Corporate governance

Transcription

Summary
Figures in millions of pesos at December 31st, 2007
2007
%
2006
%
Units sold
23,781
22,688
4.9
Total revenues
9,257.3
100.0
8,786.2
100.0
5.4
Operating income
2,065.1
22.3
1,982.8
22.6
4.1
Net income
1,368.6
14.8
1,387.7
15.8
–1.4
EBITDA
2,169.9
23.4
2,074.1
23.6
4.6
Total assets
13,718.9
12,093.4
13.4
Total liabilities
5,130.2
4,721.6
8.7
Shareholder equity
8,588.8
7,371.8
16.5
Land bank investment
4,252.3
3,845.9
10.6
Land bank (in millions of m2)
34.6
36.4
–4.9
Revenue mix
by housing products
Residential
5.2 %
6.1%
Others
24.2% Progresiva
35.6%
Middle income
Affordable
entry-level
29.0%
Competitive advantages
• We are a vertically integrated company taking
full advantage of economies of scale.
• Our 34.6 million m2 land bank is located in strategic zones.
• ARA boasts 31 years of experience in
Mexico’s housing-development industry.
• Eight out of 11 board members are independent,
and ARA maintains international standards
of best corporate governance practices.
• Extensive geographic and product diversification.
• A highly experienced management team.
• Operations in the 18 states with the greatest
economic and demographic development.
• Strong financial position with the flexibility to
adapt to changes in both the housing market
and mortgage credit flows in México.
• The fifth largest producer in México of concrete,
all of which the company consumes directly.
• The most solid balance sheet in the industry.
Contents
Summary of financial results
1
Celebrating the future
5
Socially responsible company
11
15
About us
21
Our business
35
Our products
49
Operating and financial performance
55
59
Letter to our investors
Board of directors
Planning and execution with a strategic vision
Human capital
Corporate officers
Regions
Residential department
Regional officers, residential department
Fundación ARA
Land bank
This is our business
Construction
Outfitting
Marketing
Shopping malls division
Rialta residential developments
Unit sales
Consolidated financial statements
Los Álamos / Paraíso Country Club
Celebrat
ting
the
future
Celebrating the future
6
Ing. Luis Felipe Ahumada Russek
For 31 years Consorcio ARA has been part of the housing development industry in Mexico. We have
accumulated an impressive history of achievements and dramatically expanded as a company, but
the challenges we face have increasingly broadened as have our commitments and responsibilities
now that we have emerged as one of the preeminent actors in Mexico’s urban transformation.
In recent years, the Mexican economy has achieved sustained growth and a stable macroeconomic
environment in which inflation has trended lower at the same time as both employment and median
wages have risen.
Structural reforms including the changes to Mexico’s tax code that Congress approved last fall have inspired
investor confidence, significantly lowered country risk and allowed Standard & Poor’s to raise the country’s
sovereign debt ratings.
The Ministy of Finance and Public Credit (Secretaría de Hacienda y Crédito Público) projects further
improvements along these lines. More specifically, México is expected to continue to enjoy controlled
inflation, stable economic growth linked in part to U.S. production, declining real interest rates and a
moderate yet sustained expansion of formal economy.
In this context, the country’s building industry looks both solid and competitive. In contrast to other countries,
Mexico’s housing sector can look to years of robust growth. Estimates for the period 2007-2020 anticipate
the formation on average of 800,000 families a year while a stable job market will facilitate their acquiring a
home of their own. Future home buyers will likely be concentrated among people between 25 and 50 years
of age, a demographic group that is expected to grow from 38.5 million in 2007 to 44.4 million in 2020.
7
Ing. Germán Ahumada Russek
Letter to our investors
The federal government has set its sights on helping to issue six million mortgage credits during
the current presidential administration (2006-2012). Its housing policy seeks to double the
achievements of the past administration, deepen a focus on low-income families, implement
an aggressive subsidy program and work through new mortgage financing arrangements that
are expected to contribute to infrastructure development and formal economy growth.
Today, the housing industry in México is undergoing a sweepingly broad process of development
powered by growing demand and an unprecedented supply of mortgage credits that have
made it possible for an ever increasing number of people to acquire a home of their own.
We can anticipate continuing support for the housing industry on the part of the federal government
and Consorcio ARA is prepared to take full advantage of it, supplying our customary quality products,
homes, developments and infrastructure to build the sort of communities in which people take pride.
Although we have practically overcome the hurdle of assuring the credit flows necessary for the public to
acquire housing, we recognize that both the country and the industry face new challenges and needs. We
are up to the task and respond as we have always done: with responsibility, flexibility and business vision.
Fully aware that the industry to which we belong is highly sensitive to economic and socio-demographic
changes, we comprehend the need for constant innovation. We respond to the challenge by fine-tuning
our operations and achieving solid results with a combination of risk management and diversification.
8
Paraíso Country Club Project
We are prepared to remain one of the best and most competitive housing developers
in the Mexican market.
We own the housing industry’s best placed land bank. In 2007 we expanded it to include the largest
extension of land we have ever acquired, strategically located in Huehuetoca, in Estado de México.
This is the site of a sustainable macro-city that we are developing with top-rate outfitting and
infrastructure, and all the facilities a transit oriented, master-plan new town requires including
shopping centers, bus terminals and schools. We are also actively working with government officials
in the construction of infrastructure for the suburban train whose first leg will run from Buenavista in
the heart of Mexico City to Cuautitlán with a future extension running all the way to Huehuetoca.
We combine quality construction techniques with solid service and a comprehensive
infrastructure network. Our developments come with the outfitting essential to highly
appealing, comprehensive real-estate products such as Las Américas, which now boasts the
fourth largest shopping center in the metropolitan area, or Paraíso Country Club, whose
status as a golf-course community reflects the scenic natural beauty of its location.
As part of our strategy of product diversification, we have set up a special department for
the construction and marketing of residential products under the name Rialta, building
on the prestige that our flagship brand Casas ARA has sustained for 31 years as one of
the favorite choices of those looking to acquire enduring home equity value.
In recent years we have achieved our strength, solidity and reliability by strategically combining
several factors in addition to the organic growth of Mexico’s housing industry: our robust
operating performance and growth potential, our integral business model, geographic and product
diversification as well as an efficient use of capital and our highly seasoned management team.
Our proven ability to respond to a changing environment, extensive knowledge of the
business and the customer preference we have obtained on the strength of the quality
products and services we offer, have created and sustained long-term company value.
Our code of conduct and work ethic guides us in our decisions about what we must do
and just how to accomplish it. Our general principles and long-standing record of strictly
ethical behavior says a great deal about the company we are building. Our code of conduct
defines the sort of criteria and deeds that assure the integrity and transparency of each
action, and is fully reflected in each individual, in our family and our organization.
We end 2007 with a spirit of renewal. As we embarked on our corporate restructuring at the
beginning of the year, we redefined ourselves as a company that operates throughout our nine
regions and our residential department in keeping with centrally defined policies and a firm
commitment to honesty, ethics and transparency at all levels of responsibility, and with human
capital that finds Consorcio ARA the best home in which to perform, develop and grow.
A company in which cutting edge technology assures timely access to information and which
employs standards that allow us to assure continuous control and improvement: a focus on results.
Our financial strength allows us to provide investors with a solid company concerned with
observing best practices of corporate governance in maintaining and improving on our
ability to generate value added. We are a publicly traded company with sustained growth
whose flexibility, experience and responsibility are a source of confidence for our investors.
We wish to express our deep gratitude for the confidence you have expressed in us.
We begin the first year since our internal restructuring as a company that is both forward looking
and true to its roots and trajectory.
Ing. Germán Ahumada Russek
Ing. Luis Felipe Ahumada Russek
9
Colinas de Chapultepec
A socially res
sponsible
company
A socially responsible company
A socially responsible company
In 2007 we were recognized for a second time
by the Mexican Center for Philanthropy as a socially
responsible company (ESR), a distinction we have
incorporated as an essential component of our
corporate image.
Being a socially responsible company involves
promoting best business practices as a means
of creating social value. It means linking our
business mission with the promotion of a culture
of responsible competition, fighting corruption
both from outside and within, creating circumstances
that are conducive to a healthy working conditions,
and respecting nature. It involves investing the
time, talent and resources into actions that raise
the quality of life in our communities. In short, it
involves all the tasks necessary to win recognition
from our customers, employees and shareholders
of our social commitment and performance.
Paraíso Country Club
12
Obtaining the ESR seal of approval meant
compliance with 120 indicators ranging from the
quality of the company’s internal organization,
defense of the environment, observance of a code
of ethics and involvement with the community on
the basis of our business outlook. It also implied
respect for values such as honesty, commitment, the
development of human capital and service quality.
Our sense of social responsibility is manifest in the
many ways we tailor our housing developments to
assure that they emerge as vibrant and truly livable
communities, fully equipped with pedestrian- and
public-transit-accessible necessities such as schools,
recreational areas, markets and other commercial
properties, hospitals and the full range of
infrastructure that thriving communities require.
We are fully aware of the importance of protecting
and preserving the environment and of taking steps
to fully mitigate the ecosystem impact that economic
development may imply. For example, we build
suction pits for handling overflows of fluvial runoff
or sewerage water to avoid flooding.
Paseos del Río
All of our developments have underground power,
phone and cable lines which are more esthetically
pleasing and safer for residents, who also enjoy
the health and safety benefits, and convenience
of the potable-water wells and residual-water
treatment plants we install in most all of our
communities.
13
In the Northeast Region (Región noreste), in Paseos del
Roble we are developing a pilot project of eco housing with
sustainable features such as high energy efficiency combined
with thermal and visual comfort.
Other initiatives include a policy of donating land for
recreational and green spaces including reforestation efforts.
For example, at our Paraíso Country Club project in the
state of Morelos we have planted appropriate vegetation
and placed a geomembrane liner along the banks of a
local river for purposes of erosion prevention. Our Rancho
Bellavista project, the only environmentally responsible
development in the state of Querétaro, includes an Ar-D dual
water treatment plant that makes possible the recycling of
greywater for domestic use and for irrigating green spaces.
We implement social and environmental responsibility
programs tailored to each region’s specific characteristics.
In synthesis, we can proudly state that Consorcio ARA’s
profitability is underpinned by our social, environmental and
human commitments.
Quinta del Bosque
Corpora
ate governance
In 1996 Consorcio ARA became one of the first housing development
companies in México to begin trading publicly. That pioneering initiative
helped us to consolidate as a company that fulfills and surpasses the
requirements set by Mexican laws regulating publicly traded companies.
We work in compliance with international standards of corporate governance and have
adopted recommendations from the code of best practices of corporate governance
such as reporting to investors the extent to which we conform to those precepts.
Eight out of 11 members of our Board of Directors are independent,
bringing to the boardroom expertise from a range of backgrounds and
specializations. Internal control and auditing mechanisms have been put
into place that assure a reliable and secure handling of financial information
under the concepts of immediacy, timeliness and simultaneity.
16
We guarantee a proper handling of our financial information, work
to maximize company value and strive to reinforce the confidence
that our shareholders have deposited in Consorcio ARA. In short,
we are a value company with a long range outlook.
17
18
Auditing Committee 2
Félix Gavito Marco*
Andrés Massieu Berlanga*
Antonio Franck Cabrera*
Roberto Danel Díaz*
Chairman
Full member
Full member
Full member
Finance and Planning Committee 3
Election / ratification
of the heads of the Auditing and
company-practices committees
In keeping with the decisions of the combined Ordinary
and Extraordinary Shareholders’ Meeting of October 19,
2006, Mr. Félix Gavito Marco was re-elected as Chairman
of the Auditing Committee, and Mr. Roberto Danel Díaz
as Chairman of the Company Practices Committee.
