EX-99.1 4 dictdef.htm FINANCIAL PAGES Independent Auditors' Report

Independent Auditors' Report

Board of Directors and Stockholders of
Vitro, S.A. de C.V.
San Pedro Garza García, N. L.

 

We have audited the accompanying consolidated balance sheets of Vitro, S.A. de C.V. and Subsidiaries (the "Company") as of December 31, 2001 and 2002, and the related consolidated statements of income, stockholders' equity and changes in financial position for each of the three years in the period ended December 31, 2002 (all expressed in millions of constant Mexican pesos as of December 31, 2002). 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. The financial statements of the subsidiaries and associated companies named in note 2 b), were audited by other auditors whose reports have been furnished to us, and our opinion, regarding the amounts reported by these companies, is based solely on the reports of such other auditors. The total assets of the companies above mentioned represent 21% in 2001 and 9% in 2002 of the consolidated total assets, whereas their net sales represent 9% of the consolidated net sales in 2000, 2001 and 2002.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of Vitro, S.A. de C.V. and Subsidiaries as of December 31, 2001 and 2002, and the results of their operations and changes in their financial position for each of the three years in the period ended December 31 2002, in conformity with accounting principles generally accepted in México.

Accounting principles generally accepted in Mexico vary in certain significant respects from accounting principles generally accepted in the United States of America. The application of the latter would have affected the determination of net income (loss) for each of the three years in the period ended December 31, 2002 and the determination of stockholders' equity at December 31, 2000, 2001 and 2002 to the extent summarized in note 21.

Our audits also comprehended the translation of Mexican peso amounts into United States dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in note 2 a). Such United States dollar amounts are presented solely for the convenience of readers.

The accompanying financial statements have been translated into English language for the convenience of readers.

February 7, 2003
February 27, 2003, as to note 20a)
June 20, 2003, as to note 20b)
June 26, 2003, as to note 21

Vitro, S.A. de C.V. and Subsidiaries
Consolidated Balance Sheets
(Millions of constant Mexican pesos as of December 31, 2002)
December 31,
  
Millions of US dollars (Convenience Translation)
ASSETS
2001
2002
  
2002

Cash and cash equivalents

Ps. 1,087

Ps. 2,232

 

$  214

Trade receivables, net (note 5)

1,761

2,046

 

196

Other receivables

1,035

1,036

 

99

Inventories (note 6)

3,423

3,809

 

365

Current assets of discontinued operations (note 4)

1,240

     

  Current assets

8,546

9,123

 

874

Land and buildings (note 7)

9,413

8,712

 

835

Machinery and equipment (note 7)

9,385

8,962

 

858

Construction in progress

609

816

 

78

Goodwill, net of accumulated amortization of Ps. 122 and
Ps. 157 

724

748

 

72

Intangible pension asset

701

609

 

58

Other assets

1,027

1,046

 

100

Non-current assets of discontinued operations (note 4)

3,246

     

  Long - term assets

25,105

20,893

 

2,001

         

Total assets

Ps. 33,651

Ps.  30,016

 

$  2,875


LIABILITIES

       

Short-term borrowings (note 8)

Ps. 3,207

Ps. 3,176

 

  $  305

Current maturities of long-term debt (note 9)

2,795

1,602

 

153

Trade payables

2,568

2,295

 

220

Accrued expenses

639

676

 

64

Other current liabilities

1,053

1,326

 

127

Current liabilities of discontinued operations (note 4)

1,646

     

Current  liabilities

11,908

9,075

 

869

Long-term debt (note 9)

8,551

10,413

 

997

Seniority premiums, pensions and other long-term

       

liabilities (note 10)

1,248

1,380

 

132

Deferred tax liabilities (note 17)

1,412

550

 

53

Longerm liabilities of discontinued operations (note 4)

821

     

Long-term liabilities

12,032

12,343

 

  1,182

Total liabilities

23,940

21,418

 

2,051

Commitments and contingencies (note 11)

       
         

STOCKHOLDERS' EQUITY

       

Capital stock: no par value, shares issued and

       

outstanding, 324,000,000

  324

  324

 

 31

Restatement of capital stock

5,878

5,878

 

  563

Capital stock restated

6,202

6,202

 

  594

Treasury stock (50,294,020 shares in 2001 and 47,979,489 in 2002) 

(547)

(514)

 

(49)

Paid-in capital

  941

  915

 

87

Shortfall in restatement of capital

(17,073)

(16,996)

 

  (1,628)

Cumulative effect of deferred taxes

(1,484)

(1,484)

 

(142)

Minimum pension liability adjustment

(191)

(298)

 

(28)

Retained earnings reserved for

       

reacquisition of shares of Vitro

1,300

514

 

 49

Retained earnings

16,934

  17,598

 

1,686

Total majority interest

  6,082

5,937

 

569

Minority interest in consolidated subsidiaries

  3,629

2,661

 

255

Total stockholders' equity (note 13)

  9,711

8,598

 

  824

Total liabilities and stockholders' equity

  Ps.  33,651

 Ps. 30,016

 

$ 2,875

 

Vitro, S.A. de C.V. and Subsidiaries
Consolidated Statements of Income
(Millions of constant Mexican pesos as of December 31, 2002, except per share amounts)

 

Millions of US dollars, except per share amounts (Convenience translation)

Year ended December 31,

2000

2001

2002

2002

Net sales

Ps.  25,005

Ps. 24,406

Ps. 23,922

$  2,292

Cost of sales

17,148

17,193

16,999

1,629

Gross profit

7,857

7,213

6,923

663

General, administrative and selling expenses

4,752

4,898

4,937

473

Operating income

3,105

2,315

1,986

190

Total financing cost (note 14)

1,073

611

2,259

216

Income (loss) after financing cost

2,032

1,704

  (273)

(26)

Other expense, net (note 15)

436

817

  416

40

Income (loss) before income tax and workers' profit sharing

1,596

887

(689)

(66)

Income and asset tax (note 17)

581

336

(478)

(46)

Workers' profit sharing (note 17)

324

96

47

  5

Net income (loss) from continuing operations

691

455

(258)

(25)

Net income (loss) from discontinued operations (note 4)

  211

189

(118)

(11)

Income on disposal of discontinued operations (note 4)

  463

44

Net income for the year

Ps.  902

Ps. 644

  Ps. 87

  $ 8

Net income of minority interest

Ps.  525

Ps. 480

Ps. 131

  $ 12

Net income (loss) of majority interest

  377

164

(44)

(4)

Ps.  902

Ps. 644

  Ps. 87

$  8

Earnings per common share (based on weighted average

shares outstanding of 278,402,173 for 2000,

286,078,897 for 2001 and 275,441,504 for 2002):

Net income (loss) from continuing operations

  Ps. 2.48

  Ps.1.59

Ps.  (0.94)

$  (0.09)

Income on disposal of discontinued operations

1.68

0.16

Net income (loss) from discontinued operations

  0.76

0.66

(0.43)

(0.04)

Net income of minority interest

(1.89)

  (1.68)

  (0.47)

(0.05)

Net income (loss) of majority interest

  Ps.1.35

 Ps. 0.57

Ps.  (0.16)

$  (0.02)

 

Vitro, S.A. de C.V. and Subsidiaries
Consolidated Statements of Changes in Financial Position
(Millions of constant Mexican pesos as of December 31, 2002)

         
Millions of US dollars (Convenience Translation)
 
Year ended December 31,
 
2000
2001
2002
2002

OPERATING ACTIVITIES:

         

Net income (loss) from continuing operations

  Ps.691

Ps.  455

Ps. (258)

 

$ (25)

Add (deduct) non cash items:

         

Depreciation and amortization

1,948

1,929

1,908

 

183

Provision for seniority premiums and pensions

  211

  211

  187

 

18

Amortization of debt issue costs

  50

 58

  51

 

  5

Share in net income of unconsolidated associated companies

(5)

(9)

     

(Gain) loss from sale of subsidiaries and associated companies

(60)

124

(65)

 

(6)

Write-off and loss from sale of assets

  347

  375

  409

 

39

Deferred income tax and workers' profit sharing

  256

  104

(848)

 

(81)

 

3,438

3,247

1,384

 

  133

Increase (decrease) in trade payables

  101

  579

(272)

 

(26)

Decrease (increase) in trade receivables

  552

  355

(303)

 

(29)

Decrease (increase) in inventories

(378)

  1

(534)

 

(51)

Change in other current assets and liabilities, net

  368

(277)

330

 

31

Pension funding payments

(687)

(91)

(167)

 

(16)

  Resources generated from continuing operations

3,394

  3,814

  438

 

42

Net income (loss) from discontinued operations

211

  189

(118)

 

(11)

Proceeds from disposal of discontinued operations

   

1,418

 

135

Operating assets and liabilities from discontinued operations

  331

  198

  166

 

  16

Resources generated from operations

3,936

4,201

1,904

 

  182

           

FINANCING ACTIVITIES:

         

Short-term bank loans

6,651

4,293

5,495

 

526

Long-term bank loans

6,987

6,233

3,855

 

369

Capital stock contributed by minority interest

  8

  107

  7

 

1

Monetary effect on liabilities with financing cost

(1,367)

(659)

(784)

 

(75)

Payment of short-term loans

(5,162)

(6,491)

(6,086)

 

(583)

Payment of long-term loans

(7,610)

(5,098)

(1,850)

 

(177)

Acquisition of treasury stock

(860)

(180)

     

Sale of treasury stock

  622

 

24

 

2

Dividends paid to stockholders of Vitro

(341)

(162)

(78)

 

(7)

Dividends paid to minority interest

(396)

(293)

(272)

 

(26)

Effect from discontinued operations

(397)

(224)

(42)

 

(4)

Resources (used in) generated from financing activities

(1,865)

(2,474)

269

 

  26

           

INVESTING ACTIVITIES:

         

Investment in land and buildings and machinery and equipment

(952)

(848)

(1,018)

 

(98)

Sale of land and buildings and machinery and equipment

  228

133

  140

 

14

Investment in subsidiaries and associated companies

(595)

 (475)

(9)

 

(1)

Sale of subsidiaries and associated companies

 

94

115

 

11

Long-term investments

 

(145)

(49)

 

(4)

Effect from discontinued operations

(144)

(164)

(6)

 

(1)

Other

(438)

(85)

(201)

 

(19)

Resources used in investing activities

(1,901)

(1,490)

(1,028)

 

(98)

Net increase in cash and cash equivalents

  170

  237

1,145

 

110

Balance at beginning of year

  680

850

1,087

 

104

Balance at end of year

  Ps.  850

Ps. 1,087

Ps. 2,232

 

$ 214

 

Vitro, S.A. de C.V. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Millions of constant Mexican pesos as of December 31, 2002, except per share amounts)

 

Capital
stock

Treasury
stock
and paid-in
capital

Shortfall
in restatement
of capital

Cumulative
effect of
deferred
taxes

Minimum
pension
liability
adjustment

Retained
earnings

Minority
interest

Stock-
holders'
equity

Balance at

 

 

 

 

 

 

 

 

January 1, 2000

Ps.  6,202

  Ps. 758

Ps.(16,452)

Ps.

