTERMEDIATE ORGANS Audit Committee José Manuel Canal Hernando Cosme A. Torrado Martínez Armando Torrado Martínez Mario Sánchez Martínez Chairman Member Member Secretary Planning & Finance Committee Salvador Cerón Aguilar Cosme A. Torrado Martínez Member Sergio Mario Larraguivel Cuervo Member José Rivera Río Rocha Secretary Chairman Comité de Evaluación y Compensación Sergio Mario Larraguivel Cuervo Alberto Torrado Monge Federico Tejado Bárcena Juan Carlos Jallath Hernández Member Member Secretary Chairman Comité de Mercadotecnia Marcelo Rivero Garza Federico Tejado Bárcena Diego Cossío Bartón Francisco Rodríguez Lara Chairman Member Member Secretary 32 ALSEA. S.A. de C.V. AND SUBSIDIARIES Consolidated Financial Statements December 31, 2004 and 2003 (Translation from Spanish Language Original) Statutory Auditor’s ReportStatutory Auditor’s Report Independent Auditor’s Report Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Changes in Financial Position Consolidated Statements of Changes in Stockholders’ Equity Notes to Consolidated Financial Statements 34 35 36 38 39 40 42 Statutory Auditor’s Report (Translation from Spanish Language Original) The Stockholders Alsea, S. A. de C. V.: In my capacity as Statutory Auditor, and in compliance with the provisions of Article 166 of the General Corporations Law and the Company’s bylaws, I hereby submit my report on the accuracy, sufficiency and fairness of the information contained in the accompanying financial statements, furnished to the General Stockholders’ Meeting by the Board of Directors, for the year ended December 31, 2004. I have attended the stockholders and board of directors meetings to which I have been summoned, and I have obtained from the directors and management of the Company such information on the operations, documentation and accounting records as I considered necessary in the circumstances. In addition, I have examined the balance sheet of Alsea, S. A. de C. V. as of December 31, 2004, and the related statements of operations, stockholders’ equity and changes in financial position for the year then ended, which are the responsibility of the Company’s management. My examination was carried out in accordance with auditing standards generally accepted in Mexico. As stated in note 1, on January 1, 2004, Alsea acquired the majority of shares of Operadora West, S. A. de C. V. (Franchisee of Burger King Corporation), by increasing its equity interest from 31.56% to 63.1% (date of inclusion into consolidation). In December 2004, the stockholders agreed to merge Operadora West, S. A. de C. V. and Alsea, S. A. de C. V., with the latter being the subsisting entity. The merger will be effective on the date the aforementioned companies receive the respective criterion confirmation from the Ministry of Finance and Public Credit (SHCP) since it is a corporate restructuring, and Burger King Corporation’s authorization in conformity with the franchise contracts they have entered into. In my opinion, the accounting and reporting criteria and policies followed by the Company, and considered by management in preparing the financial statements presented at this meeting, are adequate and sufficient under the circumstances and have been applied on a basis consistent with that of the preceding year. Therefore, such information is a fair, reasonable and sufficient representation of the financial position of Alsea, S. A. de C. V., as of December 31, 2004, and of 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 Mexico. Very truly yours, Mario Carrillo Villalpando Statutory Auditor Mexico City, February 28, 2005. 34 Independent Auditor’s Report (Translation from Spanish Language Original) The Board of Directors and Stockholders Alsea, S. A. de C. V.: We have audited the accompanying consolidated balance sheets of Alsea, S. A. de C. V. and Subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of income, stockholders’ equity and changes in financial position for the years 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 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 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 audits provide a reasonable basis for our opinion. As stated in note 1, on January 1, 2004, Alsea acquired the majority of shares of Operadora West, S. A. de C. V. (Franchisee of Burger King Corporation), by increasing its equity interest from 31.56% to 63.1% (date of inclusion into consolidation). In December 2004, the stockholders agreed to merge Operadora West, S. A. de C. V. and Alsea, S. A. de C. V., with the latter being the subsisting entity. The merger will be effective on the date the aforementioned companies receive the respective criterion confirmation from the Ministry of Finance and Public Credit (SHCP) since it is a corporate restructuring, and Burger King Corporation’s authorization in conformity with the franchise contracts they have entered into. 