Risk Factors Related to the Company
We Participate in Competitive Markets and Increased Competition May Adversely Affect Our Business.
We face competition in the distribution of pharmaceuticals, health, beauty aids and consumer goods, publications, general merchandise and other products. In our Pharmaceutical Products business division, we face competition primarily from Mexico’s only other national distributor, Nacional de Drogas, S.A. de C.V., or Nadro, and several regional distributors. In our Health, Beauty Aids and Consumer Goods, Publications and General Merchandise and Other Products business divisions, we compete with many manufacturers, wholesalers and distributors that target the same markets that we do.
The retail pharmacy markets in Mexico and Brazil are very fragmented. In Mexico, we face competition from other large pharmacy chains, such as Farmacias Guadalajara, Farmacias Benavides and Farmacias del Ahorro and supercenter chains, such as Wal-Mart. In Brazil, we face competition from other pharmacy chains such as Drogaria São Paulo, Pague Menos and Drogasil, in the states of Río de Janeiro and São Paolo. In addition, we face competition from supermarkets, mass merchandisers, discount stores, independently owned pharmacies, e-commerce and other smaller participants.
Our ability to achieve profitability in our retail and distribution businesses depends on our ability to achieve a critical mass of loyal, repeat customers. Loss of existing or future market share to competitors may adversely affect our performance and, to the extent that one or more of our competitors becomes more successful than us with respect to any key competitive factors, our operating margins and profitability could be adversely affected.
Our Results of Operations May Suffer Upon the Bankruptcy, Insolvency or Other Credit Failure of Our Suppliers.
Our relationships with pharmaceutical suppliers and manufacturers give rise to substantial amounts that are due to us from time to time, including amounts owed to us for returned or defective goods and for services provided. The continued volatility of the capital and credit markets may adversely affect the solvency or creditworthiness of our suppliers. Although in 2009 we did not have a significant concentration of a specific supplier relating to the purchase of inventory, the bankruptcy, insolvency or other credit failure of any supplier or group of suppliers at a time when such suppliers have a substantial account payable balance due to us could have a material adverse affect on our results of operations.
Our Total Revenue and Results of Operations May Suffer Upon the Bankruptcy, Insolvency or Other Credit Failure of Our Customers.
Most of our customers in our distribution business buy pharmaceuticals and other products and services from us on credit that is short-term in nature and generally unsecured. Credit is extended based on evaluation of a customer’s financial condition. The continued volatility of the capital and credit markets may adversely affect the solvency or creditworthiness of our customers. Any adverse change in general economic conditions can adversely reduce sales to our customers, affect consumer buying practices or cause our customers to delay or be unable to pay accounts receivable owed to us, which would reduce our revenue growth and cause a decrease in our profitability and cash flow. Although no single customer accounted for a significant amount of our total sales in 2009, the bankruptcy, insolvency or other credit failure of any customer or group of customers that in the aggregate have a substantial amount owed to us could have a material adverse affect on our operating revenue and results of operations.
Our Distribution Business is Dependent Upon Sophisticated Information Systems. The Implementation Delay, Malfunction or Failure of These Systems for Any Extended Period of Time Could Adversely Affect Our Business.
We rely on sophisticated information systems in our distribution business to obtain, rapidly process, analyze and manage data to (i) facilitate the purchase and distribution of thousands of inventory items from numerous distribution centers, (ii) receive, process and ship orders on a timely basis, (iii) manage the accurate billing and collections for thousands of customers and (iv) process payments to suppliers. If any such systems is interrupted, damaged by unforeseen events or fails for any extended period of time, we could suffer an adverse impact on our results of operations.
We Provide Remote Hosting Services That Involve Operating Both Our Software and the Software of Third-Party Vendors for Our Customers.
The ability to access the systems and the data, including inventory, purchasing management, price updates and advisory services that we provide to our customers, including data provided through our proprietary point-of sale system,
www.farmaservicios.pdv
, is critical to them. Our operations and facilities are vulnerable to interruption and/or damage from a number of sources, many of which are beyond our control, including, without limitation (i) power loss and telecommunications failures, (ii) fire, flood, hurricane and other natural disasters, (iii) software and hardware errors, failures or crashes and (iv) computer viruses, hacking and similar disruptive problems. We attempt to mitigate these risks through various means including disaster recovery plans and test systems but our precautions may not protect against all problems. Any significant instances of system downtime could negatively affect our reputation and ability to sell our remote hosting services.
Our results of operation may be negatively affected if we are unable to operate our retail pharmacy business efficiently.
A portion of our future operations and cash flow will depend upon our ability to operate our retail pharmacy business efficiently, achieve the strategic operating objectives for our business and realize significant cost savings and synergies. Our management team may encounter unforeseen difficulties in managing the integration of the retail pharmacy business. The retail pharmacy business entails different risks, strategies and models to which our management must adapt. Although we are diversifying our risk from the distribution of pharmaceutical products, any substantial diversion of management’s attention or any difficulties in operating the retail pharmacy business together with the distribution business could affect our sales and ability to achieve operational, financial and strategic objectives.
Our Retail Pharmacy Business is Subject to Additional Risks That May Impede Our Desired Growth Plans to Materialize.
Our ability to grow our retail pharmacy business may be constrained if suitable new store locations cannot be identified with lease terms or purchase prices that are acceptable to us. We compete with other retailers and businesses for suitable locations for our stores. Local land use and other regulations applicable to the types of stores we may seek to lease or construct could impact our ability to find suitable locations and influence the cost of leasing, constructing and refurbishing our pharmacies. The expiration of leases at existing store locations may adversely affect us if the renewal terms of those leases are unacceptable to us and we are forced to close or relocate stores. Further, changing local demographics at existing store locations may adversely affect revenue and profitability levels at those stores.
Our retail pharmacy sales and profit margins are affected by the introduction of new brand name and generic drugs. New brand name drugs can result in increased drug utilization and associated sales revenues, while the introduction of lower priced generic alternatives typically result in higher gross profit margins. Accordingly, a decrease in the number of significant new drugs or generics successfully introduced could adversely affect our results of operations.
If we fail to offer products and services that are not attractive to our customers, the sales of our retail pharmacy business may be affected
.
The success of our retail operations depends on our ability to offer a superior shopping experience, quality assortment of available merchandise and excellent customer service. We must identify, obtain supplies of, and offer to our customers, attractive, innovative and high quality products on a continuous basis. Our products and services must satisfy the desires of our customers, whose preferences may change in the future. If we misjudge either the demand for products and services we sell or our customers’ purchasing habits and tastes, we may be faced with excess inventories of some products and missed opportunities for products and services we chose not to offer. In addition, our sales may decline or we may be required to sell the merchandise we have obtained at lower prices. This would have a negative effect on our business and results of operations.
There are Differences in Corporate Disclosure and Accounting Standards for Mexican Companies and this May Cause Our Financial Statements to Differ in Certain Respects from U.S. Issuers
.
One of the primary objectives of the United States, Mexico and other countries’ securities laws is to promote full and fair disclosure of all material corporate information. However, there may be less publicly available information about foreign private issuers of securities listed in the United States than is regularly published by or about domestic issuers of listed securities. Corporate governance standards applicable to companies listed in Mexico and the United States differ. See “Item 16G. Corporate Governance”. In addition, we prepare our financial statements in accordance with Mexican FRS, which differs from U.S. GAAP and accounting procedures in certain significant respects. Thus, Mexican financial statements and reported earnings may differ from those of companies in other countries. Notes 18 and 19 to our audited annual financial statements describe the principal differences between Mexican FRS and U.S. GAAP as they relate to us and provide reconciliation to U.S. GAAP of net income and total stockholders’ equity.
We Are Controlled by One Controlling Shareholder.
Eighty-five percent of our outstanding Ordinary Shares are directly owned by our controlling shareholder. See “Item 7. Major Shareholders and Related Party Transactions—Principal Shareholders”. Our controlling shareholder controls our business and has the power to elect the majority of our Board of Directors, as well as to determine the outcome of all actions that require shareholder approval, including the determination to declare and pay dividends, in cash or otherwise.
We Rely on Certain Key Managers and Other Personnel, and Our Business Could Be Adversely Affected If We Are Not Able to Retain These Key Personnel or Find Suitable Replacements.
Our growth and success depend on our ability to retain skilled, qualified and experienced managerial and technical personnel. Any loss or interruption of
the services of key senior personnel, or the inability to timely recruit sufficient qualified personnel, could adversely affect our business, results of operations and financial condition.
We Are a Holding Company; Therefore, Our Ability to Pay Dividends, Repay Our Indebtedness and Finance Our Operations Is Dependent on Cash Flow Generated by Our Subsidiaries and Their Ability to Make Distributions to Us.
We are a holding company with no significant operations or material assets other than the capital stock of our subsidiaries. As a result, our ability to pay dividends is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividends, debt repayments or otherwise. Our subsidiaries may not be able to, or be permitted to, make distributions to enable us to pay dividends or make payments in respect of our indebtedness. Each of our subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions, as well as their financial condition and operating requirements, may limit our ability to obtain cash from our subsidiaries. In addition, our right to receive assets from our subsidiaries or shareholders of our subsidiaries, in the case of a liquidation or corporate reorganization, is subordinated to the rights of the creditors of such subsidiaries, including suppliers.
Failure to Achieve and Maintain Effective Internal Controls in Accordance with Section 404 of the Sarbanes-Oxley Act of 2002, and Delays in Adequately Completing Our Internal Controls and Financial Statements Audits, Could Have a Material Adverse Effect on Our Business and Our Stock Price.
As discussed in Item 15 of this annual report, “Controls and Procedures”, our management team conducted an evaluation of the effectiveness of the design and operation of our internal controls and concluded that, as a result of the Drogasmil acquisition, a material weakness existed in our internal controls over financial reporting for the fiscal year ended December 31, 2009. A “material weakness” is defined under auditing standards as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.
We are attempting to resolve this material weakness, but we have not yet completed remediation and there can be no assurance that such remediation will be successful. During the course of our continued testing, we may also find other significant deficiencies or material weaknesses, in addition to the ones already identified, which we may not be able to remediate in a timely manner or at all. If we continue to fail to achieve and maintain effective internal controls, we will not be able to conclude that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Failure to achieve and maintain an effective internal control environment, and delays in completing our internal controls and financial statement audits may adversely impact our ability to report our financial condition and results of operations in the future accurately and in a timely manner, and cause our investors to lose confidence in our reported financial information and in us, which could result in a decline in the market price of our Ordinary Shares and our ADSs.
In addition, as discussed in Note 1(c) to our consolidated financial statements, in connection with the acquisition of CSB Drogarias, S.A. (f/k/a Drogasmil Medicamentos e Perfumaria, S.A., or Drogasmil), we were unable to prepare a purchase price allocation at the acquisition date because of inadequate accounting records of Drogasmil at that date. Consequently, at the acquisition date, we recorded a preliminary purchase price allocation based on the estimated net assets identified from the business acquired. For that reason, Salles Sainz-Grant Thornton, S.C., our independent auditors, were not able to audit the underlying assets and liabilities or assess the potential impairment of assets as of and for the year ended December 31, 2008, neither the operations of this subsidiary from May 15 to December 31, 2008. In connection with the foregoing, at the date of the audit report from our independent auditors included in this annual report we completed clearing and adjusting the accounting records of Drogasmil as of December 31, 2008, and were able to allocate the purchase price of the acquisition, except with respect to the value of inventories, whose estimated value at that date amounted to Ps. 246 million, as well as certain unquantifiable contingencies as disclosed in Note 15(i) to our consolidated financial statements. At December 31, 2009, Drogasmil still lacked adequate accounting records to enable our auditors to audit the balance of inventories as well as certain unquantifiable contingencies referred in Note 15(i) to our audited consolidated financial statements. As a consequence the audit report of Salles Sainz-Grant Thornton, S.C. on our consolidated financial statements, included in page F-3 of this annual report, was qualified. Because the audit report was qualified, the staff of the Securities and Exchange Commission will likely take the position that this annual report has not been filed in accordance with applicable U.S. securities laws, which in turn could lead to the suspension of trading of our ADSs on, or our delisting from, the New York Stock Exchange. However, we are taking all actions we deem necessary to remedy the deficiencies and while we do not expect our ADSs to be suspended from trading on, or to be delisted from, the New York Stock Exchange, we cannot assure you that such events or other adverse events as a consequence of the qualified audit report will not occur.
Risk Factors Related to the Acquisition of FASA
Risks associated with our planned expansion into new geographical markets could adversely affect our profitability.
Our future growth and profitability depends in part on our ability to penetrate new geographical markets. We have entered into an agreement to acquire control of Farmacias Ahumada, S.A., or FASA, which currently owns over 1,240 pharmacies in Chile, Mexico and Peru. See “Item 4. Information on the Company—History and Development of the Company” and “Item 10. Additional Information—Material Contracts”. If we succeed in our attempt to acquire FASA, or if we otherwise expand our operations into new geographical markets, we may become subject to new regulatory requirements and enforcement practices that place additional burdens on our operations or encounter other difficulties with the legal or regulatory systems in such jurisdictions. Failure to comply with such regulations may result in the imposition of fines and penalties. Moreover, we may not be able to adapt our product offerings to consumer habits and trends in such new markets. In addition, we may become subject to exchange control regulations that restrict or prohibit the conversion of other currencies into Pesos or limit our ability to freely move currency in or out of particular jurisdictions. The occurrence of any of these factors could have a material adverse impact on our financial results.
Our Business Could Be Hindered if We are Unable to Complete and Integrate Acquisitions Successfully.
Part of our growth strategy is to identify, pursue and consummate acquisitions that either expand or complement our business. We have grown our retail pharmacy business through acquisitions in recent years and expect to acquire drugstore chains and independent drugstores in the future. In May 2010 we entered into an agreement to acquire control of FASA (the “Acquisition”). See “Item 4. Information on the Company—History and Development of the Company” and “Item 10. Additional Information—Material Contracts”. Once the Acquisition is completed, we will have to implement an integration plan for FASA’s and its subsidiaries operations. Integration of acquisitions involves a number of risks including the diversion of management’s attention to the assimilation of the operations of businesses we acquire, difficulties in the integration of operations and systems, the realization of potential operating synergies, the assimilation and retention of the personnel of the acquired companies, challenges in retaining the customers of the combined businesses and potential adverse effects on operating results. If we are unable to successfully complete the Acquisition and integrate FASA’s and its subsidiaries’ operations in a timely manner, our business, operations and financial condition could be negatively affected.
If the Acquisition is completed, the integration of FASA’s administration and its operations with that of the Company depend, in large part, on the participation of key FASA personnel. Because these individuals have an in-depth understanding of the management and the operation of FASA’s business and that they have significant experience in the industry, we believe that the projected results of the Acquisition will largely depend on the efforts of these individuals. Consequently, the loss of such key personnel could have an adverse effect on our results of operations.
In addition, the consummation of the Acquisition depends on certain approvals from regulative authorities, including Mexico’s Antitrust Commission, Comision Federal de Competencia. Any delay in obtaining the required approvals could generate higher expenses and increase the amount of time required to implement the Acquisition. This could significantly reduce the projected results of the Acquisition.
Our operating expenses and capital expenditure needs may be increased as a result of the
Acquisition
.
Once the Acquisition is completed, the Company will have to continue investing in technological, human and administrative resources to continue to grow. The development of the Company’s and FASA’s business, the display and the expansion of the respective operating networks, services and client base require important capital investments. These investments, together with the related operating expenses, may have a significant impact on our cash flows and earnings.
Loss of key suppliers may have an adverse impact in our results of operations
.
FASA and its subsidiaries are dependant in large part on certain key suppliers to carry out its operations. If any such suppliers fails to honor their existing agreements and stop providing their services, FASA’s operations and those of its subsidiaries could be substantially reduced. This would have an adverse effect on the projected results of the Acquisition.
We may be subject to significant penalties if the Acquisition is not completed.
The FASA Agreement contains provisions pursuant to which we will be required to pay a penalty to the selling entities under such agreement if we do not complete the Acquisition within the first three weeks of September 2010 under certain circumstances. See “Item 10. Additional Information—Material Contracts”. Pursuant to the FASA Agreement, we could face penalties of approximately $50 million. If we incur any such penalties, our business could be significantly adversely affected.
We may not be able to pay dividends in the immediate future as a result of the Acquisition.
Pursuant to Mexican law, decisions regarding the payment and amount of dividends are subject to approval of our shareholders. Depending on the results and condition of our business, dividends for a specific year would be paid to the extent that such payment would not impair our ability to invest and grow. Therefore, any dividend payment would depend on the cash that the Company generates in a specific year as well as on the market conditions of our business. Since, as a result of the Acquisition, we may incur higher expenses, there is a possibility that we may not pay out dividends in the immediate future.
In connection with the Acquisition, the Company will incur a significant amount of debt, which may result in an adverse effect on the price of our shares and increase our interest costs.
For purposes of completing the Acquisition, we will incur significant amounts of financing, which may have an adverse effect on the price of our outstanding shares. Such financing could, likewise, have important consequences to the Company, including an increase in the costs for interests. The agreement that will document the financing will contain covenants that, among others, will restrict the Company’s ability to incur additional debt, carry out capital expenditures and maintain financial ratios. Consequently, our ability to pay dividends, finance acquisitions, carry out investments and maintain flexibility in the performance of our business, may be significantly limited. This could have a significant adverse effect on our financial condition.
As a result of entering into the FASA Agreement and the financing to be obtained in connection therewith, we could face an exchange rate risk against the Chilean Peso, due to the fact that the financing to be obtained to complete the Acquisition will be denominated in Pesos and U.S. Dollars and the payment of the Acquisition’s purchase price will be made in Chilean Pesos.
Risk Factors Related to our Securities
Our Controlling Shareholder Has the Ability to Restrict the Payment and Amount of Dividends.
Under Mexico’s
Ley General de Sociedades Mercantiles
, or General Corporations Law, decisions regarding the payment and amount of dividends are subject to the approval of our shareholders, generally, but not necessarily, based on the Board of Directors’ recommendation. Our controlling shareholder owns 85% of our outstanding Ordinary Shares and, so long as it continues to own a majority of our outstanding shares, it will have the ability to determine whether or not we will declare and pay dividends, in cash or otherwise. See “Item 3. Key Information—Dividends” and “Item 7. Major Shareholders and Related Party Transactions—Principal Shareholders”.
Preemptive Rights May Be Unavailable to Holders of Our ADSs.
Under Mexican law, our shareholders are afforded preemptive rights. In the event that we issue new Ordinary Shares for cash, our shareholders will have the right to purchase the number of Ordinary Shares necessary to maintain their existing share participation. U.S. holders of our ADSs cannot exercise their preemptive rights unless we register newly issued Ordinary Shares under the Securities Act of 1933 or qualify for an exemption from registration. If U.S. holders of our ADSs cannot exercise their preemptive rights, the interests of these holders would be diluted in the event that we issue new Ordinary Shares for cash. We intend to evaluate, at the time of any offering of preemptive rights, the costs and potential liabilities associated with registering any additional Ordinary Shares under the Securities Act of 1933. We cannot assure you that we will register any new Ordinary Shares that we issue for cash. In addition, although the deposit agreement provides that the Depositary may, after consulting with us, sell preemptive rights in Mexico or elsewhere outside the United States and distribute the proceeds to holders of ADSs, such sales are not allowed under current Mexican law.
The Protections Afforded to Minority Shareholders in Mexico are Different From Those in the United States.
Under Mexican law, the protections afforded to minority shareholders are different from those in the United States. In particular, the law concerning fiduciary duties of directors is not appropriately developed, there is no procedure for class actions or shareholder derivative action, and there are different procedural requirements for bringing shareholder lawsuits. As a result, in practice, it may be more difficult for our minority shareholders to enforce their rights against us or our directors or controlling shareholder than it would be for shareholders of a U.S. company. In accordance with the
Ley del Mercado de Valores
, or the Mexican Securities Market Law, as amended, we amended our bylaws to increase the protections afforded to our minority shareholders in an effort to try to ensure that our corporate governance procedures are substantially similar to international standards. See “Item 10. Additional Information—Amendments to the Mexican Securities Market Law—Bylaws”.
You may be unable to enforce judgments against us.
We are a corporation with variable capital (
sociedad anónima bursátil de capital variable
) organized under the laws of Mexico. A majority of our assets and operations are located, and a majority of our revenues are derived from sources, outside of the United States. All of our directors and officers reside outside of the United States and all, or a significant portion of, the assets of these persons and of our Company are located outside of the United States. As a result, it may not be possible for shareholders to effect service of process within the United States upon such persons or upon us, or to enforce against them or against us judgments by U.S. courts predicated upon the civil liability provisions of the U.S. federal securities laws or otherwise. As of this date, there is no effective treaty between the United States and Mexico for the reciprocal enforcement of judgments issued in the other country. Generally, Mexican courts would enforce final judgments rendered in the United States if certain requirements are met, including the review in Mexico of the U.S. judgment to ascertain compliance with certain basic principles of due process and the non-violation of Mexican law or public policy, provided that U.S. courts would grant reciprocal treatment to Mexican judgments. Additionally, we have been advised by our Mexican counsel that there is doubt as to the enforceability, in original actions in Mexican courts, of liabilities predicated in whole or in part on U.S. federal securities laws as well as to the enforceability in Mexican courts of judgments of U.S. courts obtained in actions predicated upon the civil liability provisions of U.S. federal securities laws.
Risk Factors Relating to Economic and Political Developments
Economic and Political Developments in Mexico May Adversely Affect Our Business
. We are a Mexican company and the vast majority of our business operations take place in Mexico. Approximately 94.9% of our consolidated net sales for the year ended December 31, 2009 derived from sales made in Mexico. Consequently, our business, financial condition and results of operations are affected by economic, political or social developments in Mexico, including, among others, any political or social instability, changes in the rate of economic growth or contraction, changes in the exchange rate between the Peso and the U.S. Dollar, an increase in Mexican inflation or interest rates, changes in Mexican taxation and any amendments to existing Mexican laws and regulations. Accordingly, Mexican governmental actions and policies concerning the economy in general and healthcare policy in particular could have a significant impact on us, as well as more generally on market conditions, prices and returns on Mexican equity securities. We cannot assure you that changes in governmental policies in Mexico will not adversely affect our business, results of operations, financial condition and prospects.
Social and political instability in Mexico or other adverse social or political developments in or affecting the countries in which we have operations could adversely affect us and our ability to obtain financing. We cannot provide any assurance that the current political situation or any future developments in Mexico will not have a material adverse effect on our financial condition or results of operations.
Our business may be especially affected by economic conditions in Mexico. Mexico has experienced both prolonged periods of weak economic conditions and deterioration in economic conditions that have had a negative impact on our company. According to preliminary data, during 2009, Mexico’s gross domestic product, or GDP, fell by 6.5% in real terms. Mexico has also experienced high levels of inflation and high domestic interest rates in the past, which significantly lowered the purchasing power of consumers and businesses. The annual rate of inflation, as measured by changes in the NCPI, as published by the
Banco de México
, was 3.6% for 2009 and the average interest rate on 28-day Mexican government treasury securities, or “CETES”, averaged 5.4% for 2009. In addition, the Mexican government’s efforts to control inflation by tightening the monetary supply have historically resulted in higher financing costs, as real interest rates have increased. High inflation rates may also lead to Peso devaluations. Inflation itself, as well as governmental efforts to reduce inflation, has had significant negative effects on the Mexican economy in general and on Mexican companies, including ours. Such policies have had and could in the future have an adverse effect on us. Future economic slowdowns or developments in or affecting Mexico could impair our business, results of operations, financial condition, prospects and ability to obtain financing.
In addition, international events affecting Mexico may also have an adverse impact in our business. For example, public health crises such as the outbreak of Influenza AH1N1 virus in May 2009 had negative consequences on the Mexican economy.
The continuation or further worsening of deteriorated financial and economic conditions could have a significant adverse effect on our sales, profitability and results of operation.
Devaluation of the Peso Against the U.S. Dollar Could Adversely Affect Our Financial Condition and Results of Operations.
We are affected by fluctuations in the value of the Peso against the U.S. Dollar. In 2004, high oil prices, higher remittance levels and a recovery in the U.S. economy led to a slight appreciation of the Peso against the U.S. dollar of 0.8%. During 2005, this trend continued in that the peso appreciated 4.7% against the U.S. Dollar. In 2006, however, the peso depreciated 1.6% with respect to the US Dollar due to higher inflation levels in Mexico. The combination of more moderate GDP growth and a slightly lower level of inflation, led to a 1.0% depreciation of the peso against the US Dollar in 2007. As a result of the global economic crisis that began in 2008 and has lead to a significant increase in inflation as well as slowdown in GDP growth, the peso depreciated by 26.7% versus the US Dollar in 2008. In 2009, the peso appreciated 5.6% against the U.S. Dollar as a result of lower inflation levels.
Any future depreciation or devaluation of the Peso will likely result in price increases from our suppliers that would impact the purchasing capacity of the final consumers. This, in turn, would lead to a reduction in our sales. A severe devaluation or depreciation of the Peso may also disrupt international foreign exchange markets and, as such, may limit our ability to transfer or to convert Pesos into U.S. Dollars and other currencies for the purpose of obtaining imported goods. A devaluation or depreciation of the Peso against the U.S. Dollar may also adversely affect the U.S. Dollar prices of our securities on the Mexican Stock Exchange, including the Ordinary Shares and, as a result, will likely affect the market price of the ADSs. Such fluctuations would also impact the conversion value of any cash dividends paid on the Ordinary Shares in Pesos, into U.S. Dollars in order to pay such dividend to the holders of our ADSs.
High Levels of Inflation and High Interest Rates in Mexico Could Adversely Affect Our Financial Condition and Results of Operations.
In recent years, Mexico has experienced high levels of inflation. The annual rate of inflation, as measured by changes in the NCPI, was 3.3% for 2005, 4.1% for 2006, 3.8% for 2007, 6.5% for 2008 and 3.6% in 2009. High inflation rates can adversely affect our business and our results of operations in the following ways:
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inflation can adversely affect consumer purchasing power, thereby adversely affecting consumer demand for the products we sell and/or distribute; and
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to the extent that inflation exceeds price increases, our prices and revenues will be adversely affected in “real” terms.
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Mexico also has, and could continue to have, high nominal interest rates. The interest rates on 28-day CETES averaged approximately 7.2%, 7.2% and 7.7% for 2006, 2007, 2008 and 5.4% in 2009, respectively, and 4.52% by May 2010. Accordingly, we may be subject to high interest rates in the event we incur Peso-denominated debt in the future.
If Foreign Currency Exchange Controls and Restrictions are Imposed, Investors Would be Exposed to Foreign Currency Exchange Rate Risk.
In the past, the Mexican economy has experienced balance of payments deficits, shortages in foreign currency reserves and other issues that have affected the availability of foreign currencies in Mexico. The Mexican government does not currently restrict or regulate the ability of persons or entities to convert Pesos into U.S. Dollars. However, it has done so in the past and could do so again in the future. We cannot assure you that the Mexican government will not institute a restrictive foreign currency exchange control policy in the future. Any such restrictive foreign currency exchange control policy could (i) affect the ability of the depositary of our ADSs to convert dividends, which are payable in Pesos, into U.S. Dollars for purposes of making distributions to the holders of our ADSs, (ii) prevent or restrict access to U.S. Dollars, (iii) should we incur any U.S. Dollar-denominated debt in the future, affect our ability to service such debt and (iv) have an adverse effect on our business and financial condition.
Risks Related to Our Operations in Brazil May Adversely Affect Our Business.
As a result of our acquisition of Drogasmil in May 2008, we are exposed to a variety of risks and uncertainties related to our operations in Brazil including political, economic or social upheaval, devaluations in the Real, high levels of inflation and interest rates, the introduction of import, investment or currency restrictions, including pricing regulation on pharmaceutical products, restrictions on the repatriation of earnings and capital, as well as tariffs and import quotas that may indirectly increase the cost of the products that we sell. These disruptions can affect our ability to sell products and to repatriate funds, as well as affecting the levels of consumer demand, and therefore our levels of sales and profitability.
The Brazilian monetary unit, the Real, has been devalued frequently over the past four decades. Throughout this period, the Brazilian government has implemented various economic plans and exchange rate policies, including sudden devaluations, exchange controls, dual exchange rate markets and a floating exchange rate system. From time to time, there have been significant fluctuations in the exchange rate between the Brazilian currency and the U.S. Dollar and other currencies. For example, the Real depreciated against the U.S. Dollar, on average, by 22.3% in 2001, 19.6% in 2002 and 4.8% in 2003. In 2004, 2005, 2006 and 2007 the Real appreciated 8.8%, 13.4%, 9.5% and 16.3%, respectively, against the U.S. Dollar. In 2008 the Real depreciated 31.9% against the U.S. Dollar. In 2009 the Real appreciated 24.7% against the U.S. Dollar. In general, devaluations decrease consumers’ purchasing power which could have a negative effect on our business should a devaluation occur.
Our business could be affected by high rates of inflation and interest rates in Brazil, which historically has experienced such high rates. According to the Brazilian Central Bank’s
Índice Nacional de Preços Ao Consumidor Amplo
(National Consumer Price Index), or “IPCA,” the inflation rates in Brazil were 5.7% in 2005, 3.1% in 2006, 4.5% in 2007, 5.9% in 2008 and 4.3% in 2009. Periods of higher inflation may slow the rate of growth of the Brazilian economy, which could lead to reduced demand for our products in Brazil and decreased net sales. Inflation is also likely to increase some of our costs and expenses, which we may not be able to pass on to our customers and, as a result, may reduce our profit margins and net income.