Ps. (137)

 Ps.18,358

 Ps. 4,732

  Ps. 13,461

Dividends  (Ps. 1.05 per share)

 

 

 

 

 

(341)

 

(341)

Decrease in minority interest

 

 

 

 

 

 

(524)

(524)

Sale of treasury stock

 

698

 

 

 

 

 

698

Paid-in capital

 

(53)

 

 

 

 

 

(53)

Acquisition of  treasury stock

 

(860)

 

 

 

 

 

(860)

Comprehensive loss (note 13 i) 

 

 

(265)

(1,484)

(23)

  377

(715)

(2,110)

Balance at

December 31, 2000

6,202

543

(16,717)

(1,484)

(160)

18,394

  3,493

  10,271

Dividends (Ps. 1.05 per share)

(324)

(324)

Decrease in minority interest

(128)

(128)

Paid-in capital

55

  55

Acquisition of treasury stock

 (204)

(204)

Comprehensive income (note 13i)

(356)

(31)

  164

  264

41

 Balance at

December 31, 2001

  6,202

394

(17,073)

(1,484)

(191)

18,234

  3,629

9,711

Dividends (Ps. 0.25 per share)

(78)

(78)

Decrease in minority interest

(1,304)

(1,304)

Paid-in capital

7

7

Comprehensive income (note 13i)

77

(107)

(44)

  336

262

Balance at

December 31, 2002

Ps.6,202

Ps. 401

Ps.(16,996)

Ps. (1,484)

Ps. (298)

Ps.18,112

Ps.  2,661

  Ps. 8,598

 

 

Vitro, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
(Millions of constant Mexican pesos as of December 31, 2002, except per share amounts)


1. Activities of the company

Vitro, S.A. de C.V. ("Vitro") is a holding company, the subsidiaries of which manufacture and market glass and plastic containers, thermoformed articles, aluminum cans, flat glass for construction and automotive uses, glassware for table and kitchen use, fiberglass insulation and reinforcements, chemical products and minerals, and capital goods.


2. Basis of presentation and principles of consolidation

a) Basis of presentation

The consolidated financial statements of Vitro and its subsidiaries (the "Company") are prepared in accordance with accounting principles generally accepted in México ("Mexican GAAP"), as further described in note 3.

The consolidated financial statements presented herein are expressed in millions of constant Mexican pesos as of December 31, 2002, except per share amounts. However, solely for the convenience of users, the consolidated financial statements as of and for the year ended December 31, 2002 have been translated into United States (US) dollars at the rate of 10.4393 pesos per one dollar, the rate of exchange determined by Banco de México (Mexico's Central Bank) on December 31, 2002. The translation should not be construed as a representation that the peso amounts shown could be converted into US dollars at such rate or at any rate.

All references to dollars, in the financial statements and these notes, correspond to dollars of the United States of America.

b) Consolidated subsidiaries

Those companies in which Vitro holds, directly or indirectly, more than 50% of the capital stock or which Vitro controls are included in the consolidated financial statements. For those companies in which Vitro has joint control, the proportionate consolidation method is used, this method consists in consolidating on a proportionate basis the assets, liabilities, stockholders equity and revenues. All significant intercompany balances and transactions have been eliminated in consolidation.

Vitro's subsidiaries Vitromátic, S. A. de C. V. and subsidiaries (see note 18f); Empresas Comegua, S.A. and subsidiaries; and Vitro Flex, S. A. de C. V.; as well as certain other subsidiaries and associated companies which in the aggregate are not material, are audited by firms of public accountants other than the Company's principal auditor.

In order to consolidate the financial statements of subsidiaries located in the United States of America, the effects of inflation were taken into consideration in accordance with Bulletin B-10, as amended, which is the principal difference between US generally accepted accounting principles ("US GAAP") and Mexican GAAP for these companies. Such companies' financial statements are initially prepared in accordance with US GAAP and are translated into Mexican pesos under the current rate method. The assets, liabilities, stockholders' equity (except capital stock) and the income statement accounts are translated into Mexican pesos using the exchange rate as of the date of the most recent balance sheet presented. The cumulative translation adjustment is included as a component of stockholders' equity.

c) Investment in associated companies

Associated companies are those companies in which Vitro holds, as a permanent investment, less than 50% of the capital stock and maintains significant influence. Such investments are accounted for by the equity method.


3. Principal accounting policies

a) Accounting method for the treatment of the effects of inflation

The consolidated financial statements of the Company have been prepared in accordance with Bulletin B-10, "Recognition of the Effects of Inflation in Financial Information", as amended, issued by the Mexican Institute of Public Accountants ("IMCP"), which relates to the recognition of the effects of inflation. The Third Amendment to Bulletin B-10 (the "Third Amendment") has been adopted in preparing such consolidated financial statements. The Third Amendment requires the restatement of all comparative financial statements to constant pesos as of the date of the most recent balance sheet presented. For that purpose, Vitro's Mexican subsidiaries and associated companies use the "Indice Nacional de Precios al Consumidor" (Mexican National Consumer Price Index: "INPC"), published by Banco de México; Vitro's US subsidiaries use the Consumer Price Index - All Urban Consumers - All Items, Unadjusted ("CPI") published by the US Labor Department, and are translated using the exchange rate at the end of the last period presented.

Bulletin B-12 set the rules related to the statement of changes in financial position. This statement presents the sources and uses of funds during the period measured as the differences, in constant pesos, between the beginning and ending balances of balance sheet items adjusted by the excess (shortfall) in restatement of capital. As required by Bulletin B-12, the monetary effect and the effect of changes in exchange rates are not considered non-cash items in the determination of resources generated from operations due to the fact they affect the purchasing power of the entity.

b) Cash and cash equivalents

Highly liquid short-term investments with original maturity of ninety days or less, consisting primarily of Mexican Government Treasury Bonds and money market instruments, are classified as cash equivalents. They are valued at the lower of acquisition cost plus accrued yields or estimated net realizable value.

c) Financial instruments

Assets and liabilities resulting from any financial instrument, except for such instruments held to maturity, are recorded in the balance sheet at fair value. The financial instruments held to maturity are valued at their acquisition cost. The effects of valuation of the financial instruments, including their cost and yield are recorded in the corresponding year in the statement of operations.

Financial instruments for hedging purposes, are valued using the same criteria of valuation of the assets or liabilities hedged, and the effect of such valuation is recognized in net income, net of costs, expenses, or income from the assets or liabilities whose risks are being hedged.

d) Inventories and cost of sales

Inventories are valued at the price of the last purchase made during the year or at the latest production cost without exceeding the net realizable value. Cost of sales is determined by using the price of the last purchase prior to the date of consumption or the latest production cost at the time of sale.

e) Land, buildings, machinery and equipment

Expenditures for land, buildings, machinery and equipment, including renewals and improvements that extend useful lives, are capitalized. The Company follows the principles of the Fifth Amendment to Bulletin B-10, under which, fixed assets are restated under the method of consumer price index adjustment, using the INPC. The initial balance to apply the INPC was the net replacement value as of December 31, 1996. For machinery and equipment purchased in a foreign country, the restatement is based on a general consumer price index from the country of origin and the exchange rate at the end of each period.

Maintenance and repair expenses are recorded as costs and expenses in the period when they are incurred.

Depreciation is calculated using the straight-line method, taking into consideration the estimated useful life of the asset, in order to depreciate the original cost and the revaluation. The depreciation begins in the month in which the asset is placed in service. The estimated useful lives of the assets are as follows:

 
  Years
Buildings
20 to 50
Machinery and equipment
5 to 30

f) Goodwill

Goodwill is amortized on a straight-line basis over a period of 20 years. Amortization expense for the years ended December 31, 2000, 2001 and 2002 was Ps. 18, Ps. 30 and Ps. 41, respectively.

g) Seniority premiums, retirement plans and severance payments

Seniority premiums and pension plans for all personnel are considered as costs in the periods in which services are rendered. Periodic costs are calculated in accordance with Bulletin D-3 issued by the IMCP, and the actuarial computations were made by an independent actuary, using estimates of the salaries that will be in effect at the time of payment. The past service cost is amortized over the average period required for workers to reach their retirement age. The method used is the projected unit credit. Effective 2000 the Company began funding a trust in order to cover the payment of such liabilities.

Severance payments are expensed in the period in which such payments are made.

h) Excess (shortfall) in restatement of capital

This item, which is an element of stockholders' equity, reflects the accumulated effect of holding non-monetary assets and the effect of the initial monetary position gain or loss. The accumulated effect of holding non-monetary assets represents the difference between the specific values of non-monetary assets in excess of or below the increase attributable to general inflation as measured by the INPC and CPI.

i) Restatement of capital stock and retained earnings

Capital stock and retained earnings, for Mexican subsidiaries, are restated using the INPC from the respective dates such capital was contributed or net income generated to the date of the most recent balance sheet presented. Retained earnings for US subsidiaries are restated using the CPI.

j) Employee stock option plan

An employee stock option plan (see note 13b) was adopted in 1998. The Company is accounting for stock-based compensation using a fair value based method. Compensation cost is measured at the grant date based on the value of the stock option award and is recognized over the vesting period.

k) Transactions in foreign currency for Mexican subsidiaries

All transactions in foreign currency are translated at the exchange rate as of the date of such transactions. In accordance with the Third Amendment, to Bulletin B-10, such transactions are restated using the INPC. Monetary assets and liabilities denominated in foreign currency are translated into Mexican pesos at the exchange rate at the date of the financial statements. Exchange fluctuations are recorded in the statements of operations as part of the total financing cost.

l) Revenue recognition

Revenues and related costs are recognized in the period in which risks and benefits are transferred to purchasers, which generally coincides with the shipment of products to costumers in satisfaction of orders.

m) Gain (loss) from monetary position

The gain (loss) from monetary position reflects the result of holding monetary assets and liabilities during periods of inflation. Values stated in current monetary units decrease in purchasing power over time. This means that losses are incurred by holding monetary assets over time, whereas gains are realized by maintaining monetary liabilities. The net effect is presented in the statements of operations as part of the total financing cost. For subsidiaries located in the US the result from monetary position is calculated using the CPI.

n) Income tax, tax on assets and profit sharing to workers

The Company applies the provisions of the Bulletin D-4 "Accounting Treatment of Income Tax, Tax on Assets and Workers' Profit Sharing", issued by the IMCP. As required by this bulletin, deferred income taxes are provided for differences between the book and tax value of assets and liabilities and deferred workers' profit sharing for temporary differences between the financial and adjusted tax income, that are expected to reverse in the future. Additionally, tax on assets paid in excess of income tax payable is recognized as an asset to the extent it is recoverable.

o) Earnings per share

Earnings per share are computed by dividing income by the weighted average number of shares outstanding during each period. Diluted earnings per share is no presented for periods in which all common stock equivalents are anti-dilutive or periods in which the Company records a net loss from continuing operations.

p) Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts in these consolidated financial statements and in the related disclosures. Actual results could differ from those estimated.


4. Discontinued operations

On July 3, 2002, Vitro sold its 51% interest in Vitromátic, S.A. de C.V (Vitromátic) the holding company of the subsidiaries who comprised the segment Acros - Whirlpool. Vitro sold its ownership in Vitromátic to Whirlpool Corporation, who owns the related remaining 49% interest, for $ 148.3 million. Such sale resulted in a gain of Ps. 463 which is presented in the consolidated statement of income in the line item "Income on disposal of discontinued operations."