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, 2004 and 2003, and the results of their operations, the changes in their stockholders’ equity and the changes in their financial position for the years then ended in conformity with accounting principles generally accepted in Mexico. KPMG CARDENAS DOSAL, S. C. Javier Morales Ríos February 28, 2005. 35 Consolidated Balance Sheets Alsea, S. A. de C. V. and Subsidiaries December 31, 2004 and 2003 (Thousands of constant Mexican pesos as of December 31, 2004) Assets Current assets: Cash Accounts receivable: Trade less allowance for doubtful accounts of $3,863 in 2004 and $6,287 in 2003 Recoverable taxes Other Associated company (note 4) Inventories, net (note 5) Prepaid expenses Total current assets Investment in shares of associated companies (note 6) 2004 2003 $ 142,451 205,800 112,973 42,890 24,932 – 176,030 33,700 114,931 51,360 18,347 35,864 113,457 17,130 532,976 556,889 3,551 74,444 Property, equipment and leasehold improvements, net (note 7) 1,266,564 875,503 Goodwill of subsidiaries and associated companies, less accumulated amortization of $15,222 in 2004 and $33,732 in 2003 (note 8) 64,091 56,081 Intangible assets (note 9): Trademarks, less accumulated amortization of $100,694 in 2004 and $80,988 in 2003 Preoperating expenses, less accumulated amortization of $25,215 in 2004 and $16,226 in 2003 Other assets, net 196,358 165,033 61,643 39,490 9,748 30,787 $ 2,134,931 1,798,227 See accompanying notes to consolidated financial statements. 36 Liabilities and Stockholders' Equity 2004 2003 Short-term liabilities: Bank loans (note 11) Short-term maturity of medium-term promissory note (note 11) Suppliers Accounts payable and accrued liabilities Accruals (note 12) Taxes payable and employee statutory profit sharing Total short-term liabilities Bank loans, excluding short-term maturities (note 11) Other liabilities Deferred income tax, employees' statutory profit sharing and long-term taxes payable on retained earnings (note 15) Total liabilities Stockholders' equity (note 16): Capital stock Additional paid-in capital Retained earnings Reserve for repurchase of shares Cummulative translation effect from foreign entity Majority stockholders' equity Minority interest Total stockholders' equity Commitments and contingencies (note 17) Subsequent event (note 19) $ 70,454 – 217,370 48,070 54,693 67,129 25,199 105,190 196,027 24,055 37,912 8,815 457,716 397,198 25,072 8,405 106,905 19,933 19,679 107,141 598,098 543,951 419,663 261,250 608,103 90,080 353 402,886 243,448 534,214 35,582 (4,182) 1,379,449 1,211,948 157,384 42,328 1,536,833 1,254,276 $ 2,134,931 1,798,227 Lic. José Rivera Río Rocha Corporate Finance Director C.P. Alberto Torrado Martínez General Director C.P. Abel Barrera Fermín Corporate Comptroller 37 Consolidated Statements of Income Alsea, S. A. de C. V. and Subsidiaries Years ended December 31, 2004 and 2003 (Thousands of constant Mexican pesos as of December 31, 2004) Net sales Cost of sales Gross profit Operating expenses Operating income Comprehensive financial results (note 13) Other expenses, net (note 14) Income from continuing operations, before income taxes and employees' statutory profit sharing Income tax and employee statutory profit sharing (note 15): Income tax Employees' statutory profit sharing Total income tax and employee statutory profit sharing Income from continuing operations, before equity interest in associated companies Equity interest in associated companies (note 6) Income from continuing operations 2004 2003 $ 3,589,078 1,520,689 2,871,491 1,256,166 2,068,389 1,615,325 1,717,626 1,361,576 350,763 253,749 (1,999) (4,679) (72,001) (32,894) 276,763 216,176 117,492 1,608 84,797 803 119,100 85,600 157,663 130,576 1,423 9,898 159,086 140,474 Gain (loss) from discontinued operations, net of taxes (note 10) 9,427 (17,310) Income before minority interest Minority interest Net income Net earnings per share (note 2u.) 168,513 123,164 18,887 (4,984) 149,626 128,148 1.22 1.09 $ $ See accompanying notes to consolidated financial statements. Lic. José Rivera Río Rocha Corporate Finance Director C.P. Alberto Torrado Martínez General Director C.P. Abel Barrera Fermín Corporate Comptroller 38 Consolidated Statements of Changes in Financial Position Alsea, S. A. de C. V. and Subsidiaries Years ended December 31, 2004 and 2003 (Thousands of constant Mexican pesos as of December 31, 2004) Operating activities: Net income Add charges (deduct credits) to income not requiring (providing) funds: Depreciation and amortization of trademarks and goodwill Write-off