In addition, high inflation generally leads to higher domestic interest rates and, as a result, the costs of servicing our Real-denominated debt may increase, resulting in lower net income. The
Sistema Especial de Liquidação e Custodia
rate (SELIC) is the Brazilian Central Bank’s overnight lending rate. In 2004 and 2005, the Brazilian interest rate was higher than 16% (17.8% in 2004 and 18.0% in 2005). In 2006, interest rates decreased to 13.3% and in 2007, the SELIC decreased further, to 11.3% and increased to 13.8% in 2008. During 2009, the SELIC averaged 10.0%, its lowest level during this decade. Inflation and its effect on domestic interest rates can, in addition, lead to reduced liquidity in the domestic capital and lending markets, which could affect our ability to refinance our indebtedness in those markets.
Brazil has also implemented exchange controls in the past, as well as restrictions on repatriation of capital. We cannot guarantee that such types of policies will not be adopted by Brazil in the future, which would have an adverse effect on our dividend flow to Grupo Casa Saba, which depends on dividends from its subsidiaries as a source of income.
Developments in Other Emerging Market Countries May Adversely Affect our Business or the Market Price of our Securities.
The market price of securities of Mexican companies is, to varying degrees, affected by economic and market conditions in other emerging market countries. Although economic conditions in such countries may differ significantly from economic conditions in Mexico, investors’ reactions to developments in such countries may have an adverse effect on the market price of securities of Mexican companies, including ours. In late October of 1997, prices of Mexican securities dropped substantially, precipitated by a sharp drop in the price of securities traded in the Asian markets. Likewise, prices of Mexican securities were adversely affected by the economic crises in Russia and Brazil in the second half of 1998 and, to a lesser extent, the economic crisis in Argentina in 2002. During 2005, the Mexican Stock Exchange Index increased by 37.8%, as did the average index for emerging markets, including Latin America, Asia and Emerging Europe. The considerable growth of the Mexican exchange was supported by high economic growth worldwide and low interest rates. In 2006, the index of the Mexican Stock Exchange increased by 48.6%, following the positive performance of both emerging and developed markets worldwide. High levels of liquidity as well as positive outlooks for emerging markets, including Mexico, contributed to the increase of the index of the Mexican Stock Exchange. During 2007, the index of the Mexican Stock Exchange increased by 11.7%, somewhat lower than the last four years, but still positive as a result of strong economic growth of emerging economies such as China and Brazil, as well as solid internal economic activity. During 2008, the index of the Mexican Stock Exchange declined by 24.2%, mainly due to the volatility brought on by the financial crisis that began during the second half of 2008 in the United States and which has had a negative effect on both developed and developing countries worldwide. By the end of 2009, the Mexican Stock Exchange Index recovered, posting a gain of 43.5% and by March 31, 2010, the market’s main index rose an additional 3.6%, aided by the positive economic performance of emerging market countries such as China, Brazil and India. There can be no assurance that the market price of our securities will not be adversely affected by future events elsewhere in the world, particularly in other emerging market countries.
Risk Factors Relating to Regulations to which our Business is Subject
Mexican Antitrust Law and Regulations May Affect Our Ability to do Business
.
Mexico’s Federal Antitrust Law, or
Ley Federal de Competencia Económica
, and its Regulations, or
Reglamento de la Ley Federal de Competencia Económica
, may affect some of our activities. In particular, such laws and regulations may adversely affect our ability to acquire and sell businesses or to enter into joint ventures with competitors due to our market share in some of the industries in which we operate and the reduced number of participants in those markets.
Changes in Mexican Legislation May Negatively Affect Our Operations and Revenue.
Existing laws and regulations could be amended, the manner in which laws and regulations are enforced or interpreted could change, and new laws or regulations could be adopted. The implementation of such amendments or changes in interpretation or enforcement of existing Mexican laws and regulations or any other future laws or regulations could materially and adversely affect our operations and revenue.
In September 2007, the Mexican Congress approved a new federal tax applicable to all Mexican corporations (which will be applicable to us), known as the single rate business tax (
Impuesto Empresarial a Tasa Única
), or IETU, which is a form of an alternative minimum tax and replaces the asset tax that previously applied to corporations and other taxpayers in Mexico. The IETU tax rate for 2009 was 17.0% and is 17.5% for calendar year 2010 and thereafter. A Mexican corporation is required to pay the IETU if, as a result of the calculation of the IETU, the amount payable under the IETU exceeds the income tax payable by the corporation under the Mexican Income Tax Law (
Ley del Impuesto Sobre la Renta
). In general terms, the IETU is determined by applying the rates specified above to the amount resulting from deducting from a company’s taxable income, among other items, goods acquired (consisting of raw materials and capital investments), services provided by independent contractors and lease payments required for the performance of the activities taxable under the IETU. Salaries, royalty payments made to related parties and interest payments arising from financing transactions are not deductible for purposes of determining the IETU. However, salaries subject to income tax and social security contributions paid to employees are creditable for purposes of determining the IETU. The legislation became effective in January 2008. Although we cannot currently predict the impact of this legislation or quantify its effect on our tax liability for future years, this change in the tax regime could materially increase our tax liabilities and cash tax payments, including by limiting our ability to make use of tax loss carry forwards, which could adversely affect our results of operations and financial condition.
In December 2009, an amendment to the Mexican Income Tax Law (
Ley del Impuesto Sobre la Renta
) containing new rules for the tax consolidation regime, was published in the Official Gazette. The deferred income tax benefit derived from tax consolidation of a parent company and its subsidiaries is limited to a period of five years; therefore, the resulting deferred income tax has to be paid starting in the sixth year following the fiscal year in which the deferred income tax benefit was received. Payment of deferred income tax must be made in installments: 25% in the first and second year, 20% in the third year, and 15% in the fourth and fifth year. This new provisions apply to deferred income tax resulting from tax consolidation prior to and from 2010, therefore in 2010 taxpayers will have to pay the first installment of the cumulative amount of the deferred tax benefits determined as of December 31, 2004.
The application of such provisions could increase our tax liabilities and have an adverse effect on our financial condition.
Our Ability to Increase the Prices of Some Products is Regulated by the Mexican Government.
Our historical operating performance has been significantly affected by price controls imposed by the Mexican government in the pharmaceutical sector. Prices of pharmaceuticals continue to be subject to approval by the Mexican government. As a result, neither our suppliers nor we may be able to increase pharmaceutical prices at or above the rate of inflation, which would substantially limit the growth of our pharmaceutical-related revenues. Since 1990, the Mexican government has deregulated pharmaceutical prices to some extent, and prices have increased in the Mexican pharmaceutical market as a result of this deregulation. However, we cannot assure you that the Mexican government will continue to deregulate pharmaceutical prices, or if they do, that our ability to increase prices will continue, or that these increases will result in an improvement in our operating performance.
Any Value-Added Tax Imposed on Prescription Drugs May Adversely Affect Our Business, Financial Condition and Results of Operations.
Unlike the HBCG, entertainment products, general merchandise and other products that we distribute, the prescription drugs and over-the-counter drugs that we distribute are not currently subject to a 15% value-added tax. In April 2001, a proposal was filed with the Mexican congress requesting a substantial amendment to Mexican tax laws. One of the reforms contemplated by this proposal was an increase in the value-added tax on prescription drugs and over-the-counter drugs from 0% to 15%. Although that bill was not passed by the Mexican congress, the current government may file similar proposals. If prescription drugs and over-the-counter drugs become subject to a value-added tax in excess of the currently applicable 0% rate, the prices paid by consumers for prescription drugs and over-the-counter drugs would likely increase by the percentage amount of the value-added tax rate. While any price increases resulting from the imposition of a higher value-added tax would be non-recurring, we still believe that these price increases would have an adverse effect on consumer demand for these products and result in a decrease in related revenues. To the extent that any of these price increases adversely impact revenues related to prescription and over-the-counter drugs, our business, financial condition and results of operations could be adversely affected. We cannot assure you that the proposal containing this request or other similar proposals will not be filed again with the Mexican congress and, if such proposal were enacted into law, will not adversely affect our business, financial condition or results of operations.
Changes to Retail Pharmacy Regulation in Mexico May Affect Our Business
. Our retail pharmacy business operations are subject to health and safety laws and regulations, including those concerning the commercialization of controlled medicines, commercialization and storage of controlled substances used in pharmaceutical products and the sale and distribution of cigarettes, among others. The enactment of more stringent laws and regulations, or a change in the interpretation of such existing laws and regulations, could entail new obligations for us, restrictions or result in our having to invest additional amounts in health control matters, all of which could have a materially adverse effect on our results of operations and financial condition.
Changes in Brazilian Regulations Relating to the Sale of Pharmaceutical Products and Retail Pharmacy Operations May Adversely Affect Our Business
. Pharmacies are required to obtain a number of permits and operating licenses from federal, state and local authorities in Brazil, including from the
Secretaria de Vigilância em Saúde
, Health Surveillance Secretariat of the Ministry of Health, or SVS, in order to engage in the handling, distribution, transport, repackaging, import and export of the substances determined by the SVS, as well as the medicines that contain such substances. Changes in the type of permits that are required or our failure to obtain such permits may adversely affect our results of operations in Brazil.
Our operating performance in Brazil may also be affected by the price controls on pharmaceutical products and certain non-pharmaceutical products imposed by the Brazilian government through the
Câmara de Regulação do Mercado de Medicamentos
, the Chamber for Regulation of Medicine Market, or CMED, with the oversight of the
Agência Nacional de Vigilância Sanitária
, the National Health Surveillance Agency, or ANVISA. As a result neither our suppliers nor we may be able to increase prices above the maximums established by the relevant Brazilian authorities. Price controls are governed through regulatory mechanisms that allow for controlled percentage increases in prices due to fluctuations in the exchange rate, inflation rate and raw material costs, among other factors. Adjustments to price controls take place on an annual basis, on March 31
st
of each year. The CMED established a maximum drug price adjustment of 4.6% for the year commencing on March 31, 2010. We cannot assure you that more stringent measures will be implemented by the Brazilian government in respect of price controls. Changes to the manner in which price controls are implemented in Brazil may materially affect our results of operations in Brazil.
In August 2009, ANVISA adopted new rules for the sale of products in pharmacies in an effort to curb self-medication. Resolution RDC 44/09 prohibits the sale of convenience products and other services not related to health and personal hygiene. In addition, pursuant to the new rules, pharmacies will be required to place several products, including common over-the-counter drugs like analgesics and antacids, behind the counter. The new rules came into effect on February 18, 2010. We believe such rules are not legal and that ANVISA went beyond its powers in issuing them. Based on the foregoing, Abrafarma, the Brazilian Association of Pharmacy and Drugstore Networks of which our subsidiary Drogarias is a member, has filed for an injunction for the benefit of its members against the application of the new rules. In January 2010, a federal court in the Federal District granted the injunction to Abrafarma an its members, including Drogarias, against the application of the above-mentioned rules. If such new rules were to be applied to Drogarias, its business, results of operation and financial condition may be significantly adversely affected.
Currently, Brazil’s Federal Pharmaceutical Council,
Conselho Federal de Farmacia
, is considering a draft resolution that would require that over-the-counter medications, such as analgesics and antacids, may only be sold if prescribed from a pharmacist. If approved, we believe such regulation could have an adverse effect in the operations of our subsidiary Drogarias.
The sale of pharmaceutical products in Brazil is subject to a tax rate of 19% one of the highest in Latin America. Further increases in the taxes applicable to the sale of the products we sell may affect our results of operation and our margins in Brazil to the extent that we are not able to pass on such costs to the end-consumer, for example, as a result of price controls.
|
Item 4.
|
Information on the Company
|
History and Development of the Company
Grupo Casa Saba, S.A.B. de C.V. is a
sociedad anónima
bursátil
de capital variable
, or stock corporation with variable capital, which was organized under the laws of Mexico November 16, 1982. Our deed of incorporation was registered with the Public Registry of Commerce in Mexico City on January 10, 1983 under Commercial Folio Number 55,635. Pursuant to the terms of our
estatutos sociales
, or bylaws, our corporate existence is indefinite. Our principal executive offices are located at Paseo de la Reforma, No. 215, Colonia Lomas de Chapultepec, C.P. 11000, D.F., Mexico. Our telephone number at that address is (52 55) 5284-6600. Grupo Casa Saba’s authorized representative in the United States is Puglisi & Associates and is located at 850 Library Avenue, Suite 204, P.O. Box 885, Newark, Delaware 19714. Their telephone number is (302) 738-6680.
Grupo Casa Saba was founded as a pharmacy in 1892, and is currently one of the leading multi-channel, multi-product national wholesale distributors in Mexico, operating through one of Mexico’s largest nationwide distribution networks of its type. We distribute pharmaceutical products, health, beauty aids and consumer goods, general merchandise, publications and other products. The majority of these products are distributed by us on a non-exclusive basis. With over 115 years of experience, we serve a significant number of Mexico’s pharmacies, mass merchandisers, retail and convenience stores, supermarkets and other specialized channels.
In February 2000, Mr. Isaac Saba y Raffoul, also known as Isaac Saba Raffoul, acquired 225,606,456 of our Ordinary Shares. In 2008, he contributed them to Trust F-709, of which he was the sole beneficiary. Upon his death on July 27, 2008, Manuel Saba Ades and Alberto Saba Ades, sons of Isaac Saba Raffoul, are the sole beneficiaries, on an equal basis, of the Ordinary Shares held by Trust F-709. References in this annual report to “our controlling shareholder” are to Trust F-709, as the direct holder of 225,606,456 Ordinary Shares for the benefit of Manuel Saba Ades and Alberto Saba Ades.
By the end of 2007, we had no interest-bearing liabilities and our net debt by year-end was Ps. 684 million. As of December 31, 2008, our interest-bearing liabilities were Ps. 1,324.8 million and our net debt was Ps. 723 million, primarily as a result of the acquisition of Drogasmil, a Brazilian pharmacy chain. Our interest-bearing liabilities at the close of the 2009 fiscal year totaled Ps. 2,382.7 million and our net debt reached Ps. 1,719. On March 25, 2010, our subsidiary Casa Saba entered into a new credit agreement with Scotiabank Inverlat, S. A. to liquidate the bank loans payable by Drogarias (see Notes 9 and 16 to our audited consolidated financial statements). On March 26, 2010, Casa Saba drew down this credit in the amount of Ps. 520 million, which will be repaid monthly at the TIIE (
Tasa de Interes Interbanciario de Equilibrio
) rate plus
a margin over a term of five years, plus a grace period of six months. The Company and its subsidiary Drogueros are guarantors of such loan.
See “Item 5. Operating and Financial Review and Prospects—Indebtedness” and Note 9 to our consolidated financial statements.
During 2008, as part of our growth strategy, we expanded our retail pharmacy operations in Mexico and overseas. We experienced significant growth in the retail pharmacy chain that we operate through our subsidiary Farmacias ABC de Mexico, S.A. de C.V., or Farmacias ABC, which is based in Guadalajara, Jalisco. We acquired Farmacias ABC in November 2007 with 40 pharmacies and grew to over 150 pharmacies by the end of 2008 through a series of small acquisitions of retail pharmacy assets (primarily inventory and store locations) in the metropolitan area of Mexico City and in the states of Guanajuato, Michoacán, Jalisco and Coahuila. In May 2008 we expanded into the Brazilian retail pharmacy market. We acquired 100% of the shares of Drogasmil, a closely-held company, for a transaction price of approximately $155 million Reals. We financed the acquisition by obtaining a long-term loan for an aggregate amount of up to Ps. 1,210 million from a Mexican financial institution, of which we had drawn Ps. 1,210 million as of December 31, 2009. Drogasmil currently operates pharmacies in the states of Río de Janeiro and São Paulo. In 2008, we incorporated Casa Saba Brasil Holdings Ltda., or Casa Saba Brasil, as a holding company for our operations in Brazil. References in this annual report to Casa Saba Brasil include any of its subsidiaries, including Drogasmil.
In April of 2008, we continued to open new lines of business through the acquisition of 50.1% of Controladora de Clínicas Ambulatorias y de Rehabilitación, S.A. de C.V., or Controladora de Clinicas Ambulatorias, a company that operates two full-service clinics under the name “Sport Clinic” specializing in orthopedics, trauma, sports medicine, nutrition, otorhinolaryngology and plastic surgery for short-stay patients. Each clinic is staffed with highly-trained, specialized personnel that conduct out-patient surgeries and provide rehabilitative therapy. Both clinics are located in Mexico City. With this acquisition, we are seeking to diversify and increase our participation in the healthcare sector. In 2008, we began construction of a new clinic in Tampico, Tamaulipas, which opened to the public in November 2009.
In addition, in 2009 we have continued our expansion in the healthcare sector and opened
Perfect Image
in Mexico City, a clinic specializing in plastic surgery as well as health and beauty treatments.
As part of our strategy to expand our retail pharmacy operations, in May 17, 2010 we entered into a Stock Purchase and Sale Promise Agreement, or the FASA Agreement, with a group of entities controlled by Mr. Jose Codner Chijner to acquire up to 100% of the capital stock of Farmacias Ahumada, S.A., or FASA, for a total price of approximately $637 million, including the assumption of net debt that, as of March 31, 2010 was $162 million. FASA is the largest retail pharmacy chain in Latin America, with annual sales of approximately $1,650 million in 2009 and over 1,240 pharmacies in Chile, Mexico and Peru. The transaction is subject to the completion of a tender offer for all of the outstanding shares of FASA on the Santiago Stock Market, at a price equal or greater than 1,642 Chilean Pesos per share. The validity of the offer is conditioned upon the sale of at least fifty percent plus one of the outstanding shares of FASA. The transaction is also subject to the approval of our general shareholders’ meeting and the Mexican Antitrust Commission,
Comision Federal de Competencia
. See
“
Item 10. Additional Information
—
Material Contracts
”
. We intend to fund the transaction with a mix of our own resources and bank debt, for which we have received commitments from two Mexican financial institutions. We estimate that the financing from one financial institution will be for up to Ps. 5,904 million, and up to the equivalent amount in Pesos for $200 million. In addition, we estimate that the financing from other financial institution will be for approximately Ps. 1,950 million, which will be mainly used to prepay certain credit liabilities that the Company has.
Our consolidated net sales for the year ended on December 31, 2009 totaled Ps. 29,791 million, approximately 94.9% of which were made in Mexico. As of the end of 2009, our total assets were Ps. 15,087 million and we had 22 distribution centers in Mexico. Our operations in Brazil represented 5.1% of our consolidated net sales for the year ended on December 31, 2009. Our operations are currently organized into four operative business divisions: the Private Pharmaceutical Products business division, which we refer to as “Private Pharma” (85.94% of our consolidated net sales in 2009) and includes results from our retail pharmacies business; the Government Pharmaceutical business division, which we refer to as “Government Pharma” (3.04% of our consolidated net sales in 2009); the Health, Beauty Aids, Consumer Goods, General Merchandise and Other Products business division, which we refer to as the “HBCG/Other Products” business division (8.49% of our consolidated net sales in 2009); and the Publications business division (2.53% of our consolidated net sales in 2009).
In light of the amendments to the Mexican Federal Income Tax Law, effective January 1, 2010, relating to changes in the tax consolidation regime, the Company decided to deconsolidate for tax purposes and filed a deconsolidation tax return on June 25, 2010 for an amount of Ps. 132,628,957, which has been paid to this date.
Organizational Structure
Grupo Casa Saba is a holding company that has an ownership interest in the subsidiaries through which we operate. Grupo Casa Saba and all of our significant subsidiaries listed below are organized under the laws of Mexico, except where otherwise indicated.
The following table sets forth our significant subsidiaries and our direct or indirect percentage equity ownership in such subsidiaries as of December 31, 2009:
|
Name of Subsidairy (1)
|
|
|
Economic Interest
(Direct or Indirect) (2)
|
|
|
|
|
|
|
Mexican Subsidiaries
Direct Interest
|
|
|
2008
|
2009
|
|
Casa Saba, S.A. de C.V.(3)
|
(Casa Saba)
|
|
99.9%
|
48.21%
|
|
Distribuidora Casa Saba, S.A. de C.V. (4)
|
(Dicasa)
|
|
99.9%
|
99.9%
|
|
Publicaciones Citem, S.A. de C.V. (5)
|
(Citem)
|
|
99.9%
|
99.9%
|
|
Transportes Marproa, S.A. de C.V. (6)
|
(Marproa)
|
|
99.9%
|
99.9%
|
|
Farmacias ABC de México, S.A. de C.V. (7)
|
(Farmacias ABC)
|
|
99.9%
|
99.9%
|
|
Controladora de Cl
í
nicas Ambulatorias y de Rehabilitaci
ó
n, S.A. de C.V. (8)
|
(Controladora de Cl
í
nicas)
|
|
50.005%
|
50.005%
|
|
Centennial, S.A. de C.V. (9)
|
(Centennial)
|
|
|
99.9%
|
|
Grupo Mexatar, S.A. de C.V. (10)
|
(Mexatar)
|
|
|
99.9%
|
|
Other companies (23)
|
|
|
99.9%
|
99.9%
|
|
Indirect Interest
|
|
|
|
|
|
Centennial, S.A. de C.V. (9)
|
(Centenial)
|
|
99.9%
|
|
|
Grupo Mexatar, S.A. de C.V. (10)
|
(Mexatar)
|
|
99.9%
|
|
|
Casa Saba, S.A. de C.V. (3)
|
(Casa Saba)
|
|
|
51.79%
|
|
Distribuidora Drogueros, S.A. de C.V. (11)
|
(Didrosa)
|
|
99.9%
|
99.9%
|
|
Daltem Provee Norte, S.A. de C.V. (12)
|
(Daltem Norte)
|
|
99.9%
|
99.9%
|
|
Drogueros, S.A. de C.V. (13)
|
(Drogueros)
|
|
99.9%
|
99.9%
|
|
Farmacias Provee de Especialidades, S.A. de C.V.) (14)
|
(Farmacias Provee)
|
|
99.9%
|
99.9%
|
|
Servicios Corporativos Drogueros, S.A. de C.V. (15)
|
(Secodro)
|
|
99.99%
|
99.99%
|
|
Inmuebles Visosil, S.A. de C.V. (16)
|
(Visosil)
|
|
99.9%
|
99.9%
|
|
Servicios Corporativos Saba, S.A. de C.V. (17)
|
(Secosa)
|
|
99.9%
|
99.9%
|
|
Resonancia Sports Clinic, S.A. de C.V. (18)
|
|
|
50.001%
|
50.001%
|
|
Servicios Corporativos Sports Clinic, S.A. de C.V. (19)
|
|
|
50.001%
|
50.001%
|
|
Tampico Sports Clinic Ambulatorias, S.A. de C.V. (20)
|
|
|
50.001%
|
50.001%
|
|
Other companies (23)
|
|
|
99.9%
|
99.9%
|
|
Brazilian Subsidiaries:
|
|
|
|
|
|
Casa Saba Brasil Holdings Ltda. (21)
|
(Casa Saba Brasil)
|
|
100%
|
100%
|
|
CSB Drogarias, S.A. (22)
|
(Drogarias)
|
|
100%
|
100%
|
|
Lomas Sports Clinic Ambulatorias, S.A. de C.V.
|
|
|
|
|
|
Associates
|
|
|
|
|
|
Lomas Sports Clinic Ambulatorias, S.A. de C.V.
|
|
|
36.2%
|
36.2%
|
|
WTC Sports Clinic Ambulatorias, S.A. de C.V.
|
|
|
47.0%
|
47.0%
|
(1) With the exception of Casa Saba, S.A. de C.V. and CSB Drogarias, S.A., none of our operating subsidiaries is a “significant subsidiary” within the meaning of Rule 1-02(w) of Regulation S-X of the Securities Act of 1933.
(2) Percentage of equity owned by us directly or indirectly through subsidiaries or affiliates.
(3) We directly own 48.21% of the shares of Casa Saba and the remaining 51.79% is held through our subsidiary Transporte Marproa, S.A. de C.V.. Through this subsidiary we distribute pharmaceutical products to private and government clients.
(4)
Subsidiary that provides logistical and transportation services to Casa Saba, S.A
de
C.V.
(5) Subsidiary through which we distribute publications.
(6) Subsidiary through which we deliver products to our distribution centers throughout Mexico. We place centralized purchase orders for all of our distribution centers directly with suppliers, who deliver these centralized purchase orders to Transportes Marproa, S.A. de C.V., or Marproa. Marproa then distributes customized orders to our distribution centers throughout Mexico. Marproa also provides freight services to third parties at market rates.
(7) Subsidiary through which we sell pharmaceutical products.
(8) Subsidiary through which we operate medical clinics.
(9) Subsidiary through which we distribute general merchandise and other products.
(10) Subsidiary through which we own Casa Saba Brasil Holdings Ltda.
(11) Subsidiary through which we distribute pharmaceutical products to private and government clients.
(12) Subsidiary through which we distribute pharmaceutical products to private and government clients.
(13) Subsidiary through which we distribute pharmaceutical products to private and government clients.
(14) Subsidiary through which we sell pharmaceutical products.
(15) Subsidiary that provides administrative, legal, accounting, tax planning, financial counseling and other professional services to Drogueros, S.A. de C.V.
(16)
Subsidiary through which we lease real estate to our other subsidiaries. Inmuebles Visosil, S.A. de C.V. owns substantially all of the capital stock of Drogueros, S.A. de C.V.
(17)
Subsidiary that provides administrative, legal, accounting, tax planning, financial counseling and other professional services to Casa Saba, S.A
de C
.V.
(18) Subsidiary through which we purchase medical equipment.
(19)
Subsidiary that provides administrative, legal, accounting, tax planning, financial counseling and other professional services to
Lomas Sports Clinic Ambulatorias., S.A. de C.V. and WTC Sports Clinic Ambulatorias, S.A. de C.V.
(20) Subsidiary through which we provide specialized medical, rehabilitation and surgical services for short-stay patients.
(21) Subsidiary, organized under Brazilian laws, through which we own operating subsidiaries in Brazil, including Drogasmil.
(22) Subsidiary, organized under Brazilian laws, through which we sell pharmaceutical products.
(23)
Real estate and Service companies (24 subsidiaries).
Capital Expenditures
The table below sets forth our capital expenditures for the years ended December 31, 2007, 2008 and 2009. Our capital expenditure program is primarily focused on new investments in vehicles for our distribution fleet, information technology and computer equipment. For a discussion of how we funded our capital expenditures in 2009, as well as a more detailed description of our capital expenditures, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Overview” and “—Capital Expenditures”.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Mexican Pesos)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution fleet
|
|
Ps.
|
38.9
|
|
|
Ps.
|
36.4
|
|
|
Ps.
|
19.4
|
|
|
Technology and computer
equipment
|
|
|
41.2
|
|
|
|
30.7
|
|
|
|
22.2
|
|
|
Other general capital
expenditures
|
|
|
39.8
|
|
|
|
63.7
|
|
|
|
34.0
|
|
|
Total capital expenditures
(1)
|
|
Ps.
|
119.9
|
|
|
Ps.
|
130.8
|
|
|
Ps.
|
75.6
|
|
(1) In addition, in 2007 we incurred work-in-progress related expenditures of approximately Ps. 44.0 million, primarily related to the construction of our distribution center in Hermosillo, Sonora, as well as improvements to other storage facilities.
During 2008, we made information technology improvements at our Daltem and Centennial distribution centers which we believe will ensure the quality with which we process client transactions and will help us to streamline inventory management procedures. See “—Information and Technology Systems”, and “Item 5. Operating and Financial Review and Prospects—Overview”.
During 2009, our capital expenditures were primarily related to the purchase of machinery, computer hardware, as well as for the purchase of transport and delivery equipment. See “—Information and Technology Systems” and “Item 5. Operating and Financial Review and Prospects—Overview”.
In 2010, we expect that our main capital expenditures will be related to IT investments and developments, as well as to the renewal of our distribution fleet.
Business Overview
Grupo Casa Saba was founded as a pharmacy in 1892 and is currently one of the leading multi-channel, multi-product national wholesale distributors in Mexico, operating through one of Mexico’s largest distribution networks of its type. We distribute pharmaceutical products, health, beauty aids and consumer goods, publications, general merchandise and other products. We distribute the majority of these products on a non-exclusive basis. With over 115 years of experience, we supply a significant number of Mexico’s pharmacies, mass merchandisers, retail and convenience stores, supermarkets and other specialized channels nationwide.
We currently distribute nearly 15,000 different products, including approximately:
|
|
●
|
5,400
pharmaceutical products;
|
|
|
●
|
5,100
health and beauty products;
|
|
|
●
|
450
general merchandise and other products, such as food and toiletries; and
|
We distribute these products throughout Mexico through our nationwide distribution network to clients in the following segments:
|
|
●
|
more than
14,450
pharmacies owned by private individuals;
|
|
|
●
|
approximately 4
,200
privately-owned pharmacy chains and over 475 government pharmacies;
|
|
|
●
|
approximately
2,900
regional and national supermarkets;
|
|
|
●
|
approximately 400 racks and 170 nationwide agents;
|
|
|
●
|
over
110
department stores; and
|
|
|
●
|
approximately
400
major wholesalers and 5
,000
convenience stores.
|
We currently operate over 160 pharmacies in Mexico, primarily in the states of Jalisco, Guanajuato, Michoacán, Nuevo León, Coahuila and the metropolitan area of Mexico City and 71 pharmacies in the states of Río de Janeiro and São Paulo in Brazil through which we sell pharmaceutical products as well as health and beauty aids and other related consumer goods.