The balance sheet and statements of income for all periods presented, have been restated to present the balances and results of Vitromátic as discontinued operations. The condensed balance sheet and income statements of Vitromátic are comprised as follows:

Condensed Balance sheet:
 
December 31, 2001
Cash and cash equivalents
Ps. 8
Trade receivables
668
Inventories
479
Other receivables
85
Current assets
1,240
Fixed assets
3,034
Other assets
212
Long-term assets
3,246
Total assets
Ps. 4,486
   
Trade payables
Ps. 965
Short-term borrowings
522
Other current liabilities
159
Current liabilities
1,646
Long-term debt
249
Other long-term liabilities
572
Long-term liabilities
821
Total liabilities
2,467
Stockholders' equity
2,019
Total liabilities and stockholders' equity
Ps. 4,486

Condensed income statements:

 
Year ended December 31,
Period from January 1,
to June 31, 2002
(unaudited)
 
 
  2000
2001
Net sales
Ps. 6,115
 Ps.  6,306
  Ps. 3,311
Cost of sales
4,877
5,213
2,772
Gross profit
1,238
1,093
539
General, administrative and selling expenses
588
598
304
Operating income
650
495
235
Financing cost and other
275
176
445
Income tax
164
130
(92)
Net income (loss)
Ps.  211
Ps.  189
  Ps.  (118)

5. Trade receivables

a) Trade receivables are recorded net of allowance for doubtful accounts of Ps. 43 and Ps. 62 at December 31, 2001 and 2002, respectively.

b) Sales of receivables.- The Company has entered into several factoring agreements to sell trade accounts receivable. In accordance with the terms of these agreements, the Company has the obligation to pay uncollected receivables, in the case of non-compliance of clients. The outstanding balance of receivables sold, which are deducted from the trade receivables balance, at December 31, 2001 and 2002 amounted to $ 93 million and $ 99 million. The Company periodically monitors collections to provide for any uncollectible account.


6. Inventories

Inventories are summarized as follows:

 
December, 31
 
2001
2002
Semi-finished and finished products
Ps. 2,497
Ps. 2,658
Raw materials
400
499
Packaging materials
89
86
 
2,986
3,243
Spare parts
243
272
Refractory
51
95
Merchandise in transit
118
177
Other
25
22
 
Ps. 3,423
Ps. 3,809


7. Land and buildings, and machinery and equipment

Land and buildings, and machinery and equipment are summarized as follows:

 
December, 31
 
2001
2002
Land
Ps. 3,517
Ps. 3,390
Buildings
10,947
10,211
Accumulated depreciation
5,051
4,889
 
Ps. 9,413
Ps. 8,712
Machinery and equipment
Ps. 25,708
Ps. 25,655
Accumulated depreciation
16,323
16,693
 
Ps. 9,385
Ps. 8,962

As mentioned in note 3 e), machinery and equipment purchased in a foreign country was restated using the CPI of such country.


8. Short-term borrowings

At December 31, 2001 and 2002, short-term borrowings denominated in Mexican pesos totaled Ps. 122 and Ps. 71, respectively, and short-term borrowings denominated in foreign currency (all of which are denominated in US dollars) totaled Ps. 3,085 and Ps. 3,105, respectively. During 2002, the Company weighted average rate for short-term borrowings in Mexican pesos was 9.45% and for short-term borrowings denominated in dollars was 4.28%.


9. Long-term debt

Long-term debt consists of the following:

December 31,
2001
2002
I. Foreign Subsidiaries (payable in US Dollars):
Secured debt, floating interest rate based on LIBOR plus a spread between 2.0% and 2.5%, principal payable in several installments through 2005.
Ps. 159
Ps. 167
Secured debt, fixed interest rate of 5.25%, principal payable in several installments through 2008.
90
Unsecured debt, floating interest rate based on LIBOR plus a spread of 1.6%, principal payable in  2003.
312
287
Unsecured debt, floating interest rate based on EURIBOR plus a spread of 2.54%, principal payable in several installments through 2010.
30
 
II. Mexican Subsidiaries (payable in US Dollars):
Secured debt, floating interest rate based on LIBOR plus a spread between 1.75% and 2.3%, principal payable in several installments through 2007.
2,836
2,323
Unsecured debt, floating interest rate based on LIBOR plus a spread between 1.5% and 2.5%, principal payable in several installments through 2008.
1,944
2,825
Unsecured debt, fixed interest rate of 11.50%, principal payable in several installments through 2009.
844(1)
11.375% guaranteed senior unsecured notes due in 2007.
4,022
2,415
 
III. Vitro and Mexican Subsidiaries (payable in Mexican Pesos):
Unsecured medium term notes, floating interest rate based on 182 day treasury bonds (CETES) plus a spread between of 2.4% and 3.26%, principal payable in 2004 and 2008.
328
1,670
 
IV. Vitro and Mexican Subsidiaries denominated in UDI's (investment units), payable in Mexican Pesos :
Unsecured debt, interest rate of 8.75%, principal payable in several installments through 2006.
229
174
Unsecured medium term notes, fixed interest rate between 9.0% and 10.0%, principal payable  in 2002 and 2006.
1,370
1,037
Unsecured medium term notes, floating rate based on UDI's plus 1.75%, principal payable in 2004.
146
153
 
11,346
12,015
Less current maturities
2,795
1,602
 
Ps. 8,551
Ps. 10,413

(1) A portion of the net proceeds of the sale of the 2009 Senior Notes, in the amount of $39.1 million, were used to purchase 13.889% Credit Linked Notes issued by the CLN Issuer with an aggregate principal amount of $40 million. Under the terms of the 13.889% Credit Linked Notes, upon the occurrence of a Credit Event, which includes our bankruptcy or insolvency, noncompliance with the terms of our indebtedness which would permit the acceleration thereof, a default with respect to our indebtedness, a restructuring of our indebtedness or a repudiation of or moratorium with respect to payments of our indebtedness, whether by us or a governmental entity, the principal amount of the 13.889% Credit Linked Notes will be reduced pursuant to a formula based on the then current market price of the 11?% Guaranteed Notes. As a result, if a Credit Event occurs and we are not able to cure such Credit Event within the applicable period, we may lose the entire amount that we invested in the 13.889% Credit Linked Notes. As long as a Credit Event has not occurred, the CLN Issuer is generally required to redeem (i) the 13.889% Credit Linked Notes in four annual installments, beginning on May 7, 2003 and (ii) a pro rata portion of the 13.889% Credit Linked Notes at the time any portion of the 2009 Senior Notes is sold by CSFBI.

Concurrently with the issuance of the 2009 Senior Notes and the purchase of the 13.889% Credit Linked Notes, we entered into a swap agreement with CSFBI pursuant to which we agreed to make certain payments on April 30 of each year, beginning on April 30, 2003 and ending on April 30, 2006, to CSFBI calculated with respect to an original notional amount of $80 million if a proportional part of the 2009 Senior Notes have not been sold by CSFBI at that time and the market price of the 11?% Guaranteed Notes has declined from an initial benchmark price which is based on the price paid by CSFBI for the 2009 Senior Notes. In addition, under the swap agreement, CSFBI may require us to, at any time, make payments of all amounts that would be owed by us on all future payment dates if the market price of the 11?% Guaranteed Notes has declined to certain levels, with any such payments being reduced by payments we would be required to make on future payment dates. If certain Termination Events occur, which are similar to the Credit Events described above, CSFBI may terminate the swap agreement. In that event, we may owe CSFBI an amount calculated as described above with respect to declines in the market price of the 2009 Senior Notes for up to $40 million.

As of December 31, 2002, the interest rate of EURIBOR, CETES and LIBOR were 2.90%, 6.88% and 1.42%, respectively.

We reclassified short- term borrowings to long- term debt (see note 20).

The schedule of principal payments of long-term debt as of December 31, 2002 is as follows:

2004
Ps.  2,724
2005
1,009
2006
1,731
2007
2,708
2008
2,241
 
Ps.  10,413


Certain of the Company's long-term debt agreements contain restrictions and covenants that require the maintenance of various financial ratios. The Company has complied with the restrictions and covenants during 2002.

Debt of the Company totaling Ps. 2,822 is collateralized with fixed assets and trade receivables with a book value of Ps. 4,379 as of December 31, 2002.

The Company primarily uses interest rate swaps ("interest swaps"), foreign currency forward contracts ("forward contracts"), and currency swaps ("currency swaps") to manage its exposure to fluctuations in interest and foreign currency exchange rates. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various derivative transactions. It is the Company's policy not to enter into derivative financial instruments for speculative purposes.

The Company's Interest Swaps effectively convert a portion of its variable rate debt to fixed rate debt. Their forward contracts provide for the purchase of foreign currencies at specified future dates at specified exchange rates. Further, the Company's currency swaps effectively convert a portion of its UDI's denominated debt to dollars and then to mexican pesos denominated debt.

The following table summarizes the derivative financial instruments in place as of December 31, 2002:

 
Type of transaction
Commence-ment date
Termination date
Fixed interest rate
Variable interest rate
Notional  amount
Interest rate cap
Contract currency
Foreign  exchange rate
Interest swap 29-Jun-00 29-Jun-05
6.85%
 Libor - reviewed each 6 months 20 million USD      
Interest swap 30-Jun-01 30-Jun-06
5.20%
 Libor - reviewed each 3 months 188 million USD      
Interest cap 28-Nov-01 28-Nov-06     350 Million USD
5.9457%
    
Currency swap 24-Jan-01 12-Oct-06      155 million UDI's    Dollars  
Currency swap 24-Jan-01 7-Jun-06      200 million UDI's    Dollars  
Currency swap 25-Jan-01 12-Oct-04      50 million UDI's    Dollars  
Currency swap 17-Apr-02 12-Oct-06      47 million USD    Pesos  
Currency swap 17-Apr-02 7-Jun-06      61 million USD    Pesos  
Currency swap 17-Apr-02 12-Oct-04     15 millon USD   Pesos  
Forward contract 12-Aug-02 12-Aug-07      100 million USD    Pesos
11.61
Forward contract 29-Aug-02 12-Aug-07      100 million USD    Pesos
11.76

The effect in the income statement of the above mentioned transactions were:

Income (expense)
Year ended December 31,
2001
2002
Interest swap
Ps.  (32)
Ps.  (151)
Forward contract
61
Currency swap
166
5
Net
Ps. 134
Ps. (85)


10. Pension plans and seniority premiums

The disclosures relating to the Company's pension plans and seniority premiums required by Bulletin D-3, issued by IMCP, calculated as described in note 3 g), together with certain actuarial assumptions utilized are presented below as of December 31, 2001 and 2002:

 
December 31,
 
2001
2002
Accumulated benefit obligation
Ps.  1,586
  Ps.  1,684
 
Projected benefit obligation
  Ps.  1,647
  Ps.  1,759
Plan assets at fair value
(418)
(433)
Unrecognized net loss
(237)
(212)
Unrecognized transition obligation
(491)
(419)

Changes in assumptions and adjustments from experience
(286)
(515)
Projected net liability
  Ps.  215
Ps.  180
Additional minimum liability
  Ps.  964
Ps. 1,071
Net periodic cost (Ps. 245 for 2000)
210
214

At December 31, 2002, the plan assets presented above, included 39.2 million shares of Vitro.