of investment and cancellation of goodwill of subsidiaries companies, net 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, net and prepaid expenses Inventories Associated company Suppliers, accounts payable, accrued liabilities and other accounts payable Taxes payable and employees' statutory profit sharing 2004 2003 $ 168,513 123,164 177,112 39,383 (1,423) (29,727) 161,460 39,056 (9,898) 39,224 353,858 353,006 4,036 (54,353) 35,864 30,497 51,370 (10,849) (39,871) (31,412) (40,461) (4,597) Funds provided by (used in) operating activities 67,414 (127,190) Financing activities: Increase in capital stock and minority interest, net Repurchase of shares Payment of loans, net Dividends declared Funds provided by (used in) financing activities Investing activities: Acquisition of property, equipment and leasehold improvements Discontinued operations, net Investment in shares of associated companies, net of dividends collected Translation effect from foreign entity Trademarks, preoperating expenses and other assets Goodwill of subsidiaries and associated companies, net Funds used in investing activities Decrease in cash Cash: At beginning of year At end of year See accompanying notes to consolidated financial statements. 116,436 68,810 (84,732) (75,737) 19,000 (16,439) (28,980) (46,585) 24,777 (73,004) (271,853) 28,981 (134,832) 4,536 (85,039) (51,191) (93,915) (4,770) (15,024) 10,643 (56,823) (4,957) (509,398) (164,846) (63,349) (12,034) 205,800 217,834 $ 142,451 205,800 Lic. José Rivera Río Rocha Corporate Finance Director C.P. Alberto Torrado Martínez General Director C.P. Abel Barrera Fermín Corporate Comptroller 39 Consolidated Statements of Changes in Stockholders' Equity Alsea, S. A. de C. V. and Subsidiaries Years ended December 31, 2004 and 2003 (Thousands of constant Mexican pesos as of December 31, 2004) Capital stock Additional paid-in capital Statutory reserve Balances as of December 31, 2002 $ 407,043 243,448 7,476 Increase in minority interest Repurchase of shares (note 16) Appropriation to statutory reserve Dividends declared ($0.3784 per share) (note 16) Comprehensive income – (4,157) – – – – – – – – – – 7,715 – – Balances as of December 31, 2003 402,886 243,448 15,191 Increase in minority interest Increase in equity (note 16) Repurchase of shares (note 16) Appropriation to statutory reserve Dividends declared ($0.5926 per share) (note 16) Decrease in contributed capital Comprehensive income – 2,465 14,312 – – – – – 20,348 – – – (2,546) – – – – 6,316 – – – Balances as of December 31, 2004 $ 419,663 261,250 21,507 See accompanying notes to consolidated financial statements. Lic. José Rivera Río Rocha Corporate Finance Director C.P. Alberto Torrado Martínez General Director C.P. Abel Barrera Fermín Corporate Comptroller 40 Retained earnings Retained earnings Total Reserve for repurchase of shares Cummulative translation effect from foreign entity Total majority stockholders' equity Minority interest Total stockholders' equity 449,290 456,766 43,749 (14,825) 1,136,181 28,312 1,164,493 – (4,115) (7,715) – – (4,115) (8,167) – (46,585) (46,585) 128,148 128,148 – – – – – 19,000 19,000 (16,439) – (46,585) – – – (16,439) – (46,585) 10,643 138,791 (4,984) 133,807 – – – 519,023 534,214 35,582 (4,182) 1,211,948 42,328 1,254,276 – 96,169 – – – (6,316) – – – – (75,737) (75,737) – – 149,626 149,626 – – 54,498 – – – – – – – – – – 4,535 22,813 68,810 – (75,737) (2,546) 154,161 96,169 22,813 68,810 – (75,737) (2,546) – – – – – 18,887 173,048 586,596 608,103 90,080 353 1,379,449 157,384 1,536,833 41 Notes to Consolidated Financial Statements Alsea, S. A. de C. V. and Subsidiaries December 31, 2004 and 2003 (Thousands of constant Mexican pesos as of December 31, 2004) NOTE 1. Description of business and significant transactions- 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, Burger King and Popeyes Chicken & Seafood. In Brazil, it operates Domino’s Pizza. The operation of its multi-units is supported by its distribution division (“DIA”). Significant transactions- • In January 2004, Alsea acquired the majority of shares of Operadora West, S. A. de C. V. (Franchisee of Burger King Corporation), by increasing its equity interest from 31.56% to 63.1%, (date of inclusion into consolidation) and to 65.02% at year-end through subsequent contributions. In December 2004, the stockholders agreed to merge Operadora West, S. A. de C. V. with Alsea, S. A. de C. V., with the latter being the subsisting entity. The merger will be effective on the date the aforementioned companies receive the respective criterion confirmation from the Ministry of Finance and Public Credit (SHCP) since it is a corporate restructuring, and Burger King Corporation’s authorization in conformity with the