Our cash flows are subject to seasonal fluctuations and market conditions. To maintain a larger winter inventory and to ensure adequate inventory levels for the two or more weeks of holidays in December, during which suppliers do not make sales or deliveries, our accounts payable and inventories typically increase at year-end. After reaching their highest levels in December, our inventories gradually decrease to what we estimate is a normal operational level of approximately 50 inventory days. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Overview”.
Distribution Business Overview
Our core business is the wholesale distribution of pharmaceutical products in Mexico. The following table shows our sales by business division, as a percentage of consolidated net sales for the last three years:
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Pharmaceuticals
(1)(2)(3)
|
|
|
84.2
|
%
|
|
|
84.9
|
%
|
|
|
85.9
|
%
|
|
Government Pharmaceuticals
|
|
|
3.1
|
%
|
|
|
3.6
|
%
|
|
|
3.0
|
%
|
|
HBCG/Other Products
|
|
|
9.0
|
%
|
|
|
8.9
|
%
|
|
|
8.5
|
%
|
|
Publications
|
|
|
3.7
|
%
|
|
|
2.6
|
%
|
|
|
2.5
|
%
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
(1) For a brief description of the types of products included within the term “pharmaceutical products” for purposes of this annual report, as well as a discussion of the differences between the pharmaceutical markets in Mexico and the United States, see “—Pharmaceutical Industry,” below in this item.
(2) The operations of Casa Saba Brasil are consolidated and reflected in the Private Pharmaceuticals business division. For the year ended December 31, 2009, Casa Saba Brasil’s net sales represented 5.1% of our consolidated net sales and 6.0% of the net sales of the Private Pharmaceuticals business division.
(3) The operations of our retail pharmacy business in Mexico are consolidated and reflected in the Private Pharmaceuticals business division. For the year ended December 31, 2009, our retail pharmacy business in Mexico represented 4.1% of our consolidated net sales and 4.7% of the net sales of the Private Pharmaceuticals business division.
We seek to distribute pharmaceutical products on a “full-line/full-service” basis. We distribute a wide array of pharmaceutical and other products of the kinds listed above, as well as provide our clients with a range of value-added services, including multiple daily deliveries and emergency product replacement services. In our HBCG/Other Products business division we distribute certain products on an exclusive basis while also providing our clients with specialized value-added services on a product-by-product basis, including merchandising, marketing support and other customer counseling services.
We purchase the products we distribute from a wide variety of suppliers, the majority of which are located in Mexico. We place purchase orders on an ongoing basis, negotiating quantity and price periodically rather than committing to contractual terms. By distributing pharmaceutical products, our role is generally not that of a “demand creator”, given that we do not advertise products, nor do we suggest or provide substitute products for those ordered.
Our principal strengths are our nationwide distribution network, through which we are able to deliver products within 12 to 24 hours from the time of order, our state-of-the-art technology, our commitment to customer service and our well-trained and experienced personnel. In addition, as a result of our continued use of new technologies since the early 1990s, we have increased our operating efficiency and distribution capacity.
Mexico’s vast and mountainous terrain and old road network connecting small towns present a difficult environment for distribution. This is further complicated in Mexico City and the surrounding areas by traffic congestion. We believe that we will continue to overcome these constraints with our strategically located distribution centers near Mexico’s major population centers.
As of December 31, 2009, we distributed products to our clients nationwide through a distribution network consisting of 22 active distribution centers. Grupo Casa Saba’s warehouses have more than 100,000 square meters of warehouse space. Using a fleet of over 900 vans, trucks and cars, we filled more than 6.3 million orders in 2009, averaging more than 530,000 orders per month. For a list of our distribution centers and their locations, see “—Property, Plant and Equipment,” below in this item.
Retail Business Overview
Consistent with our business strategy, we have continued to strengthen our retail pharmacy business. In Mexico, we sell pharmaceutical products through the Farmacias ABC pharmacy chain, which is based in Guadalajara, Jalisco, and through Farmacias Provee de Especialidades, which has operations in the northern region of Mexico, particularly in Monterrey, Nuevo Leon and in the states of Chihuahua and Coahuila. Through Farmacias ABC, we operated over 150 pharmacies in 2009, mainly in the metropolitan area of Guadalajara, Jalisco, which is Mexico’s second most populated city, as well as in the Mexico City metropolitan area and in the states of Guanajuato, Michoacán, Jalisco and Coahuila. Through Farmacias Provee de Especialidades we operated 10 pharmacies in 2009 in or close to important healthcare centers and hospitals. We currently lease all of the locations where the pharmacies are located. See “—Property, Plant and Equipment”.
Our Brazilian operations are focused on the operation of retail pharmacies. We purchase the pharmaceutical products we sell from Brazil’s three main pharmaceutical wholesale distributors while our non-pharmaceutical products are purchased from a wide range of distributors, manufactures and suppliers. We place purchase orders on an ongoing basis, depending on market needs, pricing and payment terms rather than committing to contractual terms. Our presence in the states of Río de Janeiro and São Paulo, through 71 pharmacies, allows us access to a wide range of customers. Our customers are primarily individual clients, although we do maintain corporate arrangements, which are generally longer-term in nature, within several healthcare providers and corporate clients, such as Carrefour and Unilever. Since acquiring Drogasmil in the second quarter of 2008, we have carried out an ongoing process of integrating and raising its operational standards to those of our Mexican operations.
In our stores, we sell pharmaceutical products and a wide assortment of other merchandise. In fiscal year 2009, pharmaceutical product sales, which for purposes of this annual report include prescription drugs as well as over-the-counter medications, accounted for approximately 66% of our retail pharmacy business sales in Mexico. We believe that our pharmacy operations will contribute to our overall operations due to favorable industry trends, including an aging population, increased life expectancy and the discovery of new and better drug therapies. We offer a wide variety of non-pharmaceutical products, including health and beauty aids and other merchandise which accounted for approximately 23% and 11%, respectively, of our Mexican retail pharmacy business sales in 2009. Non-pharmaceutical products include health and beauty aids, personal care items, cosmetics, household items, beverages, convenience foods, seasonal merchandise and numerous other everyday and convenience products.
Business Strategy
Since the acquisition of our Company in February 2000, we have been operating under the direction of our current management. See “Item 4. Information on the Company—History and Development of the Company”. Under the direction of our current management, we are focused on enhancing the value of Grupo Casa Saba by:
|
|
●
|
Expand our retail pharmacy business in Mexico and Latin America;
|
|
|
●
|
Improve the efficiency of our retail operations.
|
|
|
●
|
Maintaining continuous contact with clients and suppliers to enhance the supply chains in which we participate;
|
|
|
●
|
Analyzing the efficiency of our existing distribution centers and implementing IT solutions that will increase our operational efficiency;
|
|
|
●
|
Offering our clients both value-added and internet solutions for facilitating commercial decisions and promoting higher sales;
|
|
|
●
|
Entering new businesses to diversify and increase our participation in the health sector;
|
|
|
●
|
Continuing to focus on internal savings and operating efficiencies programs that will maximize our operations’ profitability; and
|
As a result of these measures, as of December 31, 2009, we:
|
|
●
|
Had commercial operations with almost all of the clients and suppliers of the private pharmaceutical market in Mexico;
|
|
|
●
|
Improved our connectivity to various clients’ systems in order to streamline order processing and product availability, which we believe will enable us to improve our purchasing and inventory management practices;
|
|
|
●
|
Adapted our radio frequency technology to eliminate the use of paper in two of our largest distribution centers, which resulted in cost savings
|
|
|
●
|
Opened a new distribution center with a more advanced design that we believe will enable us to offer a better level of service to our clients located in this region at a lower cost;
|
|
|
●
|
Increased efficiency of our retail pharmacy operations in Mexico and Brazil by improving our product offering as well as the level of service that we provide at the point-of-sale;
|
|
|
●
|
Opened a new Sports Clinic in Tampico, Tamaulipas in the northeast part of Mexico and inaugurated Perfect Image, a clinic that specializes in plastic surgery and health and beauty treatments in Mexico City;
|
|
|
●
|
Offer value-added services to our clients such as targeted publications, special discount programs and an electronic procurement portal that helps facilitate purchasing for our clients; and
|
|
|
●
|
Reviewed and, in some cases, changed the commercial terms of several of our clients and suppliers and, when required, discontinued unprofitable operations.
|
Expand our retail pharmacy business in Mexico and Latin America to a leading market position in the region
We intend to grow our retail pharmacy market share in Mexico and Brazil as well as to penetrate into new geographical markets in Latin America, through new store growth and strategic acquisitions. We believe that this will allow us to continue creating synergies with our existing distribution network, and increase our margins in the long-term.
In 2006, we acquired Distribuidora Solis, currently known as Farmacias Provee de Especialidades, a specialized pharmaceutical products distributor located in northern Mexico. At the time of the acquisition, Farmacias Provee de Especialidades consisted of nine pharmacies. We have continued to develop this business and by the end of 2008 we had four additional points-of-sale, which contributed to an increase in our overall sales of specialized pharmaceutical products.
During the fourth quarter of 2007 we acquired Farmacias ABC, a pharmacy chain based in Guadalajara, with operations in the state of Jalisco. This company also has a home delivery division known as “Repartos a Domicilio”. Since then, we have made a series of small acquisitions of retail pharmacy assets (primarily inventory and store locations) in the Mexico City metropolitan area and in the states of Guanajuato, Michoacán, Jalisco and Coahuila through which we increased the number of pharmacies operating under the Farmacias ABC brand from 40 pharmacies to over 150 pharmacies.
In May 2008, Grupo Casa Saba acquired Drogasmil, a Brazilian pharmacy chain that currently operates in the states of São Paulo and Río de Janeiro.
In May 2010, we entered into the FASA Agreement pursuant to which we will acquire control of FASA, subject to certain conditions. The transaction will potentially turn us into the largest drugstore chain in Latin America and one of the largest distributors of consumer and pharmaceutical products in the region, with a platform of approximately 1,500 pharmacies across Mexico, Brazil, Chile and Peru. See “
—
History and Development of the Company
”
and
“
Item 10. Additional Information—Material Contracts”.
We believe the Acquisition will create value for our shareholders through the projected benefits of the synergies that will be created. These synergies will provide added strength to the Company by significantly increasing its size as the main distributor and vendor of pharmaceutical, health, beauty, personal care and general consumption products and giving us a larger national presence.
As a result of the Acquisition, we also seek to reinforce our regional growth strategy through a proved and wide multi-country platform, that also has the necessary corporate and system capacities to integrate efficiently our existing operations in Mexico and Brazil.
We believe that although the initial costs of growing our retail operations, either organically or through strategic acquisitions, may be high and our margins may be temporarily affected, the retail pharmacy business will contribute to our long-term growth and profitability.
Improve the efficiency of our retail operations.
We seek to focus our efforts on improving the efficiency of our Mexican and Brazilian retail operations, by offering pharmaceutical products as well as health, beauty care and general merchandise products at competitive prices while providing excellent service to our customers at the point-of-sale. This product offering will exist not only in the larger Mexican cities, but also in smaller cities and rural populations, thus benefiting regions that today do not have access to a wide range of such products at competitive prices.
In Latin America, we seek to integrate the experience that we have accumulated in Mexico as one of the leading distributors of pharmaceutical products with FASA’s knowledge as one of the leading participants in the pharmacy segment in various countries. As a result, we expect to offer customers a high quality service and a wide range of products at competitive prices at the point-of-sale.
Maintaining Continuous Contact with Clients and Suppliers
We are well aware that continuous contact with our clients and a solid knowledge of the markets in which we operate is key to finding new ways to increase our sales and further develop our core pharmaceutical business. Therefore, in 2009, we continued to focus our efforts on working closely with our clients and suppliers in order to identify their specific needs and customize our services to meet their requirements. All of these efforts were accomplished under our minimum profitability parameters. In terms of our suppliers, we worked closely with them to determine the market’s needs and to create innovative commercial schemes.
Analyzing the Efficiency of our Distribution Centers and Implementing IT Solutions that Increase Our Operational Efficiency
At Grupo Casa Saba we manage approximately
15,000
products, which requires a high level of efficiency and systematization in terms of order fulfillment and delivery. Grupo Casa Saba analyzes the geographic location and efficiency of its distribution centers in order to identify facilities that are not operating at maximum efficiency levels. To assure the optimal operation of its infrastructure and distribution network, Grupo Casa Saba continuously renews its distribution fleet and invests in upgrading its logistics and information systems.
In March 2006, Grupo Casa Saba signed an alliance with IBM and SAP to upgrade its technology systems, thereby increasing its competitive advantages as well as the efficiency of its execution processes. By the end of 2007, we completed the implementation of these projects, including the installation of systems containing the latest in back-up procedures and disaster recuperation, the unification of various database drivers into IBM’s DB2 platform and, finally, the implementation of the first two modules of SAP’s supply chain management tool. With this investment in technology, Grupo Casa Saba obtained a system with state-of-the-art technology that is flexible, tolerant to failures and that includes up-to-date back-up procedures and disaster recovery. We consider that these features will aid us by ensuring the continuous processing of client transactions nationwide, help us to improve purchasing and streamline inventory management procedures.
During 2008, we installed a new software called BaaN in our Daltem distribution center and made several improvements at our Centennial distribution center. At the Daltem distribution center, we designed a process that (i) enables us to capture orders at a call center, (ii) includes a pricing structure for each government contract and (iii) allows us to process orders for biological products (vaccines) by means of a new cold network. At the Centennial distribution center, we re-engineered our processes which consisted of updating our catalogs, adjusting the systems so that they can now recognize bar codes and purchased radio frequency terminals for use in the warehouse.
During 2008, we completed a new distribution center in Hermosillo, Sonora to better enable us to meet our regional distribution needs. The new center has larger storage capacity and semi-automatic product sorting capabilities, which will enable us to service the surrounding area more efficiently. The facility became operational in the first quarter of 2009.
In 2009, our IT efforts were focused primarily on general computer and communication systems updates and maintenance, including: the purchase of new computer equipment, the replacement of critical servers for our central site with state-of-the-art hardware and the implementation of a digital voice and data network in all of our distribution centers as well as our corporate headquarters. We believe that these upgrades will reduce operating costs and improve system availability.
In addition, we have eliminated the use of paper in several of our warehouses through the use of radio frequency terminals. This measure is intended to reduce paper consumption and improve the accuracy of our order processing. We also updated our software and connectivity with various clients in order to improve on-line order processing and product availability.
We consider that all of these features will ensure the quality with which we process client transactions and will help us to streamline inventory management procedures.
Offering our Clients Value-Added and Internet Solutions to Facilitate Commercial Decision-Making and Promoting Higher Sales
In an increasingly competitive business environment, service is key. Therefore, we do our best to go one step further to provide value-added services to our clients. In 2009, we continued to use an online distribution and information website,
www.farmaservicios.com
, which we currently make available to our clients free of charge. Clients that log on to
www.farmaservicios.com
are able to communicate directly with us, as well as place and track their orders and shipments on-line. In addition, these clients have access to a wide range of additional services including news and industry information, business advice and a variety of special promotions. We believe that
www.farmaservicios.com
is a value-added service that provides our clients with a faster, more convenient way to link their demand to our system, given that they can place and track their orders unlike other traditional distribution channels. See “— Information Technology Systems” below in this item. We will continue with our efforts to develop internet-based solutions for our clients and suppliers as we believe that doing so will allow us to provide a value-added service that complements our existing business.
Entering New Businesses to Diversify and Increase Our Participation in the Health Sector
In addition to entering the retail pharmacy business, in April of 2008, we continued to open new lines of business, through the acquisition of 50.1% of Controladora de Clínicas Ambulatorias, a company which consists of two full-service clinics specializing in orthopedics, trauma, sports medicine, nutrition, otorhinolaryngology and plastic surgery for short-stay patients. In 2009, we built a new clinic in Tampico, Tamaulipas. This facility started operations in November 2009 and is the first clinic to be opened outside of Mexico City. In addition, in October, we launched
Perfect Image
in Mexico City.
Perfect Image
is a clinic that specializes in plastic surgery as well as health and beauty treatments.
We believe that these investments will permit us to diversify ourselves within the healthcare sector in order to increase our overall participation.
Developing Internal Savings and Operating Efficiencies Programs to Maximize our Operations’ Profitability
During 2009, we continued implementing our profitability-focused strategy, which involved the ongoing review and negotiation of commercial terms with our suppliers and clients to obtain better profitability levels, even if, upon occasion, this resulted in our Company deciding not to make certain sales that did not meet our minimum profitability parameters. Likewise, diverse efficiency and continuous cost-savings programs were successfully implemented, such as ongoing reengineering of routes, the optimization of distribution centers, and waste reduction, among others.
Operations
Our operations are currently organized into four operating business divisions: the Private Pharma business division (which includes our retail pharmacy business), the Government Pharma business division, the HBCG/Other Products Division and the Publications business division. Please see “Item 5. Operating and Financial Review and Prospects—Results of Operations” for a breakdown of our consolidated net sales by business division for the three year period ended on December 31, 2009.
Private and Government Pharma Business Divisions
Pharmaceutical Industry Overview
In Mexico, pharmaceuticals are available to the public through both private and government distribution channels. The Mexican government plays a significant role in the market for pharmaceuticals. In Mexico, pharmaceutical products consist of prescription drugs that may be sold only in licensed pharmacies and “over-the-counter” pharmaceutical products that may be sold without a prescription in licensed pharmacies. For the purposes of this annual report, pharmaceutical products include “over-the-counter” pharmaceuticals.
The
Secretaría de Salud
, or the Mexican Ministry of Health, oversees the provision of public health care through hospitals in Mexico, pharmacies and clinics operated by various governmental agencies and state-owned institutions. Distribution of pharmaceuticals within the public sector is largely undertaken by each governmental agency through direct purchases from manufacturers during yearly bidding programs based primarily on price.
Based on information from IMS Health, A.G. and our internal data, we estimate that approximately 80% of private sector pharmaceutical sales are placed through wholesalers, which in turn sell primarily to retail pharmacies. The remaining 20% of private sector pharmaceutical sales are placed directly by manufacturers to a few large pharmaceutical retail chains that purchase sufficiently large volumes to have direct access to the laboratories. Most manufacturers have adopted a “wholesaler only” policy because it is the most cost-efficient method of distributing their products. Nearly all of the individual pharmaceutical purchases take place at retail pharmacies and are either paid for by individuals or through private health insurance. The following table shows annual sales and average unit prices in U.S. Dollars and growth rates for the private sector of the Mexican pharmaceutical market:
|
|
Year Ended December 31,
(1)
|
|
|
|
|
|
|
|
|
Sales in millions
(2)
|
US$10,283.5
|
|
US$10,127.0
|
|
US$8,377.5
|
|
Sales in millions of units
(3)(4)
|
986.5
|
|
932.7
|
|
909.7
|
|
Average unit price
(3)
|
US$10.31
|
|
US$10.86
|
|
US$9.21
|
|
Growth in average unit price
|
6.7%
|
|
5.4%
|
|
(
15.2)%
|
(1) Statistics based on information made publicly available by IMS Health, A.G. for private sector data and our estimates.
(2) Revenues based on prices charged by wholesalers to retailers.
(3) In Mexico, pharmaceutical products are distributed in pre-packaged doses or units, which may vary in size from year to year.
(4) To calculate U.S. dollar amounts, IMS Health uses a semester average based on the daily interbank rate published by
OANDA Corporation.
The U.S. Dollar rate used for conversion in 2009 was Ps. 13.48 per U.S.$1.00.
Industry Prices
As a result of government regulation, Mexican pharmaceutical prices are lower than in other countries such as the United States. We believe that price increases of pharmaceutical and over-the-counter products in Mexico continue to represent an area of possible future revenue growth for us. Prior to 1990, the Mexican government was responsible for determining pharmaceutical prices and did not increase pharmaceutical prices at the rate of inflation, thereby limiting the growth of our revenues from the distribution of these products. As of 1990, the Mexican government, acting through the
Secretaría de Comercio y Fomento Industrial
, or Ministry of Commerce and Industrial Promotion, now known as the
Secretaría de Economía
, or Ministry of Economy, and the
Cámara Nacional de la Industria Farmacéutica
, or National Chamber of the Pharmaceutical Industry, known as
Canifarma
, entered into a series of agreements to deregulate the prices of domestically manufactured pharmaceutical products, which constitute most of the pharmaceutical products we sell. In order to obtain the benefits of these agreements, many Mexican pharmaceutical manufacturers have agreed, in conjunction with Canifarma, to continue submitting price increase proposals for approval by the Ministry of Economy. Under current practice, any manufacturer seeking a price increase must file a request before the Ministry of Economy, outlining the reasons for the price increase. The most important factors considered by the Ministry of Economy are: the minimum wage increase, the inflation rate, the exchange rate and the amount of foreign direct investment that the manufacturer commits to its Mexican facilities. If the Ministry of Economy does not respond within 30 days, the increase is automatically granted. Canifarma and the Ministry of Economy continuously engage in negotiations regarding the level of price increases for individual products and for the pharmaceutical sector as a whole. In the case of new pharmaceutical products, the manufacturer is required to file a request for a price increase before the Ministry of Economy, which outlines the price for the new product and the rationale behind the chosen price. Since 1990, prices have increased above the rate of inflation.
However, this trend has subsided in recent years, with average prices coming back into line with the annual inflation rate. During 2008, the average unit price increased 6.8% in Peso terms, somewhat higher than
the annual inflation rate of 6.5%.
In 2009, the
average unit price increased by 3.2% in Peso terms, below the rate of inflation of 3.6%.
The devaluation of the Peso may affect our ability to increase the prices of some of our products. See “Item 3. Key Information—Risk Factors—Risk Factors Relating to Political and Economic Developments”.
In Brazil, the pricing of certain pharmaceutical and non-pharmaceutical products sold through pharmacies are controlled and monitored by the Brazilian government through the
Câmara de Regulação do Mercado de Medicamentos
, the Chamber for Regulation of Medicine Market or CMED, with the general oversight of the
Agência Nacional de Vigilância Sanitária
, the National Health Surveillance Agency or ANVISA. ANVISA is linked to the Ministry of Health and was formed in 1999 and the CMED in 2003 in an attempt to curtail spiraling costs associated with existing drug products that resulted from nearly a decade of deregulation and unchecked commercial practices. During the time of deregulation, drug manufacturers set retail prices that were marked-up to cover wholesale and retail activities, as well as tax liability, which inflated prices for the consumer. In such an environment, the prices paid by the consumer included a pharmacy mark-up as high as 30% of a medication’s total price. Moreover, a federal tax of 6% and a state tax of approximately 18% were imposed, making the products costly as retailers passed on much of the cost to the consumer. In 2002, the retail pharmacy market in Brazil suffered drastic declines due to a devaluation of the Brazilian currency. Nevertheless, prices in local currency continued to rise. In October 2003, legislation was enacted that re-established price controls and empowered ANVISA and CMED to monitor the prices, set a maximum sales price and determine maximum annual price adjustments, thus limiting the degree to which pharmaceutical companies and pharmacies can set their own prices. Price controls are governed through regulatory mechanisms that allow for controlled percentage increases due to fluctuations in the exchange rate, inflation rate and raw material costs, among other factors. Adjustments to price controls take place on an annual basis, on March 31
st
of each year. The CMED established a maximum drug price adjustment of 4.6% for the year commencing on March 31, 2010.
Private Sector Pharmaceutical Distribution (Private Pharma)
Our private sector customers consist primarily of over
14,450
privately owned pharmacies, as well as national and regional pharmaceutical and supermarket chains (comprising approximately
7,100
stores) and the pharmacies associated with private hospitals. We were the first nationwide wholesale pharmaceutical distributor to enter the private sector market in Mexico and, since the 1960s we have been one of only two wholesalers providing national coverage. We believe that our customer coverage is one of the highest in the industry and that we cater to a majority of retailers nationwide.
According to IMS Health, A.G. and our estimates, in 2007, 2008 and 2009, Grupo Casa Saba and Nadro, Mexico’s only other nationwide pharmaceutical distributor, together accounted for more than 50% of prescription and over-the-counter drug sales throughout the private sector wholesale pharmaceutical channels in Mexico (this figure does not include the sale of similar and generic products). Mexico has adopted individual dosage packaging whereby pharmaceuticals are distributed in pre-packaged dosages rather than in bulk. Retail customers demand a rapid and continuous supply of pharmaceutical products. As a result, inventory turnover is high. Consequently, shortages and stock-outs are common and pharmacies are forced to rely on multiple suppliers. We seek to overcome these market constraints by maintaining a superior distribution network. Through our more than 115 years of experience, we have developed a highly-sophisticated transportation and inventory logistics system, which enables us to distribute our products between 12 and 24 hours from the time of order nationwide. We believe that we are able to fill the highest rate of orders in the industry and plan to maintain a state-of-the-art distribution network to continue improving our distribution capabilities.
Public Sector Pharmaceutical Distribution (Government Pharma)
Our public sector customers consist of Mexican government institutions. The Mexican government has a vast network of hospitals, clinics and pharmacies on a national level, as well as specialized health institutions, to which we cater. The government institutions that purchase products from us include:
|
|
●
|
“ISSSTE” – The
Instituto de Seguridad y Servicios Sociales para los Trabajadores del Estado
, the health and social security institution for Mexican federal government employees;
|
|
|
●
|
“PEMEX” – The hospitals and pharmacies operated by
Petróleos Mexicanos,
the Mexican national oil company and one of the largest employers in Mexico.
|
|
|
●
|
“IMSS” – The hospitals and pharmacies of the
Instituto Mexicano del Seguro Social
, the health and social security institution for Mexican employees of private companies; and
|
|
|
●
|
“State Health Institutions” – The hospitals, clinics and pharmacies of each of the States of Mexico. The government employees of the States of Mexico have the right to go to these institutions for their healthcare needs.
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Since the Mexican government generally buys directly from manufacturers through IMSS and ISSSTE, it is able to purchase at prices that are substantially lower than those paid by private entities. Our sales to IMSS, ISSSTE hospitals, State Health Institutions, and PEMEX are not in bulk and, therefore, are not offered at bulk prices. In addition, we deliver pharmaceutical products to ISSSTE Tiendas, the supermarket pharmacies operated by ISSSTE, at prices comparable to those prices we charge our large private sector customers. We are able to sell our pharmaceutical products to approximately 250 ISSSTE Tiendas at private sector prices because we can provide them with additional services and increased efficiency. Since our sales to ISSSTE Tiendas are not through the usual public sector channels, we classify them as private sector sales. Sales to PEMEX are at prices substantially lower than those for the private sector. Sales to IMSS are made also at prices substantially lower than those for the private sector and, in many cases, depend on the negotiations conducted with the laboratories for each specific product.
The sales of our Government Pharma business division depend greatly on the contracts that we are able to obtain from our government institution clients, particularly ISSSTE, IMSS, PEMEX and other State Health Institutions. Our sales by the Government Pharma business division have tended to fluctuate from year to year since most of these government contracts are awarded through bidding processes on an annual basis.
In the last three fiscal years we have experienced the following trends in our Government Pharma division. In 2007, our Government Pharma division sales decreased by 7.7%, in part, due to an increase in the participation of interchangeable generics in the government bidding processes. During 2008, sales in our government pharma division rose by 32.6%, due, in large part, to an increase in sales to PEMEX and ISSSTE. Sales for our Government Pharma division decreased by 12.4% in 2009, mainly as a result of a reduction in our sales to PEMEX. This reduction was primarily due to a lower participation in the bidding processes. We cannot assure that we will participate in future PEMEX auction processes or that we will be awarded contracts with PEMEX similar to those we have had in previous years.
Retail Pharmacy Business
Our retail pharmacy business consists of our operation of over 150 pharmacies in the states of Jalisco, Mexico, Guanajuato, Michoacán, Coahuila and Mexico City, through Farmacias ABC, 10 pharmacies in certain northern states of Mexico, including Nuevo Leon, Coahuila and Chihuahua, through Farmacias Provee de Especialidades, and 71 pharmacies in the states of Río de Janeiro and São Paulo in Brazil, through Drogasmil. For the year ended December 31, 2009, net sales by our retail pharmacy business amounted to Ps. 2,737.8 million, which represented 9.2% of our total consolidated net sales.
In Mexico, our pharmacies obtain the products we sell mainly from our own distribution channels although approximately 57% of the products are purchased from third parties. We are seeking to capitalize on our know-how of the pharmaceutical business and our potential to grow by rolling-up small pharmacy chains to become a competitive retailer. However, any material disruptions to our distribution business could materially affect our retail pharmacy business. Our pharmacies under the Farmacias Provee de Especialidades brand are mostly located at or near health centers, including some of the best hospitals in the Monterrey metropolitan area. We believe this allows us to capture a stable customer base and to provide specialized products that have attractive margins. Our pharmacies under the Farmacias ABC brand are located throughout the Guadalajara metropolitan area, the Mexico City metropolitan area and in the states of Guanajuato, Michoacán, Jalisco and Coahuila. We seek to become a competitive retailer in the long-term.