*Independent board members
**Internal board members
$
Equity board members
Marcos Ramírez Miguel*
Germán Ahumada Russek
Luis Felipe Ahumada Russek
Germán Ahumada Alduncin
Pedro Alonso Angulo*
Luis Ramón Carazo Preciado*
Jean Louis Guinchard*
Committee on Business Practices 4
Chairman
Full member
Full member
Full member
Full member
Full member
Full member
Full member
Full member
Chairman
Full member
Full member
Full member
Full member
In compliance with the decisions of the combined Ordinary and Extraordinary Shareholders’ Meeting of October 19, 2006
According to the decision of the Board of Directors’ Meeting of July 20, 2006
According to the decision of the Board of Directors’ Meeting of October 19, 2006
4
Idem
1
2
3
19
Board of directors
Germán Ahumada Russek**$
Vicente Naves Ramos**
Luis Felipe Ahumada Russek**$
Luis E. Ayestarán Escudero**
Germán Ahumada Alduncin**$
J. Sacramento Soto Solís**
María Cristina Hernández Trejo*
Eugenio Riveroll Picazo*
Manuel Gutiérrez García*
Félix Gavito Marco*
Lorenzo Lucas Sánchez*
Manuel Campos Spoor*
Marcos Ramírez Miguel*
Raúl Robledo Tovi*
Chairman
Vice Chairman
Voting board member
Voting board member
Voting board member
Voting board member
Voting board member
Voting board member
Voting board member
Alternate board member
Luis Federico Moreno Treviño*
Jean Louis Guinchard*
Francisco Javier Lomelín Ayala*
Voting board member
Secretary
Antonio Hugo Franck Cabrera*
Voting board member
Ricardo Maldonado Yáñez
Lorenza K. Langarica O’hea
Pro-Secretary
1
About
us
About us
About us
We are leaders in Mexico’s housing industry. During our 31 years of work we have built more
than 201,000 homes for more than 800,000 people and have generated more than P$70 billion
in revenues and close to P$10 billion in profit. We saw the beginning of our third decade of
existence as an opportunity to undertake the consolidation process from which we emerged at
the end of 2007 as a company with reinforced foundations, a refreshed entrepreneurial culture
and a totally new operating structure. We are ruled by a series of values directly linked to a code
of conduct and work ethics. We have attracted the best talent and retain the finest personnel.
However, our process of change is far from over as we prepare to emerge as the most reliable,
profitable and innovative housing developer in Latin America.
Planning and execution
with strategic vision
We employ modern tools of strategic planning. With our sights firmly set on meeting our
long-term goals, we are guided by a clearly defined mission. We work in a standardized fashion
that allows for continual improvements and benefits our customers. Those who purchase an ARA
home receive the best product available on the market and those who invest in our stock do so
with the certainty that they own a piece of a solid company.
22
In mid 2006 we decided to decentralize operations, leaving the corporate headquarters as a
normative body and turning operations over to local command. We carried through on that
goal by putting into place clearer and more precise planning, strong technical support through
which to control and track processes in keeping with the concept of business intelligence that
registers, considers and links all transactions throughout the productive cycle in each region
all the way from the acquisition of land through to planning entire developments, building
homes, developing infrastructure and urban outfitting, marketing and sales, titleing and most
importantly customers occupying their homes as the first step toward embarking on a new life
in a new neighborhood of their own. At that point the family ingredient converges with ARA’s
efforts to create homes.
23
Villas Playa Diamante
As of 2005 we launched ARA Net as our enterprise resource planning system (ERP), integrating and managing
operations and processes throughout the five business cycles:
1. Planning
2. Construction
3. Marketing
4. Technical
5. Administrative
This system links planning with construction, and the latter with sales at each development. It also supplies us with
reliable, detailed, and timely information with optimally secure access.
Our strategic planning involves technologies that allow us to control and measure developments as a path toward
improvement. However, neither of these two tools is useful without the asset that truly powers our business machinery:
human capital.
Human capital
We know that productivity, profitability, growth and competitiveness depend on a work force that is engaged and
passionate. We believe that the combination of talent and commitment to the business’ goals provides powerful
market advantages: the high performing human capital of Consorcio ARA underpins our results at all levels.
In 2007 we consolidated an organizational culture that provides recognition of our personnel’s strong performance,
honesty and loyalty. We work to attract, develop and hold onto those who contribute to our positioning as an industry
leader and to helping us to scale new heights.
During 2007, Infonavit began a sales-representative certification program providing
immediate benefits in customer care and in both simplifying and streamlining the entire
sales process. Consorcio ARA has certified 80% of its sales representatives and has also
launched a valuation and training program for mid-level members of our sales staff.
The goal we have set for 2008 is to implement a talent retention effort and sustain
our program for recognizing the performance of our 430 sales representatives on a
quarterly basis.
Each member of the team that comprises our human capital, no matter what his or
her level in the organization, performs under standards that are based on a culture of
responsibility, commitment, organizational loyalty, honesty and ethical behavior. The
Regional Project Process we conducted during 2007 produced training sessions in all
departments and tested ARA’s strategies for talent retention and both personal and
professional development. One key sample of the success of that effort is the fact that
eight out of ten of our regional officers were chosen in house at ARA, our people.
New organizational culture
Attracting
and identifying
talent
Training
Career
development
and succession
plans
Organizational
and internalcommunications
development
Organization and
compensation
24
Strategic projects for our human capital
Objective
Benefits
Evaluation performance
Align individual effort
with strategic objectives
Set quarterly and yearly performance goals.
Measure each employee’s results with the aim of
recognizing their achievements and providing them
with feedback on opportunities for improvement.
Promote an open and honest dialogue
between managers and associates
regarding individual performance.
Decentralization of
human capital processes
Restructure the operation of
human capital, stabilizing key
processes nationwide
Achieve a more efficient handling of information
from our associates and assure greater agility
in each region’s response capabilities by
establishing uniform personnel data bases.
Expand response capacity relative to aspects
of human capital in each region.
Sales representative
certification
Strengthen the performance of our
sales representatives, professionally
certifying their skills as housing
advisory specialists
Standardize the technical knowledge of
managing credit instruments for the marketing
of housing. Help sales representatives to
develop into industry experts. Recognize
the results of sales representatives,
promoting their official certification.
25
Comaci
Germán Ahumada
Russek
Luis Felipe Ahumada
Russek
CEO
Housing
CEO
Shopping malls division
26
Vicente Naves
Ramos
Fernando Calderón
Nava
J. Sacramento Soto
Solís
Jaime del Río
Castillo
Operations
Director
Technical Area
Director
Administrative and Financial
Investor Relations
Director
Director
Corporate officers
Germán Ahumada
Alduncin
Co-Chief
Executive Officer
27
Sergio Villalobos
Gómez
Óscar Emiliano
González Montiel
Óscar López
Ruiz
Miguel Guillermo
Lozano Pardinas
Legal
Director
Marketing/Sales
Director
Human Resources
Director
Comaci*
Director
Shopping malls
Luis E. Ayestarán
Escudero
Alejandro Mota
Piña
Financial and New Business
Director
Development and Operation
Director
*
Concrete, machinery and construction molds
Regions
The heart and soul of the process of Consorcio ARA’s renewal has
been its reorganization into ten independent and self-sustaining
business units that meet the specific needs of their respective local
markets while efficiently and profitably reproducing the operating
model that the company has adopted and codified nationally.
We refer to this process that we fully put into place in 2007 as
Regional Project and it has proven to be the most efficient means
for managing our corporate strategy on a local level in a
standardized fashion.
We operate one residential and nine regional departments.
The regional officers are well versed in the markets in which
they work. Their participation, experience and dedication are
allowing us to develop an edge over our competitors locally.
The Regional Project has extended to all levels of the
Consorcio ARA organization and has allowed for a structural
change that implies the decentralization of such areas as
marketing and sales, human capital and construction.
28
Metropolitana norte
Noreste
Sur
Metropolitana oriente
Noroeste
Centro
Metropolitana poniente
Occidente
Bajío
29
Consorcio ARA initially entered the residential housing market using
the same methodologies and production guidelines that we employ in
the other housing segments where we compete. Since 2006, however,
we have managed a residential department for attending to the needs
and demands of this pinnacle market while always maintaining the
company’s quality standards.
With the authorization and backing of Consorcio ARA, the residential
department searches for land, handles building permits, develops
and outfits housing projects, assures the necessary infrastructure, and
handles marketing, advertising and sales strategies and operations.
We market our residential products under the Rialta brand. These
are architecturally superior projects located in high-economic-status
neighborhoods built with elaborately designed urban services that
include additional outfitting and amenities such as swimming pools,
tennis courts and in the case of our Paraíso Country Club development
in the state of Morelos, an 18-hole golf course.
The structural quality of a Rialta home is the same as that of traditional
ARA housing, but differs in the type of finishings, dimensions and
architectural concept they offer.
30
Héctor Vallín
Pérez
Deborah Reyes
Barba
Melitón Zavala
Casas
Edgar Villegas
Bustos
Regional Director
Región metropolitana
norte y oriente
Regional Director
Región noreste
Regional Director
Región noroeste
Regional Director
Región occidente
Regional officers
31
Ma. Concepción
Espinoza Chávez
Hugo Serrato
Ángeles
Daniel Cisneros
Magaña
Carlos Ávila
Viveros
Regional Director
Región sur
Regional Director
Región bajío
Regional Director
Región centro
Regional Director
Región metropolitana
poniente
Jorge Alduncin
Breadsley
Residential
Director
32
Hacienda Santa Fe
Since 2004, Fundación ARA has worked to raise the quality
of life, improve communities and help those traditionally
lacking access to mortgage credit while observing values
of respect, integrity, loyalty, service and transparency.
Fundación ARA delivers inhabitable basic dwelling
work, known as pies de casa, along with blueprints
with which the owners can eventually expand the
one-room, one-bathroom structure, to families whose
incomes are no greater than two and a half Mexican
minimum wages. In this way we provide them with a
dignified space in which to live, potentially serving as a
catalyst for their economic and social self-improvement.
These homes are built on land donated by federal,
state or municipal governments and local officials fund
services and urban outfitting for the neighborhood.
The homes that Fundación ARA distributes are
fully livable units, located in communities with
20% more room for developing green spaces and
pedestrian walkways, solar-powered public lighting,
treatment plants for greywater, sewage and drinking
water, parking space and a community center.
Fundación ARA is a non profit entity. We have entered
into strategic alliances with organizations such as
Provivah, a trust working to obtain housing for those
without access to mortgage loans, and Fundación
Televisa. With both entities we invest on an equal footing
and obtain funding and subsidies from the federal
government through the agencies Fonhapo or Conavi.
Fundación ARA
Summary
activities 2006-2007
States
Units
Chiapas
2,595
Michoacán
1,047
Veracruz
527
Hidalgo
460
Tamaulipas
200
Coahuila
38
Total
4,829
33
We locate circles of poverty and those places where it
is possible to achieve support from state and municipal
governments. We design a prototype in keeping with the
terms of the available subsidies, issue a public call and
choose from among respondents. Those chosen pay a
minimal down payment. We also distribute units specially
designed for those with special needs or capabilities.
During 2007 we were able to double the number of
Fundación ARA homes delivered. Our first project five
years ago was a 280-unit community; this year we
turned over more than 4,000 homes including 38 to
the relatives of those killed at the Pasta de Conchos
mine in the northeastern border state of Coahuila.
Most importantly, Fundación ARA is not separate from
the company; those of us who work for Consorcio
ARA also belong to the foundation, committed
to its work and growth. This is part of what it
means to be a socially responsible company.
Loma del Ángel
Our
business
Our business
Our business
We own the finest and best located
land bank of any company in Mexico’s
housing industry. And on that land we
use our own construction equipment
and produce all of our own cement,
cast-in-place wall and falsework.
We offer a wide range of products
integrated into planned communities
fully equipped with a wide range
of high quality infrastructure and
outfitting. We work through ten
business units that reproduce our
model, including ARA’s marketing
and sales strategies. We are a publicly
traded company that has been listed on
the Mexican Stock Exchange since 1996.
Business Lines
Housing Products
Regional Units
Business model
Share Service Units
Noroeste
Noreste
Centro
Metro poniente
Metro oriente
Metro norte
Bajío
Occidente
Strategic and tactical planning
Financial planning and control
Operative planning and control
Sur
Operative audits and quality control
Marketing and customer services
Human resources
Residential
Middle
Affordable
Progresiva
Shopping Centers
Technical and urban design
Land with services
Process design and information technologies
36
Ex-Hacienda San Francisco
Land bank
Because we know that the ARA value chain begins with
the land available for beginning a new productive cycle,
each year we acquire land in keeping with its prospects
for economic development. 2007 was no exception.