Assumptions:

 
December 31,
  2001 2002
Discount rate 5.0% 4.5%
Expected rate of return on plan assets 7.0% 6.0%
Rate of compensation increase 1.0% 1.0%

 

11. Commitments and contingencies

a) In October, 2000, several subsidiaries of Vitro, S.A. de C.V. which have facilities throughout Monterrey, Mexico and the Mexico City area, entered into a 15 year energy purchase agreement for approximately 110 MW ("Megawatts") of electricity with Tractebel Energía de Monterrey, S. de R..L. de C.V. ("Tractebel"). It is expected that Tractebel will commence commercial operations during February 2003.

b) The Company's consumption of natural gas during 2002 was approximately 24,000,000 of British Thermal Units ("MMBTUS"), of which, it had covered a total of 14,211,024 MMBTUS with fixed price purchased contracts as follows:

 
% of coverage
MMBTUS 
over consumption
coverage price
Petroleos Mexicanos
42%
$4.00
Petroleos Mexicanos
17%
4.165

As of December 31, 2002, the Company maintains hedges on the price of natural gas for approximately 42% of its future planned consumption with Petróleos Mexicanos at a price of $ 4.00 dollar per MMBTUS.

As of February 7, 2003, the market price for MMBTUS was $ 5.435 dollars.

c) The Company has several non-cancellable operating lease agreements for the rent of warehouses and equipment. Rental expense for the years 2000, 2001 and 2002 was Ps. 280, Ps. 340 and Ps. 386, respectively.

Future minimum lease payments under these agreements are as follows:

2003
Ps. 385
2004
377
2005
359
2006
365
2007
370

d) The Company is not a party, and none of its assets is subject, to any pending legal proceedings nor is the Company subject to any contingent liabilities, other than as described in note 11 e) and legal proceedings and contingent liabilities arising in the normal course of business and against which the Company is adequately insured or indemnified or which the Company believes are not material in the aggregate.

e) As part of Anchor's disposal in a transaction approved by the U.S. Bankruptcy Court, Vitro provided to the Pension Benefit Guaranty Corporation ("PBGC"), a United States governmental agency that guarantees pensions, a limited guarantee of Anchor's under funded pension liability. No payments would be made under the guarantee unless the PBGC terminated any of Anchor's pension plans, and the guarantee would be payable only to the extent the PBGC could not otherwise recover the under funded liabilities from the entity that purchased Anchor's assets. The amount of the guarantee was originally limited to $70 million. Under the guarantee, payments would not begin until August 1, 2002, and would then generally be payable in equal semiannual installments over the following 10 years. Payments would not bear interest. The amount and the term of the guarantee would be proportionately reduced if the pension plans were terminated after January 31, 2002. Beginning February 2002, the guarantee would be reduced by $7 million semiannually until August 1, 2006, when the guarantee would expire if the plans did not terminate.

On April 15, 2002, Anchor filed a pre-negotiated plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code. On August 6, 2002, an amended plan of reorganization was confirmed, pursuant to which the Anchor pension plan was terminated and the obligations there under were assumed by the PBGC in exchange for cash, securities and a commitment of the new reorganized entity to make certain future payments. The actual date of the termination is not known. The PBGC may consider that this termination of the Anchor plan may give rise to claims against Vitro under the limited guarantee. There are various certain issues concerning any such possible claims and certain defenses that could be asserted by Vitro. It is not possible to estimate the amounts, if any, that would be paid with respect to such possible claims; however, the total payments required could not exceed $63 million under the terms of the guarantee payable in equal bi-annual installments through August 1, 2011. If the termination date was after July 31, 2002, then the maximum payments could not exceed $56 million payable in equal bi-annual installments through February 1, 2011. See Note 20.


12. Foreign currency operations

a) At December 31, 2002, the assets and liabilities denominated in foreign currency (other than Mexican pesos) of the Company's Mexican subsidiaries consist of the following:

 
Millions of US Dollars
Millions of Mexican Pesos
Monetary assets
$132
Ps.  1,375
Inventories
29
298
Fixed assets
392
4,096
Monetary liabilities
987
10,302

b) Foreign operations of the Company's Mexican subsidiaries during 2002 consisted of the following:

 
Millions of US Dollars
Millions of Mexican Pesos
Exports
$586
Ps. 5,993
Imports
318
3,170
Interest expense, net
113
1,135

c) The condensed financial information of the principal foreign subsidiaries of the Company at December 31, 2002 is the following:

 
United States of America
Central and South America
Europe
Net sales
Ps.  7,730
Ps.  1,309
Ps.  867
Operating income
146
156
93
Total assets
2,413
2,786
1,257
Total liabilities
968
813
583

d) The exchange rates of the Mexican peso against the US dollar, used for purposes of the Company's consolidated financial statements at the following dates were:

December 31, 1999
Ps. 9.4986
December 31, 2000
9.6098
December 31, 2001
9.1695
December 31, 2002
10.4394

On February 7, 2003, the exchange rate was Ps. 10.8979 per one US dollar.


13. Stockholders' equity

a) At December 31, 2001 and 2002, the capital stock of the Company consisted of 324,000,000 ordinary, nominative, fully paid common shares, without par value.

b) The Company maintains an Employee Stock Option Plan established in March 1998 (the "Plan"). The Plan specifies amount of shares, time and initial exercise price, which is equal to the average closing price on the Mexican Stock Exchange of the common shares on the 20 days prior to the Grant Date, except for the options issued during 2000, 2001 and 2002, which were Ps. 11.00, Ps. 8.27 and Ps. 7.53, respectively. The vesting period of the options is 5 years and the life of such options is 10 years. At December 31, 2002, no options have been exercised.

The following table summarizes the activity relating to the Plan:

 
1998
1999
2000
2001
2002
Options granted during the year
2,813,300
2,893,000
4,851,900
3,204,800
3,941,950
Options cancelled in 2002
618,820
594,500
583,000
62,000
39,600
Options outstanding at December 31, 2002
2,194,480
2,298,500
4,268,900
3,142,800
3,902,350
Exercisable options
822,250
1,357,500
1,377,525
891,975
0
Initial exercise price
Ps.  31.31
 Ps.  14.88
 Ps.  11.00
 Ps.  8.27
Ps. 7.53
Weighted exercise price at December 31, 2002
34.82
17.48
11.00
8.27
7.53

During 2001 the Company repriced 940,950 of the options granted in 1998 to Ps. 13.00.

The closing price of the Company's shares on the Mexican Stock Exchange on December 31, 2002 was Ps. 8.02.

The exercise price of the options granted in 1998 and 1999 will be determined at the time such options are exercised by indexing the initial price using an indexing factor based on the cumulative performance of the Company's common shares relative to the cumulative performance of the Indice de Precios y Cotizaciones of the Mexican Stock Exchange; such indexing factor is subject to certain ceilings and floors. There is no indexing factor for the options granted in 2000, 2001 and 2002.

The estimated fair value of the options was made on the Grant Date using the Black-Scholes option-pricing model with the following assumptions:

Risk-free interest rate
3.23%
Expected life in years
8
Price volatility
44.62%
Dividend Yield
0

Compensation cost charged against income for such plan was Ps. 23, Ps. 34 and Ps. 37 for 2000, 2001 and 2002, respectively.

c) As of December 31, 2001 and 2002 the treasury shares held by the Company were 50,294,020 and 47,979,489, respectively, which include the shares held by Stock Option Trust (see note 13b) which were 24,674,020 as of December 31, 2001 and 2002.

d) Stockholders' equity, except restated paid-in capital and tax retained earnings will be subject to a 35% dividend tax, payable by the Company in the event of distribution. Beginning 2003 such tax rate will be reduced by 1 percent each year through 2005 to 32%. The tax paid for such dividend can be credited against the income tax of the Company during the three years following the payment.

The balance of the stockholders' equity tax accounts, corresponding to the contributed capital account and the net consolidated tax income account, as of December 31, 2002 are Ps. 1,389 and Ps. 1,111, respectively.

e) Dividends declared and paid:

Stockholders' meeting date
Dividend Amount
  Nominal
 Constant
Payment date
March 31, 2000
146
171
April, 2000
March 31, 2000
146
162
October, 2000
April 5, 2001
149
162
May, 2001
April 5, 2001
149
(1)
March 14, 2002
75
78
June, 2002

     (1) This dividend will be paid on a date to be determined by the Board of Directors.

f) Minority interest in consolidated subsidiaries consists of the following:
December 31, 
2001
2002
Capital stock
Ps. 4,102
Ps. 2,094
Shortfall in restatement of capital
(4,378)
(2,657)
Retained earnings
3,425
3,093
Net income for the year
480
131
 
 Ps. 3,629
Ps. 2,661

g) Majority interest stockholders' equity consists of the following:

 
December 31, 2002
 
Nominal Value
Restatement
Restated Value
Capital stock
Ps. 324
Ps. 5,878
Ps. 6,202
Treasury stock
(303)
(211)
(514)
Paid-in capital
(121)
1,036
915
Shortfall in restatement of capital
(16,996)
(16,996)
Cumulative effect of deferred taxes
(1,259)
(225)
(1,484)
Minimum pension liability adjustment 
(298)
(298)
Retained earnings
(2,395)
20,507
18,112
 
Ps. (4,052)
 Ps. 9,989
Ps.  5,937

h) At December 31, 2002, stockholders equity includes Ps. 3,615 of retained earnings and other undistributed capital items of the subsidiaries.

i) Comprehensive income (loss) that is reflected in the accompanying statements of Stockholders´ Equity, represents the net result of the Company's performance each financial year, and consists of net income of each year plus other items of comprehensive income of the same period, which in accordance with the Mexican GAAP are reflected directly in Stockholders´ Equity, without affecting the income statement. The other items of comprehensive income consist of the result of holding non-monetary assets and the minimum pension liability adjustment. In addition, in 2000 the comprehensive loss includes the cumulative effect of deferred income tax of Ps. 1,484 in majority interest and Ps. 1,125 in minority interest. Consequently, comprehensive income of 2001 and 2002, is not comparable with 2000.

 

14. Total financing cost

Following is a disclosure of the most important items that are included in total financing cost:

 
Year ended December 31,
 
2000
2001
2002
Interest expense on debt denominated in dollars
 Ps. 1,252
Ps. 1,308
  Ps.  1,157
Interest expense on debt denominated in pesos
432
165
69
Interest expense on debt denominated in UDI's
188
50
34
Restatement of UDI's
164
27
9
Interest income
(25)
(28)
(57)
Exchange loss (gain), net
111
(578)
1,544
Gain from monetary position
(1,303)
(653)
(778)
Other financial expenses
254
320
281
Total financing cost
Ps.  1,073
Ps.  611
Ps. 2,259

 

15. Other expense, net

Following is the analysis of other expenses, net:

 
Year ended December 31,
 
2000
2001
2002
Restructuring charges
 Ps. 139
Ps.  302
Ps. 94
Write-off and loss from sale of fixed assets
284
375
409
(Gain) loss from sale of subsidiaries and associated companies
(60)
124
(65)
Disposition of Manufacturas, Ensamblajes y Fundiciones, S. de R.L. de C.V. (see note 18 b)
76
Other
(3)
16
(22)
 
Ps.  436
 Ps.  817
Ps.  416


During 2000, 2001 and 2002 the Company downsized its corporate services at headquarters and certain business units, which resulted in a charge of Ps. 139, Ps. 302 and Ps. 94, respectively.