In Brazil, we purchase pharmaceutical products mainly from the three largest wholesale distributors, which deliver the products directly to our stores using a “just-in-time” system, enabling us to receive our products promptly and to minimize stock-outs. We centralize our purchases of new non-pharmaceutical products through a distribution center that provides logistics support to our pharmacies. Through our pharmacies in Brazil, we sell over 300 different brands of products, including health and beauty aids, generic drugs, prescription drugs, over-the-counter drugs and other consumer goods. We operate a call center through which we channel the delivery of products to our customer’s home or office in one hour’s time. We have entered into partnerships with providers of health care plans and corporate clients that allow us to gain access to a wider customer base. In addition, we participate in the Popular Pharmacy Program, a government sponsored program through which we grant substantial discounts to low-income customers and then we obtain a refund of the discount amount from the government.
We sell many different types of non-pharmaceutical products, from health and beauty aids to consumer goods such as magazines, candies and other food products. The types and number of non-pharmaceutical products in each store vary, and selections are based on customer needs and preferences and available space. No single non-pharmaceutical product category contributed significantly to our sales during 2009.
In 2009, our main classes of products were prescription drugs and over-the-counter medications, health and beauty aids and other merchandise. In Mexico, at our Farmacias ABC and our Farmacias Provee de Especialidades pharmacies, approximately 65% and 85% of the sales was derived from pharmaceutical products, respectively, and the remaining 35% and 15% was derived from health and beauty aids and other merchandise. The customer base of our retail pharmacy business is well diversified; therefore the loss of any one customer would not have a material adverse impact on our results of operations.
We believe that the retail pharmacy markets in Mexico and Brazil will continue to grow due to the growing population, the stable demand for pharmaceutical products, an increase in the amount of senior citizens with access to health care and social security coverage and the growing market of over-the-counter products and other health and beauty aids and consumer goods that are sold at our retail pharmacies However, given the global current economic downturn and the economic conditions in Mexico and Brazil, we cannot assure you that the retail pharmacy market will not experience decreases in growth or that our results of operations will not be materially affected.
Value-Added Pharmaceutical Services
We believe that we distinguish ourselves from our distribution competitors, in part, by the wide range of value-added services we provide our customers in addition to our products. For example, we provide pharmacies with suggested retail price lists that are updated immediately upon notice of price changes from our suppliers. These price lists are the only notices used by pharmacies to adjust their prices. We also provide purchasing management, price updates and advisory services to our customers through direct personal computer links between us and individual pharmacies using
www.farmaservicios.pdv
, our proprietary point-of-sale system. See
“—Technology Information Systems—Pharmacy Personal Point-of-Sale Computers” below in this item.
We also offer our customers a series of specialized services, including training, conferences and trade fairs. Some customer services are supported by a monthly pharmaceutical publication, “
Farmservicios Editorial
,” formerly “
Correo Farmacéutico
,” a monthly magazine and product catalog. We have already established an online distribution and information site for our clients and suppliers,
www.farmaservicios.com
, which we currently make available to them free of charge. Clients that log on to
www.farmaservicios.com
are able to communicate directly with us, and can place and track their orders and shipments on-line. These clients also have access to a wide range of additional services, including news and industry information, free e-mail, business advice and a variety of special promotions.
www.farmaservicios.com
also links to
www.farmaservicios.pdv
. See “—Information Technology Systems” below in this item.
Health, Beauty Aids, Consumer Goods, General Merchandise and Other
Prior to 2004, we broke out the divisions of General Merchandise and Other Products and Office Products. In 2004, however, as part of a strategic business decision, the Group decided to unite all three divisions under the name of “Health, Beauty Aids, Consumer Goods, General Merchandise and Other, or HBCG/Other Products.” The decision was made due to the diminishing participation of the General Merchandise and Other products Group’s sales, which together accounted for less than 1% of the Group’s total net sales.
We distribute health and beauty aids, various consumer products that are typically sold through supermarkets, convenience stores, specialty stores and pharmacies in Mexico. The products distributed in this division consist principally of basic toiletries, food products and consumer goods, some of which are distributed on an exclusive basis, such as:
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Mexsana talcum powders from Schering Plough (since 1999);
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Lipovitan energizing beverage (since 2002);
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The Sensual Tea (since 2004);
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Mustela products (since 2007);
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Costalitos, trash bags (since 2007);
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Dr. Fresh, toothbrushes (since 2008)
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Aquanet, hair sprays and hair care products (since 2009)
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Jergen’s, hand and body creams (since 2009)
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Bioré, facial cleansing products (since 2009)
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John Frieda, hair care products (since 2009)
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Canderel, artificial sweetners (since 2009)
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Vanart, hair care products and liquid hand soaps (since 2009)
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During 2009, we stopped distributing Brunswick seafood products, Planet Pop microwavable popcorn and other snack food items and Colombina candies. In addition, we incorporated several additional brands into our product catalog, including Aquanet hair care products, Jergens hand and body creams, Bioré facial cleansing products, the John Frieda line of hair care products, Vanart hair care products as well as a liquid soap line and Canderel artificial sweeteners. During the first quarter of 2010, we discontinued the Lipovitan and Canderel lines of products.
At times, we enter into short-term exclusive distribution agreements on a preliminary, experimental basis, in order to test the real demand for specific products. If upon the termination of these agreements we conclude that there is no significant demand for a specific product, we cease the distribution of such product. For this reason, in the normal course of business, products we distribute one year may not be distributed the next year. We are always seeking suppliers with whom we can enter into distribution agreements to distribute health and beauty aids, consumer goods, general merchandise and other products, so long as they provide acceptable margins. We cannot assure you that we will enter into distribution agreements to distribute any or all of these products at acceptable margin levels.
In the HBCG/Other Products business division, in some cases, we provide manufacturers with highly specialized integrated services. These services range from purchasing, planning, centralized sales, merchandising, collections, execution of promotions and product information.
We anticipate that the market in Mexico for health and beauty aids, consumer goods, general merchandise and other products will continue to grow due to the young profile of the Mexican population. We believe that as the Mexican population continues to grow and consumers’ disposable income increases, consumer demand for our products in this division could increase. However, we are uncertain how the effects of the global economic downturn may affect our sales of health and beauty aids, consumer goods, general merchandise and other products. If there is a prolonged recession and consumers’ disposable income decreases, our results of operations for this division may be affected.
We distribute general merchandise and other products that are generally sold through grocery stores, supermarkets, convenience stores, major warehouses and pharmacies in Mexico. The general merchandise products that we distribute consist primarily of packaged and canned foods, beverages and personal care products. The other products that we distribute consist of over-the-counter products, household cleansers and toiletries. The general merchandise and other products that we distribute are mostly products sold on an exclusive basis in specified geographic areas pursuant to contractual arrangements.
During 2007, sales by our HBCG/Other Products division increased by 2.23%, and during 2008 sales by our HBCG/Other Products division increased by 10.53%, primarily as a result of an increase in the demand for personal care and general merchandise products as well as commercial agreements that enabled us to increase promotions and discounts. In 2009, sales in our HBCG/Other Products Division increased by 0.4%.
Publications
We distribute books and magazines, a large majority of which we distribute on an exclusive basis through our publishing subsidiary, Publicaciones Citem, S.A. de C.V., or Citem, which we believe is one of the leading distributors of magazines in Mexico. We are also one of the leading suppliers of self-service store chains, as well as the exclusive supplier of Wal-Mart Mexico’s VIPS and Portón restaurant chains in Mexico City. We sell primarily through approximately 170 nationwide agents and four firms affiliated with the
Union de Voceadores
, or Union of Newspaper Boys, in Mexico City. Citem also distributes entertainment products to other establishments, including supermarkets, convenience stores, racks and magazine newsstands in airports, libraries and hotel magazine stores. In addition, Citem offers one of the most efficient forces of rack-jobbers, or shelf-keeping merchandisers, to the VIPS and Portón restaurant chains. These merchandisers keep the shelves of more than 400 stores across Mexico duly organized.
Revenues from publication sales to export clients in the United States accounted for approximately 43%, of our total publication export sales in 2006, while sales to Central America, South America and the Caribbean together represented 57% of total export sales. During 2007, 59% of our export sales went to the United States while 29% were distributed in South America, 9% were distributed in Central America and 3% were distributed in the Caribbean. In 2008, we decided to discontinue distributing our publication products outside of Mexico. This decision was made due to our intention to focus on domestic distribution where we benefit from our proprietary distribution network, as well as to the reduced margins of our export sales caused by fluctuations in currency exchange rates that were brought on by the worldwide economic crisis. Given that we did not reinitiate our international business during the 2009 fiscal year, we did not register any export sales during the period.
In the second half of 2002, Citem started an administrative and operational restructuring to achieve higher levels of profitability. This process has involved changes in Citem’s product catalog, client base, personnel and distribution units and methods, among other changes. As a result of the restructuring process our sales were affected in 2002 and 2003 but a positive trend of increases in sales started in the last quarter of 2003 and carried on through 2007. Annual Publications division sales for the year 2007 rose 2.8%, primarily as a result of the addition of new entertainment and fashion magazines. In 2008, our Publication division sales declined 19.3%, primarily as a result of our policy of discontinuing the distribution of publications that did not meet our minimum profitability parameter. During 2009, sales in the Publication division increased 0.6%, aided by the reincorporation of various publications to the catalog as well as strong year-end specialty title and collector’s item sales.
Exclusive Distribution Agreements
In the areas of HBCG/Other Products and Publications, exclusive distribution agreements are typically limited to specific products, channels and geographic areas. Some of our exclusive distribution agreements can be terminated without cause, by means of proper notice, given by either party. We do not anticipate the imminent termination of any of these agreements, other than those that we decide to terminate if the products distributed are not sufficiently profitable. Before entering into exclusive distribution arrangements, we require that each prospective supplier agrees to advertise its services and offer a specific number of promotions and trade discounts to ensure that the supplier is seeking to take a leading position in the Mexican market. We provide manufacturers with highly specialized integrated services, ranging from purchasing, planning, centralized sales, merchandising, collections, execution of promotions and the provision of information.
We are currently seeking to enter into exclusive distribution agreements that will allow us to distribute products, particularly in our HBCG/Other Products and Publications business divisions, at acceptable margins. We cannot assure you that we will enter into distribution agreements to distribute any or all of these products at acceptable margins.
Purchasing
We order all of our products for the distribution business on an ongoing basis, negotiating quantity and price periodically, rather than committing to contractual terms. While the majority of our suppliers are Mexican companies, we do purchase some products from international manufacturers. We negotiate exchange risks by purchasing these products in Pesos or setting a limit on our exchange risk exposure.
In previous years, each of our distribution centers placed its own orders on a weekly basis, directly to suppliers. These orders were placed through our computerized order system, Electronic Document Interchange, or EDI, which we have implemented to communicate efficiently with clients and suppliers through a platform supporting different electronic communication protocols. Suppliers delivered orders directly to the distribution warehouse that placed the order, or to our transportation subsidiary, Marproa. Suppliers typically delivered bulk orders directly to the distribution warehouse that placed the order. In the second half of 2000, we centralized our purchasing to improve our financial results and increase the efficiency of our operations. As a result, all of our orders for all of our distribution centers are placed through our centralized system. Deliveries of non-Mexican products are handled by Mexican customs near the U.S. border, and are typically made directly from the supplier to a Mexican customs agent. Once the customs agent completes the importation procedure, the products are then sent to our distribution center via ground transportation.
Marproa is a common carrier that also provides freight services to third parties at market rates. From Marproa, we make deliveries several times a week to each of our distribution centers.
Maintaining good relationships with our suppliers and publishers is important to our competitive success because of the tight inventory policies that are common in the Mexican pharmaceutical industry. We are committed to making rapid and timely deliveries to our customers.
Pharmaceutical Products
We purchase pharmaceutical products from over 150 laboratories and manufacturers. Most of these suppliers are located in Mexico City and its surrounding areas. Purchases are made through purchase orders from time to time, on an as-needed basis. More than two-thirds of the suppliers that manufacture pharmaceuticals products in Mexico are owned primarily by large multinational companies. Purchases made from these suppliers represent more than 80% of our Private Pharma and Government Pharma business divisions’ purchases. Companies such as Sanofi-Aventis, Pfizer, Roche, Astrazeneca, Boehringer, Bayer, Novartis and Bristol-Myers Squibb are among our major suppliers.
Health, Beauty, Consumer Goods, General Merchandise and Other Products
We purchase health, beauty and consumer goods from more than 150 suppliers located primarily in Mexico City. We purchased our catalog of over 450 general merchandise and other products from a wide range of suppliers including, Plastoza (maker of Costalitos), Laboratorios Expanscience (Mustela), Schering Plough (Mexsana), Herbamedica (The Sensual Tea) and Kao Brands (Jergens, Bioré and John Frieda). In some cases, we negotiate directly with our suppliers in other countries and directly import the products through a customs agent. Imported products are delivered to our warehouses by the customs agent after complying with all the legal requirements, which in some cases depends on the type of product.
Publications
Our Publications business division distributes, through Citem, magazines, books, albums and stickers from leading licensors and publishers in the market. Nearly all of the products purchased as of today may be returned to the publisher. For the year 2007, Citem worked with more than 250 publishers and distributed more than 4,700 of their publications. In 2008, we distributed nearly 4,000 publications from more than 250 publishers. During 2009, Citem’s clients included over 250 publishers for whom it distributed more than 4,000 publications. Currently, Citem is distributing only publications (magazine and books titles) that meet the Group’s minimum profit requirement. Purchases are made through our centralized administration. As a result of this profitability strategy, certain titles were incorporated into or discontinued from Citem’s product catalog.
Competition
Pharmaceutical Products
Our primary competitor in the private pharmaceutical distribution business is Nadro, Mexico’s only other national pharmaceutical distributor. According to IMS Health, A.G. and our estimates, in 2007, 2008 and 2009, Grupo Casa Saba and Nadro together accounted for over 50% of prescription and over-the-counter pharmaceutical sales through private sector wholesale pharmaceutical channels in Mexico (this figure does not include the sale of similar and generic products, which if included would increase that percentage). Our other primary competitor is Casa Marzam, S.A. de C.V., a large Mexican regional distributor. Our other competitors include approximately twelve regional distributors, some of which own pharmacy chains. We believe that our distribution services are superior to those of the regional distributors due to the speed with which we distribute our products, as well as the quality, product catalog and value-added services that we provide.
In the government pharmaceutical distribution business, government entities acquire products through bidding programs in which wholesalers and laboratories participate directly. These bidding processes are open to the public and, therefore, we face competition in this division just as we do in the private sector.
In Mexico and Brazil, the retail pharmacy markets are very fragmented. Our Farmacias ABC pharmacies face competition from large pharmacy chains, such as Farmacias Guadalajara, Farmacias Benavides, Farmacias del Ahorro, as well as from Wal-Mart supercenters. In Brazil, we face competition from companies such as Drogaria Sao Paulo, Pague Menos and Drogasil, which operate large pharmacy chains as well as from supermarkets and retailers that sell pharmaceutical products, such as Carrefour, Walmart and Pão de Açúcar. In addition, we compete with, among others, independently owned drugstores, supermarkets, mass merchandisers, discount stores, e-commerce sites that specialize in drugstore items and other small participants. We compete on the basis of store location and convenient access, customer service, product selection and price. We believe continued consolidation of the drugstore industry in Mexico and Brazil, the aggressive discounting of generic drugs by supermarkets, specialized generic drug pharmacies and mass merchandisers and the increase of promotional incentives to drive prescription sales will further increase competitive pressures in the retail pharmacy market.
Health, Beauty, Consumer Goods, General Merchandise and Other Products
Our competition in the Health, Beauty, Consumer Goods, General Merchandise and Other Products business division is similar to the competition that we face in our pharmaceutical products distribution business unit. We compete primarily with manufacturers that deliver directly to supermarkets, some pharmaceutical chains and with various regional distributors. In addition, Nadro and other regional wholesalers also distribute health, beauty, consumer goods, general merchandise and other products. This holds true in our retail pharmacy business as well in that we compete with other major pharmacy chains that offer similar products.
Our principal competitors in the general merchandise and other products market segment are manufacturers that deliver directly to supermarkets and some regional distributors. We compete directly with many middle and product-specialized wholesalers that distribute to convenience stores, independent grocery stores and “mom and pop” stores. In terms of the lines that we distribute exclusively, we face no competition from other wholesalers.
Publications
In Mexico, our principal competitors in our publications product line include:
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Intermex, a company owned by Televisa, which primarily distributes its own publications;
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Codyplirsa, which primarily distributes popular magazines nationwide; and
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DIMSA, which distributes primarily English-language publications.
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Payments and Collections
Most of our sales are made on credit, with customers signing promissory notes for each invoice indicating the delivery of a product. Cash-on-delivery terms are mainly used with new clients or those whose credit has been temporarily suspended. We negotiate the number of days of credit that we will extend to our clients on a case-by-case basis. The determination of the number of days that we will extend credit to a particular client depends on a number of factors, including the client’s creditworthiness, as well as the length and nature of the client’s relationship with us. The determination of the number of days that we will extend credit to a particular client also depends on our current business strategy. For example, in connection with our efforts to increase sales to particular sectors of the market, in some cases we extend credit to clients in these sectors on more favorable terms than those offered to our overall client base and, as a result, the maturity of accounts receivable due from clients in these sectors increases slightly. We are constantly adapting our collection methods to market and general economic conditions. The average maturity of accounts receivable due from our overall client base was,
65
days in 2007, 66 days in 2008 and 63 days in 2009.
Although we are continuously seeking to reduce the average maturity of our accounts receivable and maintain an aggressive collection policy for delinquent accounts receivable in conjunction with our efforts to improve our financial results and the efficiency of our operations, we could, in the future, decide to extend credit to clients in particular sectors on more favorable terms than those offered to our overall client base.
The following chart sets forth the average contracted maturity of accounts receivable due from various market sectors.
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Credit terms
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Days
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Pharmacies
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41
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Supermarkets and local wholesalers
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47
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Government
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50
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Publications to wholesalers
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50
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Publications to retailers (1)
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50
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(1) National retail chains are centralized
Information Technology Systems
Overview
We periodically acquire and use new technologies to increase our efficiency and distribution capabilities. All dealings with suppliers, leasers, banks and insurance companies, as well as our treasury, are centralized. We believe that our information technology systems have been, and will continue to be, instrumental in our ability to provide value-added services to our clients.
In 2009, our IT efforts were focused primarily on general computer and communication systems updates and maintenance, including: the purchase of new computer equipment, the replacement of critical servers for our central site with state-of-the-art hardware and the implementation of a digital voice and data network in all of our distribution centers as well as our corporate headquarters. We believe that these upgrades will reduce operating costs and improve system availability.
In addition, we have eliminated the use of paper in several of our warehouses through the use of radio frequency terminals. This measure is intended to reduce paper consumption and improve the accuracy of our order processing. We also updated our software and connectivity with various clients in order to improve on-line order processing and product availability.We consider that all of these features will ensure the quality with which we process client transactions and will help us to streamline inventory management procedures.
Retail Order Computers
A substantial part of our sales representatives use portable hand-held computer terminals to take and process orders. These orders are transmitted via telephone lines to a mirrored and redundant data center. The orders are then printed and separated by route and filled according to a departure schedule. We continually upgrade our systems to increase the effectiveness of our order system, install individual workstations in a greater number of locations, and track customer and supplier orders in the system’s network and ensure the accurate fulfillment of those orders.
Pharmacy Personal Point-of-Sale Computers
We have developed a point-of-sale software known as
www.farmaservicios.pdv.
, which is a PC-based application that has been designed to meet the needs of our pharmacy customers.
www.farmaservicios.pdv
has point-of-sale, inventory control and Internet capabilities to update and synchronize data using web-based technology. Clients that use
www.farmaservicios.pdv
can access and synchronize point-of-sale inventory and other databases through our business-to-business website,
www.farmaservicios.com
. Pharmacies that use our system are automatically linked to our inventory control and order placement systems, which allow these pharmacies to order items electronically, view current product prices and track promotional discounts and pending orders. Additionally, through this system, we can also assist customers with their own inventory control and business management. The
www.farmaservicios.pdv
application can operate on a stand-alone PC or in a network environment, depending on the customer’s particular needs. The pharmacy owners purchase the PCs and related hardware and we provide the software package. We charge a one-time fee for this software. Management believes that
www.farmaservicios.pdv
will continue to be an important factor in developing customer loyalty and improving overall customer service to pharmacies, which are our primary client base. As of December 31, 2009, we had more than 4,100 registered users, 9% more than we did at the end of 2008.
Automatic Picking Technology
We use automated pickers in some of our distribution centers. An automated picker is a computerized robot that matches an order number with an order number previously submitted by one of our sales representatives, selects the appropriate item(s) ordered and deposits the item(s) in a box for delivery. Each automated picker processes, in some cases, approximately 50% of the total units sold out of each distribution center where one is located and is significantly more efficient than a team of experienced workers. The automated pickers operate at high speed with extremely high accuracy and include error correction features. As of December 31, 2009, 6 of our 22 distribution centers had automated pickers. The installation of additional automated pickers in our remaining 16 manual pick distribution centers will depend upon whether or not we deem the cost to be justifiable.
Computerized Purchase Order Placement System
We have developed and continue to update an automatic inventory control and order placement system. This system utilizes inventory optimization software to track historic demand for products and to forecast future demand. The system also seeks to optimize inventory levels and order sizes at each distribution center through a “just-in-time” inventory approach.
Back-Office and Accounting Services
Our back-office information systems operate using a software program called BaaN, an Infor Software Company product. The database provides us with a strong analytical tool for decision-making that affects all aspects of our operations. BaaN is an integrated back-office and accounting system that currently manages our General Ledger, Accounts Receivable, Accounts Payable, Fixed Assets Control System and Treasury, as well as other financial information. During 2009, we continued to update all of our back-office information systems in order to improve our internal as well as our administrative reporting processes.
Software
We license
www.farmaservicios.pdv
to our clients for an annual fee. We also operate with software designed by third parties with whom we have entered into license agreements.
Regulation
Our business is primarily regulated by the
Ley General de Salud
, or General Health Law, and the accompanying regulations. Two federal agencies that pertain to the executive branch of the Mexican government, the Mexican Ministry of Health and the Mexican Ministry of Economy, mainly regulate the pharmaceutical industry. We are required to obtain authorization from the Mexican Ministry of Health to distribute prescription drugs and over-the-counter pharmaceuticals on the wholesale level. Similarly, the retail sales of pharmaceutical products, health and beauty aids and other merchandise is subject to the General Health Law and is its regulations, state and local health rules and regulations, the
Ley Federal de Proteccíon al Consumidor,
or Federal Consumer Protection Law, and
Normas Oficiales Mexicanas
, or Mexican Official Norms. We are required to obtain a license for each pharmacy to commercialize controlled medicines that contain certain substances. Such medicines cannot be sold without prescription and sales must registered in accordance with specific requirements set forth in applicable regulations in control books. We are required to appoint a pharmacist who must be present at the pharmacy during business hours and who is responsible for compliance with the applicable health regulations in such pharmacy. Such appointment must be notified to the Mexican Ministry of Health.
We believe that we have obtained all necessary authorization and permits required for the operation of our distribution and retail businesses and we do not foresee any revocation, cancellation or termination of such authorizations and/or permits.
The Ministry of Economy regulates both the wholesale and retail prices of prescription and over-the-counter pharmaceutical products. Mexican law requires us to sell all prescription and over-the-counter drugs at a price that is equal to or lower than the price approved by the Ministry of Economy for each product. The Ministry of Economy periodically receives and, if appropriate, approves revised price lists submitted by manufacturers on a product-by-product basis.
The pharmaceutical industry in Brazil operates in highly regulated environment. The pharmaceutical industry is regulated at the federal, state and municipal levels. Federal laws and regulations provide a regulatory framework. Enforcement and specific regulation is implemented through state and municipal rules and regulations through agencies such as the
Conselho Regional de Farmacia
, or Pharmaceutical Regional Council. Pharmacies in Brazil are required to obtain an operating license from the
Secretaria de Vigilância em Saúde
, Health Surveillance Secretariat of the Ministry of Health, or SVS, in order to engage in the handling, distribution, transport, repackaging, import and export of the substances determined by the SVS, as well as the medicines that contain such substances. In addition, operating permits, certificates and authorizations must be obtained periodically from relevant local authorities. All pharmaceutical products and certain non-pharmaceutical products, including certain health and beauty aids, are required to be registered with the
Agência Nacional de Vigilância Sanitária
, the National Health Surveillance Agency or ANVISA. Although retail pharmacies are not responsible for obtaining registration of the products sold, pharmacies must check that products offered are duly registered with the appropriate authorities. We believe that we have obtained all the necessary licenses and permits necessary to operate our business in Brazil.
The pricing of certain pharmaceutical and non-pharmaceutical products sold through pharmacies in Brazil are controlled and monitored by the Brazilian government through the
Câmara de Regulação do Mercado de Medicamentos
, the Chamber for Regulation of Medicine Market or CMED, with general oversight from ANVISA. ANVISA establishes regulatory mechanisms that allow for controlled percentage increases in prices due to fluctuations in the exchange rate, inflation rate and raw material costs. Adjustments to price controls take place on an annual basis, on March 31
st
of each year. The CMED establish a maximum drug price adjustment of 4.6% for the year commencing on March 31, 2010. Most over-the-counter drugs are not subject to such price controls.
Property, Plant and Equipment
As of December 31, 2009, our principal properties consisted of 22 distribution centers, complete with all of the equipment necessary to operate these centers, as well as the Sports Clinic site in Tampico, Tamaulipas. The majority of our fixed assets is wholly owned and free of any liens or encumbrances.
We also own a fleet of over 900 vans, trucks and cars which we use to distribute products to our customers.
As of June 30, 2010, we have 22 distribution centers that represent more than 100,000 square meters of warehouse space. From these centers, we filled more than 6.3 million orders in 2009, averaging more than 530,000 orders per month. All of our distribution centers are strategically located near Mexico’s major population centers.
The following table shows our current distribution centers in Mexico and their locations, as of June 30, 2010:
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Distribution Center Name
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Location (City, State)
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1.
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Taxqueña
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Mexico City, Federal District
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2.
|
Chihuahua
|
Chihuahua, Chihuahua
|
|
3.
|
Coatzacoalcos
|
Coatzacoalcos, Veracruz
|
|
4.
|
Culiacán
|
Culiacán, Sinaloa
|
|
5.
|
Guadalajara
|
Guadalajara, Jalisco
|
|
6.
|
Hermosillo
|
Hermosillo, Sonora
|
|
7.
|
Juárez
|
Ciudad Juárez, Chihuahua
|
|
8.
|
La Laguna
|
Gómez Palacio, Durango
|
|
9.
|
León
|
León, Guanajuato
|
|
10.
|
Centennial
|
Tlalnepantla, Mexico
|
|
11.
|
Monterrey
|
Monterrey, Nuevo León
|
|
12.
|
Peninsular
|
Mérida, Yucatán
|
|
13.
|
Citem
|
Tlalnepantla, Mexico
|
|
14.
|
Reynosa
|
Reynosa, Tamaulipas
|
|
15.
|
Tampico
|
Tampico, Tamaulipas
|
|
16.
|
Tijuana
|
Tijuana, Baja California
|
|
17.
|
Tláhuac
|
Mexico City, Federal District
|
|
18.
|
Tuxtla
|
Tuxtla Gutiérrez, Chiapas
|
|
19.
|
Vallejo
|
Mexico City, Federal District
|
|
20.
|
Veracruz
|
Veracruz, Veracruz
|
|
21.
|
Daltem Norte
|
Monterrey, Nuevo León
|
|
22.
|
Daltem Nacional
|
Mexico City, Federal District
|
In January 2009 we started operations in our new distribution center in Hermosillo, Sonora. The new facility has quadruple the storage capacity of the previous center as well as semi-automatic picking capabilities, thus allowing for more efficient distribution to the surrounding region.
In addition, we own the approximately 3,500 square meters site (2,548 square meters of construction) of the “Sports Clinic” facility located in Tampico, and all of the necessary equipment for its operation.
In Brazil, we lease all of the properties where our retail pharmacies are located, as well as one distribution center in São João de Meriti which has approximately 5,000 square meters of storage space and is used to provide local logistics support to our pharmacies. In Mexico, we currently lease 162 properties where our retail pharmacies are located.
The following table shows our pharmacy locations in Mexico and Brazil as of December 31, 2009:
|
Brand
|
Location
|
Number of Pharmacies
|
|
Farmacias ABC
|
Guadalajara, Jalisco
|
54
|
|
Farmacias ABC
|
States of Guanajuato, Michoacán, Coahuila and Jalisco (other than Guadalajara)
|
66
|
|
Farmacias ABC
Farmacias ABC
|
Mexico City and State of Mexico
Tampico, Tamaulipas
|
31
1
|
|
Farmacias Provee de Especialidades
|
Monterrey, Nuevo León
|
6
|
|
Farmacias Provee de Especialidades
|
Saltillo and Torreón, Coahuila
|
2
|
|
Farmacias Provee de Especialidades
|
Chihuahua, Chihuahua
|
1
|
|
Farmacias Provee de Especialidades
|
Hermosillo, Sonora
|
1
|
|
Drogasmil
|
Río de Janeiro
|
65
|
|
Drogasmil
|
São Paulo
|
6
|
Item 4A.