We incorporated into our land bank the largest piece
of land in our history: 4.3 million m2 in Huehuetoca,
Estado de México. The incorporation of that expanse
pushed our land bank to 34.6 million m2, enough to
build 150,807 master-plan units along with 3.4 million
m2 for commercial and touristic development.
A full 85% of the Huehuetoca land is approved for high
density development and the remaining 15% for industrial
use. It is also 100% urbanizable, thereby making possible
our plan to develop a sustainable master-plan new town.
This macro project includes 26,000 master-plan
homes, schools, green spaces and a wide range of areas
for sports, and other social and recreational activities;
healthcare and social-assistance facilities, water treatment
plants; shopping centers, supermarkets, small shops,
non-polluting small-scale industries, and infrastructure that
allows for easy access to a range of transportation options.
Land bank
at December 31st, 2007
Characteristics
Units
ARA presence
States in which we operate
Area
Equivalent to
18
34.6 million m2
150,807 master-plan homes
Capacity
%
Valle de México
64,317
42.65
Quintana Roo
29,847
19.79
Nuevo León
14,499
9.61
Veracruz
12,307
8.16
Baja California
5,955
3.95
Jalisco
5,723
3.79
Querétaro
4,251
2.82
Sonora
2,822
1.87
Guanajuato
2,614
1.73
Nayarit
2,582
1.71
Morelos
2,341
1.55
Puebla
1,456
0.97
Michoacán
954
0.63
Guerrero
445
0.30
Residential
3,191
Chihuahua
348
0.23
Middle-income
12,798
Distrito Federal
234
0.16
Affordable entry-level
68,394
Sinaloa
72
0.05
Progresiva
66,424
Tabasco
40
0.03
Total
150,807
100.0
0
20,000
40,000
60,000
80,000
37
The
end
St
Post-sales
services
De
live
ho ry o
usi
ng f
ar
38
t
Ma
res rket
ear
ch
ing
Plann d
an
and l ion
sit
acqui
of
n
sig ing
e
D us
ho nd nt
a me
lop
e
v
de
Housing construc
This is our business
ing
y
Suppl
ts
i
rm
Pe
Sa
ci
Coma
supply
les
ts
Title
ing
ion
ct
u
r
t
s
n
Co
ction and sales are closely coordinated
39
Construction
Until late 2006, construction activities were handled
by a central department. As a result of Consorcio
ARA’s restructuring into nine regions and a residential
department, construction is now managed locally.
Implementation of
Para Ser Mejor System
At the corporate level, a central construction department
is charged with defining procedural and process
norms for each region, as well as budgetary and
quality control, which includes project oversight and
supervision of the production trains under a system we
term Para Ser Mejor (literally in order to do better).
Para Ser Mejor allows us to guarantee that our products fully
comply with the highest quality standards assuring a work
culture based on time- and cost-saving building processes.
Thanks to this system we are able to verify that production
takes place in an orderly and ongoing manner, and to assure
coordination between marketing and building activities.
40
The construction corporate headquarters is also in charge
of the purchasing and distribution of materials for the
developments, calculating volumes and prices based on
authorized budgets and production plans, which allows
us to control purchasing prices and volumes, guarantee
low project inventory costs, and assure the quality of
our homes nationwide as we work with suppliers with
a long-standing reputation for quality and service.
Follow up
Planning
Control
Quality cycle
Freeing up of housing
Execution 2
Quality audit and
housing production chain
Execution 1
The vital parts of the building process consist of concrete,
machinery and construction molds (an area of production
known by its Spanish-language abbreviation Comaci), an
area in which we design and produce the cast-in-place
wall that best responds to our construction needs.
All of our ready mix production goes directly into
the building of Consorcio ARA developments. We
build concrete production plants at developments
with a need for more than 2,500 m3 a month. As
owners of the machinery used we have the ability to
quickly and efficiently respond to construction needs,
and assure a minimum impact on project costs.
As part of our constant development, we conduct an
every day search for new technologies with which to
improve construction processes, falsework and concrete,
as well as research and analysis on latest generation
materials that can help enhance prototype quality.
We employ sustainability criteria when seeking formulas
and materials so as to economize electric power usage and
optimize water and gas consumption. We have participated
in the Green Mortgage program and currently are
developing projects that implement alternative systems for
power generation and water recycling in our developments.
Comaci
41
Comaci
Concrete
production in 2007
Output m3
(in thousand)
% share
Cemex
7,500
25.0
Apasco
3,500
11.7
Lacosa
1,500
5.0
Cruz Azul
1,100
3.7
Consorcio ARA
718
2.4
PCM
700
2.3
Total
15,018
50.1
Total output
30,000
100.0
Source: Mexican Association of the Concrete Industry (AMIC)
Comaci
Outfitting
and infrastructure
Consorcio ARA is a company that is committed to the building
of master-plan new towns, communities and neighborhoods
with comprehensive construction plans fully outfitted with
urban infrastructure; all of these features enhance the
quality of life of inhabitants of Consorcio ARA communities.
An example in 2007 of our outfitting commitment was the
construction of the bridge at our Vistas del Río development
in the state of Nuevo León.
The bridge, with the capacity to handle double-trailer freight
trucks, served as a growth and modernization catalyst in the
municipality of Juárez in the Monterrey Area. It benefits
both Vistas del Río residents and all those looking for access
to safe, high speed roads from the area toward the northern
border city of Reynosa and toward Cadereyta.
Vehicular bridge, Vistas del Río, Nuevo León
Another outstanding example of our outfitting work is the
certification of Consorcio ARA as the country’s first housing
developer to build a last-mile outside plant network with
which to guarantee local residents support for the highest
quality broadband-based communications services.
Vistas del Río
vehicular bridge
meters
Las Américas, Los Álamos, Ex-Hacienda San Francisco, Real del
Valle, Colinas de San José and Hacienda Santa Clara are our
first developments to adopt this technology, which has been
certified by 3M® México.
Number of spans
Investment
Construction time
Vehicular bridge, Vistas del Río, Nuevo León
42
Once again Consorcio ARA is a market pioneer. Its
developments make the difference with the
implementation of this technological platform that allows
for the installation of telephony, cable TV, alarms, video
surveillance and Internet access, thereby providing an
additional source of value added for those who decide to
reside in an ARA home.
7
$ 28'713,000
6 months
Total longitude
210
Longitude of each span
30
Width of roadbed
9
Width of sidewalk
1.50
Average height
9.50
Maximum height
14.5
43
Hacienda Las Palomas
Marketing
and sales
During 2007 the sales department was decentralized into nine regions
and a residential department. The transition proved to be an unqualified
success throughout our operations from home sales to titleing.
At the corporate level, the marketing area is responsible for developing
process norms and oversight. It also sets the publicity and marketing
strategies which correspond to a central and standardized line even though
they are developed in keeping with the peculiarities of each region.
As part of these tasks, in 2007 we conducted studies for expanding the sales
and promotional points of our local operation so as to draw us closer to our
customers, and we develop direct marketing strategies in keeping with buyer
profiles. We have placed greater emphasis on our sales advisors engaging
in increased, systematic and aggressive promotion to provide attention at
work centers in their areas of influence and in potential sales locations.
The Regional Project has allowed us to respond more efficiently to customer
needs and to better develop products in keeping with their expectations.
The decentralization also allowed us to strengthen relations with financial
and housing institutions in each region and as a result expand Consorcio
ARA’s local market share, develop an ability to quickly respond to buyers and
build close and solid ties with financial service providers in each locale. We
also began an analysis of how to industrialize the titleing process through
the development of a special technological platform and the segmentation
of the sales process, an initiative that we expect to consolidate during 2008.
Our goal is to assure that we stay competitive by offering the best
housing on the market with superb architectural design and distribution,
guaranteed quality, unbeatable infrastructure and finishings.
Rancho Bellavista
44
Shopping
malls division
Seven years ago we decided to expand into a new market niche linking housing with a broad variety of
community services, thereby expanding our original concept. Today, our shopping center program has
surpassed all expectations.
With all these innovations and changes, we have developed a new trend in the Mexican real estate
industry, that of master planned communities, which encompass housing, a full range of services, work
centers and social development. All these factors have had a significant positive impact in Consorcio ARA’s
developments. Inside and near the communities we have increased job opportunities, reduced traveling
times, and satisfied consumer needs. We have also delivered easier access to both recreational and leisure
activities. Of course, our growth has also increased significantly.
We have built an organization with a capable and responsible team that knows how to preserve our
values while it also stimulates change. We plan, design, and develop master planned communities with
the services and infrastructure needed to satisfy the needs of community members.
Eventhough we have faced a constantly expanding industry competition our capacity and creativity
have helped us achieve higher returns. These are not easy times, but we continue to make progress
as we redesign and adapt our model to meet new market demands. We conduct the necessary analysis
to define strategies, consolidate quality standards and in this way achieve better decision making.
We are alert to the needs of the consumers on whom we depend: they point us in the right direction,
we act as the helmsman.
We respond with high-impact projects such as Centro Las Américas, the fourth largest shopping complex
in the Greater Mexico City Metropolitan Area, located in the adjacent municipality of Ecatepec. Another
of our success stories is that of Plaza Oasis, in Tijuana, Baja California, which we began to develop in 2007
and for which both construction and leasing is almost completed.
45
Centro Las Américas
The combined gross leasable area (GLA) of Plaza
Oasis, Centro San Miguel, Centro San Buenaventura
and Centro Las Américas totals more than 130,000
sqm, making us one of the most important
shopping-center developers in México.
Visitor traffic at our four shopping centers also
suggests that these developments have emerged
as a favorite community venue, clearly recognized
by residents as one of the preferred and most
outstanding recreational locations in their
communities.
Our shopping centers have a major impact on
their setting. We can confidently state that we
remain at the forefront of the commercial property
industry in México, enhancing the quality of life in
our communities while providing superior homes,
commercial and recreational services, infrastructure,
urbanization and urban outfitting.
Most importantly, consumers recognize this fact,
making our developments more competitive and our
results increasingly stronger.
Thanks to the success of the shopping centers
we have built inside our housing developments,
Consorcio ARA looks to accelerate our growth
and expand our reach beyond these communities
to cities and plots of land with great commercial
potential. Today we stand as a consolidated firm
with dynamic strategies and with a firm industry
leadership expanding into the future.
Plaza Oasis
• We have leased a total of 22,055 sqm, or 84% of the gross
leasable area (GLA) to chains such as Comercial Mexicana,
Cinemastar, FAMSA, Solo un Precio and Peter Piper Pizza
• The weighted progress of construction reached 80%
by the end of 2007; only the movie complex and a 500
sqm sub-anchor store remain pending to complete
• Plaza Oasis is opening in stages; it is projected for a full
inauguration in July 2008
46
Annual
Gross
visitor traffic
leasable area (GLA)2
1
140,000
6%
120,000
6%
100,000
25,000,000
20,000,000
19,150,000
20,708,000
80,000
15,000,000
60,000
10,000,000
40,000
5,000,000
20,000
0
2006
2007
0
94%
94%
2006
2007
Leased
Available
1. This is calculated based on the parking lot vehicular inflows. We calculate 3.5 people per vehicle for Centro Las Américas and Centro San Miguel; Plaza Oasis data is from
November and December, following the opening of the Comercial Mexicana supermarket
2. Data on real estate belonging to ARA – DCD as part of its 50-50% joint venture with O’Connor Capital Partners; GLA at the end of each year
47
Strategic indicators
Centro
San Miguel
Centro San
Buenaventura
Fashion
Mall
Power
Center
Plaza
Oasis
Municipality or city
Cuautitlán Izcalli
Ixtapaluca
Ecatepec
Ecatepec
Tijuana
State
State of México
State of México
State of México
State of México
Baja California
Type
Community Center
Community Center
Regional
Fashion Mall
Regional
Power Center
Community Center
Mega Comercial
Mexicana
C&A, Coppel,
Rest. California
Bodega Aurrerá
Liverpool, Sears
Wal-Mart, Sam’s
N/A
Sanborn’s, Suburbia,
C&A, Yak
Office Max, Marti,
SportCity, Famsa
Mega Comercial
Mexicana
Famsa, Solo un Precio,
Peter Piper Pizza
Cinépolis (10)
N/A
Cinépolis (14)
N/A
Cinemastar (9)
Gross Leasable Area (GLA)
The entire complex (m2)
26,661
10,290
75,277
43,742
26,345
Gross Leasable Area (GLA)
ARA2 (m2)
26,661
10,290
46,161
14,066
26,345
Year of construction
2001
2006
2005
2005
2007
% ARA
50%
50%
50%
50%
50%
Anchor stores
Sub-anchor stores
Cinemas (number of screens)
Colinas de San José
Our
products
Our products
Our products
We are totally diversified in terms of the products we
offer the market: Progresiva, affordable entry-level,
middle-income and residential housing in both vertical
and horizontal arrangements. We not only offer the
best homes of any housing developer in México, we
are committed to working harder to improve their
surroundings, employ the technology necessary to
achieving sustainability and respect for the environment,
assure that a culture of home care and community
improvement takes hold from day one, and above all
improve the quality of life of those who choose to buy
an ARA home.