16. Tax loss carryforwards

At December 31, 2002, the tax loss carryforwards, the asset tax to be recovered and the capital losses that can be amortized against capital gains consist of the following:
Tax loss carryforwards
Asset Tax
Expiration Year
Majority Interest
Minority Interest
Majority Interest
Minority Interest
Capital Losses
2004
  Ps.
Ps.
Ps.  185
  Ps.
Ps.  2,086
2005
281
2006
537
2007
1,741
1,128
2008
4,586
12
172
2009
64
5
2010
463
129
2011
209
33
2012
1,133
170
 
Ps.  8,477
 Ps.  349
Ps. 357
  Ps.
Ps.  3,751

 

17. Income tax , workers' profit sharing and asset tax

a) The Company is subject to income tax and tax on assets for consolidation purposes in the proportion of the number of the subsidiary's voting shares that Vitro owns. As of January 1, 2002, the proportion is calculated based on the average daily equity percentage which the Company owns of its subsidiaries during the year. The taxable income of the subsidiaries are consolidated at 60% of the mentioned proportion. The monthly tax advances to Secretaría de Hacienda y Credito Publico of Vitro as well as its subsidiaries, are made as if they have not elected tax consolidation.

b) The income tax and workers' profit sharing included in the Company's results are:

 
Year ended December 31,
 
2000
2001
2002
Income tax:
Current
Ps.  478
Ps.  280
 Ps.  399
Deferred
90
56
(869)
 
568
336
(470)
Asset tax
13
(8)
 
Ps. 581
Ps. 336
Ps.  (478)


 
Year ended December 31,
 
2000
2001
2002
Workers' profit sharing:
Current
Ps. 173
Ps.  48
Ps. 46
Deferred
151
48
1
 
Ps. 324
Ps.  96
Ps. 47

Deferred tax assets (liabilities) presented on the balance sheets consist of the following:

 
December 31,
 
2001
2002
Assets:    
Accounts receivable
Ps. 187
Ps.  110
Tax benefit from the future deduction of inventories held on December 31, 1986
156
81
Reserve for seniority premiums and pensions
496
430
Tax loss carryforwards
2,452
2,835
Exchange fluctuations
(40)
14
Asset tax
392
357
 
3,643
3,827
 
Liabilities:
Inventories
968
794
Fixed assets
3,698
3,247
Other
389
336
 
5,055
4,377
Net liabilities
Ps.  1,412
 Ps. 550

c) The income tax rate is 35%. In accordance with the new income tax law, which became effective on January 1, 2002, the income tax rate will be reduced annually by 1% beginning 2003 through 2005. The effect of this decrease in the income tax rate was recorded effective January 1, 2002 and was a decrease in net long-term liabilities and an increase in net income of Ps. 36. Following is a reconciliation between the Company's effective income tax rate and the statutory rate:

 
Year ended December 31,
 
2000
2001
2002
Effective income tax rate
36.4%
37.9%
69.4%
Asset tax included as income tax
  (1.2)
Loss on sale of subsidiaries
5.6
1.0
Difference between tax and accounting basis for monetary gain
  (0.6)
  (1.9)
  (8.9)
Loss from foreign companies and minority interest
  (0.2)
  (3.6)
  (14.0)
Effect of change in the income tax rate
  (5.1)
Other
  (0.6)
  (3.0)
  (6.2)
Statutory income tax rate
35.0%
35.0%
35.0%

d) Changes in stockholders' equity in shortfall in restatement of capital and minimum pension liability adjustment are presented net of deferred tax effect as follows:

 
Year ended December 31,
 
2000
2001
2002
Shortfall in restatement of capital
Ps.  108
Ps.  172
Ps.  (108)
Minimum pension liability adjustment
13
17
59
 
Ps.  121
Ps.  189
Ps.  (49)


18. Business acquisitions and dispositions

a) Acquisition of Harding Glass Inc.- In April 2000, VVP America consummated the acquisition of substantially all of the assets of Harding Glass, Inc., for an amount of $ 31.4 million. With the acquisition of Harding, VVP America incorporated into its operations 5 distribution centers and 118 retail stores located throughout the United States. Harding is one of the leading distributors of glass products for automotive and construction markets.

b) Disposition of Manufacturas, Ensamblajes y Fundiciones, S. de R. L. de C.V.- On August 10, 2000 Vitro and GE México, S.A. de C.V. a subsidiary of General Electric Company, a U.S. Corporation, decided to terminate their Joint Venture Agreement which in 1997 resulted in the creation of Manufacturas, Ensamblajes y Fundiciones, S. de R.L. de C.V. The termination of the joint venture was subject to compliance with certain requirements imposed by both parties. Those requirements were completed in January 2001, resulting in the closing of such facility. A loss of Ps. 76 was recognized in 2000 and is included in Other expense, net.

c) Sale of Regioplast, S.A. de C.V.- On May 21, 2001, Vitro sold its 50% interest in Regioplast, S.A. de C.V. to Owens Illinois Inc., former partner of Vitro in such company, for an amount of $ 8.0 million. A loss of Ps. 86 was realized as a result of this transaction and is included in Other expense, net.

d) Acquisition of Cristalglass Vidrio Aislante, S.A. - On May 4, 2001 the Company acquired 60 percent of the outstanding shares of Spain's Cristalglass Vidrio Aislante, S.A., holding company of Group Cristalglass. Cristalglass fabricates, distributes and sells flat glass for the construction industry. The company employs over 300 people. Annual sales are approximately $ 60 million.

e) Ampolletas- On April 15, 2002 the Company sold to Gerresheimer Glas AG, its 51% interest in Ampolletas, S.A. for consideration that includes cash, the assumption of debt and the assignment of certain receivables, that altogether amount to approximately $ 21 million.

f) Vitromatic - On July 3, 2002, Vitro sold its interest in Vitromatic (see note 4).


19. Business segment data

The accounting policies of the segments are the same as those described in notes 2 and 3. The Company evaluates the performance of its segments on the basis of operating income. Intersegment sales and transfers are accounted for as if the sales and transfers were to third parties, that is, at current market prices.

Vitro's reportable segments are strategic business units that offer different products. The segments are managed separately; each requires different manufacturing operations, technology and marketing strategies; and each segment primarily serves a different customer base.

The Company has three reportable segments: Glass Containers, Flat Glass and Glassware. On July 3, 2002, Vitro sold its interest in the segment Acros - Whirlpool (see note 4). The principal products of each of the segments are summarized below:

Segment
Principal products
Glass Containers Glass containers, sodium carbonate, borosilicate glass, capital goods, aluminum cans, precision components and molds for glass industry
Flat Glass Flat glass for the construction and automotive industries and Fiberglass
Glassware Glassware for table and kitchen use, and plastic disposable thermo fold ware


The segment data presented below does not include discontinued operations for any of the periods presented.

 
 Glass Containers 
 Flat Glass 
 Glassware 
 Corporate and other 
 Consolidated 
December 31, 2000:          
Net sales
 Ps.  10,258 
 Ps.  11,624 
 Ps. 3,187 
 Ps. 132 
 Ps.  25,201 
Interdivisional sales
  52
  102
  42
196
Consolidated net sales
10,206
11,522
3,145
  132
  25,005
Operating income
1,165
1,779
  546
(385)
  3,105
Assets 
15,368
11,464
3,965
  159
  30,956
Capital expenditures
  407
  364
  163
  18
952
Depreciation and amortization
1,019
  619
  241
  69
  1,948
Goodwill
 
  345
 
  345
 
December 31, 2001:
Net sales
 Ps. 9,997 
 Ps.  11,753 
 Ps.  2,776 
 Ps. 79 
 Ps.  24,605 
Interdivisional sales
  64
  94
  41
199
Consolidated net sales
9,933
11,659
2,735
  79
  24,406
Operating income
  932
1,346
  346
(309)
  2,315
Assets
13,380
11,254
3,390
1,141
  29,165
Capital expenditures
  314
  406
  91
  37
848
Depreciation and amortization
  975
  616
  251
  87
  1,929
Goodwill
 
  724
  
 
  724
 
December 31, 2002:
Net sales
 Ps.  10,012 
 Ps.  11,380 
 Ps. 2,618 
 Ps.  117 
 Ps.  24,127 
Interdivisional sales
  69
  107
  29
205
Consolidated net sales
9,943
11,273
2,589
  117
  23,922
Operating income
1,188
  845
  260
(307)
  1,986
Assets
12,969
11,467
3,200
2,380
  30,016
Capital expenditures
  589
  283
  125
  21
  1,018
Depreciation and amortization
  893
  656
  264
  95
  1,908
Goodwill
 
  748
  
 
  748

Export sales from México, substantially all of which are denominated in US dollars, are mainly to the United States and Canada and were as follows (in million of US dollars):

Year ended December 31,
2000
2001
2002
 $ 608
 $ 589
 $ 586

Certain geographic information about the Company's operations and assets is summarized as follows:

 
Year ended December 31,
 
2000
2001
2002
Net sales (1)  to customers in:
Mexico
Ps.  12,668
Ps. 11,687
Ps. 11,319
All foreign countries, mainly the United States and Canada
12,337
12,719
12,603
Consolidated
Ps.  25,005
Ps. 24,406
Ps. 23,922

Consolidated net sales to any single external customer did not equal 10% or more of Vitro's total consolidated net sales.

 
December 31,
 
2000
2001
2002
Land and buildings, machinery and equipment, and construction in progress:
Mexico
Ps.  19,016
Ps.  17,413
Ps.  16,466
All foreign countries, mainly Central and South America and the United States
1,889
1,994
2,024
Consolidated
Ps.  20,905
Ps.  19,407
Ps. 18,490

 

20. Subsequent events

a) On February 27, 2003, the Company signed a Syndicated Facility for $ 201 million through its subsidiary Vitro Plan, S.A. de C.V. Accordingly, we reclassified short- term borrowings to long- term debt in the amount of $ 80 million.

b) On June 20, 2003, the Company received a letter from the PBGC, noting that the Anchor Plan was terminated effective as of July 31, 2002, and demanding payments pursuant to the limited guaranty of $7 million on or before August 1, 2003 and of $3.5 million semi-annually through August 1, 2011. There are various issues concerning any demand and certain defenses that could be asserted by Vitro. It is not possible to estimate the amounts that will ultimately be paid in response to such demand; however, the total payments required could not exceed $63 million under the guaranty.

21. Differences between Mexican and United States accounting principles

The Company's consolidated financial statements are prepared in accordance with Mexican GAAP, which differ in certain significant respects from US GAAP. The Mexican GAAP consolidated financial statements include the effects of inflation as provided for under Bulletin B-10, as amended (see note 3), whereas financial statements prepared under US GAAP are presented on a historical basis. However, the following reconciliation to US GAAP does not include the reversal of the adjustments required under Bulletin B-10, as amended, with the exceptions of the adjustment required by the fifth amendment to Bulletin B-10 discussed in note 21h) and the restatement of prior years' balances mentioned in note 21i). The application of Bulletin B-10, as amended, represents a comprehensive measure of the effects of price level changes in the inflationary Mexican economy and, as such, is considered a more meaningful presentation than historical cost-based financial reporting for both Mexican and U.S. accounting purposes.