Unresolved Staff Comments.
Not applicable
|
Item 5.
|
Operating and Financial Review and Prospects
|
The following discussion should be read in conjunction with our audited consolidated financial statements and the accompanying notes included in this annual report starting on page F-1. Our audited consolidated financial statements have been prepared in accordance with Mexican FRS, which differ in some significant respects from U.S. GAAP. Note 18 to our audited consolidated financial statements provides a description of the primary differences between Mexican FRS and U.S. GAAP. Note 19 also provides a partial reconciliation of consolidated net income for each of the three years in the period ended December 31, 2009 and consolidated stockholders’ equity as of December 31, 2008 and 2009 from Mexican FRS to U.S. GAAP.
Through the end of 2007, Bulletin B-10, “Recognition of the impact of inflation on the financial information (integrated document)” required us to recognize certain effects of inflation in our consolidated financial statements, including the requirement to restate financial statements from prior periods to constant pesos as of the end of the most recent period presented. The method of restatement required us to calculate a restatement factor using a weighted average rate based upon the Mexican National Consumer Price Index, or NCPI. The recognition of the effects of inflation through December 31, 2007 principally resulted in the recognition of gains and losses for inflation on monetary and non-monetary items, which were presented in the financial statements. See Note 3 to our consolidated financial statements.
Effective January 1, 2008, FRS B-10 “Impact of inflation”, no longer
requires us to recognize the effects of inflation unless the economic environment qualifies as “inflationary”. An economic environment is considered inflationary if the cumulative inflation rate equals or exceeds an aggregate of 26% over the three preceding years (equivalent to an average of 8% in each year). Because of the relatively low level of inflation in Mexico in recent years (6.5% in 2008, 3.7% in 2007 and 4.1% in 2006), the cumulative inflation rate in Mexico over the three-year period preceding December 31, 2008 does not qualify the economic environment as inflationary. Additionally, based on current forecasts, we do not expect the economic environment of Mexico or any other country where we operate to qualify as inflationary in 2010. These expectations could change depending on actual economic performance.
As a result, we are presenting our 2009 financial statements without inflation accounting. Financial information for dates and periods prior to January 1, 2008 continue to be expressed in constant pesos as of December 31, 2007. The impact of inflation accounting under Mexican FRS has not been reversed in our reconciliation to U.S. GAAP. See Notes 18 and 19 to our audited consolidated financial statements.
Overview
The year 2009 was a challenging year for Grupo Casa Saba, given that the ongoing world economic crisis continued to affect many industries. Nevertheless, this situation led us to reinforce our business model and to consolidate our operations.
As a result, the Group sought to capitalize on the benefits of a diversified and solid business structure within the healthcare sector by developing a strategy that focuses on medium-term growth and profitability as well as increasing the level of service that we provide to our clients.
As part of this effort, in January of 2009 we inaugurated a new distribution center in Hermosillo through which we expect to achieve significant efficiencies of scale in terms of both routes and processes in the region. In Sports Clinic, a company that operates short-stay clinics specializing in orthopedics, trauma, sports medicine and otorhinolaryngology, we invested in projects not only in established markets but also in cities with high growth potential, such as Tampico, where we built a clinic that has state-of-the art technology and outstanding patient care. This clinic opened its doors
in
November 2009
and
is
the first facility to operate outside of Mexico City. In addition, in October 2009 in Mexico City, we launched Perfect Image, a new concept in plastic and reconstructive surgical clinics that we believe will broaden our product portfolio in this segment and allow us to access a new and growing market. Finally, we also continued to consolidate our presence in South America through Drogasmil.
In the area of environmental protection, GCS launched a program to reduce waste within our distribution centers. As a result, in several of our largest facilities, we substituted the use of Radio Frequency for paper in our orders, which reduced paper consumption and waste. On a national level, we redesigned our invoices so that they require less paper, thus contributing to the country’s ecology.
In terms of our financial results, at the end of 2009, the Group’s net sales reached $29, 791.6 million pesos, an increase of 4.90% versus the previous year. This year, 85.94% of the Group’s sales were derived from our main division, Private Pharma, which grew 6.25% and totaled $25,601.6 million pesos. Sales from our Government Pharma division decreased 12.44%,and represented 3.04% of our total sales. Sales in the Health, Beauty, Consumer Goods, General Merchandise and Other division rose slightly compared to 2008 and represented 8.49% of our total sales. The remaining 2.53% of sales came from our Publications division, where sales increased slightly mainly as a result of strong year-end sales and the reincorporation of some publications back into our catalog.
It is worth mentioning that our gross profit increased 5.2% to reach $3,225.8 million pesos, which resulted in a gross margin of 10.83%, 4 basis points higher than the margin obtained during the previous year. For the fiscal year ended on December 31, 2009, Grupo Casa Saba’s net income was $280.2 million pesos.
Despite the gradual recuperation of the principal stock market indexes in 2009, the instability of the economic environment led to market volatility throughout the year. As a result, the price of our shares listed on the Bolsa Mexicana de Valores decreased 7.6% while that of our shares listed on the New York Stock Exchange declined by 5.0% compared to 2008. Nevertheless, the Group’s management upheld its commitment to its shareholders and, for the seventh consecutive year, paid a cash dividend in the amount of $170 million pesos, or $0.6450 pesos per share.
As part of our growth strategy, we plan to expand our retail pharmacy operations by acquiring up to 100% of the capital stock of FASA, for a total price of approximately $637 million. See “Item 4. Information on the Company—History and Development of the Company”. Subject to fulfillment of the relevant conditions and completion of the transaction, the Acquisition will make us the largest retail pharmacy chain in Latin America, with a platform of approximately 1,500 pharmacies across Mexico, Brazil, Chile, and Peru. We believe the Acquisition will create value for our shareholders through the projected benefits of the synergies that will be created. As a result of the Acquisition, we expect to reinforce our regional growth strategy through a proved and wide multi-country platform.
Effects of Economic and Governmental Factors on Our Results of Operations
The vast majority of our operations and assets are located in Mexico. As a consequence, our results of operations may be significantly affected by the general condition of the Mexican economy, Mexican inflation, interest rates and political developments in Mexico. With the acquisition of Drogasmil, a Brazilian pharmacy chain, our operations in such country may be significantly affected by the general conditions of the Brazilian economy. See “Item 3. Key Information—Risk Factors Relating to Economic and Political Developments”.
Economic Situation
In 2005, the Mexican economy benefited from sharp increases in oil prices and global economic recovery. As a result, the Mexico’s GDP for the year grew by 3.0%, annual inflation reached a low of 3.3% and the interest rate on 28-day CETES averaged 9.2%. During 2006, Mexico’s GDP grew 4.8% mainly as a result of presidential, congressional and state elections, which enhanced extraordinary spending and a continued increase in oil prices. Inflation reached 4.1% and the interest rate on 28-day CETES averaged 7.2%. During 2007, the Mexican economy proved resilient in the face of a downturn in the US economy. GDP growth was 3.3%, inflation reached 3.8% and the interest rate on 28-day CETES averaged 7.2%. In response to the worldwide economic downturn, in 2008 Mexico’s GDP growth was cut in half, to reach 1.6%, inflation rose to 6.5% and the interest rate on 28-day CETES averaged 7.7%. In 2009, the Mexican economy continued to be affected by the global economic crisis. GDP declined by 6.5% while the average interest rate on the 28-day CETES fell to 5.4%. Inflation, however, decreased to 3.6%.
For each of the years ended on December 31, 2006 and 2007 approximately 99% of our consolidated net sales resulted from sales to parties located within Mexico. With the acquisition of Drogasmil in Brazil in May 2008, approximately 95% of our consolidated net sales in 2009 resulted from sales to parties located within Mexico. In the past, inflation has led to high interest rates and devaluations of the Peso. Inflation itself, as well as governmental efforts to reduce inflation, has had significant negative effects on the Mexican economy in general and on Mexican companies, including us, in particular. One result of inflation in Mexico is the decrease in the real purchasing power of the Mexican population, which can lead to a decrease in the demand for the products that we distribute. In addition, the Mexican government’s efforts to control inflation by tightening the monetary supply have historically resulted in higher financing costs as real interest rates have increased. Such policies have had and could have an adverse effect on our business, financial condition and results of operations.
Brazil has historically had high inflation and interest rates. The impact of high inflation rates and high interest in Brazil could have negative effects in our operations in such country. Consumer demand could decrease as purchasing power declines and access to Brazilian credit markets could become more difficult and at high interest rates.
Currency Fluctuations
Although we currently do not have any U.S. Dollar-denominated debt, we may need to incur such debt in the near future. A significant majority of our revenues are and will continue to be Peso-denominated. As a result, should we incur any substantial U.S. Dollar-denominated debt, we would be adversely affected by decreases in the value of the Peso against the U.S. Dollar, which would most likely result in net foreign exchange losses. Based on the change in the Noon Buying Rate as reported by the Board of Governors of the U.S. Federal Reserve Bank of New York, the Mexican Peso appreciated by approximately 5.6% against the U.S. Dollar in 2009. During the first quarter of 2010, the Peso appreciated by an additional 5.8% against the U.S. Dollar to reach $12.30 pesos per dollar. Any future depreciation of the Peso will likely result in price increases from our suppliers, which could impact the purchasing capacity of the final consumers, causing a reduction in our net sales.
As a result of our recent acquisition in Brazil, we now face currency exchange risk versus the Real, the official currency of Brazil. As part of the acquisition, we assumed certain Real-denominated liabilities for which we could be adversely affected in the event that the Real appreciated against the Peso. Nonetheless, the asset accounts and future revenues would have the opposite effect under such a scenario. In the event that the Real depreciates against the Peso, the opposite would hold true. For the year ended December 31, 2009, 5.1% of our total revenues were Real-denominated. We cannot assure you that fluctuations in the Real will not adversely affect our financial results in the future.
Severe devaluation or depreciation of the Peso may also result in the disruption of the international foreign exchange markets. This may limit our ability to transfer or to convert Pesos into U.S. Dollars and other currencies for the purpose of making timely payments of principal and interest on any non-Peso-denominated debt we may incur in the future, which could, in turn, affect our ability to obtain foreign services and products. Devaluation or depreciation of the Peso against the U.S. Dollar may also adversely affect U.S. Dollar prices for our securities on the Mexican Stock Exchange, including the Ordinary Shares and, as a result, will likely affect the market price of the ADSs. Such fluctuations would also affect the conversion value of any cash dividends paid on the Ordinary Shares in Pesos into U.S. Dollars.
Inflation and Interest Rates
In recent years, Mexico has experienced high levels of inflation. The rate of inflation on an annualized basis, as measured by changes in NCPI, was 3.8%, 6.5% and 3.6% for 2007, 2008 and 2009, respectively. High inflation rates can adversely affect our business and our results of operations by adversely affecting consumer purchasing power, thereby adversely lowering the demand for the products that we distribute. In addition, to the extent that inflation exceeds our price increases or to the extent that we do not increase our prices, high inflation rates can adversely affect our revenues by adversely affecting our prices in “real” terms.
Mexico has had, and is expected to continue to have, high nominal interest rates. The interest rates on 28-day Mexican government treasury bonds averaged approximately 7.2%, 7.7% and 5.4% for 2007, 2008 and 2009, respectively. In the first quarter of 2010, the 28-day Mexican CETES averaged 4.5%.
Brazil has historically had high inflation and interest rates. The impact of high inflation rates and high interest in Brazil could have negative effects in our operations in such country. Consumer demand could decrease as purchasing power declines and access to Brazilian credit markets could become more difficult and at high interest rates.
Introduction to Our Operations
The following table sets forth the real price increases and unit volume growth for our Private Pharma division, our core business division, for the years indicated:
|
|
|
Year Ended December 31,
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Total Mexican Private Pharmaceuticals Market:
|
|
|
|
|
|
|
|
|
|
|
Real Unit Price Increases
|
|
|
3.2
|
%
|
|
|
0.3
|
%
|
|
|
(0.4
|
%)
|
|
Growth in Units
|
|
|
1.2
|
%
|
|
|
(4.7
|
%)
|
|
|
(2.5
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grupo Casa Saba Private Pharmaceutical Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Unit Price Increases
|
|
|
2.8
|
%
|
|
|
4.7
|
%
|
|
|
3.1
|
%
|
|
Growth in Units
|
|
|
1.5
|
%
|
|
|
(2.2
|
)%
|
|
|
(5.8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Share of Grupo Casa Saba
(1)
:
|
|
|
23.1
|
%
|
|
|
23.7
|
%
|
|
|
22.9
|
%
|
|
Inflation
(2)
|
|
|
3.8
|
%
|
|
|
6.5
|
%
|
|
|
3.6
|
%
|
(1) Based on information from IMS Health, A.G. (Mexico) and Grupo Casa Saba’s own estimates. This market share does not include purchases made by government institutions and sales in the private pharmaceutical market from
similares
, generics and
impulso
. Also includes an IMS estimate of sales through non-wholesalers.
(2) Based on the changes in the NCPI.
For a more detailed description of the Mexican private pharmaceutical market and our private pharmaceutical business, see “Item 4. Information on the Company—Business Overview—Pharmaceutical Industry”.
The following table sets forth our net sales by division and the corresponding growth rates for each of our business divisions for the years indicated.
|
|
|
Year Ended December 31,
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
Millions of Pesos
|
|
|
Pharmaceuticals:
|
|
|
|
|
|
|
|
|
|
|
Private sector
(1)(2)
|
|
Ps.
|
21,269.6
|
|
|
Ps.
|
24,094.9
|
|
|
Ps.
|
25,601.6
|
|
|
% Growth
|
|
|
3.7
|
%
|
|
|
13.3
|
%
|
|
|
6.3
|
%
|
|
Government
|
|
|
780.5
|
|
|
|
1,034.8
|
|
|
|
906.1
|
|
|
% Growth
|
|
|
(7.7
|
)%
|
|
|
32.6
|
%
|
|
|
(12.4
|
)%
|
|
Health, Beauty, Consumer Goods, General Merchandise and Other Products
|
|
|
2,281.0
|
|
|
|
2,521.1
|
|
|
|
2,530.4
|
|
|
% Growth
|
|
|
2.2
|
%
|
|
|
10.5
|
%
|
|
|
0.4
|
%
|
|
Publications
|
|
|
928.6
|
|
|
|
749.2
|
|
|
|
753.4
|
|
|
% Growth
|
|
|
2.8
|
%
|
|
|
(19.2
|
)%
|
|
|
0.6
|
%
|
|
Total
|
|
Ps.
|
25,259.7
|
|
|
Ps.
|
28,400.0
|
|
|
Ps.
|
29,791.6
|
|
|
Total % Growth
|
|
|
3.2
|
%
|
|
|
12.4
|
%
|
|
|
4.9
|
%
|
(1) The operations of Casa Saba Brazil are consolidated and reflected in the Private Pharmaceuticals business division. For the year ended December 31, 2009, Casa Saba Brazil’s net sales represented 5.1% of our consolidated net sales and 6.0% of the net sales of the private pharmaceuticals business division.
(2) The operations of our retail pharmacy business in Mexico are consolidated and reflected in the Private Pharmaceuticals business division. For the year ended December 31, 2009, net sales by our retail pharmacy business in Mexico represented 4.4% of our consolidated net sales and 4.7% of the net sales of the private pharmaceuticals business division.
The following table sets forth the net sales for each of our business divisions and our results of operations as a percentage of our total net sales for the years indicated:
|
|
|
Year Ended December 31,
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Pharmaceuticals:
|
|
|
|
|
|
|
|
|
|
|
Private
(1)(2)
|
|
|
84.2
|
%
|
|
|
84.9
|
%
|
|
|
85.9
|
%
|
|
Government
|
|
|
3.1
|
%
|
|
|
3.6
|
%
|
|
|
3.0
|
%
|
|
Health, Beauty, Consumer Goods, General Merchandise and Other Products
|
|
|
9.0
|
%
|
|
|
8.9
|
%
|
|
|
8.5
|
%
|
|
Publications
|
|
|
3.7
|
%
|
|
|
2.6
|
%
|
|
|
2.6
|
%
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Cost of Sales
|
|
|
90.2
|
%
|
|
|
89.2
|
%
|
|
|
89.2
|
%
|
|
Gross Profit
|
|
|
9.8
|
%
|
|
|
10.8
|
%
|
|
|
10.8
|
%
|
|
Operating expenses
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
2.4
|
%
|
|
|
3.2
|
%
|
|
|
3.1
|
%
|
|
Administrative expenses
|
|
|
3.3
|
%
|
|
|
4.2
|
%
|
|
|
4.7
|
%
|
|
|
|
|
5.6
|
%
|
|
|
7.4
|
%
|
|
|
7.8
|
%
|
|
Operating income
|
|
|
4.2
|
%
|
|
|
3.4
|
%
|
|
|
3.0
|
%
|
|
Comprehensive cost of financing, net
|
|
|
0.1
|
%
|
|
|
0.6
|
%
|
|
|
0.9
|
%
|
|
Other income
|
|
|
0.2
|
%
|
|
|
(0.2
|
%)
|
|
|
0.5
|
%
|
|
Income tax and employee profit sharing
|
|
|
0.7
|
%
|
|
|
1.1
|
%
|
|
|
0.7
|
%
|
|
Net income
|
|
|
3.6
|
%
|
|
|
2.1
|
%
|
|
|
0.9
|
%
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
(1) The operations of Casa Saba Brazil are consolidated and reflected in the Private Pharmaceuticals business division. For the year ended December 31, 2009, Casa Saba Brazil’s net sales represented 5.1% of our consolidated net sales and 6.0% of the net sales of the private pharmaceuticals business division.
(2) The operations of our retail pharmacy business in Mexico are consolidated and reflected in the Private Pharmaceuticals business division. For the year ended December 31, 2009, net sales by our retail pharmacy business in Mexico represented 4.4% of our consolidated net sales and 4.7% of the net sales of the private pharmaceuticals business division.
For a more detailed description of each of our divisions, see “Item 4. Information on the Company—Operations”.
Results of Operations
In accordance with Mexican FRS, Peso amounts presented below for 2007 are expressed in constant Pesos as of December 31, 2007 while the 2008 and 2009 figures are expressed in nominal terms.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Total Net Sales
. Grupo Casa Saba’s total net sales amounted to Ps. 29,791.6 million for the year ended December 31, 2009, an increase of 4.90% as compared to the same period for 2008. The increase was primarily due to a 3.55% increase in the sales of our distribution business as compared to the previous year and our Brazilian retail pharmacy business.
Sales by Division:Net Private Pharma Sales
. Net sales from our Private Pharma business division increased 6.25%, from Ps. 24,094.9 million for the year ended December 31, 2008 to Ps. 25,601.6 million for the year ended December 31, 2009. Sales for this division rose primarily as a result of an increase in sales of Drogasmil, our Brazilian pharmacy chain and our Mexican distribution business. Private Pharma accounted for 85.94% of the Group’s total net sales in 2009, 1.10% higher than in 2008.
Net Government Pharma Sales
. Net sales from our Government Pharma business division decreased 12.44%, from Ps. 1,034.8 million for the year ended December 31, 2008 to Ps. 906.1million for the year ended December 31, 2009, due primarily to a lower level of participation of sales to PEMEX. As a result, this division’s sales represented 3.04% of the Group’s total net sales, somewhat lower than the 3.64% that it accounted for in 2008.
Net Health, Beauty, Consumer Goods, General Merchandise and Other Sales
. Net sales from our Health, Beauty, Consumer Goods, General Merchandise and Other business division grew 0.37%, from Ps. 2,521.1 million for the year ended December 31, 2008 to Ps. 2,530.4 million for the year ended December 31, 2009. Net sales by this division represented 8.49% of our total net sales, 4.39% lower than in 2008.
Net Publication Sales
. Net sales from our Publications business division rose slightly, from Ps. 749.2 million for the year ended December 31, 2008 to Ps. 753.4 million for the year ended December 31, 2009 and accounted for 2.53% of our total net sales for the year ended December 31, 2009. This result was primarily due to the reincorporation of various publications into the catalog as well as strong year-end specialty title and collector’s item sales.
Gross Profit.
Grupo Casa Saba’s gross profit amounted to Ps. 3,225.8 million for the year ended December 31, 2009, an increase of 5.23% as compared to Ps. 3,065.5 million for the same period in 2008. The improvement in the gross margin, which was 10.83% for the year ended December 31, 2009, as compared to 10.79% registered during the previous year, was mainly due to improved sales in the Mexican distribution business as well as the Company’s investments in the retail pharmacy business in Brazil, which resulted in increased total sales, as described above.
Operating Expenses
. Our operating expenses totaled Ps. 2,335.1 million for the year ended December 31, 2009, an increase of 10.94% as compared to Ps. 2,104.8 million for the year ended December 31, 2008. This was mainly the result of the extraordinary expenses related to changes in the operating environment in our Brazilian retail business that took place during the year. Operating expenses represented 7.84% of our total net sales for the year ended December 31, 2009.
Operating Income
. Operating income for the year ended December 31, 2009 was Ps. 890.7 million, a decrease of 7.28% as compared to Ps. 960.7 million for the year ended December 31, 2008. This was due primarily to the increase in our operating expenses, as described above. As a result, our operating margin for year ended December 31, 2009 was 2.99%, a decline of 11.5% as compared to the margin of 3.38% obtained for the year ended December 31, 2008.
Comprehensive Financing Cost, Net
. Pursuant to Mexican FRS, we report four items within this line item: interest expense, interest income, foreign exchange (gain) loss and the (gain) loss on net monetary position. Foreign exchange losses (or gains) arise primarily from U.S. Dollar-denominated position or loans as the Peso devalues or appreciates against the U.S. Dollar. The gain or loss on the net monetary position incorporates the effect of inflation on monetary assets and liabilities. Monetary gains arise from holding a net monetary liability position during periods of inflation, while monetary losses arise from holding a net monetary asset position during periods of inflation. Since January 1, 2008 we ceased inflation accounting pursuant to Mexican FRS.
Our comprehensive financing cost, net increased from Ps. 181.1 million for the year ended December 31, 2008 to Ps. 262.2million for the year ended December 31, 2009. This increase was largely due to the amount of interest paid during the year. The interest payments were made in connection with the long-term loan that was obtained for purposes of financing the acquisition of Drogasmil in Brazil, as well as to the interest related to the use of short-term credits for our operations in both Mexico and Brazil.
Tax Provisions
. Provisions for taxes for the year ended December 31, 2009 was Ps. 211.8 million, a decrease of 29.9% as compared to Ps. 302.4 million for the year ended December 31, 2008. Income tax for the year ended December 31, 2009 amounted to Ps. 323.9 million, 0.73% greater than the income tax provisions for the year ended December 31, 2008, and which was partially offset by the deferred income tax of Ps. 131.8 million.
Net Income.
The Group’s net income for the year ended December 31, 2009 amounted to Ps. 280.2 million, a decrease of 52.9% as compared to Ps. 595.1 million for the year ended December 31, 2008. This decline was primarily due to the fact that the Group assessed goodwill impairment during the last quarter of fiscal 2009, which concurred with the decrease in the economic activity of Drogarias, due to the generalized crisis in the economic environment that had a negative impact on the pharmaceutical industry market in Brazil that year. As a result, at December 31, 2009, an impairment loss was recognized in the line item
“other (income) expenses, net,” since the net carrying value of the cash generating unit exceeded its
“value in use” in the amount of Ps. 210 million.
.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Total Net Sales
. Grupo Casa Saba’s total net sales amounted to Ps. 28,400.0 million for the year ended December 31, 2008, an increase of 12.43% as compared to the same period for 2007. The increase was primarily due to the investments that were made during the course of the year in our retail pharmacy business, particularly our acquisition of a pharmacy chain, Drogasmil, in Brazil and our expansion of our pharmacy chain, Farmacias ABC, in Mexico. To a lesser extent, our total net sales increased as a result of an increase in sales by our distribution business, which increased 3.80% for the year ended December 31, 2008 as compared to the prior year.
Sales by Division:Net Private Pharma Sales
. Net sales from our Private Pharma business division increased 13.28%, from Ps. 21,269.6 million for the year ended December 31, 2007 to Ps. 24,094.9 million for the year ended December 31, 2008. Sales for this division grew mainly as a result of the investments that were made by Grupo Casa Saba within the sector, including the acquisition of Drogasmil, a Brazilian pharmacy chain and the expansion of our retail pharmacy chain, Farmacias ABC, in Mexico. Private Pharma accounted for 84.84% of the Group’s total net sales in 2008, 0.64% higher than in 2007.
Net Government Pharma Sales
. Net sales from our Government Pharma business division increased 32.58%, from Ps. 780.5 million for the year ended December 31, 2007 to Ps. 1,034.8 million for the year ended December 31, 2008, due primarily to a higher level of participation of sales to PEMEX and ISSSTE. As a result, this division’s sales represented 3.64% of the Group’s total net sales, slightly higher than the 3.09% that it accounted for in 2007.
Net Health, Beauty, Consumer Goods, General Merchandise and Other Sales
. Net sales from our Health, Beauty, Consumer Goods, General Merchandise and Other business division increased 10.53%, from Ps. 2,281.0 million for the year ended December 31, 2007 to Ps. 2,521.1 million for the year ended December 31, 2008, primarily as a result of the increase in the demand for personal care and general merchandise products, as well as commercial agreements that enabled us to increase our promotions and discounts. Net sales by this division represented 8.88% of our total net sales, 0.15% lower than in 2007.
Net Publication Sales
. Net sales from our Publications business division decreased 19.23%, from Ps. 928.6 million for the year ended December 31, 2007 to Ps. 749.2 million for the year ended December 31, 2008 and accounted for 2.64% of our total net sales for the year ended December 31, 2008. The decline was primarily due to the fact that we stopped distributing publications that did not meet our minimum profitability requirements.
Gross Profit.
Grupo Casa Saba’s gross profit amounted to Ps. 3,065 million for the year ended December 31, 2008, an increase of 23.40% as compared to Ps. 2,484.3 million for the same period in 2007. The improvement in the gross margin, which was 10.79% for the year ended December 31, 2008, as compared to 9.83% registered during the previous year, was mainly due to the Company’s recent investments in the retail pharmacy business in Mexico and Brazil which resulted in increased total sales, as described above.
Operating Expenses
. Our operating expenses amounted to Ps. 2,104.8 million for the year ended December 31, 2008, an increase of 47.73% as compared to Ps. 1,424.9 million for the year ended December 31, 2007. This was mainly the result of the investments that were made throughout the course of the year in our retail pharmacy business in Mexico and Brazil, which increased our payroll, lease payment obligations, legal fees and other operating costs significantly. Operating expenses represented 7.41% of our total net sales for the year ended December 31, 2008.
Operating Income
. Operating income for the year ended December 31, 2008 was Ps. 960 million, a decrease of 9.32% as compared to Ps. 1,059.4 million for the year ended December 31, 2007. This was due primarily to the increase in our operating expenses, as described above. As a result, our operating margin for year ended December 31, 2008 was 3.38%, a decline of 0.81% as compared to the margin of 4.19% obtained for the year ended December 31, 2007.
Comprehensive Financing Cost, Net
. Pursuant to Mexican FRS, we report four items within this line item: interest expense, interest income, foreign exchange (gain) loss and the (gain) loss on net monetary position. Foreign exchange losses (or gains) arise primarily from U.S. Dollar-denominated position or loans as the Peso devalues or appreciates against the U.S. Dollar. The gain or loss on the net monetary position incorporates the effect of inflation on monetary assets and liabilities. Monetary gains arise from holding a net monetary liability position during periods of inflation, while monetary losses arise from holding a net monetary asset position during periods of inflation. Since January 1, 2008 we ceased inflation accounting pursuant to Mexican FRS.
Our comprehensive financing cost, net increased from Ps. 17.8 million for the year ended December 31, 2007 to Ps. 181.1 million for the year ended December 31, 2008. This increase was largely due to the amount of interest paid in 2008. The interest payments were made in connection with the long-term loan that was obtained for purposes of the acquisition of Drogasmil in Brazil, as well as to the interest related to the use of short-term credits for our operations in both Mexico and Brazil.
Tax Provisions
. Provisions for taxes for the year ended December 31, 2008 was Ps. 302.4 million, an increase of 60.68% as compared to Ps. 188.2 million for the year ended December 31, 2007. Income tax for the year ended December 31, 2008 amounted to Ps. 321.5 million, 13.3% less than the income tax provisions for the year ended December 31, 2007, and which was partially offset by the deferred income tax of Ps. 95.1 million.
Net Income
. The Group’s net income for the year ended December 31, 2008 amounted to Ps. 595.1 million, a decrease of 34.25% as compared to Ps. 905.1 million for the year ended December 31, 2007. This decline was primarily the result of the increase in operating expenses, the amount of interest paid as well as the increase in tax provisions, as described above.
Aggregate Contractual Obligations
Below is a table containing a description of Grupo Casa Saba’s aggregate contractual obligations as of December 31, 2009.