Our sales force offers the widest variety of financing
plans backed by government agencies such as Infonavit,
Sociedad Hipotecaria Federal, and Fovissste, as well as
mortgage facilities offered by commercial banks and
Sofoles.
A major new financing option is now available in the
form of Cofinavit, a product combining mortgage credit
from both Infonavit and either a bank or Sofol that can
be used to buy houses in any price range.
50
The list of master plan communities that we developed
during 2007 is led off by, in order of scale:
Ex-Hacienda Santa Inés
Real de San Martín
Real del Valle
Real de San Francisco
Misión San Juan
Paseos del Río
Palma Real
Lomas del Ángel
Prices in pesos
(MXN)
Construction
m2
Land
m2
Financing
Infonavit, Fovissste, SHF
Progresiva
200/250 thousand
35 / 45
50 / 90
251/400 thousand
46 / 70
60 / 120
401/1 million
71 / 160
96 / 200
Fovissste, SHF
Cofinavit, Bancos y Sofoles
more than 1 million
90 / 250
since 160
SHF, Bancos y Sofoles
Cofinavit
Middle-income
Residential
Infonavit, Fovissste, SHF
Bancos y Sofoles, Cofinavit
Rialta
residential developments
Total area
Total area of residential lots
164 hectares
since 450 m2
769
Number of lots
Area of cluster
houses with private pool
230 m2
Area of departments
51
204 m2 y 173 m2
Golf course
Hectares
Holes
67.5
18, par 72
Yards
7 thousand
Lakes
6
Teeing areas
5
Driving ranges
Villas Playa Diamante
300 yards
Other Rialta developments
• Quinta del Bosque
• Bosque Verde
• Real del Mar
• Rivera Country Club
Units sold
100
1.2
0.9
0.6
1.3
90
13.3
13.2
19.7
26.1
Residential
Middle-income
80
Percentage
70
60
74.3
62.3
44.4
33.0
50
40
30
20
Progresiva
10
0
11.2
23.7
34.3
39.6
2004
2005
2006
2007
1,916
4,504
7,781
9,419
Affordable entry-level 12,705
11,832
10,119
7,858
Middle-income
2,272
2,510
4,622
6,200
Residential
211
169
146
304
Total
17,104
19,015
22,668
23,781
Progresiva
52
Income
figures in millions of pesos at December 31st, 2007
100
3.2
90
1.6
4.3
5.3
6.0
3.2
6.1
5.2
22.0
23.1
29.5
35.6
62.6
57.2
41.2
29.0
80
Others
Residential
Middle-income
Percentage
70
60
50
40
30
20
Progresiva
10
0
6.3
13.9
20.8
24.2
2004
2005
2006
2007
Progresiva
406.7
1,014.8
1,829.5
2,237.8
4,029.0
4,178.0
3,612.8
2,680.2
Middle-income
1,417.3
1,689.2
2,593.9
3,291.8
Residential
389.1
315.4
278.2
479.5
Others
203.7
115.4
472.5
568.0
Total
6,445.8
7,317.8
8,786.2
9,257.3
53
Quinta del Bosque
Hacienda La Gloria
Operating and fina
ancial
performance
Operating and financial performance
56
Operating
and financial performance
Consorcio ARA is organized as a controlling company of its subsidiaries. It was founded in 1977 as
one of those firms and 11 years later, in 1988, it was established as variable stock corporation and
today stands as the most reliable developer in the industry.
During 2007, we reported P$9.257 billion in sales, 5.4 % greater than the preceding year. Our
P$2.717 billion gross income represented a 29.4% gross margin, at the same time as operating
income reached P$2.065 billion with a 22.3% operating margin. Lastly, net income totaled P$1.369
billion with a 14.8% net margin; our P$2.170 billion in EBITDA allowed for a 23.4% margin.
These numbers confirm our commitment to investors to sustain a healthy financial position
and efficient use of capital, keep meeting our growth targets, and constantly explore new
opportunities in the Mexican housing industry. Thanks to that commitment we managed over the
course of 2007 to expand total assets 13.4%, shareholder equity 16.5% and total liabilities by a
mere 8.7%
Cost bearing liabilities ended 2007 at P$1.804 billion (bank loans plus financial leasing), equal to
21.0% of shareholder equity, and our net cash position totaled P$119.6 million. Our low debt
level compared to that of other homebuilders affords us greater options and room to build on
this competitive advantage to the benefit of the company and our investors.
Our moderate financial leverage, conservative financial positioning, efficient operating processes
and proper degree of liquidity make Consorcio ARA one of the housing developers with the
industry’s best market response capacity.
We stand out among publicly traded housing developers in México for many reasons including
our financial strength and flexibility, and greater return on assets. We are the only homebuilder
in México that consistently pays out dividends.
57
Consorcio ARA boasts the highest credit rating in
Mexico’s housing industry. Moody’s Investors Service
has rated us Ba2 (global scale, local currency) and
A2.mx (México national scale), while Standard & Poor’s
rates us mxA+ (México national scale –CaVal-).
We have consolidated while sustaining the company’s
long term value thanks to our deep knowledge of the
business, operating strength, flexibility and ability to
respond to a changing environment. Over the past 11
years this performance has won the preference of our
investors, who have learned to trust ARA.
2005
2006
2007
Dividends per share*
0.1075
0.95
0.1528
Price per share*(1)
$8.38
$11.25
Yield
1.28%
8.44%
$18.29
0.84%
* In nominal pesos with data adjusted for the share split of 2005-2006
(1)
At January 1st of the previous year
Our operating strength
• Flexibility in the face of the ever changing availability of financing
• Maximization of the land bank by constantly evaluating strategic
alternatives for strengthening margins
• Comprehensive and innovative plans for dedicated housing and
commercial properties, and for the sale of lots with services
• Reduced operating risks
• Geographic and housing-product diversification
• Coordinated production and sales cycle
• Improved data-management platform that provide real-time
access to operational and financial information
Consorcio ARA, S. A. B. de C. V. and Subsidiaries
Consolidated Financial Statements
for the Years Ended December 31st, 2007 and 2006, and
Independent Auditors’ Report Dated March 18st, 2008
Independent Auditors’ Report
and Consolidated Financial Statements 2007 and 2006
Independent Auditors’ Report
60
Consolidated Balance Sheets
61
Consolidated Statements of Income
62
Consolidated Statements of Changes in Stockholders’ Equity
63
Consolidated Statements of Changes in Financial Position
64
Notes to Consolidated Financial Statements
65
Independent Auditors’ Report to
the Board of Directors and Stockholders
of Consorcio ARA, S. A. B. de C. V.
We have audited the accompanying consolidated balance sheets of Consorcio ARA, S. A.
B. de C. V. and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the
related consolidated statements of income, changes in stockholders’ equity and changes
in financial position for the years then ended, all expressed in thousands of Mexican
pesos of purchasing power of December 31, 2007. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in Mexico. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement and that they are prepared in accordance with Mexican Financial
Reporting Standards. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing
the financial reporting standards 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.
60
In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Consorcio ARA, S. A. B. de C. V. and subsidiaries as
of December 31, 2007 and 2006, and the results of their operations, changes in their
stockholders’ equity and changes in their financial position for the years then ended in
conformity with Mexican Financial Reporting Standards.
The accompanying consolidated financial statements have been translated into English
for the convenience of users.
Galaz, Yamazaki, Ruiz Urquiza, S. C.
Member of Deloitte Touche Tohmatsu
C. P. C. Miguel Angel Andrade Leven
March 18, 2008
Consolidated balance sheets
As of December 31, 2007 and 2006
(In thousands of Mexican pesos of purchasing power of December 31, 2007)
Assets
2007
2006
Current assets:
Cash and cash equivalents
$
220,053
$
231,093
Financial investments held-to-maturity
1,703,481
1,902,679
Trade accounts receivable - Net
4,424,853
3,652,097
Due from equity method investees
Inventories
Other current assets
Total current assets
Long-term trade accounts receivable
Golf club memberships available-for-sale
Notes receivable from equity method investees
Long-term land held for development
Employee retirement obligations intangible asset
Investments in equity method investees
3,461
4,944,213
4,066,274
219,353
137,661
11,517,858
9,993,265
33,308
____
201,742
____
183,973
172,523
1,038,247
1,229,026
9,590
10,920
45,481
40,850
688,743
646,814
$13,718,942
$12,093,398
$
$
Property, machinery and equipement - Net
Total
5,905
Liabilities and stockholders’ equity
Current liabilities:
Notes payable to financial institutions
55,000
____
Current portion of long-term debt
281,429
Current portion of capital lease obligations
109,842
92,986
Trade accounts payable
339,848
463,113
Accrued expenses and taxes, other than income taxes
504,353
435,194
Advances from customers
180,364
392,340
Income tax payable
8,976
133,279
Statutory employee profit sharing
1,980
2,294
1,481,792
1,645,200
1,252,262
844,277
Total current liabilities
Long-term debt
Long-term trade accounts payable for land
Capital lease obligations
____
125,994
65,679
105,319
119,425
Employee retirement obligations
13,006
13,561
Other long-term liabilities
38,978
31,857
2,238,800
2,001,611
5,130,157
4,721,610
1,064,648
1,065,198
567,810
567,810
87,964
99,640
Deferred income tax
Total liabilities
Commitments (Note 20)
Stockholders’ equity:
Common stock
Additional paid-in capital
Reserve for acquisition of own stock
Premium on sale of repurchased stock
Retained earnings
Insufficiency in restated stockholders’ equity
Initial cumulative effect of deferred income tax
Majority stockholders’ equity
Minority stockholders’ equity
Total stockholders’ equity
Total
See accompanying notes to consolidated financial statements.
28,187
30,672
8,038,515
6,882,099
(300,694)
(930,253)
(371,358)
(930,253)
8,556,177
7,343,808
32,608
27,980
8,588,785
7,371,788
$13,718,942
$12,093,398
61
Consolidated statements of income
For the years ended December 31, 2007 and 2006
(In thousands of Mexican pesos of purchasing power of December 31, 2007,
except share amounts)
2007
2006
$9,257,294
$8,786,152
Costs
6,540,016
6,188,300
Gross profit
2,717,278
2,597,852
652,215
615,043
2,065,063
1,982,809
44,349
32,712
212,171
107,288
(133,137)
(144,086)
61,212
57,249
Revenues
General and administrative expenses
Income from operations
Other expense - Net
Net comprehensive financing result:
Interest expense
Interest income
Monetary position loss
Exchange loss (gain) - Net
64
(6,166)
140,310
14,285
21,060
24,052
1,901,464
1,959,864
532,881
572,097
Consolidated net income
$1,368,583
$1,387,767
Net income of majority stockholders
$1,363,386
$1,382,267
Net income of minority stockholders
5,197
5,500
$1,368,583
$1,387,767
Basic earnings per share
$
$
62
Equity in earnings of equity method investees
Income before income taxes
Income taxes
Weighted average number of shares outstanding
See accompanying notes to consolidated financial statementes.