franchise contracts they have entered into (note 19). • • • • In March 2004, Alsea entered into an agreement with AFC Enterprises Inc. for promoting and developing the Popeyes Chicken & Seafood trademark in Mexico. It operated four restaurants in 2004 (note 9). In October 2004, Alsea acquired 100% of the shares of Segurápido, S. A. de C. V.; this company operated a sub-franchise of Domino’s Pizza in Mérida, Yucatán Mexico (note 8). In December 2004, Alsea entered into a venture agreement in Brazil with Spoleto Ltd. which is the most important Italian fast-food operator in that country. This agreement provides for a 50% partnership in the company that currently operates the Dominos Pizza trademark in Brazil, and establishes that as of that date the company will be run by Spoleto Ltd. On the other hand, Alsea obtains rights as master franchisee to develop the “Spoleto” concept throughout the Mexican territory. In December 2004, Alsea acquired 100% of the shares of Todopizza, S. A. de C. V. and Grupo C&T de Iberoamerica, S. A. de C. V., subsidiary companies of Telepizza México, S. A. de C. V. The acquisition includes primarily assets such as store equipment, lease of certain commercial premises and ownership of two business premises. NOTE 2. Summary of significant accounting policies- (a) Financial statement presentation and disclosure- The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in México (Mexican GAAP), which require the recognition of the effects of inflation on the financial information, and are expressed in thousands of Mexican pesos of constant purchasing power as of December 2004, based on the Mexican National Consumer Price Index (NCPI) Publisher by Banco de México (central bank). Certain items in the 2003 financial statements have been reclassified to conform to the classifications used in 2004. (b) Principles of consolidation- 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. 42 The principal operating Subsidiaries are the following: Operating Ownership Activity Operadora DP de México, S. A. de C. V. Café Sirena, S. de R. L. de C. V. Operadora y Procesadora de Pollo, S. A. de C. V. Operadora West, S. A. de C. V. De Libra, Ltda. (in Brazil) (1) Distribuidor Internacional de Alimentos, S. A. de C. V. Cool Cargo, S. A. de C. V., as associated company 99.99% 82.00% 99.99% 65.02% 99.99% 99.99% 50.00% Domino’s Pizza stores Starbucks Coffee stores Popeye’s Restaurants Burger King Restaurants Domino’s Pizza stores Food distribution Transportation services The investment in shares of Cool Cargo are valued using the equity method, based on the audited financial statements prepared on the same accounting principles as those of the holding company (see note 6). (1) As mentioned in note 1, equity in this company will be 50% in 2005; therefore, as from that date the relevant investment will be recognized under the equity method. (c) Currency translation of foreign subsidiaries- The financial statements of the foreign subsidiaries included in consolidation 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 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 “Cummulative translation effect from foreign entity financial statements” in stockholders’ equity represents the effect of translation. (d) Presentation of prior year amounts- Figures of financial statements of prior years are expressed in pesos of same constant purchasing power, using an adjustment factor derived from NCPI. The indexes used in 2004 and 2003 were 1.0519 and 1.0397, respectively. (e) 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. (f) 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. Cost of sales represents the replacement cost of inventories at the time of sale and expressed in constant pesos as of the most recent year end. (g) Goodwill of subsidiaries and associated companies- Goodwill represents the excess of cost over fair value of net assets acquired. In determining these amounts, intangible assets acquired with no recoverable value are eliminated, and the remainder is adjusted using NCPI factors. Goodwill is amortized straight line over a 9-year period, beginning in the year following that in which it arose through December 31, 2004, in accordance with the changes in accounting standards. Beginning in 2005, goodwill will no longer be amortized and will be tested for impairment. (h) Property, equipment and leasehold improvements- They 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% 43 (i) Intangible assets- Trademarks represent payments made for the right to use the “Domino’s Pizza” trademark through out 2025, the “Starbucks Coffee” trademark through out 2021, the “Burger King” trademark through out 2024 and “Popeyes Chicken & Seafood” trademark through out 2042. Adjustment is made by applying NCPI factors to the historical cost; amortization is at an annual 5% rate. Pre-operating and leasehold improvement expenses relate to the opening of new points of sale in various zones, and are reported at adjusted value based on NCPI factors. Amortization over restated value is computed by the straight-line method at an annual 7.7% rate. (j) Impairment of long-lived assets property, equipment, leasehold improvements, goodwill and other intangible assets- The Company evaluates periodically the restated values of long-lived assets, property, equipment, leasehold improvements, goodwill and other intangible assets, to determine whether there is an indication of potential impairment. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net revenues expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated net revenues, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported in the balance statements at the lower of the carrying amount or realizable value. (k) Accruals- Based on management’s estimates, the Company recognizes accruals for those present obligations in which the transfer of assets or the rendering of services is virtually assured and arises as a consequence of past events, principally for services and other amounts payable to employees. (l) Seniority premium and other post retirement plans- 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. Other compensation to which employees may be entitled, mainly severance, are charged to operations as incurred. (m) Income (IT) and asset (AT) taxes, and employee statutory profit sharing (ESPS)- Provisions for IT and ESPS are charged to operations for the year as incurred. 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 credits (AT) carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 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. (n) 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. (o) Additional paid-in capital- Represents the excess of the payments for subscribed shared over their normal price. (p) Cumulative deferred income taxes- Represents the effect of the recognition of cumulative deferred taxes as of the date the accounting standard is adopted, which is reported in retained earnings. (q) Comprehensive financial results (CFR)- The CFR includes interest income and expense, foreign exchange gains and losses and monetary position gains and losses. 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. 44 (r) Revenue recognition- The Company recognizes revenue from the sale of goods when the products are delivered to the customer; service revenue is recognized when the services are rendered. The Company provides for returns and discounts. These provisions are deducted from sales. (s) 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. (t) 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. (u) Earnings per share- Earnings per share equal the year’s net income divided by the weighted average of outstanding shares during the year. (v) New accounting pronouncements- The Company has adopted the new accounting standards issued by the Mexican Institute of Public Accountants (IMCP) related to Bulletin B-5 “Financial Information by Segments”, Bulletin C-9 “Liabilities, Provisions, Contingent Assets and Liabilities and Commitments”, and Bulletin C-15 “Impairment of Long-lived Assets and Disposal” effective for fiscal years beginning on or after January 1, 2004 as well as Bulletin B-7 “Business Combinations” and Bulletin D-3 “Labor Obligations” which adoption is encouraged for 2004. The adoption of these Bulletins had no significant effect on the presentation of the Company’s financial information. NOTE 3. Foreign currency exposure- Monetary assets and liabilities denominated in U.S. dollars (dollars) as of December 31, 2004 and 2003 were as follows: Assets Liabilities Net liabilities Thousands of dollars 2004 2003 6,872 7,716 (844) 4,741 5,615 (874) The exchange rate of the peso to the dollar, as of December 31, 2004 and 2003, was $11.15 and $11.22, respectively. At February 28, 2005, the exchange rate was $11.1086. At December 31, 2004, the Company did not have foreign exchange hedge instruments. At December 31, 2004 and 2003, the Company had a very immaterial position of non-monetary asset and liabilities from origin abroad or which replacement cost may only be determined in dollars. Below is a summary of transactions carried out with foreign entities, for the years ended December 31, 2004 and 2003: Food purchases Equipment purchases Royalties Thousands of dollars 2004 2003 57,679 816 10,828 52,860 1,818 7,154 45 NOTE 4. Balances and transactions with associated companies- Accounts receivable as of December 31, 2003 relate to Operadora West, S. A de C. V and amounted to $35,864. Accounts payable related to Cool Cargo amounted to $1,853 and $1,918 in 2004 and 2003, respectively, included in accounts payable and accrued liabilities. During the year ended December 31, 2003, sales of food and supplies amounted to $95,743 and relate to Operadora West, S. A. de C. V. The contracted freight services related to Cool Cargo amounted to $13,614 and $12,167 in 2004 and 2003, respectively. NOTE 5. Inventories- Comprise the following: Food and beverages Containers and packaging Other Less allowance for obsolete items 2004 2003 $ 132,241 14,530 31,538 (2,279) 78,331 13,806 25,521 (4,201) $ 176,030 113,457 NOTE 6. 