Tabular Presentation of Aggregate Contractual Obligations
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Contractual Obligations
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Payments due by period
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(millions of Pesos)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
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Less than 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5 years
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt (1)
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|
|
891.6
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|
|
|
-
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|
|
|
403.8
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|
|
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403.8
|
|
|
|
84.0
|
|
|
Capital Lease Obligations (2)
|
|
|
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
Operating Leases (3)
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|
|
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
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|
|
|
|
|
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Purchase Obligations (4)
|
|
|
|
|
|
|
–
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|
|
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–
|
|
|
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–
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|
|
|
|
|
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Other Long-Term Liabilities (deferred income tax and other liabilities) reflected on our Balance Sheet under Mexican FRS (5)
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865.3
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–
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–
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–
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|
|
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865.3
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Total
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1,756.9
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|
|
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-
|
|
|
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403.8
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403.8
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949.3
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(
1)
Current maturities of long-term debt (see Note 8 to our audited consolidated financial statements).
(2) Not applicable.
(3) Our operating leases are primarily related to our retail pharmacy business in Mexico and Brazil. These leases, which amounted to
Ps. 200.8
million in 2009, are entered into in the ordinary course of business and their term varies from one-year to a longer term of up to ten years, depending on the circumstances and location.
(4) Not applicable.
(5) Includes reserve for retirement pensions and seniority premiums. The maturity of this obligation will occur in accordance with the disclosure in Note 3(m) to our audited consolidated financial statements.
Non-Exchange Traded Contracts Accounted for at Fair Value
All financial assets and financial liabilities derived from any type of financial instrument are recognized in our balance sheet and assessed at fair value. The valuation effect, as well as costs and returns generated by financial instruments form part of the comprehensive gain or loss on financing when incurred or earned.
As of December 31, 2008 and 2009 the carrying value of financial instruments approximates their value due to their short-term nature. Long-term debt incurred through bank loans with similar terms and due dates accrues variable markets prevailing financing rates.
Off- Balance Sheet Arrangements
Under “Disclosure of information about financial instruments with off-balance sheet risk and financial instruments with concentrations of credit risk” (ASC 825) the Group sells its products mainly to distributors including supermarket chains, pharmacies and retail customers, throughout Mexico, as well as in Rio de Janeiro and S
ã
o Paulo in Brazil. No single customer accounted for a significant amount of the Group’s sales in fiscal year 2007, 2008 or 2009, and there were no significant accounts receivable from a single customer for the same years. Moreover, there is no significant concentration of a specific supplier relating to the purchase of inventories.
The Group currently does not have any off-balance sheet arrangement that has or is reasonably likely to have a current or future effect on the financial statements, changes in liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Policies
Application of critical accounting policies
Preparing our consolidated financial statements requires that we make certain estimates and use certain assumptions to determine the valuation of some assets and liabilities and disclose our contingent assets and liabilities at the date of our financial statements and the reported amount of revenues and expenses incurred during the reporting periods. We base our estimates and judgments on our experience and on various other reasonable factors that together form the basis for making judgments about the carrying values of our assets and liabilities. Our actual results may differ from these estimates under different assumptions or conditions. We evaluate our estimates on an on-going concern basis and they are continuously reviewed by using the available information. Our significant accounting policies are described in Note 3 to our audited consolidated financial statements. We believe that our most critical accounting policies that imply the application of estimates and/or judgments are:
Allowance for doubtful accounts
The allowance for doubtful accounts represents our estimate of the probable loss inherent in all receivables by considering the general historical trend of customers’ payment performance and factors surrounding the specific customer’s credit risk. On a periodic basis, we analyze the recoverability of our accounts receivable in order to determine whether, due to credit risk or other factors, some receivables may not be recovered. If we determine that such a situation exists, book value related to the non-recoverable assets is adjusted and expensed through an increase in the allowance for doubtful accounts. This determination requires substantial judgment by our management. Final losses from doubtful accounts may differ from our estimated reserve.
Estimate for slow-moving inventory
Periodically, we analyze the recoverability of our inventories in order to determine whether due to certain factors or conditions, certain products in our inventories may not be available or useable for sale purposes. If such a situation exists, book value related to the non-recoverable assets is adjusted and expensed through an increase in the estimate for slow-moving inventory. As a result, final losses from slow-moving inventory could differ from our estimated reserves.
Property and equipment
Our balance sheet reflects amounts of long-lived assets (mainly fixed assets and goodwill) associated with our operations throughout Mexico and Brazil. Many of these assets have resulted from past acquisitions, which have required us to report these assets at their market value at the dates of acquisition. Subsequently they were restated up to December 31, 2007 applying the “adjustments due to changes in the general price level method” by using the NCPI to value those assets, as permitted by Mexican FRS mentioned in the Note 3(d) to our financial statements.
As we discuss in Note 3(d) to our audited consolidated financial statements, we periodically assess the recoverability of the book value of our long-lived tangible and intangible assets, including goodwill and permanent investments in associate, to establish whether significant adverse events, changes in the business environment and/or changes in expectations with respect to operating income for each cash generating unit, indicate that the carrying value of those assets may not be recovered. This determination requires substantial judgment. The impairment loss is determined by the excess of carrying value of long-lived assets over the
“
value in use
”
, which consists of determining the present value of estimated cash flows. The impairment loss, if any, is recorded as a charge to operations in
“
other (income) expenses, net
”
in the period when such an assessment is carried out, unless the indications mentioned are of a temporary nature. Mexican FRS contemplates the reversal of the recognition of impairment, under certain circumstances. Property and equipment to be disposed of are recorded as the lower of the carrying value or the fair market value less any sale related costs. Additionally, we review the lives assigned to these long-lived assets for purposes of depreciation or amortization, as the case may be, when applicable. This determination is subjective and is an integral part of the determination of whether an impairment has occurred.
As mentioned before, property and equipment are initially recorded at acquisition cost. Effective January 1, 2008, during high inflationary periods, those assets are restated by using INPC factors applicable to the country where those assets are established in accordance with Mexican FRS B-10. Through December 31, 2007, the last date on which the Group operated in inflationary economic environment, the value of those assets were restated by using INPC factors, as discussed in Note 3 (d). Depreciation is calculated on the value of property and equipment restated through December 31, 2007 or when the inflationary economic environment is applied, as well as on the acquisition cost for additions subsequent to 2007 when the economic environment is not inflationary, in accordance with FRS B-10, by applying the straight-line method based on the remaining economic useful life thereof.
At 2008 and 2009 fiscal year end, the Group’s management determined that there were no impairment indications that had a significant adverse impact in the carrying value of property and equipment except in Casa Saba Brasil as mentioned below. Accordingly, fair value of property and equipment other than property in Casa Saba Brasil was equivalent to or greater than the carrying value thereof at that date.
While we believe that our estimates are reasonable, different assumptions could materially affect our evaluations. Our evaluations throughout the year and up to the date of this annual report did not lead to any impairment of property and equipment. We can give no assurance that our expectations will not change as a result of new information or developments.
The provisions of Mexican FRS (Bulletin C-15 Impairment of the value of long-lived assets and their related disposal) are virtually identical to, “Accounting for the impairment or disposal of long-lived assets” adopted by us on January 1, 2002 under U.S. GAAP.
Intangible assets and goodwill
Intangible assets are initially recorded at acquisition cost, which is equivalent to its fair value at acquisition date. Effective January 1, 2008, during high inflationary periods, those assets are restated by using INPC factors applicable to the country where those assets are established, in accordance with FRS B-10. Through December 31, 2007, the last date on which the Group operated in an inflationary economic environment, the value of those assets was restated by using INPC factors, as discussed in Note 3 (d).
Intangible assets are identifiable nonmonetary assets, with no physical substance that represent costs incurred or rights acquired, which will generate future economic benefits controlled by the Group. Intangible assets with a defined economic useful life refer to licenses related to the technological platform with which the Group operates.
Intangible assets acquired through a business combination consider: (i) the purchase method is used as the sole valuation standard; (ii) the purchase price is allocated on net assets acquired based on their estimated fair value at the acquisition date, except as discussed in hereinbelow, without exceeding the consideration paid; (iii) the portion of the purchase price not allocated that is not identifiable is included in goodwill which, if applicable, is adjusted by any correction that may arise from events or circumstances subsequent to the acquisition date; and (iv) valuation is performed with certain exceptions to the use of fair value, in which case the pertinent Mexican FRS is applied. Goodwill is allocated to the cash flow generating units.
Intangible assets with a defined economic useful life are amortized on their restated value through December 31, 2007 or when the inflationary environment applies, as well as on the acquisition cost for subsequent additions when the economic environment is not inflationary, in accordance with FRS B-10. Toward that end, the straight-line method is applied based on their remaining economic useful life.
Intangible assets with an undefined economic useful life, including goodwill, are subject to periodic impairment tests, by applying the “value in use”. Toward that end, “perpetuity value” is applied which considers: (i) the generation of excess value in use of assets other than goodwill (“excess value in use”); and (ii) the recovery of goodwill through perpetuity. Therefore, the impairment loss is generated by the excess carrying value over perpetuity value referred to above. The Group considers that its cash flow projections recognize medium and long-term economic variables fairly at the time of the calculation. Economic variables are related to the price of products, changes in operating expenses, industry trend, and discount and growth rates applied in perpetuity.
As explained in Note 1 (c) to our financial statements, the Group completed the purchase price allocation, except with respect to the value of inventories at the acquisition date (May 15, 2008) of the subsidiary Drogarias. Consequently, Management carried out the goodwill impairment test during the last quarter of 2009. Therefore, an impairment loss was determined as explained in our Note 1(c) to the financial statements. Impairment is due to significant adverse events at Drogarias that occurred in 2009, which are related to changes in the business environment, expectations in operating income, lack of liquidity, etc.
While we believe that our estimates are reasonable, different assumptions could affect our evaluation. We can give no assurance that our expectations will not change as a result of new information or developments.
Provisions, contingent assets and liabilities and commitments
We recognize provisions when present, legal or assumed, obligations are unavoidable and will require the disbursement of economic resources or can be reasonably estimated. Significant obligations or losses related to contingencies are periodically evaluated. They are only accounted for when it is likely that present obligations will require the disbursement of economic resources and there are reasonable elements for their quantification. Commitments are not recognized unless they result in a loss. Actual results may differ from our estimates under different assumptions or conditions.
Labor obligations
The Group recognizes the labor obligations derived from defined benefits for retirement pensions and seniority premiums for all of its employees, as well as severance benefits to employees when they complete the employment relationship prior to retirement age due to causes other than restructuring. Severance benefits represent legal ordinary severance payments. Those benefits are recognized in income based on actuarial computations, as employees render their services. Retirement pensions are granted to all personnel that have completed at least ten years of pension service and have reached sixty-five years of age. Seniority premiums are granted for a voluntary separation of personnel after completing fifteen years of service and then calculated based on the number of years worked. Severance benefits for termination of the employment relationship are granted by Law in the event of a dismissal, based on the years of service and last salary of personnel.
Defined benefit obligations, unamortized items, and the net periodic cost applicable to labor obligations referred to above are determined by using the
“
projected unit credit method
”
. Severance benefits which arise from restructuring causes, should continue to follow the guidelines of Bulletin C-9, “Liability, provisions, contingent assets and liabilities, and commitments” of Mexican FRS.
Employee profit sharing due is recorded based on the amount payable, determined on taxable income generated, as provided for in the currently enacted tax legislation.
Effective January 1, 2008, the Group adopted Mexican FRS D-3, “Employee fringe benefits” (FRS D-3), thereby substituting Bulletin D-3, “Labor obligations” (Bulletin D-3). As a result:
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●
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the unrecognized net transition obligation existing at December 31, 2007 can be amortized in five years if the remaining useful years of service of employees exceeds that period. At December 31, 2008 and 2009, the amortized amount of that item was immaterial.
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|
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●
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the opening transition asset or obligation is not recognized, unless a new defined fringe benefit plan is established. At December 31, 2008 and 2009, the Group did not establish any new plan for such item.
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●
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actuarial gains or losses and prior services of benefits upon termination due to causes other than restructuring are recognized in income. At December 31, 2008 and 2009, that amount was immaterial.
|
|
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●
|
employee profit sharing is recognized in income in the line item “other (income) expenses, net”. Deferred employee profit sharing is determined by using the “asset and liability method”, by applying a 10 percentage rate to the temporary differences between book and tax values of assets and liabilities for employee profit sharing purposes, in accordance with the pertinent legislation.
|
While we believe that our estimates are reasonable, different assumptions could affect our evaluation. We can give no assurance that our expectations will not change as a result of new information or developments.
Income Tax, Single Rate Business Tax
Effective January 1, 2008, the tax authorities repealed the Asset Tax Law and enacted the
Ley del Impuesto Empresarial a Tasa Única
, Single Rate Business Tax Law, or IETU Law, which co-exists with the Income Tax Law, consequently:
As discussed in Note 13(b) to our financial statements, the IETU Law went into effect on January 1, 2008. As a result of the transition, the Company and its subsidiaries determined that the taxes on earnings that will normally be paid (the higher of income tax or IETU) will be that which is obtained from the taxable income base of income tax, which the Company and its subsidiaries estimate will exceed the taxable income base of IETU, in accordance with a projection based on reasonable assumptions, as provided for in IFRS-8 “Effect of Corporate Flat Tax” (IFRS-8). If the Company and its subsidiaries determine that IETU will be due based on their estimates and that event will qualify as permanent, the deferred income tax balance will be adjusted to the resulting amount of IETU. If the event is circumstantial, the Company and its subsidiaries will account for deferred income tax, even though IETU will be due in the period. Management restates this estimate periodically.
In accordance with Mexican FRS D-4, “Taxes on earnings” (FRS D-4), the deferred income tax effect is determined by applying the “asset and liability method”. The deferred income tax effect of the year is recorded in income as a component of “provisions for income tax”, except for the deferred income tax effect that may be generated by temporary differences attributable to other stockholders’ equity accounts. In that event, the deferred income tax effect is applied to the specific stockholders’ equity account that generates it.
The Company and its subsidiaries perform a periodic valuation allowance review to determine the amount of the deferred asset (income tax and/or employee profit sharing) that is more likely that not will be realized and recorded based on the available information. At December 31, 2008 and 2009, the Company and its subsidiaries determined there was no need for a valuation allowance to be recognized as the deferred asset was deemed to be fully recoverable.
Under Mexican FRS, there are no specific guidelines for recording uncertain tax positions. Therefore, the Group is not required to record an income tax liability unless the Group expects that a cash disbursement is probable and quantifiable. For U.S. GAAP purposes, the Group adopted “Accounting for Uncertainty in Income Taxes” effective January 1, 2007 (ASC 740).This standard defines the confidence level that a tax position has taken or is expected to be taken in order to be recognized in the financial statements. The tax effects of a position must be recognized only if it is “more-likely-than-not” to be sustained based on its technical merits as of the reporting date. For this assessment, the Group assumes that the tax authorities will examine and have full knowledge of all relevant information (see Note 15). However, this difference between Mexican FRS and U.S. GAAP is not material to the Company’s consolidated financial statements during any of the periods presented herein, and has thus not resulted in a reconciling item.
Tax examinations may involve complex issues and their resolution may carry multiple years, if subject to negotiation or litigation. The Group believes its estimates of the unrecognized tax benefits are reasonable, however uncertainties could affect the amount of unrecognized tax benefits in the future periods. It is difficult to estimate the timing and range of possible change related to the uncertain tax positions, as finalizing audits with the authorities may involve administrative and legal proceedings. Therefore, any settlements or statute expirations may result in a significant increase or decrease in the total unrecognized tax benefits, including those positions related to tax examinations being currently conducted.
Tax and legal contingencies
We are subject to various claims and contingencies related to tax and legal proceedings as described in Note 15 to our consolidated financial statements. Due to their nature, such tax and legal proceedings involve inherent uncertainties including, but not limited to, court rulings, negotiations between affected parties and governmental actions. Management periodically assesses the probability of loss for such contingencies and accounts for a liability and/or discloses the relevant circumstances, as appropriate. If the potential loss from any claim or tax and legal proceedings are considered probable and the amount can be reasonably estimated, we account for a liability for the estimated loss.
Drogarias records certain provisions for contingencies based on the opinion of its legal advisors. Accordingly, Drogarias maintains a provision for the total labor and tax lawsuits, classified as risk of a probable loss. At December 31, 2008 and 2009, the liability recorded to cover those losses amounted to thousands of Brazilian real R$ 6,900 and R$ 2,422, respectively (Ps. 40,572 and Ps. 18,132), which is included in the line item “other payables and accrued long-term liabilities” in the consolidated balance sheet.
In addition, Drogarias is subject to certain unquantifiable contingencies that may result in present obligations. The solution of these matters is in a preliminary stage and a conclusion might span various years. Drogarias has considered that it has incurred a possible liability. Management considers this possible liability in the amount of R$ 7,000. However, it can not carry out an accurate estimate thereof, since there are no reasonable elements to be quantified. This contingency relates to different forms of remuneration to its management that do not conform to labor legislation. Notwithstanding the foregoing, Drogarias has recorded a provision for those contingencies in the amount of thousands of Brazilian real R$ 2,278 (Ps. 17,054) which is included in the caption “other payables and accrued long-term liabilities” in the consolidated balance sheet.
Foreign operations
The accounting records of the foreign subsidiaries are maintained in the recording currency of the country where those subsidiaries are established. Their financial statements are adjusted to Mexican FRS prior to their translation and consolidation. The translation is carried out in accordance with Mexican FRS B-15, “Foreign currency translation”. Toward that end, those financial statements are determined in their functional currency and restated by applying rate of inflation at which the foreign operation operates, depending upon whether the information comes from an inflationary or non-inflationary economic environment, in accordance with FRS B-10. Subsequently, they are translated into the reporting currency as discussed in the following paragraph.
The Group’s foreign operation operates in a non-inflationary economic environment and its functional currency is the Brazilian real. Accordingly: (i) monetary and nonmonetary assets and liabilities were translated at year end exchange rate published by Banco de Mexico and the stockholders’ equity at the historical exchange rate; and (ii) revenues and expenses were translated at the average exchange rate for the period. The translation adjustment is included in the “Accumulated translation effect” and forms part of comprehensive income. Moreover, it is recycled to income at the date of its availability. That line item includes foreign exchange fluctuations, as discussed in subparagraph o) below.
We are exposed a variety of risks and uncertainties related to operating in Brazil, including political, economic or social upheaval, devaluations in the Brazilian Real, high levels of inflation and interest rates, the introduction of import, investment or currency restrictions, including pricing regulation on pharmaceutical products, restrictions on the repatriation of earnings and capital.
Indebtedness
As of December 31, 2009 the Group’s interest-bearing liabilities totaled Ps. 2,382.7. As of March 31, 2010, we had arranged for short-term revolving credit lines for a total aggregate principal amount of Ps
.
915
million
with the following lenders:
Banco Nacional de Mexico, S.A., BBVA Bancomer
,
S
.A., Institucion de Banca Multiple, Grupo Financiero BBVA Bancomer; Ixe Banco, S.A., Institucionn de Banca Multiple, Ixe Grupo Financiero; and Financiera Bajio, S.A. de C.V., Sociedad Financiera de Objeto Multiple. These facilities may each be accessed depending on our cash flow requirements. Grupo Casa Saba did not provide specific guarantees for these facilities. The loans made under these facilities bear interest at variable rates depending on the Equilibrium Interbank Interest Rate (TIIE) published periodically by
Banco de México
plus an average of approximately
3
percentage points. The basis points which will be added to TIIE depend on negotiations and prevailing market conditions.
In May 2008, to finance the acquisition of Drogasmil, we entered into a long-term loan with Scotiabank Inverlat for an aggregate amount of up to Ps. 1,210 million, which has to be repaid monthly at the TIIE rate plus 0.75 percentage points for a term of seven years, with a grace period of 12 months. As of December 31, 2009, we had drawn the full amount under the loan. The obligations under such agreement are guaranteed by the Company and our subsidiary Drogueros, S.A. de C.V.
On March 25, 2010, Casa Saba entered into a new credit agreement with Scotiabank Inverlat, S. A. to liquidate the bank loans payable by Drogarias discussed in Note 9 to our audited consolidated financial statements. On March 26, 2010, Casa Saba drew down this credit in the amount of Ps. 520 million which will be repaid monthly at the TIIE rate plus a margin for a term of five years, plus a grace period of 6 months. The obligations under the credit agreement are guaranteed by the Company and its subsidiary Drogueros, S.A. de C.V.
See Note 9 to our consolidated financial statements for further description of our indebtedness.
Liquidity and Capital Resources
Overview
Historically, our cash and capital requirements have been satisfied through cash from operations and bank loans. We plan to continue to satisfy our cash and capital expenditure requirements primarily through cash from our operations. If deemed necessary, we can access our revolving credit facilities totaling an aggregate principal amount of up to Ps.
915
million. Net working capital (current assets minus current liabilities) as of December 31, 2009 was Ps. 5,295.7million compared to Ps. 5,433.5 million as of December 31, 2008.
Our cash flows are subject to seasonal fluctuations and market conditions. To maintain a larger winter inventory and to ensure adequate inventory levels for the two or more weeks of holidays in December, during which suppliers do not make sales or deliveries, our accounts payable and inventories typically increase at year-end. After reaching their highest levels in December, our inventories gradually decrease to what we estimate is a normal operational level of approximately 50 inventory days. Our inventories, net as of December 31, 2009, were Ps. 5,141.1million or 0.51% lower than the Ps. 5,167.7 million they amounted to on December 31, 2008. As of December 31, 2009, our inventory days were 69.7 days, 3.7 days lower than the 73.4 days registered for the year ended December 31, 2008. As of December 31, 2008, our inventory days were 73.4 days, 3.6 days lower than the 77.0 days registered for the year ended December 31, 2007. Accounts Receivable for the year ended December 31, 2009 registered 63.2 days while accounts payable accounted for 68.5 days for the same period. Accounts Receivable for the year ended December 31, 2008 registered 66.2 days while accounts payable were 83.6 days for the same period. For the year ended December 31, 2007, inventory days were
77.0
, account receivable days reached
64.7
and accounts payable days were
81.8
days.
Accounts Receivable
As of December 31, 2009, due to higher sales, a highly competitive environment and commercial negotiations with clients, accounts receivable net increased to Ps. 6,123.8 million, 3.4% higher than the Ps. 5,920.3 million registered as of December 31, 2008. Accounts receivable days as of December 31, 2009 decreased 3.0 days to 63.2 days from 66.2 days in 2008. As of December 31, 2007, accounts receivable days were
64.7
.
For a description of the nature and amounts of accounts receivable due from current and former related parties, see “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions” and Note 8 to our audited consolidated financial statements.
Trade Accounts Payable
As of December 31, 2009, trade accounts payable decreased to Ps. 5,052.2million or 14.1% compared to Ps. 5,881.4 million as of December 31, 2008. As a result, our trade accounts payable days decreased to 68.5 in 2009 compared to 83.6 days for the year ended December 31, 2008. As of December 31, 2007, our trade accounts payable days were 81.8.
For a description of the nature and amounts of trade accounts payable owed to current and former related parties, see “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions” and Note 8 to our audited consolidated financial statements.
Capital Expenditures
Our capital expenditures during 2009 were approximately Ps. 75.6 million, which consisted of Ps. 19.4 million for the purchase of transport and delivery equipment, Ps. 22.2 million for technology and computer equipment, particularly the acquisition of new computer equipment and Ps. 34.0 million for other general expenditures. These expenditures were mainly funded with working capital. For 2010 we expect to continue to fund our capital expenditures needs with working capital.
Our capital expenditures during 2008 were approximately Ps. 130.8 million, which consisted of Ps. 36.4 million for the purchase of transport and delivery equipment, Ps. 30.7 million for technology and computer equipment, particularly the acquisition of new software licenses and Ps. 63.7 million for other general expenditures. These expenditures were mainly funded with working capital.
Our capital expenditures during 2007 were approximately Ps. 163.9 million, which consisted of Ps. 38.9 million for the purchase of transport and delivery equipment, Ps. 41.2 million for technology and computer equipment, particularly the acquisition of new software licenses, Ps. 44.0 million for work-in-progress related expenditures and Ps. 39.8 million for other general expenditures. These expenditures were mainly funded with working capital.
Trend Information
During 2009, we continued with our strategy of profitable growth and implemented a number of operating efficiencies programs to maximize the profitability of our operations. We applied profitability requirements to our clients and suppliers, even when this meant discontinuing operations with certain clients and suppliers that did not meet the minimum parameters that we requested from them. In terms of our cost-saving programs, we successfully reengineered routes and optimized our distribution centers.
We believe that our profitability strategy will allow us to continue growing our divisions with acceptable margin levels and we will continue to focus our efforts on increasing profitability in the different markets in which we operate.
The Mexican private pharmaceutical market has solid growth fundamentals which lead us to expect sustained annual growth over the coming years. The main factors supporting this expected growth are Mexico’s demographic structure (adults are continuously increasing their participation in Mexico’s total population) and the increase in the life expectancy of the Mexican population. The combination of these factors generated a natural growth in the demand for healthcare services and pharmaceutical products. Despite the overall growth that we expect to continue in the pharmaceutical market, which generally benefits our wholesale distribution business, in recent years there has been a shift in the percentage of private sector pharmaceutical sales that are placed through wholesalers, like us, to sales that are placed directly by the manufacturers to a large retail pharmacy chains and supermarket supercenters that purchase sufficiently large volumes to have direct access to the laboratories. According to IMS Health, A.G. and our internal data, private sector pharmaceutical sales that are placed through wholesalers have declined from 90% in 2007 to 80% in 2008 and 2009. A continued increase in direct sales by manufacturers to retail pharmacy chains could to have a material adverse affect our results of operation.
With respect to our non-pharmaceutical or HBCG/other products related business divisions, we believe that higher levels of economic growth are necessary to increase the demand for these products; therefore, we depend on the improvement of general economic conditions and increases in consumer purchasing power to generate positive results in the upcoming years. We believe that the more solid client and editorial base of our Publication business division has, and will, allow it to generate better sales and operating results, particularly when Mexico’s economic performance improves.
Brazil is also experiencing similar trends in terms of the expansion of the adult population, prompted by an increase in overall life expectancy. Brazilians’ average life expectancy has increased, from 68.5 years in 1995 to 72.3 years in 2009. As a result, the over-60 population in the country has increased significantly over the course of the last ten years and it is this group that is most likely to stimulate the demand for both healthcare services and pharmaceutical products in the future. In addition, older consumers are generally more affluent and have larger discretionary incomes, making them a target demographic for many manufacturers, including for over-the-counter healthcare products.
From a socio-economic standpoint, we would also expect that the decrease in the unemployment in Brazil from 12.3% in 2004 to 8.1% in 2009, combined with an increase in the average salary in the last ten years, will stimulate the consumption of HBCG and Other products. However, as is the case in Mexico, the continued demand for these products will require a stable economic environment. Therefore, the growth of this segment will largely depend on the speed with which the Brazilian economy recovers from the effects of the recent global economic crisis.
In connection with the FASA Acquisition, we will incur significant amounts of debt which may have an adverse effect on the price of our outstanding shares. Such financing could, likewise, have important consequences to the Company, including an increase in the costs for interests. The agreement that will document the financing will contain covenants that, among others, will restrict the Company’s ability to incur additional debt, carry out capital expenditures and maintain financial ratios. Consequently, our ability to pay dividends, finance acquisitions, carry out investments and maintain flexibility in the performance of our business, may be significantly limited.
As a result the FASA Agreement and the financing to be obtained in connection therewith, we could face an exchange rate risk against the Chilean Peso, due to the fact that the financing to be obtained to complete the Acquisition will be denominated in Pesos and Dollars and the payment of the Acquisition’s purchase price will be in Chilean Pesos. Additionally, to cover our position in foreign currency, we have resorted to the execution of forward agreements. See “Item 10. Additional Information—Material Contracts”.
We believe the Acquisition will create value for our shareholders through the projected benefits of the synergies that will be created. These synergies will provide added strength to the Company by significantly increasing its size as the main distributor and vendor of pharmaceutical, health, beauty, personal care and general consumption products and giving us a larger national presence. As a result of the Acquisition, we also seek to reinforce our regional growth strategy through a proved and wide multi-country platform, that also has the necessary corporate and system capacities to integrate efficiently our existing operations in Mexico and Brazil.
The trends described in this section and expectations of Grupo Casa Saba may be affected by the current global economic downturn, particularly by the impact on the Mexican and Brazilian economies. See “Item 3. Key Information—Risk Factors—Risk Factors Relating to Economic and Political Developments”.
Accounting Pronouncements and Related Effects
Under Mexican FRS
Recently Issued Accounting Pronouncements
In connection with the amendments to the Income Tax Law in Mexico, effective January 1, 2010, dated December 15, 2009, the CINIF issued IFRS 18, “Recognition of the effects of the tax reform of 2010 on taxes on earnings” (IFRS-18) to be applied immediately, which sets forth the accounting treatment of the income tax liability derived from the changes to the tax consolidation regime. The change requires that the Group determines income tax due at December 31, 2009 as if the tax consolidation provisions had not existed since fiscal 1999 henceforth. IFRS-18 sets forth that: (i) the liability relative to the effect of the tax reform on intercompany dividends should be recognized with a charge to retained earnings, without preparing the restatement of prior year financial statements; and (ii) the liability related to the tax losses of subsidiaries and losses on the sale of shares, used in tax consolidation should not be offset by the income tax asset associated with the same items. The realization of the income tax asset is subject to generating future taxable income in the controlled companies that generated tax losses in the past.
Pursuant to the foregoing, the Group recognized a liability in the amount of Ps. 133,619 with a charge to retained earnings, due to the difference between the consolidated “Net taxable income account” (CUFIN-Spanish acronym) balance and the CUFIN balances of the controlled entities (refer to subparagraph Note 13 our financial statements).