1.04
1,312,268,288
1.05
1,311,423,428
Consorcio ARA S.A.B. de C.V. and Subsidiaries
Consolidated statements of changes in stockholders’ equity
Balances as of January 1, 2006
Net sale of own stock
$1,064,375
823
$567,810
$75,367
$24,133
____
24,273
6,539
$6,838,684
____
Dividends -$3.80 pesos per share
____
____
____
____
(1,338,852)
Net comprehensive income
____
____
____
____
1,382,267
567,810
99,640
30,672
6,882,099
____
(11,676)
(2,485)
Balances as of December 31, 2006
Net repurchase of own stock
1,065,198
(550)
Dividends -$0.15 pesos per share
____
____
____
____
Net comprehensive income
____
____
____
____
$87,964
$28,187
Balances as of December 31, 2007
$1,064,648
$567,810
See accompanying notes to consolidated financial statements.
$(377,588)
$(930,253)
Total stockholders’ equity
Minority stockholders’ equity
Initial cumulative effect of
deferred income tax
Insufficiency in restated
stockholders’ equity
Retained earnings
Premium on sale of
repurchased stock
Reserve for acquisition of own stock
Common stock
Additional paid-in capital
$27,360
____
____
____
____
____
____
6,230
____
$7,289,888
31,635
(1,338,852)
620
1,389,117
7,371,788
(371,358)
(930,253)
27,980
____
____
____
____
(14,711)
(206,970)
____
____
____
(206,970)
70,664
____
1,363,386
$8,038,515
$(300,694)
$(930,253)
4,628
1,438,678
$32,608
$8,588,785
63
Consolidated statements of changes in financial position
(In thousands of Mexican pesos of purchasing power of December 31, 2007)
2007
2006
Operating activities:
Items that did not require (generate) resources:
Depreciation
Deferred income tax
Employee retirement obligations
Equity in earnings of equity method investees
$ 1,368,583
$1,387,767
____
95,979
91,249
237,189
85,011
775
1,060
(21,060)
1,681,466
(24,052)
1,541,035
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade accounts receivable - Net
Due from equity method investees
Inventories and long-term land held for development
Other current assets
Golf club memberships available for sale
(806,064)
(1,331,655)
(2,444)
(1,039)
(617,065)
(302,122)
(81,692)
(48,376)
(201,742)
____
Increase (decrease) in:
Trade accounts payable and long-term trade accounts payable for land
64
(188,944)
17,286
69,159
159,577
(211,976)
105,623
Income tax payable
(124,303)
80,048
Accrued expenses and taxes, other than income taxes
Statutory employee profit sharing
Other long-term liabilities
Net resources (used in) generated by operating activities
(314)
7,121
373
16,108
(476,798)
841,102
1,840,000
1,322,927
Financing activities:
Proceeds from notes payable to financial institutions and long-term debt
Assets acquired under capital leases
Payment on notes payable to financial institutions
107,910
190,094
(1,221,580)
(379,648)
Payments on capital lease obligations
(105,160)
(72,116)
Dividends paid
(206,970)
(1,338,852)
Change in reserve for acquisition of own stock
(14,711)
31,635
399,489
(245,960)
(137,908)
(214,998)
(40,860)
(28,239)
Collection of notes receivable from equity method investees
29,410
28,510
Investment in equity method investees
16,429
12,611
199,198
(320,773)
Net resources generated by (used in) financing activities
Investing activities:
Property, machinery and equipment
Notes receivable from equity method investees
Financial investments held-to-maturity
Net resources generated by (used in) investing activities
66,269
(522,889)
Net (decrease) increase
(11,040)
72,253
Balance at beginning of year
231,093
158,840
$ 220,053
$ 231,093
Cash and cash equivalents:
Balance at end of year
See accompanying notes to consolidated finantial statements.
Notes to Consolidated Financial Statements
1. Nature of business
Consorcio ARA, S. A. B. de C. V. and subsidiaries (collectively, the “Company”)
design, develop, construct and market affordable entry-level and middle-income
residential housing developments, and promote and market commercial and industrial
developments. In addition, the Company rents mini-supermarkets to customers under
operating leases.
Article 22 of the new Securities Market Law establishes that companies whose shares
are in the National Record of Securities should add “Bursatil” or its abridgement “B” to
their legal names. Such addition was accepted in the general ordinary and extraordinary
stockholders’ meting on October 19, 2006, and registered on November 23, 2006. As a
result, the Company’s legal name is now Consorcio ARA, Sociedad Anónima Bursátil de
Capital Variable, or its abreviation, S. A. B. de C. V.
The Company hires the services of subcontractors in order to construct its housing
developments. The terms of such arrangements include the subcontractors’ obligations
to fulfill, using their own resources or with the assistance of third parties, the
construction commitments in accordance with technical requirements set by the
Company.
2. Basis of presentation
a. Explanation for translation into English
The accompanying consolidated financial statements have been translated from
Spanish into English for use outside of Mexico. These consolidated financial
statements are presented on the basis of Mexican Financial Reporting Standards
(“MFRS”, which is comprised of individual standards referred to as Normas de
Información Financiera or “NIFS”). Certain accounting practices applied by the
Company that conform with MFRS may not conform with accounting principles
generally accepted in the country of use.
b. Consolidation of financial statements
The consolidated financial statements include those of Consorcio ARA, S. A. B. de
C. V. (“ARA”) and its subsidiaries. ARA’s ownership interest in its subsidiaries at
December 31, 2007 and 2006, is shown below.
Group or Subsidiaries
Ownership
Percentage
Consorcio de Ingeniería Integral, S. A. de C. V. (“CIISA”)
99.6%
Proyectos Urbanos Ecológicos, S. A. de C. V. (“PUESA”)
99.9%
Constructora y Urbanizadora ARA, S. A. de C. V. (“CUARA”)
99.9%
Inmobiliaria ACRE, S. A. de C. V. (“ACRE”)
99.1%
Asesoría Técnica y Administrativa GAVI, S. A. de C. V. (“GAVI”)
99.9%
Comercialización y Ventas, S. A. (“COVENSA”)
98.0%
Promotora y Desarrolladora de Centros Comerciales, S. A. de C. V.
(“PDCC”) (1)
99.9%
Desarrollos Inmobiliarios Turísticos ARA, S. A. de C. V. (“DITA”) (2)
100.0%
Consorcio ARA, LLC
100.0%
(3)
65
(1) As part of the Company’s overall development plan, the Company created PDCC, which formed three 99.9%
owned subsidiaries, Operadora de Unicentros y Locales Comerciales, S. A. de C. V., Servicios Administrativos
ARADCD, S. A. de C. V. and Complejo Comercial Ecatepec, S. de R. L. These entities are dedicated to renting
commercial facilities and mini-supermarkets.
On May 25, 2006, Complejo de Comercio las Américas, S. A. de C. V. changed its social denomination
to Servicios Administrativos ARADCD, S. A. de C. V., whose main purpose is to provide professional and
administrative services to PDCC, subsidiaries and associates.
(2) The Company established DITA, whose main purpose is the acquisition, selling, leasing, construction,
marketing and management of timeshares and golf courses.
(3) The Company established Consorcio ARA, LLC, with representative offices in New York and Chicago, USA. The
main objective is the promotion and marketing of its housing in Mexico to Mexican citizens residing in the
United States.
Investments in equity investees in which Company has significant influence, but
does not have control are accounted for using the equity method, which includes
cost plus the Company’s equity in undistributed earnings, adjusted for the effects
of inflation. The adjustment for the effects of inflation on equity is inherent in
the equity method as the investee’s financial statements are also prepared in
accordance with NIF B-10. Related parties transaction and balances have been
eliminated from the Consolidated Financial Statements.
Intercompany balances and transactions have been eliminated in these
consolidated financial statements.
66
c. Comprehensive income
Represents changes in stockholders’ equity during the year, for concepts other
than distributions and activity in contributed common stock, and is comprised of
the net income of the year, plus other comprehensive income items of the same
period, which are presented directly in stockholders’ equity without affecting
the consolidated statements of income. In 2007 and 2006, other comprehensive
income items consist of the excess in restated stockholders’ equity, and the net
income of minority stockholders.
d. Income from operations
Income from operations is the result of subtracting costs and general and
administrative expenses from revenues. While NIF B-3 does not require inclusion
of this line item in the consolidated statements of income, it has been included in
order to provide a better understanding of the Company’s economic and financial
performance.
3. Summary of significant accounting policies
The accompanying consolidated financial statements have been prepared in conformity
with MFRS, which require that management make certain estimates and use certain
assumptions that affect the amounts reported in the financial statements and their
related disclosures; however, actual results may differ from such estimates. The
Company’s management, upon applying professional judgment, considers that estimates
made and assumptions used were adequate under the circumstances. The significant
accounting policies of the Company are as follows:
a. Accounting change:
Statement of income - Beginning January 1, 2007, the Company adopted new
NIF B-3, Statement of Income, which now classifies revenues, costs and expenses
into ordinary and non-ordinary. Ordinary items are derived from primary activities
representing an entity’s main source of revenues. Non-ordinary items are derived
from activities other than those representing an entity’s main source of revenues.
Consequently, the classification of certain transactions as special and extraordinary
was eliminated; these items are now part of other income and expenses and nonordinary items, respectively. Statutory employee profit sharing (“PTU”) should
now be presented as an ordinary expense and no longer presented as a tax on
income. According to Interpretation of Financial Information Standards Number
4, Presentation of Statutory Employee Profit Sharing in the Statement of Income,
(“INIF 4”) PTU should be included within other income and expenses. The main
effect of adopting this NIF was the reclassification of current and deferred PTU for
fiscal 2006 of $2,102 to other expenses.
Related parties - Beginning January 1, 2007, the Company adopted NIF C-13,
Related Parties, which broadens the concept “related parties” to include
a) the overall business in which the reporting entity participates; b) close family
members of key management or prominent executives; and c) any fund created in
connection with a labor-related compensation plan. NIF C-13 also requires
1) disclosure that terms and conditions of transactions carried out between
related parties are equivalent to those of similar transactions carried out between
independent parties and the reporting entity to the extent sufficient evidence
exists and 2) disclosure of benefits granted to the entity’s key management or
prominent executives. Notes to the 2006 consolidated financial statements were
amended to comply with the new provisions.
Capitalization of comprehensive financing result - Beginning January 1,
2007, the Company adopted NIF D-6, Capitalization of Comprehensive Financing
Result, which establishes general capitalization standards. Some of these standards
include: a) mandatory capitalization of comprehensive financing cost (“CFC”)
directly attributable to the acquisition of qualifying assets; b) when financing
in domestic currency is used to acquire assets, yields obtained from temporary
investments before the capital expenditure is made are excluded from the amount
capitalized; c) a methodology to calculate capitalizable CFC relating to funds from
generic financing; d) regarding land, CFC may be capitalized if land is developed,
and e) conditions that must be met to capitalize CFC and rules indicating when CFC
should no longer be capitalized. In 2007, the Company capitalized CFC of $ 22,688
directly attributable to the acquisition of qualifying assets. Through 2006, CFC was
charged to current earnings.
b. Recognition of the effects of inflation
The Company restates its consolidated financial statements to Mexican peso
purchasing power of the most recent balance sheet date presented. Accordingly,
the consolidated financial statements of the prior year, that are presented for
comparative purposes, have also been restated to Mexican pesos of the same
purchasing power and, therefore, differ from those originally reported in the prior
year. Recognition of the effects of inflation results mainly in inflationary gains or
losses on nonmonetary and monetary items that are presented in the financial
statements under the following two line items:
(Insufficiency) excess in restated stockholders’ equity - Represents the
accumulated monetary position result through the initial restatement of the
consolidated financial statements and the increase in the restated value of
land held for development (below) above inflation over the related deferred
income tax effect.