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. 2004 3,551 – 3,551 Equity 2003 2,128 72,316 74,444 $ $ Equity interest in the results of operations for the year 2004 1,423 – 1,423 2003 680 9,218 9,898 46 NOTE 7. Property, equipment and leasehold improvements- Comprise the following: Buildings Store equipment Leasehold improvements Transportation equipment Computer equipment Production equipment Office furniture and equipment Carried forward Brougth forward Less accumulated depreciation Land Installations in progress (*) $ $ $ 2004 2003 231,694 589,693 496,389 84,783 112,255 102,779 21,329 81,804 355,900 460,186 95,088 92,531 114,371 25,733 1,638,922 1,225,613 1,638,922 1,225,613 564,030 404,458 1,074,892 36,576 155,096 821,155 33,228 21,120 $ 1,266,564 875,503 (*) It relates primarily to the opening of food businesses and a distribution center, which will be completed in 2005. Certain of the loans mentioned in note 11 are secured by some of the properties and equipment. NOTE 8. Goodwill of associated and subsidiary companies- As of December 31, 2004 and 2003, goodwill of associated and subsidiary companies is comprised as follows: Operadora West, S. A. de C. V. Operadora DP de México, S. A. de C. V. Segurapido, S. A. de C. V. Cool Cargo, S. A. de C. V. Exim del Caribe, S. A de C. V. (Exim) * Less accumulated amortization (*) Goodwill written-off as a result of the sale of subsidiary Exim (note 10). NOTE 9. Intangible assets- Intangible assets as of December 31, 2004 and 2003 are analyzed as follows: Balances at December 31, 2003 Acquisitions Less accumulated amortization Balances at December 31, 2004 47 $ 2004 44,887 17,587 16,675 164 – 79,313 15,222 $ 64,091 2003 25,475 17,587 – 164 46,587 89,813 33,732 56,081 Trademarks Pre-operating expenses $ $ 245,818 51,234 (100,694) 55,716 31,142 (25,215) 196,358 61,643 Alsea increased its investment in trademarks mainly due to the incorporation of the Burger King trademark, through the subsidiary Operadora West, S. A. de C. V., for the rights to open “Starbucks Coffee” stores and the acquisition of the “Popeyes Chicken & Seafood” trademark. Pre-operating expenses increased primarily as a result of the inclusion of Operadora West, S. A. de C. V. in consolidation. NOTE 10. Discontinued operations- In January 2003, the Board of Directors decided to spin-off the subsidiary Exim del Caribe, S. A. de C. V. (Exim) since it was viewed as a non-strategic entity. Accordingly, the investment in Exim was adjusted at the estimated realizable value by charging $20,169 to operations in 2003, which is included in gain (loss) from discontinued operations in the statement of income for that year. In September 2004, Alsea sold the shares recording a gain of $9,427 (note 8). NOTE 11. Bank loans and medium-term promissory note- Bank loans comprise of the following: Unsecured loans Secured loan (note 7) Less current installments Long-term debt Maturity in Average annual interest rate 2004 - 2005 2003 - 2005 6.95% - 11.95% $ 8.75% - 11.45% 2004 87,709 7,817 95,526 70,454 $ 25,072 2003 34,053 11,079 45,132 25,199 19,933 Bank loans establish certain restrictive covenants, the most significant refers to the prohibition from pledging or disposing of fixed assets. As of the date of the financial statements all such covenants have been complied with. Medium-term promissory note- In 2004, the Medium-term promissory note was fully paid. NOTE 12. Accruals- Accruals comprise of the following: Balances at December 31, 2003 Increases charged to operations Payments Write-offs credited to operations Balances at December 31, 2004 Salaries and other to employee benefits 22,148 45,215 (32,945) (608) Other Total 15,764 74,951 (69,677) (155) 37,912 120,166 (102,622) (763) 33,810 20,883 54,693 $ $ 48 NOTE 13. Comprehensive financial results- Comprise the following: Interest expense, net Foreign exchange gain (loss), net Monetary position (loss) gain NOTE 14. Other expenses, net- Comprise the following: Allowance for impairment (Brazil operation, note 1) Goodwill and business divestiture (*) Disposition of fixed assets, net Other, net 2004 (3,371) 1,594 (222) 2003 (5,282) (144) 747 (1,999) (4,679) 2004 2003 (28,055) (22,914) (20,089) (943) – (21,187) (20,251) 8,544 (72,001) (32,894) $ $ $ $ (*) In 2004, the goodwill arising from the acquired Telepizza Group companies was charged to income in conformity with Bulletin B-8 “Valuation of Investment”. Business divestitures related to DP6, Ltda., and Para Servirle a Usted, S. A. de C. V. are reported in 2003. NOTE 15. 