Under U.S. GAAP
The following new accounting standards have been issued under U.S. GAAP, the application of which is required as indicated.
Recently Issued Accounting Pronouncements
In October 2009, the Accounting Standards Update (“ASU”) 2009-13, “
Multiple-Deliverable Revenue Arrangements
” (“ASU 2009-13”) was issued. This standard modifies the fair value requirements of ASC 605-25, “Revenue Recognition-Multiple Element Arrangements”
by allowing the use of the “best estimate of a selling price” in addition to Vendor Specific Objective Evidence and Third Party Evidence for determining the selling price of a deliverable. ASU 2009-13 changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price. ASU 2009-13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Group is currently evaluating the effect ASU 2009-13 may have on its audited consolidated financial statements.
In June 2009, the Accounting Standards Codification (“ASC”) 810, “
Consolidation
”,
was issued
. ASC 810 is intended to improve financial reporting by providing additional guidance to companies involved with variable interest entities and by requiring additional disclosures about a company’s involvement in variable interest entities. This standard is effective for interim and annual periods beginning after November 15, 2009. The Groups’s adoption of this provision had not an impact on its consolidated financial position and results of operation.
In June 2009, ASC 860, “
Transfers and Servicing
” (“Accounting for Transfers of Financial Assets”) was issued. ASC 860 requires more information about transfers of financial assets and where companies have continuing exposure to the risk related to transferred financial assets. ASC 860 eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets and requires additional disclosure. This standard is effective for fiscal years beginning after November 15, 2009. The Group plans to adopt this provision on January 1, 2010 and does not expect it to have an impact on its consolidated financial position and results of operation.
In June 2009, ASC 105, “
Generally Accepted Accounting Principles
” was issued. ASC 105 establishes the FASB ASC as the single source of authoritative nongovernmental U.S. GAAP, except for SEC rules and interpretive releases, which are sources of authoritative U.S. GAAP for SEC registrants. The standard is effective for interim and annual periods ending after September 15, 2009. The Group adopted the provisions of the standard on September 30, 2009, which did not have a material impact on its audited consolidated financial statements.
In April 2009, ASC 825, “
Financial Instruments
” was issued. ASC 825 requires disclosures of fair value for any financial instruments not currently reflected at fair value on the balance sheet for all interim periods. ASC 825 enhances consistency in financial reporting by increasing the frequency of fair value disclosures and is effective for interim and annual periods ending after June 15, 2009, and is to be applied prospectively. Adoption of this provision did not have an effect on the Group’s consolidated financial statements.
In April 2009, transition guidance ASC 820-10-65-4, “
Fair Value Measurements and Disclosures—Overall—Transition Guidance”,
the provisions of which have been incorporated in ASC 820-10-50-2, “Fair Value Measurements and Disclosures—Overall—Disclosures”
.
ASC 820 requires disclosures about fair value of financial instruments for interim reporting periods and annual financial statements of publicly traded companies. This guidance is effective for interim and annual periods ending after June 15, 2009. Adoption of this provision did not have an effect on the Group’s consolidated financial statements.
In March 2008, ASC 815, “
Derivatives and Hedging
” was issued. ASC 815 requires enhanced disclosures about an entity’s derivative and hedging activities including how and why an entity uses, how an entity accounts for derivative instruments; and related hedged items and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. ASC 815 is effective beginning January 1, 2009. Adoption of this provision did not have an effect on the Group’s consolidated financial statements.
|
Item 6
.
|
Directors, Senior Management and Employees
|
Board of Directors
The following table sets forth the names of our directors, their dates of birth, their principal occupation, their business experience, including other directorships, and the number of years of service they have as directors. All of these individuals were elected by our shareholders at our annual shareholders’ meeting, which was held on April 30, 2010.
Directors
Name and Date of Birth
|
|
|
|
|
|
|
|
Manuel Saba Ades
(11/03/67)
|
|
Chairman of the Board
|
|
Director – Xtra Inmuebles, S.A. de C.V. and of Grupo Casa Saba, S.A.B. de C.V. Member of the Board of Grupo Xtra S.A., de C.V. and of Ixe Grupo Financiero, S.A.B. de C.V.
|
|
April 2009
|
|
|
|
|
|
|
|
|
|
Alberto Saba Ades
(07/09/65)
|
|
Vice Chairman of the Board
|
|
Director – Xtra Inmuebles, S.A. de C.V.
Chairman of the Board of Grupo Xtra, S.A. de C.V.
|
|
February 2000
|
|
Gabriel Saba D’jamus
(07/27/69)
|
|
Chief Executive Officer
|
|
Executive Director – Grupo Comercial Hotelera, S.A. de C.V. and Grupo Casa Saba, S.A.B. de C.V.
|
|
April 2009
|
|
|
|
|
|
|
|
|
|
Juan Carlos Peralta del Río
(24/09/75)
|
|
Vice President
|
|
Vice President - IUSA Footwear International S.A. de C.V
|
|
April 2008
|
|
|
|
|
|
|
|
|
|
Pedro Alejandro Sadurni Gómez
(10/8/59)
|
|
Chief Financial Officer
|
|
Former Chief Financial Officer of Administration – INMAS, S.A. de C.V.
|
|
April 2009
|
|
|
|
|
|
|
|
|
|
Julio Madrazo García
(07/07/66)
|
|
Partner
|
|
De la Calle Madrazo Mancera, CMM and Director-Zimat Golin Harris
|
|
April 2009
|
|
|
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|
|
|
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|
Fernando Chico Pardo
(02/15/52)
|
|
President
|
|
President of PROMECAP, S.C. and Grupo Aeropuerto del Sureste, S.A. de C.V.
|
|
April 2009
|
|
|
|
|
|
|
|
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|
Miguel Alemán Magnani
( 04/25/66)
|
|
President
|
|
Grupo Alemán
|
|
April 2009
|
|
|
|
|
|
|
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|
|
Gabriel Alarcón Velázquez
(02/23/37)
|
|
Director
|
|
Banco de Comercio
|
|
April 2006
|
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|
|
|
Enrique Castillo
Sánchez-Mejorada
(13/08/56)
|
|
Chairman of the Board of Directors
|
|
IXE Grupo Financiero
S.A.B. de C.V.
|
|
April 2010
|
On April 30, 2010, Mr. Enrique Castillo Sánchez-Mejorada was elected as an independent board member in accordance with the Mexican Securities Market Law.
Francisco Fuentes Ostos is the Secretary of our Board of Directors, without being a member of the Board. Alberto Saba Ades and Manuel Saba Ades are brothers. Manuel Saba Ades and Alberto Saba Ades are cousins of Gabriel Saba D’jamus. Alberto Saba Ades is the Chairman of the Board of Directors of Grupo Xtra, S.A. de C.V. and Manuel Saba Ades is a regular member of the same Board. In addition, Manuel Saba Ades was elected as a member of the Board of Directors of Ixe Grupo Financiero, S.A.B. de C.V. and Alberto Saba Ades continues to serve as an alternate member of this same Board. Our directors are not party to a service contract with us, and there are no arrangements pursuant to which any of them was elected as a director of the Company.
Set forth below is the name of the alternate member of our board of directors. The alternate member of our board was ratified by our shareholders at our annual shareholders’ meeting, which was held on April 30, 2010.
|
|
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Iv
á
n Moguel Kuri (01/31/63)
|
|
Tax Adviser to Grupo Casa Saba, S.A.B. de C.V.
|
|
Partner – Chevez, Ruiz, Zamarripa y Cia, S.C.
|
|
February 2000
|
|
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The management of our business is vested in our Board of Directors and the Chief Executive Officer. Our bylaws provide that the number of seats on our Board of Directors shall be determined by our shareholders at a general ordinary shareholders’ meeting held for the purpose of appointing and electing directors, which at any time may be conformed by at least six but no more than twenty-one members of the Board of Directors. Directors and alternate directors are elected for one-year terms by our shareholders at each annual shareholders’ meeting, and each serves until a successor is elected and takes office. In order to have a quorum for a meeting of the Board of Directors, a majority of the directors must be present.
According to the Mexican Securities Market Law the Board of Directors may have up to 21 members and each member may have its alternate. The members of the Board of Directors shall be appointed by the shareholders’ meeting and the shareholders controlling 10% of the capital stock of the company may appoint or revoke in the shareholders’ meeting a member of the Board of Directors.
In accordance with the Mexican Securities Market Law and our bylaws, 25% of the members of our Board of Directors must qualify as “independent directors”. Under Mexican law, a person will not qualify as an “independent director” if he or she is, among other things:
|
|
●
|
one of our employees or managers;
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|
|
●
|
a controlling shareholder;
|
|
|
●
|
a director, executive officer or relative of a controlling shareholder, or entities controlled or managed by a controlling shareholder; or
|
|
|
●
|
a significant client, supplier, debtor or creditor, or member of the board of directors or executive officer of any of these entities.
|
Our bylaws also provide that the Chairman of the Board of Directors shall have the casting vote in the event of a tie. The Board of Directors is required to meet at least once a quarter. The Chairman, 25% of the directors-or the Chairman of the Audit and Corporate Practices Committee may call for a meeting of the Board of Directors. Also, our bylaws provide that the Board of Directors must approve with input from the Audit and Corporate Practices Committee, on an individual basis (i) any transaction with related parties, subject to certain limited exceptions, (ii) the appointment of our Chief Executive Officer, his compensation and removal for justified causes, (iii) our financial statements and those of our subsidiaries, (iv) unusual or non-recurrent transactions and any transactions or series of related transactions during any calendar year that involve (a) the acquisition or sale of assets with a value equal to or exceeding 5% of our consolidated assets or (b) providing collateral or guarantees or the assumption of liabilities, equal to or exceeding 5% of our consolidated assets, (v) agreements with our external auditors and (vi) accounting policies, within GAAP.
In addition, each holder or group of holders representing at least 10% of a series of shares has the right to appoint one director and a corresponding alternate director. Pursuant to the Mexican Securities Market Law and our bylaws, holders of at least 10% of our voting stock are also entitled to appoint a director and a corresponding alternate director.
Committees of Our Board of Directors
In accordance with the Mexican Securities Market Law, we have an Audit and Corporate Practices Committee. As of April 30, 2010, the Audit Committee is formed by Messrs. Julio Madrazo García (chairman), Gabriel Alarcón Velázquez and Juan Carlos Peralta del Río, all independent members of the Board of Directors. As required by the Mexican Securities Market Law, both the chairman and a majority of the members of the Audit Committee are independent directors. The Audit Committee carries out the responsibilities of the audit and corporate practice committee. Among other duties and responsibilities, the Audit and Corporate Practices Committee must:
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●
|
supervise our external auditors and analyze their report;
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●
|
analyze and supervise the preparation of our financial statements;
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●
|
inform the Board of Directors of our internal controls and their adequacy;
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●
|
request reports of our Board of Directs and executive officers whenever it deems appropriate;
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●
|
inform the Board of any irregularities that it may encounter;
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●
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receive and analyze recommendations and observations made by the stockholders’ meetings;
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●
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supervise the activities of our Chief Executive Officer;
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●
|
provide an annual report to the Board of Directors;
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●
|
provide opinions to our Board of Directors;
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●
|
request and obtain opinions from independent third parties; and
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●
|
assist the Board in the preparation of annual reports and other reporting obligations.
|
The Chairman of the Audit and Corporate Practices Committee shall prepare an annual report to our Board of Directors with respect to the findings of the Audit and Corporate Practices Committee, which shall include among others: (i) the status of the internal controls and internal audits and any deviations and deficiencies thereof, taking into consideration the reports of external auditors and independent experts; (ii) the results of any preventive and corrective measures taken based on results of investigations in respect of non-compliance of operating and accounting policies; (iii) the evaluation of external auditors; (iv) the main results from the review of our financial statements and those of our subsidiaries; (v) the description and effects of changes to accounting policies; (vi) the measures adopted as result of observation of stockholders, directors, executive officers and third parties relating to accounting, internal controls, and internal or external audits; (vii) compliance with stockholders’ and directors’ resolutions; (viii) observations with respect to relevant directors and officers; (ix) the transactions entered into with related parties; and (x) the remunerations paid to directors and officers.
Executive Officers
The following table sets forth the names of our executive officers, their dates of birth, their current position, their prior business experience, and the year in which they were first appointed to their current position.
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Gabriel Saba D’jamus
(07/27/69)
|
|
Chief Executive Officer
|
|
Executive Director – Grupo Comercial Hotelera, S.A. de C.V. and Grupo Casa Saba, S.A.B. de C.V.
|
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April 2009
|
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|
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|
|
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Pedro Alejandro Sadurni Gomez
(10/08/59)
|
|
Chief Financial Officer
|
|
Former Chief Financial Officer of Administration – INMAS, S.A. de C.V.
|
|
February 2000
|
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|
|
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Héctor Manzano de la Torre
(04/21/67)
|
|
Sales Director
|
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Former Manager of Citem, S.A. de C.V.
|
|
September 1991
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Oscar Gutiérrez Melgar
(17/04/67)
|
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Purchasing Director
|
|
Former Manager of Drogueros, S.A. de C.V.
|
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November 1985
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|
Jesus Guerra de Luna
(05/29/61)
|
|
General Counsel
|
|
Legal Manager – Grupo Casa Autrey, S.A. de C.V.
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June 1995
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Ricardo Ríos Cárdenas
(02/01/55)
|
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Human Resources Director
|
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Director of Sales & Operations, Northern Region – Grupo Casa Saba, S.A.B. de C.V.
|
|
March 2009
|
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Pedro Canton y Figueroa
(08/05/49)
|
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Sales Director
|
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Director of National Warehouse Operations
|
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December 2008
|
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Jorge Luis García
(09/12/61)
|
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Chief Information Officer
|
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Former Manager – Grupo Casa Autrey, S.A. de C.V.
|
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May 1992
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Compensation
Pursuant to our bylaws, all executive compensation must be approved by our Board of Directors on a yearly basis. For the year ended December 31, 2009, the aggregate compensation paid by us to key management personnel and/or our executive officers for services rendered in all capacities was approximately Ps. 41.0 million. By means of the ordinary annual shareholder’s meeting held on April 30, 2009, it was resolved to pay the members of the Board of Directors, without withholding income tax, a fifty peso coin known as a “Centenario” as compensation or to grant them the equivalent value of one “Centenario” for each Board of Director’s meeting attended.
Share Ownership of Directors and Officers
Share ownership of our directors and executive officers is set forth in the table under the caption “Item 7. Major Shareholders and Related Party Transactions”. Except as set forth in the table, none of our directors or executive officers is the beneficial owner of more than 1% of any class of our capital stock or options representing the right to purchase more than 1% of any class of our capital stock.
Employees
As of December 31, 2009, we had 8,454 employees. In Mexico we had 7,257 employees, 5,603 of which are part of the distribution business, 1,529 are part of the retail pharmacy business and 125 are part of the clinical area. On the distribution side, 2,476 are sales representatives for our Pharmaceutical and HBCG/Other Products businesses and other divisions, 912 are administrative employees and 2,215 are operational employees. On the retail pharmacy side, 155 are administrative employees, 150 are operational employees and 1,224 are in sales. In Brazil we had a total of 1,197 employees of which 102 are administrative employees, 178 are operational employees and 917 are in sales. A significant majority of our employees in Mexico, 83.5% as of December 2008 and 83.6% as of December 2009, are represented by unions. Almost all of our employees in Brazil,
99.7
%
as of December 31, 2008 and December 31, 2009, are unionized. We believe that our relations with our employees and the unions to which they are affiliated are good. In 2009, the number of employees decreased by 6.1% compared to 2008.
The decrease in employees resulted primarily from a restructuring within our distribution and sales divisions
.
Employee Profit Sharing
Under Mexican law, we are required to contribute 10% of our yearly taxable profits, as adjusted, to our employees. This contribution is distributed in May of each year. In addition, in the past we have customarily paid an annual Christmas bonus to our employees in an amount equal to between two (the minimum required by law) and five weeks’ salary, depending on seniority.
The Pension Fund
We recognize the labor obligations for retirement pensions and seniority premiums derived from defined benefit plans for all their employees in accordance with Mexico’s Federal Labor Law, as well as the schemes that have been established for each plan. Seniority premiums are granted for a voluntary separation of personnel who have completed at least fifteen years of service and are calculated based on the number of years worked. Retirement pensions are granted to all personnel who have completed at least ten years of service and reached sixty-five years of age. We are required to pay certain severance benefits to employees that are dismissed without proper cause. These payments for non-substitute indemnification of retirement pensions are expensed when paid.
Projected benefit obligations, unamortized items, and the net periodic cost applicable to labor obligations referred to above are determined by using the “projected unit credit method”, in conformity with Bulletin D-3, “Labor obligations” of Mexican FRS. Severance benefits which arise from restructuring causes, should continue to follow the guidelines of Bulletin C-9, “Liability, provisions, contingent assets and liabilities, and commitments” of Mexican FRS.
We have created a fund placed in irrevocable trusts at a financial institution to meet the labor obligations referred to above. Contributions to these funds are determined annually by an actuarial calculation approved by our Board of Directors. We believe that obligations under these trusts are closely monitored by their trustee.
During 2007, 2008 and 2009, contributions to the fund amounted to Ps. 15.5 million, Ps. 15.5 million and Ps. 20.6 million, respectively. As of December 31,2007, 2008 and 2009, fund assets consisted primarily of investments in equity securities as well as in fixed income securities issued by Mexican companies that are traded on the Mexican Stock Exchange.
|
Item 7.
|
Major Shareholders and Related Party Transactions
|
We are not directly or indirectly owned or controlled by another corporation or by any foreign government.
Principal Shareholders
All information presented in this section regarding beneficial ownership of our capital stock is based on the number of Ordinary Shares outstanding as of May 31, 2010, which was 265,419,360. As required by Mexican law, the number of Ordinary Shares outstanding is presented net of the number of repurchased Ordinary Shares held in our treasury as of May 31, 2010, which was 14,729,720. We repurchased these Ordinary Shares in the open market pursuant to our share repurchase program, as described under the caption “Item 9. Offer and Listing Details—Share Repurchases”. Currently, there are no arrangements known to us that could result in a change of control of the Company.
On May 6, 2008, Mr. Isaac Saba Raffoul, as settler and beneficiary “A”, executed a trust agreement with Ixe Banco, S.A., Institución de Banca Múltiple, Ixe Grupo Financiero, as trustee, Mrs. Beki Ades Tawil, as beneficiary “B”, and Mr. Manuel Saba Ades and Mr. Alberto Saba Ades both as beneficiaries “C”. In addition to other assets, the 225,606,456 Ordinary Shares directly owned by Mr. Isaac Saba Raffoul were deposited into Trust F-709. Upon the death of Isaac Saba Raffoul on July 27, 2008, Manuel Saba Ades and Alberto Saba Ades, sons of Isaac Saba Raffoul became, on an equal basis, the sole beneficiaries of the 225,606,456 Ordinary Shares held by Trust F-709. References in this annual report to “our controlling shareholder” is to Trust F-709, as direct holder of 225,606,456 Ordinary Shares for the benefit of Manuel Saba Ades and Alberto Saba Ades.
As of May 31, 2010, our controlling shareholder directly held 225,606,456 Ordinary Shares, representing 85% of our issued and outstanding capital stock. As of June 15, 2010, approximately 12.1% of our Ordinary Shares were held through ADSs by more than 30 registered holders.
The following table shows information, as of May 31, 2010, regarding the ownership of our capital stock by each person known by us to own or beneficially own more than 5% of our outstanding capital stock and by each of our directors, executive officers and key employees.
|
Name
|
|
Number of Ordinary Shares Owned
|
|
|
Percentage Stake
|
|
|
Trust F-709
(1)
|
|
|
225,606,456
|
|
|
|
85.00
|
%
|
|
Fernando Chico Pardo
(2)
|
|
|
13,689,600
|
|
|
|
5.16
|
%
|
|
Total
|
|
|
239,296,056
|
|
|
|
90.16
|
%
|
|
|
(1)
|
Manuel Saba Ades and Alberto Saba Ades, both of whom are directors of the Company, are the sole beneficial owners, on an equal basis, of the Ordinary Shares held directly by Trust F-709. The trustee of Trust F-709 is Ixe Banco, S.A. Institución de Banca Múltiple, Ixe Grupo Financiero, División Fiduciaria.
|
|
|
(2)
|
Mr. Chico Pardo is an independent director of the Company and owns 6,078,600 Ordinary Shares and 761,100 ADRs
|
Related Party Transactions
In 2009, we engaged in, and we may continue to engage in, transactions with related parties, including, without limitation, the transactions described below. Exclusively for purposes of this discussion, the term “related party” includes our affiliates, associates, directors, officers and principal shareholders, as well as affiliates of our directors, officers and principal shareholders, but does not include our consolidated subsidiaries. Conflicts of interest are inherent in transactions with related parties. See Note 8 to our audited consolidated financial statements for all of the information that we must make publicly available in Mexico regarding related party transactions.
All related party transactions we engage in are previously submitted to the Audit and Corporate Practices Committee, and are subject to thorough evaluation, which results in the determination of the terms and conditions under which the transactions shall be carried out. During this evaluation period, the Audit and Corporate Practices Committee makes relevant market research and obtains quotations from several different non-related parties that render the exact or similar services to those intended to be performed by the related party with which the transaction is intended to be conducted. Once the research is concluded, the Audit and Corporate Practices Committee prepares the guidelines that must be observed in establishing the terms of the related party transactions and submits its evaluation to the Board of Directors and to our shareholders. This procedure enables the Company to obtain objective information as to competitive market prices and conditions and, therefore, guarantees that the transactions entered with related parties are at all times entered into on an arm’s-length basis.
Principal Transactions and Arrangements with Affiliates and Related Parties of Our Directors, Officers and Principal Shareholders Effective during 2009
Leases
.
In 2001, we entered into a lease for office space with Xtra Inmuebles, S.A. de C.V., an entity owned and controlled by our controlling shareholder. During 2009, we maintained our lease for office space with Xtra Inmuebles and do not have plans to terminate this agreement. In 2009, we expensed Ps. 4.2 million as compared to Ps. 4.7 million in 2008 with respect to this lease. We believe that this lease was entered into the ordinary course of business, was made on an arm’s-length basis and is on terms no less favorable than those that could have been obtained from unaffiliated third parties.
Services
. In 2002, one of our subsidiaries, Servicios Corporativos Casa Saba, S.A. de C.V., entered into an air transport service agreement with Aero Xtra, S.A. de C.V. an entity indirectly owned and controlled by our controlling shareholder. Services pursuant to this agreement were also provided to us in 2007, 2008 and 2009. During 2009, we expensed a total amount of Ps. 17.6 million as compared to Ps. 9.9 million in 2008 related to the services rendered by Aero Xtra, S.A. de C.V. This contract was entered into in the ordinary course of business, and was made on an arm’s-length basis on terms no less favorable than those that could have been obtained from unaffiliated third parties.
As of December 31, 2008 and 2009, the receivable balances from Aero Xtra, S.A. de C.V. were Ps. 2.0 million and Ps. 4.4 million, respectively. For Xtra Inmuebles, S.A. de C.V., they were Ps. 30 thousand and Ps. 30 thousand, respectively. The receivable balance from Aero Xtra, S.A. de C.V. and Xtra Inmuebles, S.A. de C.V. represented prepaid flight services and the leasing of real estate, respectively.
See Note 8 to our consolidated financial statements for a summary table of our related party transactions.
Legal and Advisory Services
. During 2009, Mijares, Angoitia, Cortés y Fuentes, S.C., a Mexican law firm, provided us with legal and advisory services, and we expect that this will continue to be the case in the future. Francisco Fuentes Ostos, a partner from the law firm of Mijares, Angoitia, Cortés y Fuentes, S.C., is the secretary of our Board of Directors, without being a member of such Board. We believe that the fees we paid for these services were comparable to those that we would have had to pay a third-party law firm for similar services.
Tax Advisory Services
. During 2009, Chevez, Ruiz, Zamarripa y Cia, S.C., a tax advisory firm, provided us with tax advisory services, and we expect that this will continue to be the case in the future. Ivan Moguel Kuri, a partner from the tax advisory firm of Chevez, Ruiz, Zamarripa y Cia, S.C., is our independent alternate director. We believe that the fees we paid for these services were comparable to those that we would have had to pay a third party for similar services.
During 2009, we had no other related party agreements, except for the balances and transactions referred to above. We believe that all related party transactions were agreed upon on an arm’s-length basis.
|
Item 8
.
|
Financial Information
|
See “Item 18. Financial Statements” and “Item 19. Exhibits—Index to Consolidated Financial Statements,” which are incorporated herein by reference.
Material Legal Proceedings
As of December 31, 2009, except as otherwise disclosed in Note 15 of the consolidated financial statements, there were no existing material legal proceedings that could have a significant effect on the Company’s financial position or profitability.
Dividend Policy
Pursuant to Mexican law, decisions regarding the payment and amount of dividends are subject to approval of our shareholders, generally, but not necessarily, on the recommendation of the Board of Directors. Our controlling shareholder owns 85% of our outstanding Ordinary Shares and, so long as it continues to own a majority of our outstanding shares, it will have the ability to determine whether we will declare and pay dividends, in cash or otherwise. See “Item 3. Key Information—Risk Factors—Risk Factors Related to our Securities—Our Controlling Shareholder Has the Ability to Restrict the Payment and Amount of Dividends”. We do not have a specific dividend policy. Depending on the results and condition of our business, dividends for a specific year would be paid to the extent that such payment would not impair our ability to invest and grow. Therefore, any dividend payment would depend on the cash that the Company generates in a specific year as well as on the market conditions of our business.
Significant Changes
Since the date of our annual financial statements, no significant change in our financial information has occurred, other than those changes described in “Item 5. Operating and Financial Review and Prospects—Trend Information”.
|
Item 9
.
|
Offer and Listing Details
|
Trading History of Ordinary Shares and ADSs
Since December 7, 1993, our Ordinary Shares have been listed and traded on the Mexican Stock Exchange under the symbol “SAB” and our American Depositary Shares, or ADSs, have been listed and traded on the New York Stock Exchange, or NYSE, also under the symbol “SAB”. The ADSs were issued pursuant to a Deposit Agreement, dated December 1, 1993, as amended, among us, Morgan Guaranty Trust Company of New York, as depositary, and the holders from time to time of our ADSs. Each ADS represents 10 Ordinary Shares. On December 11, 2002, we entered into an Amended and Restated Deposit Agreement pursuant to which The Bank of New York was appointed as successor depositary to Morgan Guaranty Trust Company of New York.
The table below shows the high and low sales prices in U.S. Dollars for our ADSs on the NYSE for the five most recent full financial years ending December 31, 2009, each month in the six-month period ending May 31, 2010 and the first half of June 2010.
|
|
US Dollar per ADS(1)
|
|
Year
|
High
|
Low
|
|
2005
|
U.S.$ 18.50
|
U.S.$ 14.75
|
|
2006
|
U.S.$ 26.15
|
U.S.$ 16.52
|
|
2007
|
U.S.$ 42.85
|
U.S.$ 26.10
|
|
2008
|
U.S.$ 39.00
|
U.S.$ 17.61
|
|
First Quarter
|
39.00
|
32.00
|
|
Second Quarter
|
37.25
|
31.95
|
|
Third Quarter
|
35.36
|
28.00
|
|
Fourth Quarter
|
28.33
|
17.61
|
|
2009
|
U.S.$ 20.50
|
U.S.$ 11.14
|
|
First Quarter
|
20.50
|
11.23
|
|
Second Quarter
|
19.90
|
11.14
|
|
Third Quarter
|
20.00
|
12.00
|
|
Fourth Quarter
|
19.75
|
17.01
|
|
2010
|
|
|
|
First Quarter
|
20.50
|
11.23
|
|
Month
|
|
|
|
December 2009
|
19.37
|
17.25
|
|
January 2010
|
21.39
|
18.84
|
|
February 2010
|
19.40
|
13.90
|
|
March 2010
|
17.50
|
14.60
|
|
April 2010
|
17.84
|
16.00
|
|
May 2010
|
17.90
|
16.15
|
|
Through June 15, 2010
|
17.23
|
13.69
|
(1) Source: Infosel and Economatica.
Trading prices of our Ordinary Shares and our ADSs will be influenced by our results of operations, financial condition, cash requirements, future prospects and by economic, financial and other factors and market conditions. See “Item 3. Key Information—Risk Factors—Risk Factors Relating to Economic and Political Developments”. There can be no assurance that prices of our Ordinary Shares and our ADSs will, in the future, be within the ranges set forth above. As of December 31, 2009, there were 265,419,360 Ordinary Shares issued and outstanding. At the end of June 2010, approximately 12.1% of the outstanding shares were held in the form of ADSs.