Monetary position loss - Monetary position result, which represents the
erosion of purchasing power of monetary items caused by inflation, is
calculated by applying the National Consumer Price Index (“NCPI”) factors
to monthly net monetary position. Losses result from maintaining a net
monetary asset position.
c. Cash and cash equivalents
This line item consists mainly of bank deposits in checking accounts and readily
available daily investments of cash surpluses. It is stated at nominal value plus
accrued yields, which are recognized in results as they accrue.
d. Investment held to maturity
The Company classifies investments in securities in accordance with its intent
at the date of acquisition. Trading securities include financial instruments that
the Company intends to trade in the short-term before their maturity, if any,
and are marked to market through earnings. Investments in securities that the
Company intends to, and is financially capable of holding until maturity are
classified as held-to-maturity and are recognized and maintained at amortized
cost. Available-for-sale investments, include those that are classified neither as
trading nor held-to-maturity. and are stated at fair value with any unrealized gains
and losses, net of income tax recorded as a component of comprehensive income
within stockholders’ equity, and reclassified to current earnings upon their sale
or maturity, if any. The monetary position resulting from the effects of inflation
on available-for-sale investments is recorded as a component of comprehensive
income. Fair value is determined using prices quoted on recognized markets. If
such instruments are not traded, fair value is determined by applying recognized
technical valuation models.
67
As of December 31, 2007 and 2006, the investment securities are mainly
represented by promissory notes and governmental paper which mature over 2
days to 4 months and bearing annual interest of 7.56% and 7.05%, respectively.
e. Accounts receivable and advances from customers
Account receivable relates primarily to revenues recorded via the percentage-ofcompletion method (see Note 3m) less the amount applied upon transfer of titles.
The advances from customers balance represents the cash received from the home
buyer, before the transfer of title.
f. Inventories, long-term land held for development:
1. Work in process and construction materials are valued at acquisition cost
including all the incurred expenses inherent to real estate inventories and are
restated for the effects of inflation using an internal inflation index developed
by the Company based on changes in prices of construction materials that
are used by the Company to construct housing developments. The balances
of work in process and developments in progress are estimated using the
percentage of completion method, in accordance with the real cost incurred,
and represent the cost incurred on housing projects for which revenue
recognition criteria have not yet been fulfilled.
2. Land held for future development and real estate developments in progress
are valued at acquisition cost and restated for inflation accounting purposes
to replacement cost as determined by independent appraisers. Cost is
restated to replacement cost.
g. Property, machinery and equipment
Property, machinery and equipment are initially recorded at acquisition cost and
restated using the NCPI. Depreciation is calculated using the straight-line method
based on the remaining useful lives of the related assets, as follows:
68
Average years
2007
2006
32
33
Machinery and equipment
7
7
Vehicles
3
3
Office furniture and fixtures
3
4
Buildings
h. Golf club memberships available-for-sale
Are initially recorded at the lower of acquisition cost or realizable value.
i. Impairment of long-lived assets in use
The Company reviews the carrying amounts of long-lived assets in use when
an impairment indicator suggests that such amounts might not be recoverable,
considering the greater of the present value of future net cash flows or the net
sales price upon disposal. Impairment is recorded when the carrying amounts
exceed the greater of the aforementioned above amounts. The impairment
indicators considered for these purposes are, among others, operating losses or
negative cash flows in the period if they are combined with a history or projection
of losses, depreciation and amortization charged to results, which in percentage
terms in relation to revenues are substantially higher than that of previous
years, obsolescence, reduction in the demand for the products manufactured,
competition and other legal and economic factors.
j. Employee retirement obligations
Liabilities from seniority premiums, pension plans and severance payments at the
end of the work relationship are recognized as they accrue and are calculated
by independent actuaries using the projected unit credit method at net discount
rates. Accordingly, the liability is being accrued which, at present value, will cover
the obligation from benefits projected to the estimated retirement date of the
Company’s employees.
k. Provisions
Provisions are recognized for current obligations that result from a past event, are
probable to result in the future use of economic resources, and can be reasonably
estimated.
l. Statutory employee profit sharing
Statutory employee profit sharing (“PTU”) is recorded in the results of the year
in which it is incurred and presented under other income and expenses in the
accompanying consolidated statements of income. Deferred PTU is derived from
temporary differences between the accounting result and income for PTU purposes
and is recognized only when it can be reasonably assumed that such difference
will generate a liability or benefit, and there is no indication that circumstances
will change in such a way that the liabilities will not be paid or benefits will not be
realized.
m. Revenue and cost recognition
The Company uses the percentage-of-completion method to recognize revenues
and costs derived from its activities as a developer in the real state. Expected
revenues represented by housing sales prices are multiplied by the percentage
of completion. The percentage of completion is determined by taking into
account the expected total costs for each development . The difference between
revenues and costs obtained in this manner is the accrued gross profit. Revenues
and costs recognized in prior years are then deducted from the cumulative totals
to determine revenues and costs of the period in the statement of income. The
Company begins applying the percentage of completion method to cost and
revenues arising from its activities as a housing developer when the following
conditions have been met:
•
•
•
The home buyer has made the required down payment;
The home buyer has signed the purchase/sales contract; and
Infonavit, the Housing Fund of the Government Workers Social Security and
Services Institute (Fovissste), the banks and/or the Federal Mortgage Society
(SHF) approved the housing developments and have committed to provide
credit to the buyers. In addition the home buyer has filed all pertinent official
documentation required in order to obtain a loan and such documentation
has been reviewed by the Company.
The Company maintains an allowance for contract cancellations. However, based
on historical experience, the majority of buyers obtain financing, and in cases
wherein financing is not obtained, substitute buyers are found.
Construction costs include all direct material and labor costs and those indirect
costs related to the development of the project, such as indirect labor, supplies,
tools, repairs and depreciation costs. General and administrative costs are charged
to results when incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined.
Operating lease revenue is recognized on a straight-line basis over the life of the
lease agreement. Costs are recognized as incurred. (See Note 19).
n. Income taxes
Income taxes are recorded in the results of the year in which they are incurred.
Beginning October 2007, based on its financial projections, the Company must
determine whether it will incur regular income tax (“ISR”) or the new Business
Flat Tax (“IETU”) and recognize deferred taxes based on the tax it will pay.
Deferred taxes are calculated by applying the corresponding tax rate to the
applicable temporary differences resulting from comparing the accounting and
tax bases of assets and liabilities and including, if any, future benefits from tax loss
carryforwards and certain tax credits. Deferred tax assets are recorded only when
there is a high probability of recovery.
Tax on assets (“IMPAC”) paid that is expected to be recovered is recorded as an
advance payment of ISR and is presented in the consolidated balance sheets
decreasing the deferred tax liability.
69
o. Foreign currency balances and transactions
Foreign currency transactions are recorded at the applicable exchange rate in
effect at the transaction date. Monetary assets and liabilities denominated in
foreign currency are translated into Mexican pesos at the applicable exchange
rate in effect at the balance sheet date. Exchange fluctuations are recorded as
a component of net comprehensive financing cost (income) in the consolidated
statements of income.
p. Earnings per share
Basic earnings per common share is calculated by dividing majority net income by
the weighted average number of shares outstanding during the year.
4. Trade accounts receivable
2007
2006
$ 4,004,852
$ 3,278,408
447,550
380,522
2,914
19,955
36
135
4,455,352
3,679,020
(1,378)
(2,479)
(29,121)
(24,444)
$ 4,424,853
$ 3,652,097
As developer:
Unbilled revenues on developments in progress
Billed revenues
Receivables from sale of commercial land
Receivables from lessees
Allowance for doubtful accounts
Allowance for contract cancellations
70
Unbilled revenues on development in progress according to type of mortgage
lenders are as follows:
2007
2006
$ 1,234,325
$ 1,423,471
2,770,527
1,854,937
$ 4,004,852
$3,278,408
2007
2006
$ 1,437,950
$ 1,179,819
Land in progress
1,900,693
1,709,275
Land held for development short-term
1,104,065
796,863
Construction materials
205,257
185,638
Advances to suppliers
296,248
194,679
$ 4,944,213
$4,066,274
Infonavit
SHF, Fovissste and commercial banks
5. Inventories
a. Inventories are as follows:
Work in process
b. The Company’s policy is to locate and acquire land each year, classifying land
currently being developed or land planned to be developed within the next year
as a part of current assets, and classifying all remaining land within noncurrent
assets.
c. CFC Capitalization commenced in January 2007 based on annualized average of
acquisitions of work in process and land in progress that are qualifying assets
pending completion. The annualized average base was $ 436,373 and CFC
capitalized was $ 22,688.
Reconciliation of CFC of the period
2007
Capitalized CFC attributable to qualifying assets
$
Net balance recognized in the statement of income
Total CFC accrued
22,688
(13,794)
$
8,894
Annualized average capitalization rate was 4.25%.
6. Other current assets
Other accounts receivable
Recoverable taxes, principally ISR
and value aggregated tax
2007
2006
$ 35,044
$ 29,854
110,482
32,573
Advance payments
29,488
31,157
Security deposits
44,339
44,077
$ 219,353
$ 137,661
7. Investments in equity method investees
The Company’s investments accounted for by the equity method are
summarized as follows:
Related party
% of
ownership
Equity in net assets
2007
Equity in earnings
of equity method investees
2007
2006
$ 3,966
$ (1,623)
$ 5,820
33,195
21,088
32,117
17,057
50.00
6,295
7,331
(6,675)
(1,171)
33.33
___
8,465
(2,759)
2,346
$45,481
$40,850
Centro San Miguel,
S. de R. L. (1)(2) (“CSM”)
50.00
$ 5,991
Centro Regional
Las Américas, S. de R. L.
(1)(2)
(“CRAS”)
50.00
Centro San Francisco,
S. de R. L. (1)(2)
Habitania Montes de
Oca, S. A. de C. V. (3)
(Unaudited)
2006
71
$21,060
$24,052
(1) The main purpose of this investment is the construction and administration of all projects including shopping
malls. Centro San Francisco’s shopping mall opened for operations on October 16, 2007. As of December 31,
2007 the shopping mall was 79% complete with 84% of available space under lease and Company expects to
conclude it in the third quarter of 2008.
(2) As of December 31, 2007 and 2006, land sales, and capitalized interest and administrative services capitalized
of $59,029, and $56,025 respectively, were eliminated.
(3) During the final quarter of 2007, the Company finalized its participation in this investment, the main objective
of such investment was the construction of 44 apartments.
8. Property, machinery and equipment
Buildings
Commercial facilities and mini-super markets for rent
Vehicles
2007
2006
$ 69,569
$ 69,569
34,619
36,982
549,981
534,549
40,116
48,100
52,474
39,710
746,759
728,910
(408,200)
(396,664)
338,559
332,246
Land
31,613
30,140
Construction in progress
11,257
11,951
381,429
374,337
405,825
323,785
Vehicles
106,381
80,548
13,354
12,623
(218,246)
(144,479)
Accumulated depreciation
Equipment acquired under capital lease:
Accumulated depreciation
72
307,314
272,477
$ 688,743
$ 646,814
9. Due from equity method investees
2007
2006
$ 22,045
$ 41,624
Note receivable from CRAS (2)
92,829
102,659
Note receivable from CSF
69,099
28,240
$ 183,973
$ 172,523
Note receivable from CSM (1)
(3)
(1) Such note receivable bears annual interest at 18% and matures on December 23, 2013 with payments of
principal and accrued interest at the maturity date. During 2007, the Company received some early payments
on this note receivable.
(2) CRAS has executed a line of credit contract with PDCC for $230,000 and should disperse the money before August
31, 2006. According to the new agreement, the contract will mature in September 2014. As of December 31,
2007, CRAS has borrowed $87,710. These borrowings bear an annual interest rate of 21%. CRAS hereby agrees
to apply the loans to the development of the shopping mall “Centro Comercial las Américas” and its other
commercial activities. During 2007 the Company received some early payments of these note receivable.
(3) CSF has executed a line of credit contract with PDCC for $81,450. The contract will mature on December 15,
2016. As of December 31, 2007, CSF has borrowed $61,198. These borrowings bear an annual interest rate
of 16%. CSF hereby agrees to apply the loans to the building of the shopping mall located in Tijuana, Baja
California.
10. Accrued expenses and taxes, other than income taxes
Taxes, other than of income taxes and tax on assets
Accrued expenses
Accrued interest
Deposits from suppliers
2007
2006
$ 47,393
$ 55,567
326,957
280,418
3,581
4,092
126,422
95,117
$ 504,353
$ 435,194
11. Advances from customers
As of December 31, 2007 and 2006 the balance of advances from customers includes
construction commitments of $2,877 and $53,377, respectively.