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, 2004 and 2003 the Company had a net consolidated taxable income of $116,841 and $81,681, respectively. The expense attributable to income before IT and ESPS differed from the amount computed by applying the Mexican rate of 33% in 2004, as a result of the following: Expected IT rate Non-deductible expenses Goodwill write-off and amortization Effects of inflation, net Effects of enacted changes in tax laws and rates Investment impairment of subsidiary Other, net Effective consolidated IT rate 33% 1% 4% 2% (1%) 5% (2%) 42% 49 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities, at December 31, 2004 and 2003, are presented below: IT 2004 2003 Deferred tax (assets) liabilities: Allowance for doubtful accounts Accruals Trade receivable advances Seniority premium Net operating tax loss carryforwards Recoverable AT Inventories Property, equipment and leasehold improvements Other assets Prepaid expenses Net deferred tax liability Income tax payable on retained earnings $ (1,597) (6,956) (2,568) (474) (43,466) (4,198) 52,903 54,117 53,705 4,306 105,772 1,133 Liability recognized on the balance sheets $ 106,905 (2,074) (4,487) (2,449) (345) (1,687) (4,020) 36,413 26,859 43,215 1,721 93,146 13,995 107,141 The deferred income tax balance at beginning of year from Operadora West was $28,880. IT and ESPS charged to income is analyzed as follow: Current IT and ESPS Deferred IT and ESPS Total 2004 IT $ $ 129,348 (11,856) 117,492 ESPS 1,380 228 1,608 IT 45,172 39,625 84,797 2003 ESPS 1,204 (401) 803 The Company has tax loss carryforwards of $163,978, which, updated by inflation, may be carried forward to offset taxable income of the ten succeeding years. In conformity with the tax reforms published on December 1, 2004, the rates were changed to 30% for 2005, 29% for 2006 and 28% for 2007 and thereafter. As a result of these changes, during the years ended December 31, 2004 and 2003 the Company recognized a decrease in net deferred tax liabilities of $10,577 and $543, respectively, which was credited to the results of operations for the year. Under the Law in force through December 31, 2004, inventory purchases were deductible when made, regardless of the time of sale, which resulted in the deferred tax liability shown above. The new tax law, effective beginning in 2005, provides that inventories will be tax deductible when sold, establishing transition provisions to tax the inventory balance at December 31, 2004, over periods depending on the circumstances of each entity. Furthermore, the tax consolidation will be determined by increasing from 60% to 100% the investees’ and holding company’s equity subject to consolidation. 50 NOTE 16. Stockholders’ equity- The principal characteristics of stockholders’ equity are described below: (a) Structure of capital stock- In December 2004, the stockholders agreed to increase the capital stock by $3,011, issuing 1,505,621 common single series, class II shares, with no par value. Additionally, a premium on issued stock amounting to $24,843 was declared. As of December 31, 2004, 1,219,067 shares have been paid in. In April 2004 and 2003, dividends were declared in the amount of $75,737 ($73,095 historical) and $46,585 ($42,815 historical), respectively. 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. At December 31, 2004 the subscribed fixed and variable capital stock is represented by 124,222,344 common, registered shares with no par value, are as follows: Number of shares Description 122,289,370 2,358,155 (425,181) 124,222,344 Fixed capital stock Variable capital stock Repurchased shares Nominal capital stock Inflation adjustments to remeasure accumulated inflation (note 2n.) $ Amount 244,579 4,716 (850) 248,445 171,218 Capital stock at December 31, 2004 $ 419,663 The National Banking and Securities Commission established a procedure enabling companies to repurchase their own shares on the market. A “stock repurchase reserve”, chargeable to retained earnings, must be created for that purpose. In 2004, the Company re-issued 6,234,260 shares which amounted to $68,810. The Company’s own available repurchased shares are reclassified to the contributed capital. (b) Restrictions on stockholders’ equity- I. Five percent of net income for the year must be appropriated to the