The other principal differences between Mexican GAAP and US GAAP and the effect on consolidated net income and consolidated stockholders' equity are presented below:

Reconciliation of Net income (loss):

 
Year ended December 31,
 Millions of  US Dollars (Convenience Translation) Year Ended  December 31,
 
2000
2001
2002
2002
Net income  (loss) of majority interest as reported under Mexican GAAP
Ps.  377
Ps.  164
Ps.  (44)
$ (4)
         
Deferred income tax  *
  295
  82
(119)
(11)
Reduction of depreciation expense related to negative goodwill
(13)
  35
  30
  3
         
Depreciation of the effect of applying the Fifth Amendment
(157)
(188)
(202)
(19)
Workers' profit sharing  *
(43)
  344
  37
  3
Pre-operating expenses
  25
  16
 
 
Capitalized interest
(7)
(6)
(7)
(1)
Goodwill amortization    
  41
  4
Fair value of derivative financial instruments    
(176)
(17)
Effect of applying Bulletin B-15
(3)
(22)
 
 
Discontinued operations
  2
  22
(251)
(24)
Effect of the above adjustments on net income of minority interest
  183
(60)
  164
  16
         
TOTAL US GAAP adjustments
282
223
(483)
(46)
         
Net income (loss) under US GAAP
Ps.  659
Ps.  387
Ps. (527)
$ (50)
         
* Net of monetary gain        

Reconciliation of Stockholders' Equity:

  Year  ended  December  31, 
 Millions of  US Dollars (Convenience Translation) Year Ended  December 31,
2000
2001
2002
2002
Total stockholders' equity reported under Mexican GAAP
 Ps. 10,271 
 Ps. 9,711
 Ps. 8,598
$ 824
 
 
 
 
Less minority interest included as stockholders' equity under Mexican GAAP
  (3,493)
  (3,629)
  (2,661)
(255)
       
Majority interest stockholders' equity under Mexican GAAP
6,778
6,082
5,937
  569
US GAAP adjustments:        
Deferred income tax:        
Effect on retained earnings
(33)
  69
(51)
(5)
Effect on excess (shortfall) in restatement of capital
(606)
(801)
(622)
(60)
Reversal of negative goodwill 
  (4,492)
  (4,492)
  (4,492)
(430)
Reversal of the accumulated depreciation related to negative goodwill
4,265
4,300
4,330
  415
Workers' profit sharing
(453)
(86)
(58)
(6)
Preoperating expenses
(16)
      
Capitalized interest
  99
  90
  83
  8
Goodwill amortization    
  41
  4
Effect of applying the Fifth Amendment
1,535
1,711
1,144
  110
Effect of applying Bulletin B-15
(50)
(233)
    
Fair value of derivative financial instruments   
  144
(176)
(17)
Income on disposal of discontinued operations    
(251)
(24)
Effect of the above adjustments in stockholders' equity of minority interest
(159)
(288)
(66)
(6)
         
Total US GAAP adjustments
  90
  414
(118)
(11)
       
Total stockholders' equity under US GAAP
 Ps. 6,868 
 Ps.6,496 
 Ps.5,819 
$ 558

a) Minority interest

Under Mexican GAAP the minority interest in consolidated subsidiaries is presented as a separate component within the stockholders' equity section in the consolidated balance sheet. For US GAAP purposes, the minority interest is not included in stockholders' equity.

b) Provision for deferred income tax

The Company applies the provisions of the Bulletin D-4 "Accounting Treatment of Income Tax, Tax on Assets and Workers' Profit Sharing", issued by the IMCP (see notes 3n and 17). As required by this bulletin, deferred income taxes are provided for differences between the book and tax value of assets and liabilities and deferred workers' profit sharing for temporary differences between the financial and adjusted tax income that are expected to reverse in the future. Additionally, the tax on assets paid is recognized as an asset to the extent it is determined recoverable. For U.S. GAAP purposes, the Company has applied Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" for all periods presented.

Under SFAS No. 109, deferred tax assets and liabilities are recognized for future tax consequences of temporary differences between the financial statement carrying amounts of assets and liabilities and their tax bases. Deferred tax assets are also recognized for the estimated future effects of tax loss carry forwards. Deferred tax assets are reduced by any tax benefits that are not expected to be realized.

The significant components of deferred tax assets and liabilities, net of discontinued operations, which differ for US GAAP from deferred tax assets and liabilities calculated under Mexican GAAP, are presented as follows:

 
December 31,
December 31,
  
2001
2002
  
DEFERRED TAX ASSETS AND LIABILITIES    
NONCURRENT:      
Assets      
Reversal of negative goodwill
 Ps. 67 
 Ps. 53 
  
NOL and tax on assets carryforwards
  410
  78
(1)
Capital losses
1,571
1,221
(1)
Liabilities      
Fair value of derivative financial instruments
(51)
  60
 
Buildings and machinery and equipment
(473)
  (243)
  
Stockholders' equity
(119)
  (390)
  
Other
(21)
  (17)
  
Net deferred assets
1,384
  762
 
VALUATION ALLOWANCE
  (1,981)
(1,299)
 (1)
Net deferred tax liability
 Ps. (597) 
 Ps. (537) 
  

(1) The valuation allowance at December 31, 2001 and 2002 of Ps. 1,981 and Ps. 1,299, respectively, includes Ps. 1,571 and Ps. 1,221, respectively, related to capital losses and Ps. 410 and Ps. 78, respectively, related to NOL and tax on assets carryforwards.

c) Negative goodwill and reduction in depreciation expense

The Company records as a component of the consolidated statements of operations the amortization of the excess of book value over cost of certain acquisitions (negative goodwill). The period of amortization for negative goodwill is 18 months. Under US GAAP, such excess is recorded as a reduction of fixed assets, and depreciation expense is reduced accordingly over the life of the related assets.

d) Workers' profit sharing

In accordance with Mexican GAAP the Company determines the provision of workers' profit sharing with the partial accrual method (Bulletin D-4). For US GAAP purposes the Company accrues for workers' profit sharing based on a liability approach similar to accounting for income taxes under SFAS 109. If the methodology of SFAS 109 had been used for the year ended December 31, 2002, the cumulative effect in the results of the Company would have been an expense of Ps. 108 and a debit to excess (shortfall) in restatement of capital in the amount of Ps. 470. From these amounts the effect in the results for the years 2000, 2001 and 2002 would have been an increase (decrease) in the amount of Ps. 26, Ps. (129) and Ps.106, respectively.

e) Pre-operating expenses

Pre-operating expenses, which have been deferred under Mexican GAAP, are charged to expense as incurred under US GAAP.

f) Capitalized interest

In prior years, the Company has not capitalized interest under Mexican GAAP. Beginning in 1999, certain interest on additions to buildings and machinery and equipment was capitalized as is required under US GAAP. Consequently, the related differences in depreciation on such amounts included in buildings and machinery and equipment are presented in the reconciliation of net income for the years ended December 31, 2000, 2001 and 2002.

g) Goodwill and Other Intangible Assets

Under Mexican GAAP, goodwill is amortized over a straight line basis over 20 years. Effective January 1, 2002, the Company adopted SFAS 142, "Goodwill and Other Intangible Assets." SFAS 142 requires that goodwill and intangible assets with indefinite lives no longer be amortized, but instead tested for impairment at least annually and written-down with a charge to operations when the carrying amount exceeds the estimated fair value. The cost of intangible assets with determinable useful lives continues to be amortized over the useful lives of the assets. In connection with the transition provisions for adopting this standard, the Company performed a transitional impairment test and found no impairment. The Company also reviewed the classification of its intangible assets and determined there were no other intangible assets with indefinite lives, requiring reclassification. The Company performed their annual impairment test at December 31, 2002 and found no impairment. The effect of ceasing amortization of goodwill increased after-tax net income by approximately Ps. 41 in the year ended December 31, 2002.

A reconciliation of previously reported net income and net income per share to the amounts adjusted to exclude amortization of goodwill net of the related income tax effect, is as follows:

2000
2001
2002
Reported net income (loss)
 Ps. 659 
 Ps. 387 
 Ps.  (527) 
Add back:  goodwill amortization
  18
  30
 
Adjusted net income (loss)
 Ps. 677 
 Ps. 417 
 Ps.  (527) 
     
Basic and diluted earnings per share
 Ps. 2.37 
 Ps. 1.35
 Ps. (1.91) 
Add back:  goodwill amortization per share
0.06
0.11
 
Adjusted net income (loss) per share
 Ps. 2.43 
 Ps. 1.46
 Ps. (1.91) 

The changes in the carrying amount of goodwill for the years ended December 31, 2002 and 2001 are as follows:

Balance as of January 1, 2001
 Ps. 298 
Goodwill acquired
  381
Amortization
(30)
Changes for effects of inflation
  14
Balance as of December 31, 2001
  663
Goodwill acquired
  10
Changes for effects of inflation
  115
Balance as of December 31, 2002
 Ps. 788 

h) Effect of applying the Fifth Amendment to Bulletin B-10.

As discussed in note 3e), under Mexican GAAP the Fifth Amendment to Bulletin B-10 requires the restatement of machinery and equipment purchased in a foreign country using the consumer price index of the country of origin. For US GAAP purposes, such restatement is based on the INPC.

i) Effect of applying Bulletin B-15.

In 1997, the IMCP issued Bulletin B-15 which specifies procedures to be applied in the consolidation of foreign subsidiaries by Mexican companies for (i) current year amounts and (ii) prior year amounts, presented for comparative purposes. Vitro's accounting policies for the consolidation of its foreign subsidiaries are described in notes 2b) and 3a). Such policies conform to the requirements of Bulletin B-15.

The staff of the SEC has agreed that the methodology of Bulletin B-15 to translate the current year amounts for foreign operations will not result in a difference between Mexican GAAP and US GAAP which must be reconciled in order to comply with the rules of the SEC.

There are two methods allowed under Bulletin B-15 to restate prior years amounts for foreign subsidiaries. Vitro uses the method which reconsolidates prior years' balances by restating foreign subsidiaries (in Vitro's case, principally US subsidiaries) using the current inflation rate in the foreign country and translating into pesos using the year end exchange rate. The staff of the SEC has stated that the methodologies of Bulletin B-15 used to restate prior years' balances for comparative purposes do not conform to the requirements of SEC Rule 3-20e of Regulation S-X which requires all amounts in financial statements to be presented in the same reporting currency. Accordingly, in filings with the SEC, the staff requires an adjustment for the difference in methodologies of restating prior year balances. These amounts ( Ps. (3) and Ps. (22) in 2000 and 2001, respectively, in the reconciliation of net income; and Ps. (50) and Ps. (233) in 2000 and 2001, respectively, in the reconciliation of stockholders' equity) represent the differences between (i) the balance if all amounts were adjusted by the Mexican inflation rate, and (ii) the balance used in the primary financial statements to comply with Bulletin B-15.

j) Fair value of derivative financial instruments

Under Mexican GAAP, derivative instruments that are considered as a hedge from an accounting perspective, are valued using the same criteria of valuation of the assets or liabilities hedged and the effect of such valuation is recognized in net income. Under U.S. GAAP, the Company's derivative instruments are accounted for as defined by Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 requires that each derivative be stated in the balance sheet at its fair value with gains and losses reflected in the income statement, except to the extent the derivative qualifies for hedge accounting. Derivatives that do qualify for hedge accounting, under SFAS No. 133, should be recorded where the effective portion of the derivative's gain or loss is initially reported as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. SFAS No. 133 further provides specific criteria necessary for a derivative to qualify for hedge accounting and requires the discontinuance, on a prospective basis, of the accounting of the effective portion recorded in other comprehensive income for an existing hedge if the designation of the cash flow hedge is removed. Derivatives entered into by the Company in 2002 do not qualify for hedge accounting, as defined by SFAS No. 133. Additionally, the Company removed the designation of a cash flow hedge of those derivatives entered into in 2001 and, thus, has discontinued, on a prospective basis, the accounting of the effective portion recorded in other comprehensive income. The effect of the above at December 31, 2001 and 2002, respectively, was an increase in comprehensive income in the amount of Ps. 94 and a decrease in net income of Ps. 130. Within the next 12 months, the Company does not anticipate that any amounts will be reclassified out of other comprehensive earnings and into earnings.

k) Discontinued operations

The basis of the assets and liabilities of Vitromatic under US GAAP at the time of the sale in 2002 was different from the basis of such assets and liabilities under Mexican GAAP; accordingly, in 2002 the gain recorded on disposal of discontinued operations under US GAAP differs from that under Mexican GAAP.

l) Other differences and supplemental US GAAP disclosures

1. Pension disclosures.- The Company maintains defined benefit pension plans for all of its subsidiaries and seniority premium plans for all of its Mexican subsidiaries. For the Mexican companies, the Company adopted Bulletin D-3 issued by the IMCP. The accounting treatment for pensions set forth in this Bulletin are substantially the same as those set forth in Statement of Financial Accounting Standards No. 87 "Employer's Accounting for Pensions" ("SFAS 87"). The Company records the pension cost determined by actuarial computations, as described in notes 3g) and 10. Significant assumptions (weighted average rates) used in determining net periodic pension cost and related pension obligations for the benefit plans for 2001 and 2002 are also described in note 10.