12. Long-term debt
2007
2006
Note payable of $500,000, to BBVA Bancomer Bank, S.A. bearing TIIE interest
rate; plus 1%. The interest rate must not be greater than 9%, the maturity
of the note is on May 26, 2016. The effective annual interest rate as of
December 31, 2007 and 2006 is 8.93% and 8.31% respectively. Payments of
principal and interest on this note are made in monthly installments.
$ 420,834
$ 488,532
Note payable of $500,000, to Santander Serfin , S. A. Bank, bearing TIIE
interest rate; plus 0.97%. The interest rate must not be greater than 9%, the
maturity of the note is on May 30, 2013. The effective annual interest rate as
of December 31, 2007 and 2006 is 8.90% and 8.29% respectively. Payments of
principal and interest on this note are made in semiannual installments.
392,857
481,739
Note payable of $500,000, to BBVA Bancomer Bank, S.A. bearing TIIE interest
rate; plus 0.50%. The interest rate must not be greater than 8%, the maturity
of the note is on June 14, 2012. The effective annual interest rate as of
December 31, 2007 is 8.43%. Payments of principal are made in quarterly
installments, interest payments are made in monthly installments.
450,000
___
Note payable of $300,000, to Banco Nacional de México Bank S.A. bearing
TIIE interest rate; plus 0.50%. The interest rate must not be greater than 8%,
the maturity of the note is on June 26, 2012. The effective annual interest
rate as of December 31, 2007 is 8.43%. Payments of principal are made in
quarterly installments, interest payments are made in monthly installments.
270,000
___
Less – Current portion
Long-term debt
1,533,691
970,271
281,429
125,994
$1,252,262
$ 844,277
As of December 31, 2007, long-term debt matures as follows:
2008
$ 281,429
2009
281,429
2010
281,429
Thereafter
407,975
$1,252,262
The loan agreements contain restrictive covenants, which require that the Company maintain certain
minimum financial ratios and fulfill the contractual obligations during the period of the agreement.
Management believes the Company is in compliance with such covenants as of December 31, 2007.
During 2007, the Company drew $1,947,910 from available lines of credit and repaid $1,326,740
of these credits.
Additionally the Company maintains available credit lines with financial institutions of $1,059,349.
73
13. Capital lease obligations
a. Capital lease obligations for equipment bear annual interest at rates ranging
from 10.07% to 12.02% at December 31, 2007.
b. At December 31, 2007 and 2006, minimum rental commitments under capital
leases are comprised of the following:
Total minimum lease obligations
Current portion of obligations
Long-term portion of capital lease obligations
2007
2006
$ 215,161
$ 212,411
(109,842)
(92,986)
$ 105,319
$ 119,425
Capital lease obligations, which have a purchase option at the end of the lease term
mature as follows:
Year ending December 31
2009
$ 82,201
2010
23,118
$105,319
14. Employee retirement obligations
74
Net period cost for obligations resulting from the pension plan and seniority premiums
was $15,808 and $12,686 in 2007 and 2006, respectively. The labor obligation balance at
December 31, 2007 and 2006 was $13,006 and $13,561, respectively. For the liability as
of December 31, 2007 and 2006, an intangible asset is recorded for $9,590 and $10,920,
respectively. Other disclosures required under MFRS are not considered material.
15. Stockholders’ equity
a. Pursuant to a resolution of the general ordinary stockholders’ meeting on April
23, 2007, the Company paid a dividend of $206,970 ($200,623 historical pesos),
equivalent to $0.15 pesos per share. Additionally, authorization was granted to
increase the reserve for the acquisition of Company stock to a maximum of 25%
of the stated value of common stock under the terms of article 56, 3 fraction IV
of Values Market Law.
b. On March 13, 2007 the Company issued and delivered to the shareholder a 4 for 1
split of shares, free of payment, of new and unique ordinary shares, with no par
value, no subscription limitations, fully subscribed and paid, therefore the capital
stock consist of 1,312,874,496 ordinary shares with no par value, no subscription
limitations, fully subscribed and paid.
c. As of December 31, 2006 the Basic earning per share was $ 4.21 ($ 4.06 historical
pesos), pursuant to the split of shares mentioned on paragraph b. in the note,
that earning has been modified to $ 1.05 for comparative purpose.
d. As of December 31, 2006 capital stock consist of 328,211,847 ordinary shares,
with no par value, no subscription limitations, fully subscribed and paid.
e. Pursuant to a resolution of the general ordinary stockholders’ meeting on April
20, 2006, authorization was granted to increase the reserve for the acquisition
of Company stock to a maximum of 25% of the stated value of common stock
under the terms of article 14 Bis 3 fraction I of the Securities Market Law. In such
stockholders’ meeting, the Company paid a dividend of $1,338,852 ($1,247,205
historical pesos), equivalent to $3.80 pesos per share.
In the meeting mentioned above, the Company decided to include certain
arrangements in order to prevent the acquisition of the control by third parties.
f. In 2007 and 2006, the Company purchased and sold its own stock resulting in a
(loss) premium of $(2,485) and $6,539 respectively.
At December 31, 2007, the Company held 1,630,000 repurchased shares. At
December 31, 2007, the market value of the Company’s shares, as reported on the
Mexican Stock Exchange, was Ps.11.96 per share.
g. Retained earnings include the statutory legal reserve. The General Corporate
Law requires that at least 5% of net income of the year be transferred to the
legal reserve until the reserve equals 20% of capital stock at par value. The
legal reserve may be capitalized but may not be distributed unless the entity is
dissolved. The legal reserve must be replenished if it is reduced for any reason. At
December 31, 2007 and 2006, the legal reserve was $212,937.
h. Stockholders’ equity, except restated paid-in capital and tax retained earnings
will be subject to income tax payable by the Company at the rate in effect upon
distribution. Any tax paid on such distribution may be credited against annual
and estimated income taxes of the year in which the tax on dividends is paid and
the following two fiscal years.
i. The balances of the stockholders’ equity tax accounts as of December are:
Contributed capital account
Net tax income account
Total
2007
2006
$1,413,607
$1,413,607
1,564,650
1,125,729
$2,978,257
$2,539,336
16. Foreign currency balances and transactions
a. At December 31, the foreign currency monetary position is as follows:
75
2007
2006
Monetary assets
5,848
9,106
Monetary liabilities
(870)
(3,971)
Net monetary asset (liability) position
4,978
5,135
$54,360
$57,596
Thousands of U.S. dollars:
Equivalent in Mexican pesos
b.Transactions denominated in U.S. dollars were as follows:
(In thousands of U.S. dollars)
Land purchases in Mexico
Equipment acquisitions
2007
2006
748
3,074
7,087
14,340
c. The exchange rates in effect at the dates of the balance sheets and of issuance of
the consolidated financial statements were as follows:
December 31,
U.S. dollar
March 18,
2007
2006
2008
$10.92
$10.81
$10.70
17. Related party transactions
a. Transactions carried out with the corporate trust in the ordinary course of
business, were as follows:
2007
2006
Revenue:
___
Land sales
$
Interest - net
$ 16,457
$ 14,674
Shopping mall management fees
$
4,866
$
2,878
Administrative services income
$
6,300
$
2,667
Comissions
$
2,007
$
1,743
$ 40,357
Costs:
Land sales
___
$ 19,959
b. During 2007, two of the Company’s directors bought residential plots for an
amount of $5,567, which amount is equivalent to that which would be charged in
similar transactions carried out with independent parties.
c. As of December 31, 2007 and 2006, the employee benefits granted to key
Company management were $96,062 and $113,589 respectively.
d. As of December 31, 2007 and 2006, the fees paid to a members of the board of
directors were $2,021 and $2,059 respectively.
18. Taxes on income
76
In accordance with Mexican tax law, the Company is subject to ISR, and through 2007,
to IMPAC. ISR is computed taking into consideration the taxable and deductible effects
of inflation, such as depreciation calculated on restated asset values. Taxable income is
increased or reduced by the effects of inflation on certain monetary assets and liabilities
through the inflationary component, which is similar to the gain or loss from monetary
position. As of 2007, the tax rate is 28% and in 2006 it was 29%. Due to changes in
the tax legislation, effective January 1, 2007, taxpayers who file tax reports and meet
certain requirements may obtain a tax credit equivalent to 0.5% or 0.25% of taxable
income. For ISR purposes, effective in 2005, cost of sales is deducted instead of inventory
purchases. Taxpayers had the option, in 2005, to ratably increase taxable income
over a period from 11 to 12 years by the tax basis of inventories as of December 31,
2004, determined in conformity with the respective tax rules, and taking into account
inventory turnover. The net balance of this deferred income for tax purposes as of
December 31, 2007 and 2006 was $ 3,722,611 and $ 4,448,427 respectively. PTU paid is
fully deductible.
In 2007, IMPAC was calculated by applying 1.25% to the value of the assets of the year,
without deducting any debt amounts. Through 2006, IMPAC was calculated by applying
1.8% on the net average of the majority of restated assets less certain liabilities,
including liabilities payable to banks and foreign entities. IMPAC is payable only to the
extent that it exceeded ISR payable for the same period.
The Company is subject to ISR and, through 2007, IMPAC, on an individual entity basis.
The related tax results are combined in the consolidated financial statements.
On October 1, 2007, the Business Flat Tax Law (“LIETU”) was enacted and went into
effect on January 1, 2008. In addition, the Tax Benefits Decree and the Third Omnibus
Tax Bill were published on November 5 and December 31, 2007, respectively, clarifying
or expanding the transitory application of the law regarding transactions carried out in
2007 that will have an impact in 2008. IETU applies to the sale of goods, the provision
of independent services and the granting of use or enjoyment of goods, according to
the terms of the LIETU, less certain authorized deductions. IETU payable is calculated by
subtracting certain tax credits from the tax determined. Revenues, as well as deductions
and certain tax credits, are determined based on cash flows generated beginning
January 1, 2008. LIETU establishes that the IETU rate will be 16.5% in 2008, 17% in
2009, and 17.5% as of 2010. The Asset Tax Law was repealed upon enactment of LIETU;
however, under certain circumstances, IMPAC paid in the ten years prior to the year in
which ISR is paid, may be refunded, according to the terms of the law.
Based on the analysis of current and prior year’s results, and according to INIF 8, Effects
of the Business Flat Tax, the Company determined that it will basically pay only ISR.
Therefore, the enactment of IETU did not have any effects on its financial information,
since it only recognizes deferred ISR.
a. ISR and PTU consist of the following:
2007
2006
$ 252,667
$ 430,327
278,535
141,109
1,679
661
$ 532,881
$ 572,097
ISR:
Current
Deferred
Change in valuation allowance for recoverable
tax on asset paid
For the years ended December 31, 2007 and 2006, certain subsidiaries used tax
loss carryforwards of $17,695 and $24,624, respectively. The Benefit tax losses
carryforward, had been decreased in the determination of the income deferred tax.
b. The effective ISR rate for fiscal 2007 and 2006 differs from the statutory rate,
mainly due to permanent differences such as nondeductible expenses and the
effects of inflation.
c. The main items comprising the liability balance of deferred ISR are as follows:
77
2007
2006
Inventories and long-term land for development
$ (972,479)
$(1,084,168)
Unbilled revenues on developments in progress
(1,225,708)
(982,272)
(80,826)
(90,434)
18,542
76,770
Deferred ISR assets (liabilities):
Property, machinery and equipment
Allowance for doubtful accounts and
contract cancellations
8,552
7,538
Other – Net
4,359
60,778
(2,247,560)
(2,011,788)
Effect of tax loss carryforwards
23,786
26,569
Recoverable tax on assets paid
22,212
19,167
Deferred ISR from temporary differences
Valuation allowance for the deferred ISR (1)
Net long-term deferred ISR liability
45,998
45,736
(37,238)
(35,559)
$ (2,238,800)
$(2,001,611)
(1)Certain deferred income tax assets generated by ARA and PDCC was not recorded
because there is not a high probability of recovery.
d. Tax loss carryforwards and recoverable IMPAC for which the deferred ISR asset
and prepaid ISR, respectively, have been partially recognized can be recovered
subject to certain conditions. Restated amounts as of December 31, 2007 and
expiration dates are:
Year of
Expiration
2008
Tax loss
Carryfowards
$
Recoverable
IMPAC
___
$
191
2009
___
476
2010
___
3,049
2,763
2011
___
2012
___
2,305
2013
3,982
2,522
2014
31,578
1,851
2015
13,966
2,114
2016
24,597
3,325
2017
10,828
3,616
$ 84,951
$ 22,212
e. The change in insufficiency in restated stockholders’ equity, during 2007 and
2006, as shown in the accompanying consolidated statements of changes in
stockholders’ equity, is presented net of the effect of the related deferred income
tax of $28,507 and $14,315, respectively.