statutory reserve, until it reaches one-fifth of capital stock. As of December 31, 2004, the statutory reserve amounts to $21,507. II. Dividends paid out of retained earnings will be tax-free to the extent such dividends arise from the CUFIN (tax basis retained earnings account). Distributions in excess of these amounts are subject to a 30% income tax rate on the amount resulting from multiplying the dividend paid by factor 1.4286. The tax incurred on non-CUFIN dividends will be payable by the Company and may be offset against the corporate IT for the two succeeding years. NOTE 17. Commitments and contingencies- Commitments: (a) The Company rents facilities in which its stores and distribution centers are located, as well as certain transportation and store equipment under definite term lease agreements. Rental expense aggregated $142,031 and $101,482 in 2004 and 2003, respectively. Rentals were established at fixed prices and increased annually based on the NCPI. (b) The Company has some commitments related to the provisions set forth by the contracts for the trademark acquired (note 2i). (c) The Company has some commitments arising in the normal course of business as a result of raw material supply agreements, some of which provide for contractual penalties for nonperformance. Contingent liabilities: 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. 51 NOTE 18. Financial information by segments- The Company is made up of five major operating divisions, namely: Pizza sales services (Domino’s Pizza), Coffee sales services (Starbucks Coffee), Hamburger sales services (Burger King), Distribution Services and other businesses (the latter including Popeyes Chicken & Seafood); all of them under same management. The Company’s segments constitute strategic business units that provide different products and are managed separately as different technology and marketing strategies are required by each business. Segment information is as follows: Division Dominos Division Starbucks Division Burger King Division Distribution Other Eliminations Consolidated 2004 2003 2004 2003 2004 2004 2003 2004 2003 2004 2003 2004 2003 Revenue from: Third parties Inter-business $ 2,018 3 1,913 102 192 – 80 – 481 – 917 906 910 676 45 670 6 126 (64) (1,579) (38) 3,589 – (904) 2,871 – 2,021 2,015 192 80 481 1,823 1,586 715 132 (1,643) (942) 3,589 2,871 Operating costs and expenses Depreciation and amortization 1,723 107 1,752 117 170 20 84 8 403 12 1,656 22 1,440 25 751 18 Operating income $ 191 146 2 (12) 66 145 121 (54) Other income statement items Net consolidated income 112 12 8 (1,642) (2) (931) 3,061 177 (1) 2,457 161 1 (10) 351 253 (201) (125) 150 128 Assets 884 1,212 130 66 297 452 528 1,670 1,570 (1,662) (1,788) 1,771 1,588 Investment in productive assets: Investment in associated companies Investment in assets Total assets Total liabilities $ $ $ – 38 – 57 – 73 – 70 – 113 3 6 2 7 – 131 74 – – – – – 3 361 76 134 922 1,269 203 136 410 461 537 1,801 1,644 (1,662) (1,788) 2,135 1,798 276 405 29 20 115 169 192 328 434 (319) (507) 598 544 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 95% of this segment’s total revenues. NOTE 19. Subsequent event- In February 2005, criterion confirmation was obtained from the Ministry of Finance and Public Credit (SHCP) regarding the merger of Operadora West, S. A. de C. V. (note 1). Had the merger been effective, the stockholders’ equity and profit of the majority stockholder would have increased to the same extent as the minority interest would have decrease. Lic. José Rivera Río Rocha Corporate Finance Director C.P. Alberto Torrado Martínez General Director C.P. Abel Barrera Fermín Corporate Comptroller 52 n o t s u o H l , r o o c h t r a E : g n i t n i r P . x m m o c 3 o n e i . l i m : n g i s e D Investor Information Headquarters Alsea S.A. de C.V. Yucatán 23 Hipódromo Condesa 06170, Mexico D.F. Tel (55) 52 41 71 00 Information on Alsea’s stock and medium-term promissory note The shares of Alsea S.A. de C.V., single series, have been traded on the Mexican Stock Exchange (Bolsa Mexicana de Valores or BMV) since June 25, 1999. Likewise, the company’s public offer of the medium-term promissory note took place on August 25, 2000. Reference symbol for the stock BMV ALSEA* Reference symbol for the medium-term promissory note BMV ALSEA P00 Contact María Appendini Marino Manager, Investor Relations mappendini@alsea.com.mx Tel.: (55) 52 41 71 58 www.alsea.com.mx Independent Auditors KPMG Cárdenas Dosal, S.C. Bosque de Duraznos 55 P.J. Bosques de las Lomas 11700, Mexico D.F. Tel.: (55) 52 46 83 00 Fax: (55) 55 96 80 60 committed to continue celebrating... Alsea S.A. de C.V. Yucatán 23, Col. Hipódromo Condesa, 06170 Mexico, DF, Tel. 5241 7100 www.alsea.com.mx