For purposes of determining the cost of pensions and seniority premiums under US GAAP, the Company applies SFAS 87. The additional pension disclosures under Statement of Financial Accounting Standards No. 132 "Employers Disclosures about Pensions and Other Post-retirement Benefits" ("SFAS 132") which are applicable to the Company, net of discontinued operations, are presented below.

2001
2002
Change in benefit obligation:    
Benefit obligation at beginning of year
 Ps. 1,682 
 Ps. 1,807 
Service cost
  47
  50
Interest cost
  79
  77
Benefits paid
(161)
(175)
Benefit obligation at end of year
1,647
1,759
   
Changes in plan assets:    
Fair value of plan assets at beginning of year
  538
  393
Contribution of cash and securities
  20
  180
Return on plan assets
  32
  27
Benefits paid
(172)
(167)
Fair value of plan assets at end of year (1)
  418
  433
   
Funded status:
1,229
1,326
Unrecognized actuarial loss
(286)
(515)
Unrecognized prior service costs
(728)
(631)
 Net amount recognized
 Ps. 215 
 Ps. 180 
   
Amounts recognized in the consolidated balance sheet consists of:
 Ps.  1,179 
 Ps.  1,251 
Accrued benefit liability
(701)
(609)
Intangible asset
(263)
(462)
Accumulated other comprehensive income
 Ps. 215 
 Ps. 180 

(1) Includes approximately Ps. 314 as of December 31, 2002, Vitro common shares (39,150,000 shares at market value as of December 31, 2002).

Pension and seniority premium costs for 2000, 2001 and 2002 are summarized below:

Year ended December 31,
2000
2001
2002
Service costs
 Ps. 43 
 Ps. 47 
 Ps. 50 
Interest cost
  73
  79
  77
Return on plan assets
(1)
(32)
(27)
Net amortization and deferral 
  131
  116
  114
     
Net periodic cost
 Ps. 246 
 Ps. 210 
 Ps. 214 

2. Proportionate consolidation method.- The subsidiary Vitro-American National Can, S.A. de C.V. (Vancan) is a joint venture in which the Company has 50% interest and shares the control of the subsidiary with the other partner, Rexam. Under Mexican GAAP this company is consolidated using the proportionate method. Under US GAAP, the Company's investment in and its interest in the net income of Vancan is recorded based on the equity method.

Summary information of the Company's 50% interest is as follows:

As of and for the  year  ended
December  31,
2001
2002
Current assets
 Ps. 150 
 Ps.  159 
Total assets
402
395
Total liabilities
177
152
Stockholders' equity
225
243
Net sales
326
336
Net income 
13
11
   
Cash flow information-net cash provided by:  
Operating activities
51
(7)
Financing activities
(30)
(9)
Investing activities
(8)
(2)

Under US GAAP, the Company's investment in Vancan at December 31, 2001 and 2002 is Ps. 225 and Ps. 243, respectively.

3. Weighted average interest rates.- The weighted average interest rates on short-term borrowings outstanding as of December 31, 2000, 2001 and 2002 were approximately 8.4%, 6.2% and 4.3%, respectively.

4. Fair value of financial instruments.- Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS 107") requires disclosure of the estimated fair values of certain financial instruments. The carrying amounts and estimated fair values of the Company's significant financial instruments were as follows:

 
December 31, 
December 31, 
2001
2002
 
Carrying   Amount (Mexican GAAP)
Fair Value
Carrying   Amount (Mexican GAAP)
Fair Value
Liabilities:        
Short-term borrowings
3,207
3,207
3,176
3,176
Long-term debt (1)
11,346
10,866
12,015
11,895
Derivative instruments:        
Interest swaps
-
(45)
-
(328)
Foreign currency forward contracts
1,517
1,328
3,723
3,571

(1) Includes current portion of long-term debt.

The fair value of short-term borrowings approximate their carrying value due to their short maturities. The fair value of the U.S. (dollar denominated) publicly traded long-term debt was Ps. 3,542 and Ps. 1,967 as of December 31, 2001 and 2002, respectively, and its related book value was Ps. 4,022 and Ps. 2,415, respectively. The fair value of the UDI's denominated debt was Ps. 1,692 as of December 31, 2002 and its related book value was Ps. 1,364. The fair value of the remaining long-term debt closely approximates its book value of Ps. 7,324 and Ps. 8,236 as of December 31, 2001 and 2002, respectively.

The fair value of long-term investments and long-term debt was determined using available quoted market prices or other appropriate valuation methodologies that require considerable judgment in interpreting market data and developing estimates. Accordingly, the estimates presented above on long-term financial instruments are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The fair value information presented herein is based on information available to management as of December 31, 2001 and 2002. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, the current estimates of fair value may differ significantly from the amounts presented herein.

5. Classification of worker's profit sharing.- In a US GAAP statement of operations, worker's profit sharing expense would be classified as an operating expense.

6. Net sales and operating income.- The use of the proportionate consolidation method for Vancan under Mexican GAAP as discussed under 21l (2) above, results in differences in net sales and operating income as reported under Mexican GAAP and US GAAP, but does not effect net income.

7. Earnings per common share in accordance with US GAAP.- Earnings per share in accordance with US GAAP are based on the provisions of Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128") and are calculated using the weighted average number of common shares outstanding during each period. The stock options granted under the Company's Plan (see note 13b) were not dilutive during 2000, 2001 and 2002, as the average market price per share of the Company's common stock during the period was less than the exercise price per share of the options and due to the net loss recorded in 2002. The Company has no other potentially dilutive securities. Basic earnings per share are based upon, 278,402,173, 286,078,897 and 275,441,504 weighted average shares outstanding for 2000, 2001 and 2002, respectively.

Earnings (loss) per common share computed in accordance with US GAAP are presented below:

Year ended December 31,
2000
2001
2002
Earnings (loss) per share.- Basic and diluted earnings (loss)before discontinued operations 
 Ps. 1.6 
 Ps. 0.62 
 Ps. (2.25) 
Discontinued operations
0.77
0.73
0.34
Earnings (loss) per common share 
 Ps. 2.37 
 Ps. 1.35 
 Ps. (1.91) 

8. Comprehensive income.- Under US GAAP, Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"), establishes standards for reporting and display of comprehensive income and its components. Vitro's only items of other comprehensive income are loss from holding non- monetary assets, unrealized gain (loss) on long-term investments and minimum pension liability adjustments.

See note 21m), for Consolidated Financial Statements on a US GAAP basis, which reflects the provisions of SFAS 130.

Additional required disclosures under SFAS 130 are as follows:

Disclosure of accumulated other comprehensive income balances:

Loss from Holding Non-monetary Assets
Minimum Pension  Liability  Adjustment 
Fair Value of Financial Instruments
Balance at December 31, 2000
 Ps. (16,228) 
 Ps. (161) 
Ps.
Bulletin B-15 effect
  (779)
    
Change for the year
  (209)
  (30)
  94
     
Balance at December 31, 2001
(17,216)
  (191)
  94
Bulletin B-15 effect
  227
   
Change for the year
  355
  (107)
  (94)
Balance at December 31, 2002
 Ps.  (16,634) 
 Ps. (298) 
 Ps. 0 

There were no reclassification adjustments for any of the periods presented.

9. Employee stock option plan. - The Plan (see note 13b) was adopted in 1998. The Company applies SFAS 123 in accounting for its Plan under both Mexican GAAP and US GAAP. The disclosures required under US GAAP are included in note 13b).

10. Restrictions which limit the payment of dividends by the registrant. - The Company derives substantially all of its operating income from advances, fees, interest and dividends paid to the Company by its subsidiaries. Accordingly, in paying the principal of, premium, if any, interest on, and additional amounts, if any, with respect to the Company's indebtedness, the Company relies on income from advances, fees, interest and dividends from its' subsidiaries, as well as income from the disposition of one or more of its subsidiaries, interests therein or assets thereof. Therefore, the Company's subsidiaries' ability to pay such dividends or make such distributions are subject to (i) such subsidiaries having net income and the requisite amount of paid-in capital under Mexican law, (ii) such subsidiaries' shareholders (including the Company's joint venture partners) having approved the payment of such dividends at the annual shareholders' meeting and (iii) applicable laws and, in certain circumstances, restrictions contained in joint venture agreements and debt instruments. At December 31, 2002, the amount of restricted retained earnings of the Company's consolidated subsidiaries amounted to Ps. 2,579.

11. New accounting pronouncements. - In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which is effective for the Company beginning in 2003. The Company plans to adopt this new standard in 2003. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the year in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Management is currently evaluating the effects of adopting SFAS No. 143, but believes it will not have a material effect on the Company's results of operations and financial position.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections", which requires that gains and losses from extinguishment of debt in all years presented be classified as extraordinary items only if they meet the criteria of APB Opinion 30, "Reporting the Results of Operations-Discontinued Events and Extraordinary Items". The amendment of SFAS No. 13, "Accounting for Leases", eliminates an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The new standard will be effective for financial statements issued for fiscal years beginning after May 15, 2002 and lease transactions occurring after May 15, 2002, with early application encouraged. The Company plans to adopt this new standard in 2003. Management is currently evaluating the effects of adopting SFAS No. 145, but believes it will not have a material effect on the Company's results of operations and financial position.

In June 2002, the FASB issued SFAS No. 146, "Accounting for the Costs Associated with Exit or Disposal Activities." SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002 and requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. Management is currently evaluating the effects of adopting SFAS No. 146, but believes it will not have a material effect on the Company's results of operations and financial position.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantee. FIN 45 also requires additional disclosure requirements about the guarantor's obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective for financial statement periods ending after December 15, 2002. The Company has disclosed the guarantees subject to FIN 45 relating to the PBGC guarantee at note 11e).

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities". This interpretation of Accounting Research Bulletin No. 51 "Consolidated Financial Statements," addresses consolidation by business enterprises of variable interest entities. Under current practice, two enterprises generally have been included in consolidated financial statements because one enterprise controls the other through voting interests. This interpretation defines the concept of "variable interests" and requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse the risks among the parties involved. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company does not believe the adoption of this interpretation will have a material impact on its financial position or results of operations.