19. Information by activity of the business
The Company operates as a developer and a lessor solely in Mexico, as mentioned in
Note 1. Some information on revenues and costs relative to these activities is as follows:
78
2007
2006
$ 9,236,935
$8,763,678
13,173
12,752
Revenues:
As developer
As service provider
As lessor (1)
7,186
9,722
$ 9,257,294
$8,786,152
$ 6,525,463
$6,175,364
Costs:
As developer
As service provider
9,393
7,357
As lessor
5,160
5,579
$ 6,540,016
$6,188,300
(1) The rental revenue comes from operating leases of commercial facilities and
mini-supermarkets, which have one-year terms. The contracts include the option of
being renewed annually at monthly rentals that are increased by an inflation factor.
Revenues and costs by mortgage lender are as follows:
2007
2006
$ 2,695,801
$2,457,645
6,012,376
5,866,015
Revenues:
Infonavit
Commercial plots of land
528,758
440,018
$ 9,236,935
$8,763,678
$ 1,967,521
$1,787,772
4,227,169
4,119,806
330,773
267,786
$ 6,525,463
$6,175,364
Costs:
Infonavit
Commercial plots of land
No material intersegment transactions were performed during the years ended
December 31, 2007 and 2006.
20. Commitments
a. Guarantee and management trust
The Company executed a guarantee and management trust agreement to
develop and market a residential housing complex containing 765 units, called
Hacienda La Gloria in Carrillo Puerto, Querétaro. The trust is described as follows:
Participants. The participants are Lacupuesco, S. A. de C. V. (Trustor and
Beneficiary A) “Lacupuesco”; Promotora Comercial Diescinueve, S. A. de C. V.
(Trustor and Beneficiary B) “PC19”; Constructora y Urbanizadora ARA, S. A. de
C. V. (Trustor and Beneficiary C) “CUARA”, and Grupo Financiero Santander
Serfin (Trustee) “Santander”.
Contributions. The trust contributions of each participant are as follows:
Lacupuesco contributes the Querétaro land, the approximate value is $14,667
($13,148 historical pesos), CUARA contributes the development cost and
marketing cost of the residential housing complex, and PC19 contributes the
concession water right for the residential housing complex.
Benefits. For the sale or transfer of the residential units, Lacupuesco receives
15% of the selling price and CUARA the remaining 85% of such price.
Effective duration of contract. The contract will have an effective duration of
36 months computed as of the date the last construction and sales permit is
obtained. If upon termination of the agreement term the residential complex
has not been concluded, or there are still houses that have not been sold or
transferred (because they are being constructed or because construction has
not started), Lacupuesco will be entitled to extend the contract for another
six months, or request settlement of the 15% agreed upon amount, based on
the last sales price reported. As of December 31, 2007, 758 houses had been
recorded by percentage of completion at a price of $688 per unit.
b. Guarantee and management trust
In October 2003, the Company executed a guarantee and management trust
contract to develop and market a housing complex for Michoacan government’s
employees and shopping stores in Capula, Morelia. The development is divided
into the ARA project and SARE project, a commercial area and free land. The
principal characteristics of the trust are:
Participants. The participants are Instituto de Vivienda del Estado de
Michoacán de Ocampo (Trustor and Beneficiary A) “IVEMO”; Consorcio
de Ingeniería Integral, S. A. de C. V. (Trustor and Beneficiary B) “CIISA”;
FISARE, S. A. de C. V. (Trustor and Beneficiary C and a Company subsidiary)
“FISARE” and Banco Azteca, S. A. (Trustee) “Banco Azteca”.
Contributions. The contributions to the trust of each participants are: IVEMO
to contribute with Capula, Morelia land and the concession of water rights,
CIISA and SARE each contribute 50% of the development and internal works
of the ARA and SARE projects, respectively.
Benefits. For the sale or transfer of each housing unit in the ARA and
SARE projects, IVEMO receives 8% of the selling price; CIISA and SARE the
remaining 92% of such price in ARA and SARE projects, respectively.
The commercial area and free land will be returned to IVEMO.
Effective duration of contract. The contract term is based upon the length
of time to completion. IVEMO will be able to retain partially or totally the
contributed land if it is not under contract of sale to buyers and will pay the
cost of infrastructural expenses to CIISA and SARE. As of December 31, 2007,
1,359 houses had been recorded by percentage of completion at a price of
$276 per unit.
c. The Company leases offices under an operating lease that is renewable annually.
The rental expense was $19,846 and $17,217 for the years ended December 31,
2007 and 2006, respectively.
79
d. On August 18, 2004, CIISA executed a trust administration contract with a
shopping mall and Banco J.P. Morgan, S. A. Institución de Banca Múltiple,
J.P. Morgan Grupo Financiero, Trust Division, transferring part of the plot of
land known as “las Américas” on which the “las Américas shopping mall” was
developed.
CIISA or CRAS (“affiliated”) are obligated to a) construct the shopping mall
(except shop stockroom), including parking lot according to the executive project
and b) the administration of the shopping mall.
e. Property Transfer Trust
As of February 22, 2008 the Company executed an agreement to extinct the
property transfer trust that had been for ownership of real property consisting
of 449,755 square meters located in Puebla and contributed by Cemex México,
S.A de C.V. “Cemex” together with works and improvements performed by
the Company where the participants were: Cemex (Trustor A), the Company
(Trustor B) and Banca Serfin, S.A. Institución de Banca Multiple, Grupo Financiero
Santander Serfin (Fiduciary) “Banca Serfin”.
As of December 31, 2007, the Company has contributed $ 39,314, that will be
reimbursed as follows:
The amount of $1,300 was charged by Cemex for expenses of the trust, $19,007
were reimbursed in February and the rest of $19,007 will be a pre payment for
future purchases of cement, concrete and other materials.
Under terms of such agreement Cemex received property rights of the land.
f. PDCC enter into a ”Framework Agreement” with a third party, which establishes
processes and procedures related to the investment in future construction
projects and operation of malls.
80
g. Guarantee and management trust
In July 2007, the Company celebrated an agreement with Fomento Metropolitano
of Monterrey (“Fomerrey”). Fomerrey maintains documentation of consents
evidencing its rights for the substantiation and settle for the expropriation of the
land. The Company gave to Fomerrey $5,000 at the signing of this agreement.
Fomerrey will receive $25,749 if the following conditions occur:
a) Fomerrey becomes the legitimate owner of the land located in Nuevo León.
b) The Company develops social interest housing with a minimal density of 50
housings by hectare on the land.
c) Water feasibility, sanitary drainage and electrical energy are obtained
d) Fomerrey Committee authorizes this agreement.
The Company will pay to Fomerrey 2% of the total value for the sale of houses
that are built on the land.
h. The Company is party to various legal actions in the normal course of its business.
According to the Company’s legal advisors, it is not involved in or threatened
by proceedings for which the Company believes it is not adequately insured or
indemnified or which, if determined adversely, would have a material adverse
effect on its financial position, results of operations or cash flows.
21. New accounting principles
In 2007, the Mexican Board for Research and Development of Financial Information
Standards (CINIF) issued the following NIFs and Interpretations of Financial Reporting
Standards (“INIF”), which became effective for fiscal years beginning on January 1, 2008:
NIF B-2, Statement of Cash Flows
NIF B-10, Effects of Inflation
NIF B-15, Translation of Foreign Currencies
NIF D-3, Employee Benefits
NIF D-4, Taxes on Income
Some of the significant changes established by these standards are as follows:
•
NIF B-2, Statement of Cash Flows. This NIF establishes general rules for the
presentation, structure and preparation of a cash flow statement, as well as the
disclosures supplementing such statement, which replaces the statement of changes
in financial position. NIF B-2 requires that the statement show a company’s cash
inflows and outflows during the period. Line items should be preferably presented
gross. Cash flows from financing activities are now presented below those from
investing activities (a departure from the statement of changes in financial
position). In addition, NIF B-2 allows entities to determine and present their cash
flows from operating activities using either the direct or the indirect method.
•
NIF B-10, Effects of Inflation. CINIF defines two economic environments:
a) inflationary environment, when cumulative inflation of the three preceding years
is 26% or more, in which case, the effects of inflation should be recognized using
the comprehensive method; and b) non-inflationary environment, when cumulative
inflation of the three preceding years is less than 26%, in which case, no inflationary
effects should be recognized in the financial statements. Additionally, NIF B-10
eliminates the replacement cost and specific indexation methods for inventories
and fixed assets, respectively, and requires that the cumulative gain or loss from
holding non-monetary assets be reclassified to retained earnings, if such gain or loss
is realized; the gain or loss that is not realized will be maintained in stockholders’
equity and charged to current earnings of the period in which the originating item
is realized.
•
NIF B-15, Translation of Foreign Currencies. NIF B-15 eliminates classification of
integrated foreign operations and foreign entities and incorporates the concepts
of accounting currency, functional currency and reporting currency. NIF B-15
establishes the procedures to translate the financial information of a foreign
subsidiary: i) from the accounting to the functional currency; and ii) from the
functional to the reporting currency, and allows entities to present their financial
statements in a reporting currency other than their functional currency.
•
NIF D-3, Employee Benefits. This NIF includes current and deferred PTU. Deferred
PTU should be calculated using the same methodology established in NIF D-4. It
also includes the career salary concept and the amortization period of most items is
reduced to five years, as follows:
Items will be amortized over a 5-year period, or less, if employees’ remaining labor
life is less than the:
- Beginning balance of the transition liability for severance and retirement
benefits
- Beginning balance of past service cost and changes to the plan
- Beginning balance of gains and losses from severance benefits, according to
actuarial calculations, should be amortized against the results of 2008
- Beginning balance of gains and losses from retirement benefits, according
to actuarial calculations, should be amortized over a 5-year period (net of
the transition liability), with the option to fully amortize such item against
the results of 2008.
•
NIF D-4, Income Taxes – This NIF relocates accounting for current and deferred PTU
to NIF D-3, eliminates the permanent difference concept, redefines and incorporates
various definitions and requires that the cumulative ISR effect be reclassified to
retained earnings, unless it is identified with some of the other comprehensive
income items that have not been applied against current earnings.
At the date of issuance of these consolidated financial statements, the Company has not
fully assessed the effects of adopting these new standards on its financial information.
22. Financial statements issuance authorization
On March 18, 2008, the issuance of the consolidated financial statements was
authorized by C. P. J. Sacramento Soto Solís Director of Administration and Finance of
the Company. These consolidated financial statements are subject to the approval of
the ordinary stockholders’ meeting, who may modify the financial statements, based on
provisions set forth by the General Corporate Law.
81
Owr Growth 1997-2007
CAGR 16.7%
1,977.9
2,678.3
3,786.4
4,488.0
4,940.4
5,108.4
5,659.5
6,445.8
7,312.8
8,786.1
9,257.3
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
10
9
8
7
6
5
4
3
2
1
* Figures in millions of pesos at December 31st, 2007
General Balance
2007
2006
Δ%
11,517.9
9,993.3
15.3
2,201.9
2,100.1
4.8
13,718.9
12,093.4
13.4
Current liabilities
1,481.8
1,645.2
-9.9
Total liabilities
5,130.2
4,721.6
8.7
Shareholder’s equity
8,588.8
7,371.8
16.5
Current assets
Long-term assets
Total assets
Land bank
in million m2
30.8
35.7
36.4
34.6
2004
2005
2006
2007
40
35
30
25
20
15
10
5

Corporate governance

Transcription

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