In April 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. This Statement requires that contracts with comparable characteristics be accounted for similarly. The new standard will be effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. In addition, except as stated below, all provisions of this Statement should be applied prospectively. The provisions of this Statement that relate to SFAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003 should continue to be applied in accordance with their respective effective dates. Management is currently evaluating the effects of SFAS 149, but believes it will not have a material effect on the Company's results of operations and financial position.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 aims to eliminate diversity in practice by requiring that the following three types of financial instruments be reported as liabilities by their issuers 1.) mandatorily redeemable instruments, 2.) forward contracts, written put options, and other financial instruments not in the form of shares that either obligate or may obligate the issuer to settle its obligation for cash or by transferring other assets, and 3.) certain other financial instruments that include obligations. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003 and pre-existing instruments effective at the beginning of the first interim period beginning after June 15, 2003. Management is currently evaluating the effects of SFAS 150, but believes it will not have a material effect on the Company's results of operations and financial position.

m) Summarized comparative consolidated financial statements - U.S. GAAP

 

CONDENSED CONSOLIDATED BALANCE SHEETS
US GAAP BASIS
(Millions of constant Mexican pesos as of December 31, 2002)

2001
2002
ASSETS
Cash and cash equivalents
 Ps. 1,029 
 Ps. 2,224 
Trade receivables, net of allowance for doubtful accounts of Ps. 43 and Ps. 62
  1,646
  1,977
Other receivables
  1,000
  1,028
Inventories
  3,252
  3,745
Discontinued operations
  1,237
Current assets
  8,164
  8,974
Long-term investments
605
590
Investment in associated companies 
224
386
Land and buildings 
  9,311
  8,708
Machinery and equipment 
  10,300
  9,296
Construction in progress
607
812
Excess of cost over fair value of net assets acquired, net of accumulated amortization of Ps. 122
663
788
Intangible pension assets
701
609
Other assets
525
441
Discontinued operations
  3,634
Total assets
 Ps. 34,734 
 Ps. 30,604 
LIABILITIES
Short-term borrowings 
 Ps. 2,480 
 Ps. 3,176 
Current portion of long-term debt
  3,499
  1,549
Trade payables
  2,427
  2,235
Accrued expenses payable
632
674
Deferred taxes
680
672
Other current liabilities
955
  1,302
Discontinued operations
  1,788
 
  Current liabilities
  12,461
  9,608
Long-term debt 
  8,463
  10,412
Seniority premiums, pensions and other 
long-term liabilities 
  1,329
  1,609
Deferred taxes
  1,348
429
Discontinued operations
827
 
Long-term liabilities
  11,967
  12,450
Total liabilities
  24,428
  22,058
Minority interest in consolidated subsidiaries
  3,810
  2,727
STOCKHOLDERS' EQUITY
Majority interest:
Capital stock: no par value shares issued and 
outstanding, 324,000,000 in 2001 and 2002
324
324
Restatement of capital stock
  5,878
  5,878
Capital stock restated
  6,202
  6,202
Treasury stock (50,294,020 shares in 2001 and 47,979,489 in 2002)
(547)
(514)
Paid-in capital
941
915
Shortfall in restatement of capital
  (17,216)
  (16,634)
Fair value of derivative financial instruments
94
 
Minimum pension liability adjustment
(191)
(298)
Retained earnings reserved for reacquisition of shares of Vitro
  1,300
  1,300
Retained earnings
  15,526
  15,375
Net income (loss) for the year
387
(527)
Total stockholders' equity
  6,496
  5,819
Total liabilities, minority interest in consolidated subsidiaries and stockholders' equity
 Ps. 34,734 
 Ps. 30,604 

 

CONSOLIDATED STATEMENTS OF OPERATIONS
US GAAP BASIS
(Millions of constant Mexican pesos as of December 31, 2002)

Year Ended December 31, 
2000 2001 2002
Net sales
 Ps. 24,424 
 Ps. 23,172 
 Ps. 23,585 
Cost of sales
16,845
16,412
16,893
Gross profit
7,579
6,760
6,692
General, administrative and selling expenses
5,469
5,098
5,383
Operating income
2,110
1,662
1,309
Interest expense
2,291
1,856
1,802
Interest income
  42
  33
  135
Exchange loss (gain), net
  109
(573)
1,532
Gain from monetary position
1,292
  649
  774
Total financing cost
1,066
  601
2,425
Income (loss) after financing
1,044
1,061
  (1,116)
Other income (loss), net
(12)
(148)
  87
Share in net income of unconsolidated associated companies
  26
  20
  10
Income (loss) from continuing operations before income tax
1,058
  933
  (1,019)
Income tax expense 
  272
  231
(367)
Net income (loss) from continuing operations before minority interest
  786
  702
(652)
Discontinued operations
  214
  210
(118)
Income on disposal of discontinued operations
  212
Minority interest
(341)
(525)
  31
Net income  (loss)
 Ps.  659 
 Ps. 387 
 Ps. (527) 

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
US GAAP BASIS
(Millions of constant Mexican pesos as of December 31, 2002)

Capital stock
Treasury stock
Paid-In capital
Shortfall in restatement of capital
Other
Retained earnings
 Compre-
hensive income
Stock
holders'  equity
Balance at January 01, 2000
 Ps. 6,202 
 Ps. (498) 
 Ps. 1,254 
 Ps. (16,552) 
 Ps. (136) 
 Ps. 16,740 
 Ps. 7,010 
Comprehensive income:
Net income
659
 Ps.  659 
659
Bulletin B-15 adjustments
470
(545)
(75)
Other comprehensive income:
Minimum pension liability adjustment 
(36)
(36)
(36)
Loss from holding non-monetary assets
(376)
(376)
(376)
Deferred taxes allocation
  40
  12
52
52
Effect of applying the Fifth Amendment
  199
  199
  199
Deferred workers' profit sharing allocation
  (9)
  (9)
  (9)
Other comprehensive loss
  (170)
Comprehensive income
 Ps.  489 
Dividends (Ps.1.05 pesos per share)
(342)
(342)
Sales of  treasury stock
1,013
  (313)
700
Paid in capital
(53)
(53)
Acquisition of treasury stock
  (861)
  (861)
Balance at December 31, 2000
 Ps  6,202 
 Ps. (346) 
 Ps.  888 
 Ps. (16,228) 
 Ps. (160) 
 Ps. 16,512 
 Ps.  6,868 
Comprehensive income:
Net income
387
 Ps.  387 
387
Bulletin B-15 adjustments
(779)
638
(141)
Other comprehensive income:
Minimum pension liability adjustment
(48)
(48)
(48)
Loss from holding non-monetary assets
(550)
(550)
(550)
Deferred taxes allocation
  68
(33)
35
35
Effect of applying the Fifth Amendment
294
294
294
Deferred workers' profit sharing allocation
(21)
  (21)
  (21)
Fair value of financial instruments
  144
  144
  144
Other comprehensive loss
  (146)
Comprehensive income
 
 Ps.  241
Dividends (Ps. 1.05 pesos per share)
(324)
(324)
Paid in capital
53
53
Acquisition of treasury stock
  (201)
  (201)
Balance at December 31, 2001
 Ps  6,202 
 Ps.  (547) 
 Ps. 941 
 Ps. (17,216) 
 Ps. (97) 
 Ps. 17,213 
 Ps. 6,496 
Comprehensive income:
Net loss
(527)
 Ps.  (527) 
 (527) (233) 
Bulletin B-15 adjustments
227
(460)
Other comprehensive income:
Minimum pension liability adjustment
  (166)
  (166)
  (166)
Loss from holding non-monetary assets
31
  31
  31
Deferred taxes allocation
  615
  109
724
724
Effect of applying the Fifth Amendment
(283)
(283)
(283)
Deferred workers' profit sharing allocation
  (8)
  (8)
  (8)
Fair value of financial instruments
  (144)
  (144)
  (144)
Other comprehensive income
 
  154
Comprehensive loss
 Ps.  (373)
Dividends (Ps. 0.25  pesos per share)
(78)
(78)
Paid in capital
 
(26)
(26)
Sales of treasury stock
33
33
Balance at December 31, 2002
 Ps  6,202 
 Ps. (514) 
 Ps. 915 
 Ps. (16,634) 
 Ps. (298) 
 Ps. 16,148 
 Ps. 5,819 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
US GAAP BASIS *
(Millions of nominal pesos)

2000
2001
2002
OPERATING ACTIVITIES:      
Net income (loss) from continuing operations in constant pesos
 Ps.  786 
 Ps. 702 
 Ps. (652) 
Effect of constant pesos
(107)
(37)
(42)
Net income (loss) from continuing operations in nominal pesos
  679
  665
(694)
Add (deduct) non cash items:
Depreciation and amortization
1,813
1,894
1,965
Provision for seniority premiums, pension and other long-term liabilities
  183
  196
  182
Amortization of debt issue cost
  42
  54
  50
Share in net income of unconsolidated associated companies
(21)
(20)
(10)
Fair value of derivative financial instruments
  176
(Gain) loss from sale of subsidiaries and associated companies
(55)
  114
(64)
Write-off and loss from sale of fixed assets
  282
  348
  395
Deferred income tax and workers' profit sharing
(31)
(310)
(761)
Gain from monetary position
  (1,122)
(601)
(757)
Exchange loss (gain)
  104
(530)
1,495
1,874
1,810
1,977
Increase (decrease) in trade payables
  149
  625
(131)
Decrease (increase) in trade receivables
  376
  244
(322)
(Increase) decrease in inventories
(313)
  7
(503)
Change in other current assets and liabilities, net
  421
(287)
  335
Pension funding payments
(617)
(86)
(167)
Cash provided by continuing operations
1,890
2,313
1,189
Net income (loss) from discontinued operations
  186
  197
(116)
Proceeds from disposal of discontinued operations
1,390
Operating assets and liabilities from discontinued operations
  209
  106
  164
Cash provided by operating activities
2,285
2,616
2,627
INVESTING ACTIVITIES:
Sales of land and buildings and machinery and equipment
  202
  122
  138
Investment in land and buildings and machinery and equipment
(830)
(777)
(985)
Investment in subsidiaries and associated companies
(510)
(445)
(9)
Sale of subsidiaries and associated companies
 
  76
  111
Long -term receivables
(137)
(49)
Effect from discontinued operations
(128)
(147)
(6)
Other
(419)
(80)
(204)
Cash used in investing activities
  (1,685)
  (1,388)
  (1,004)
 
FINANCING ACTIVITIES:
Short-term borrowings
5,815
4,119
4,640
Issuance of long-term debt
5,916
6,196
2,793
Capital stock contributed by minority interest
  8
  97
  7
Payment of short-term borrowings
  (4,473)
  (5,935)
  (5,801)
Payment of long-term debt
  (6,581)
  (4,723)
  (1,779)
Acquisition of treasury stock
(744)
(169)
Sale of  treasury stock
  551
 
  24
Dividends paid to stockholders of Vitro
(292)
(149)
(75)
Dividends paid to minority interests
(340)
(266)
(257)
Effect from discontinued operations
(267)
(156)
(42)
Cash used in financing activities
(407)
(986)
(490)
Net increase in cash and cash equivalents
  193
  242
1,133
Monetary and exchange rate effect on cash and cash equivalents
(4)
(23)
  118
Balance at beginning of year
  565
  754
  973
Balance at end of year
 Ps.  754
 Ps.  973
 Ps. 2,224
Net cash provided by operating activities reflects net cash payments of interest and income taxes as follows:
 
 
Interest
  Ps. 1,833 
 Ps.  1,729 
  Ps.  1,536 
Income taxes
  354
  194
  148