Trading on the Mexican Stock Exchange
Overview
The Mexican Stock Exchange, located in Mexico City, is the only stock exchange in Mexico. Operating continuously since 1907, the Mexican Stock Exchange is organized as a corporation with variable capital, or
sociedad anónima
bursátil de capital variable
. Securities are traded on the Mexican Stock Exchange from 8:30 am to 3:00 pm Mexico City time, each business day. Since January 1999, all trading on the Mexican Stock Exchange has been conducted electronically. The Mexican Stock Exchange may impose a number of measures to promote the orderly and transparent trading price of securities, including the operation of a system of automatic suspension of trading in shares of a particular issuer when price fluctuations exceed certain limits. The Mexican Stock Exchange may also suspend trading of shares of a particular issuer as a result of the disclosure of a material event, or when the change in the volume traded or the share price is not consistent with either the historic performance or publicly available information. The Mexican Stock Exchange may also suspend trading if it is not disclosed as a material event that the financial statements of a company are subject to scope qualification. The Mexican Stock Exchange may resume trading of the shares when it deems that the material events have been adequately disclosed to public investors or when it deems that the issuer had adequately explained the reasons for the changes in the volume traded or prevailing share price. Under current regulations, this system applies to the ADSs. However, the Mexican Stock Exchange may take into account any suspension measures that may or may not have been taken by the New York Stock Exchange in respect of the ADSs, and may resolve not to impose a suspension of trading of our shares.
Settlement is effected two trading days after a share transaction on the Mexican Stock Exchange. Deferred settlement, even by mutual agreement, is not permitted without the approval of the CNBV. Most securities traded on the Mexican Stock Exchange are on deposit with
S.D. Indeval,
Institución para el Depósito de Valores, S.A. de C.V.
, or Indeval, a privately owned securities depositary that acts as a clearinghouse, depositary and custodian, as well as a settlement, transfer and registration agent for Mexican Stock Exchange transactions, eliminating the need for physical transfer of securities.
Although the Mexican Securities Market Law provides for the existence of an over-the-counter market, no such market for securities in Mexico currently exists.
The table below shows, for the five most recent full financial years ending December 31, 2009 and each month, the six month period ending May 31, 2010 and the first half of June 2010 the reported annual highest and lowest market prices in nominal Pesos for our Ordinary Shares on the Mexican Stock Exchange:
|
|
Pesos per ordinary share(1)
|
|
Year
|
High
|
Low
|
|
2005
|
Ps. 20.50
|
Ps. 16.70
|
|
2006
|
Ps. 26.15
|
Ps. 16.95
|
|
2007
|
Ps. 44.50
|
Ps. 28.80
|
|
2008
|
41.68
|
26.90
|
|
First Quarter
|
41.68
|
36.80
|
|
Second Quarter
|
36.80
|
36.00
|
|
Third Quarter
|
33.10
|
31.20
|
|
Fourth Quarter
|
31.20
|
26.90
|
|
2009
|
Ps. 26.60
|
Ps. 16.40
|
|
First Quarter
|
26.60
|
22.53
|
|
Second Quarter
|
25.80
|
16.40
|
|
Third Quarter
|
25.00
|
20.03
|
|
Fourth Quarter
|
25.55
|
25.00
|
|
2010
|
|
|
|
First Quarter
|
25.50
|
19.65
|
|
Month
|
|
|
|
December 2009
|
25.50
|
25.30
|
|
January 2010
|
25.50
|
25.50
|
|
February 2010
|
20.30
|
20.30
|
|
March 2010
|
20.50
|
19.65
|
|
April 2010
|
19.61
|
19.61
|
|
May 2010
|
21.60
|
21.45
|
|
Through June 15, 2010
|
22.00
|
21.50
|
(1) Source: Infosel and Economatica.
Trading on the New York Stock Exchange
Since December 7, 1993, our ADSs have been listed on the NYSE. Each ADS represents 10 Ordinary Shares. The ADSs are evidenced by American Depositary Receipts, or ADRs. ADRs evidencing ADSs may be issued by The Bank of New York, as depositary, pursuant to the Amended and Restated Deposit Agreement dated as of December 11, 2002 among Grupo Casa Saba, The Bank of New York and all registered holders, from time to time, of the ADRs issued thereunder. An ADR may evidence any number of ADSs.
At the end of June 2010, approximately 12.1% of the Ordinary Shares were publicly held through ADRs on the NYSE. Holders of ADRs have voting rights with respect to the underlying shares. In accordance with the ADR Amended and Restated Deposit Agreement, ADR holders must instruct the Depositary as to the manner in which the underlying shares are to be voted.
Share Repurchases
At our annual shareholders’ meeting, which was held on April 30, 2010, our shareholders did not approve the allocation of any amounts from retained earnings for share repurchases. Our share repurchase program has been authorized by the CNBV and all repurchases have been conducted in full compliance with Mexican law and the rules and regulations of the CNBV.
Pursuant to our share repurchase program, we may repurchase Ordinary Shares on the Mexican Stock Exchange at the prevailing market price. Upon the repurchase of Ordinary Shares, we must reduce the number of Ordinary Shares outstanding by the number of Ordinary Shares repurchased. Pursuant to our share repurchase program, we repurchased 13,433,000 Ordinary Shares during 1998 and 3,003,720 Ordinary Shares during 1999. Since then, we have not repurchased any additional Ordinary Shares.
When we resell repurchased Ordinary Shares on the Mexican Stock Exchange, we must increase the number of Ordinary Shares outstanding by the corresponding number of Ordinary Shares sold. We resold 1,438,000 Ordinary Shares during 1998 and 269,000 Ordinary Shares in 1999. As of December 31, 2009, 14,729,720 repurchased Ordinary Shares were held in our treasury. We are currently in the process of evaluating various alternatives regarding the resale or redemption of these Ordinary Shares.
We have amended our bylaws to reflect certain changes to the Mexican Securities Market Law affecting share repurchases. For a description of the amendments relating to share repurchases, see “Item 10. Additional Information—Share Repurchases”.
|
Item 10
.
|
Additional Information
|
Market Regulation and Registration Standards
In 1946, the
Comisión Nacional de Valores
, or the National Securities Commission, commonly known as the CNV, was established to regulate stock market activity. In 1995, the CNV and the
Comisión Nacional Bancaria
, or the National Banking Commission, were merged to form the CNBV. The Mexican Securities Market Law, which took effect in 1975, introduced important structural changes to the Mexican financial system, including the organization of brokerage firms as corporations with variable capital, or
sociedades anónimas de capital variable
. The Mexican Securities Market Law sets standards for authorizing companies to operate as brokerage firms, which authorization is granted at the discretion of the Ministry of Finance upon the recommendation of the CNBV. In addition to setting standards for brokerage firms, the Mexican Securities Market Law empowers the CNBV, among other things, to regulate the public offering and trading of securities and to impose sanctions for the illegal use of insider information. The CNBV regulates the Mexican securities market, the Mexican Stock Exchange and brokerage firms through a board of governors composed of thirteen members, five of which are appointed by the Ministry of Finance.
In June 2001, the Mexican Securities Market Law required issuers to increase the protections offered to minority stockholders and to impose corporate governance controls on Mexican listed companies in line with international standards. The Mexican Securities Market Law then in effect expressly permitted Mexican listed companies, with prior authorization from the CNBV, to include in their bylaws anti-takeover defenses such as stockholder rights plans, or poison pills.
To offer securities to the public in Mexico, an issuer must meet specific qualitative and quantitative requirements, and generally only securities for which an application for registration in the National Registry of Securities, or NRS, maintained by the CNBV has been approved by the CNBV may be listed on the Mexican Stock Exchange. This approval does not imply any kind of certification or assurance related to the merits or the quality of the securities or the solvency of the issuer.
In March 2003, the CNBV issued general rules, or General CNBV Rules, applicable to issuers and other securities market participants. The General CNBV Rules, which repealed several previously enacted rules, or circulares, of the CNBV, now provide a single set of rules governing issuers and issuer activity, among other things.
The General CNBV Rules have mandated that the Mexican Stock Exchange adopt minimum requirements for issuers to be registered with the CNBV and have their securities listed on the Mexican Stock Exchange. To be registered, issuers will be required to have, among other things:
|
|
●
|
a minimum price for the securities to be offered;
|
|
|
●
|
a minimum of 15% of the capital stock placed among public investors;
|
|
|
●
|
a minimum of 200 holders of shares or of shares represented by ADRs, who are deemed to be public investors under the General CNBV Rules, upon the completion of the offering;
|
|
|
●
|
the following distribution of the securities offered pursuant to an offering in Mexico: (i) at least 50% of the total number of securities offered must be placed among investors who acquire less than 5% of the total number of securities offered; and (ii) no investor may acquire more than 40% of the total number of securities offered; and
|
|
|
●
|
complied with certain corporate governance requirements.
|
To maintain its registration, an issuer will be required to have, among other things:
|
|
●
|
a minimum financial condition;
|
|
|
●
|
minimum operating conditions, including a minimum number of trades;
|
|
|
●
|
a minimum trading price of its securities;
|
|
|
●
|
a minimum of 12% of the capital stock held by public investors;
|
|
|
●
|
a minimum of 100 holders of shares or of shares represented by ADRs who are deemed to be public investors under the General CNBV Rules; and
|
|
|
●
|
complied with certain corporate governance requirements.
|
The CNBV has the authority to waive some of these requirements in some circumstances.
Last year, the General CNBV Rules were amended in order to include the obligation to disclose only to this authority the names and number of shares of the stockholders of a security market participant.
The Mexican Stock Exchange will review annually compliance with the foregoing and other requirements, some of which may be further reviewed on a quarterly or semi-annual basis. The Mexican Stock Exchange must inform the CNBV of the results of its review and this information must, in turn, be disclosed to investors. If an issuer fails to comply with any of the foregoing requirements, the Mexican Stock Exchange will request that the issuer propose a plan to cure the violation. If the issuer fails to propose such plan, if the plan is not satisfactory to the Mexican Stock Exchange or if the issuer does not make substantial progress with respect to the corrective measures, trading of the relevant series of shares on the Mexican Stock Exchange will be temporarily suspended until the situation is corrected. In addition, if the issuer fails to propose the plan or ceases to follow such plan once proposed, the CNBV may suspend or cancel the registration of the shares. In such event, the issuer must evidence the mechanisms to protect the rights of public investors and market in general.
Issuers of listed securities are required to file unaudited quarterly financial statements and audited annual financial statements as well as various periodic reports with the CNBV and the Mexican Stock Exchange. Pursuant to the General CNBV Rules, the internal regulations of the Mexican Stock Exchange must be amended to include, among other things, the implementation of the
Sistema
Electrónico de Envío y Difusión de Información
, or the SEDI, an automated system for the electronic transfer of the information required to be filed with the Mexican Stock Exchange, which will be similar to, but will replace, the existing
Sistema Electrónico de Comunicación con Emisores de Valores
, or EMISNET. Issuers of listed securities must prepare and disclose their financial information by a Mexican Stock Exchange-approved system known as the
Sistema de
Información Financiera Computarizada
, or Computerized Financial Information System, commonly known as the SIFIC. Immediately upon its receipt, the Mexican Stock Exchange makes that information available to the public.
The General CNBV Rules and the internal regulations of the Mexican Stock Exchange require issuers of listed securities to file through the SEDI information on the occurrence of material events affecting the relevant issuer. Material events include, but are not limited to:
|
|
●
|
the entering into or termination of joint venture agreements or agreements with key suppliers;
|
|
|
●
|
the creation of new lines of businesses or services;
|
|
|
●
|
significant deviations in expected or projected operating performance;
|
|
|
●
|
the restructuring or payment of significant indebtedness;
|
|
|
●
|
material litigation or labor conflicts;
|
|
|
●
|
changes in dividend policy;
|
|
|
●
|
the commencement of any insolvency, suspension or bankruptcy proceedings;
|
|
|
●
|
changes in the directors; and
|
|
|
●
|
any other event that may have a material adverse effect on the results, financial condition or operations of the relevant issuer.
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If there is unusual price volatility of the securities listed, the Mexican Stock Exchange must immediately request that the issuer inform the public as to the causes of such volatility or, if the issuer is unaware of such causes, make a statement to that effect. In addition, the Mexican Stock Exchange must immediately request that issuers disclose any information relating to relevant material events, when it deems the information currently disclosed to be insufficient, as well as instruct issuers to clarify such information when it deems the information to be confusing. The Mexican Stock Exchange may request issuers to confirm or deny any material events that have been disclosed to the public by third parties when it deems that the material event may affect or influence the securities being traded. The Mexican Stock Exchange must immediately inform the CNBV of any requests made to issuers. The CNBV may also make any of these requests directly to issuers. An issuer may delay the disclosure of material events under some circumstances, including where the information being offered is not related to transactions that have been completed.
The CNBV and the Mexican Stock Exchange may suspend the dealing in securities of an issuer:
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if the issuer does not adequately disclose a material event; or
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upon price or volume volatility or changes in the offer or demand in respect of the relevant securities, which are not consistent with the historic performance of the securities and could not be explained solely by the information made publicly available under the General CNBV Rules.
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The Mexican Stock Exchange may also suspend trading if the Company does not disclose, as a material event, that the financial statements of such company are subject to scope qualifications. The Mexican Stock Exchange must immediately inform the CNBV and the general public of any such suspension. An issuer may request that the CNBV or the Mexican Stock Exchange resume trading, provided it demonstrates that the causes triggering the suspension have been resolved and that it is in full compliance with the periodic reporting requirements under the applicable law. If its request has been granted, the Mexican Stock Exchange will determine the appropriate mechanism to resume trading in its securities. If trading of an issuer is suspended for more than 20 business days and the issuer is authorized to resume trading without conducting a public offering, the issuer must disclose through the SEDI, before trading resumes, a description of the causes that resulted in the suspension and reasons why it is now authorized to resume trading.
Likewise, if the securities of an issuer are traded on both the Mexican Stock Exchange and a foreign securities market, that issuer must file with the CNBV and the Mexican Stock Exchange on a simultaneous basis the information that it is required to file pursuant to the laws and regulations of the relevant other jurisdiction.
Pursuant to the Mexican Securities Market Law, stockholders of issuers listed on the Mexican Stock Exchange must disclose any transactions through or outside of the Mexican Stock Exchange that result in exceeding 10% ownership stake of an issuer’s capital stock. These stockholders must also inform the CNBV of the results of these transactions the day after their completion.
Additionally, related parties of an issuer who increase or decrease their ownership stake, in one or more transactions, by 5% or more shall disclose such transactions. The Mexican Securities Market Law also requires stockholders holding 10% or more of the capital stock of companies listed in the registry to notify the CNBV of any ownership changes in shares of the company.
Amendments to Mexican Securities Market Law
On December 30, 2005, a new Securities Market Law was enacted and published in the Official Gazette. The Mexican Securities Market Law became effective on June 28, 2006 and, in some cases, it allowed an additional period of 180 days (after December 2006) for issuers to incorporate in their bylaws the new corporate governance and other requirements derived from the new law. The new Mexican Securities Market Law changed the Mexican securities law in various material respects. In particular, the new law includes with respect to public companies:
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their identification as
sociedad anónima bursátil
(a stock corporation with stock registered in the CNBV and listed on the Mexican Stock Exchange) and a new set of corporate governance requirements;
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the redefinition of the functions and structure of the Board of Directors, including (i) the number of members of the Board of Directors, up to 21 with at least 25% of these being independent members, and (ii) the independence status of the independent members of the Board of Directors will be qualified at the shareholders’ meeting and the CNBV will have the authority to challenge such independence;
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the introduction of the general manager and senior management positions as a means for the Board of Directors to conduct the business;
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a clear definition of fiduciary duties for members of the Board of Directors and its secretary, the chief executive officer and other executive officers, including duty of care and duty of loyalty;
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the increase of liability standards for members of the Board of Directors and its secretary with respect to the operations and performance of the company, including (i) the payment of damages and losses caused as result of their lack of care or loyalty and (ii) criminal sanctions of up to ten years for damages caused to the company as a result of certain illegal acts involving willful misconducts. The liability actions may be exercised by the company or by shareholders that represent 5% or more of the capital stock of the company;
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the inclusion of sanctions applicable to senior management, shareholders that hold 10% or more of the capital stock of an issuer and external auditors;
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the replacement of the statutory auditor by the audit committee, the corporate governance committee and the external auditors, assigning to each of these specific obligations of surveillance and corporate governance;
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the attribution of independent status to all the members of the audit and corporate governance committees, except in companies with controlling shareholder(s) with 50% of the capital stock, such as the company;
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the increase of functions and responsibilities of the audit committee, including (i) the evaluation of the performance of the external auditors, (ii) the review and discussion of the financial statements of the company and advising the Board of Directors on the approval of such financial statements, (iii) the surveillance of internal controls and internal audit procedures of the company, (iv) the reception and analysis of recommendations and observations made by the shareholders, members of the Board of Directors and senior management, and the authority to take the necessary actions, (v) the authority to call a shareholders meeting and include the items to be discussed in the meeting’s agenda and (vi) the surveillance of the performance of the general manager; and
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the requirement that the shareholders’ meeting approve transactions that represent 20% or more of the consolidated assets of the company within one fiscal year; and the inclusion of a new set of rules to obtain authorization from the CNBV to execute public offerings.
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The Mexican Securities Market Law does not substantially modify the reporting obligations of issuers of equity securities listed on the Mexican Stock Exchange. The Mexican Securities Market Law reinforces insider trading restrictions and specifically includes, with such restrictions, trading in options and derivatives the underlying security of which is issued by such entity. Among other changes, the Mexican Securities Market Law provides for a course of action available to anyone who trades (as a counterparty) with someone in possession of privileged information to seek the appropriate indemnification. In addition, under this law insiders must abstain from purchasing or selling securities of the issuer within 90 days from the last sale or purchase, respectively.
The Mexican Securities Market Law has, in some respects, modified the rules governing tender offers conducted in Mexico. Under the current law, tender offers may be voluntary or mandatory. All tenders offers must be open for at least 20 business days and purchases thereunder are required to be made pro-rata to all tendering shareholders. Any intended purchase resulting in a 30% or greater holding requires the tender to be made for the greater of 10% of the company’s capital stock or the share capital intended to be acquired; if the purchase is aimed at obtaining control, the tender must be made for 100% of the outstanding shares. In calculating the intended purchase amount, convertible securities, warrants and derivatives, the underlying security of which are such shares, must be considered. The Mexican Securities Market Law also permits the payment of certain amounts to controlling shareholders over and above the offering price if these amounts are fully disclosed, approved by the Board of Directors and paid in connection with non-compete or similar obligations. The law also introduces exceptions to the mandatory tender offer requirements and specifically provides for the consequences, to a purchaser, of not complying with these tender offer rules (lack of voting rights, possible annulment of purchases, etc.) and other rights available to prior shareholders of the issuer.
The Mexican Securities Market Law ratifies that public companies may insert provisions in their bylaws pursuant to which the acquisition of control of the company, by the company’s shareholders or third parties, may be prevented, if such provisions (i) are approved by shareholders without the negative vote of shareholders representing 5% or more of the outstanding shares; (ii) do not exclude any shareholders or group of shareholders; and (iii) do not restrict, in an absolute manner, the change of control.
Bylaws
In 2006, a new Mexican Securities Market Law became effective, therefore all listed companies were required to incorporate certain provisions into their corporate bylaws. As a consequence, in December 2006, our shareholders approved the amendment of the bylaws of Grupo Casa Saba in order to comply with the new provisions. Most of the changes were related to corporate governance provisions and focused on the need to have independent directors.
Our current bylaws include most of the provisions above-mentioned. This description does not purport to be complete, and is qualified by reference in its entirety to our bylaws, which have been filed as an exhibit to this annual report and to Mexican law. For a description of the provisions of our bylaws relating to our Board of Directors, Executive Committee and statutory auditors, see “Item 6. Directors, Senior Management and Employees”.
Organization and Register
Grupo Casa Saba, S.A.B. de C.V., is a
sociedad anónima
bursátil
de capital variable
, or limited liability stock corporation with variable capital, which was organized under the laws of the United Mexican States in accordance with the Mexican Corporations Law on November 11, 1982. Our deed of incorporation was registered with the Public Registry of Commerce of Mexico City, D.F., under Commercial Page (
folio mercantil
) Number 55,635. We have a general corporate purpose, the specifics of which can be found in Article Four of our bylaws, which includes, among others, the following: (i) to promote, incorporate, organize, exploit and participate in the capital stock and assets of all types of commercial or civil companies, associations or industrial, commercial, service or other concerns, both domestic and foreign, and participate in the management or liquidation thereof; (ii) to manufacture, produce, purchase, sell, process, distribute, export and import all types of products permitted by law and, generally, all types of domestic or foreign goods or merchandise, whether in the form of raw materials, semi-finished or finished products and whether pre-assembled or unassembled, and to trade them in any manner whatsoever either for our account or the account of others; (iii) to acquire, transfer and, generally, negotiate with all types of shares of stock, partnership interests and securities; (iv) provide, contract and receive all types of technical, consulting and advisory services, and enter into contracts or agreements in connection therewith; (v) to enter into all types of agreements with the federal government or any local governments or public or private entities, individuals or corporations, whether domestic or foreign; (vi) to issue, subscribe, accept, endorse and guarantee credit instruments, securities and other instruments permitted by law; (vii) to acquire, transfer, lease, sublease and permit the use, enjoyment, disposition of generally, and exploitation of all types of personal and real property, including their parts or appurtenances; (viii) to provide or receive all types of technical and professional assistance and services; (ix) to obtain and grant all types of loans, providing and receiving specific guarantees thereof; issue debentures and notes; accept, draw, endorse or guarantee all types of credit instruments and other documents evidencing credit rights; and grant all types of bonds or guarantees with regard to the obligations assumed or the instruments issued or accepted by third parties; and (x) generally, to carry out all types of commercial transactions and enter into all types of contracts, agreements and transactions of any nature whatsoever, in accordance with the law.
Directors
Under the Mexican Securities Market Law, any shareholder or director that votes on a transaction in which his interest’s conflict may abstain to vote. In addition, any member of our Board of Directors that votes on a transaction in which his interest conflict with our interests may be liable for damages. The Mexican Securities Market Law provides the increase of liability standards for members of the Board of Directors and its secretary with respect to the operations and performance of the Company, including (i) the payment of damages and losses caused as result of their lack of care or loyalty and (ii) criminal sanctions of up to ten years for damages caused to the Company as a result of certain illegal acts involving willful misconducts. The liability actions may be exercised by the Company or by shareholders that represent 5% or more of the capital stock of the Company.
We have amended our bylaws in order to submit, among others, the following matters to the Board of Directors: (i) our general strategy; (ii) with input from the Audit and Corporate Practices Committee, on an individual basis (a) any transaction with related parties, subject to certain limited exceptions, and (b) the appointment of our Chief Executive Officer, his compensation and removal form justified causes; (iii) our financial statements and those of our subsidiaries; (iv) unusual or non-recurrent transactions and any transactions or series of related transactions during any calendar year that involve (a) the acquisition or sale of assets with a value equal to or exceeding 5% of our consolidated assets or (b) the giving of collateral or guarantees or the assumption of liabilities, equal to or exceeding 5% of our consolidated assets; (v) agreements with our external auditors; (vi) accounting policies, within GAAP; (vii) creation of special committees and granting them the power and authority; (viii) matters related to anti-takeover provisions provided for in our bylaws; and (ix) the exercise of our general powers in order to comply with our corporate purpose.
Voting Rights and Shareholders’ Meetings
Holders of Ordinary Shares have the right to vote on all matters subject to shareholder approval at any general shareholders’ meeting and have the right to appoint our Board of Directors.
General shareholders meetings may be ordinary general meetings or extraordinary general meetings. Extraordinary general meetings are those called to consider specific matters listed in Article 182 of the Mexican General Corporations Law and our bylaws, including the extension of the Company’s duration, changes to the corporate purpose, change of the Company’s jurisdiction of incorporation, amendments to the corporate bylaws, dissolution, liquidation or spin-offs, issuance of securities, mergers and transformations of our mercantile regime and increases and reductions in the fixed portion of our capital stock. In addition, our bylaws require an extraordinary general meeting to approve the cancellation of the Ordinary Shares’ listing with the securities section of the NRS, as the case may be, and with any other Mexican or foreign stock exchange in which our Ordinary Shares or securities represented our Ordinary Shares, such as our ADSs, are registered. General meetings called to consider all other matters are ordinary meetings that are held at least once each year within four months following the end of each year.
The procedure that must be followed in order to call a shareholders’ meeting is provided for in the General Corporations Law, the Securities Market Law and the Company’s bylaws, which the provisions set forth in the mentioned laws.
In terms of the above-mentioned regulations and our bylaws, the shareholders’ meetings shall be called by our Board of Directors, the secretary of the Board or the Audit and Corporate Practices Committee. Any shareholder or group of shareholders representing at least 10% of the capital stock may request that a shareholders’ meeting be called. If after 15 days following the request such call has not been made, the shareholder or shareholders may appear before a judge within the Company’s jurisdiction, who shall call upon such meeting as requested by the shareholder(s).
Calls for the general ordinary shareholders’ meetings must be published in the Official Federal Gazette or in one major newspaper sold within our corporate domicile at least 15 days prior to the date in which the meeting is to be held. Extraordinary shareholders’ meetings may be called as described above, although calls for such meetings may be published with at least eight days prior to the meeting.
In order for any shareholder to attend a shareholders’ meeting, a shareholder must demonstrate his title to the shares, and only such persons registered as shareholders in the Company’s stock registry book shall be deemed shareholders. Once the shareholder of record demonstrates his title to the shares, he shall obtain an admission pass for the meeting, which shall be required in order to be admitted to the corresponding meeting. The admission pass shall be delivered to such shareholders that request the pass in writing to the Secretary of the Board of Directors at least 24 hours prior to the meeting. The shareholder must then deliver their share certificates or the corresponding certificate from the depositary of the shares, as may be the case, to the Secretary.
Holders of ADRs have the same rights as holders of Ordinary Shares. They are entitled to direct the vote of the shares underlying their ADRs by means of instructing the ADRs Depositary, who must ensure that the requirements relating to attendance at shareholder’s meetings, which are set forth in the paragraph above, are met. ADR holders also have all of the economic rights inherent to the Ordinary Shares that underlie their respective ADRs, such as the right to receive dividends.
Dividend Rights
At our annual ordinary general shareholders’ meeting, our Board of Directors submits our financial statements from the previous year to the holders of our Ordinary Shares for their approval. Once our shareholders approve these financial statements, they must then allocate our net profits for the previous year. Under Mexican law, at least 5% of our net profits must be allocated to a legal reserve, until the amount of this reserve equals 20% of our paid-in capital stock. Thereafter, our shareholders may allocate our net profits to any special reserve. After this allocation, the remainder of our net profits will be available for distribution as dividends. Additionally and prior to the distribution of dividends, Mexican companies are required to contribute 10% of their yearly taxable profits to our employees. However, please note that the Company has no direct employees as of this date, only its subsidiaries. See “Item 3. Key Information—Dividends”.
Decisions regarding the payment and amount of dividends are subject to approval by the holders of our Ordinary Shares, generally, but not necessarily, on the recommendation of our Board of Directors. Our controlling shareholder owns 85% of the authorized, issued and outstanding Ordinary Shares, and as long as he continues to do so, he will have, as a result of such ownership, the ability to determine whether dividends are to be paid and the amount of such dividends. See “Item 3. Key Information—Dividends” and “Item 3. Key Information—Risk Factors—Risk Factors Relating to Our Securities—Our Controlling Shareholder Has the Ability to Restrict the Payment and Amount of Dividends”.
In accordance with the General Corporations Law, our shareholders have five years to collect their dividends, beginning on the date the dividends are declared payable. If the dividends are not collected during such period, a shareholder’s right to the dividend is void.
Limitation on Capital Increases
Our bylaws require that any capital increase is represented by new shares of each series of our capital stock in proportion to the number of each series’ outstanding shares. All increases in the capital stock of the Company must be approved at the general shareholders’ meeting. When the increase is to the fixed portion of the capital stock, then the general extraordinary shareholders’ meeting must approve it. If the increase is to the variable portion of the capital stock, then the general ordinary shareholders’ meeting must approve it.
Preemptive Rights
In the event of a capital increase, a holder of Ordinary Shares has a preferential right to subscribe to a sufficient number of Ordinary Shares in order to maintain his existing proportionate holdings of Ordinary Shares. Shareholders must exercise their preemptive rights within the time period established by our shareholders at the meeting approving the issuance of additional Ordinary Shares. This period must continue for at least 15 days following the publication of notice of the issuance in the
Diario Oficial de la Federación
, Mexico’s official newspaper, and in a newspaper of general circulation in Mexico City. Under Mexican law, shareholders cannot waive their preemptive rights in advance or be represented by an instrument that is negotiable separately from the corresponding Ordinary Share. U.S. holders of ADSs may exercise preemptive rights only if we register any newly issued Ordinary Shares under the Securities Act of 1933 or qualify for an exemption from registration. We intend to evaluate, at the time of any offering of preemptive rights, the costs and potential liabilities associated with registering additional Ordinary Shares. See “Item 3. Key Information—Risk Factors—Risk Factors Relating to Our Securities—Preemptive Rights May Be Unavailable to Holders of Our ADSs”.
Forfeiture of Shares
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As required by Mexican law, our bylaws for Ordinary Shares provide that, our non-Mexican shareholders formally agree with the Foreign Affairs Ministry:
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to be consider as Mexicans with respect to Ordinary Shares that they acquire or hold as well as to the property, rights, concessions, participations or interests owned by us or to the rights and obligations derived from any agreements we have with the Mexican government; and
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not to invoke the protection of their own governments. Failure to comply is subject to a penalty of forfeiture of such a shareholder’s capital interest in favor of Mexico.
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In the opinion of Mijares, Angoitia, Cortés y Fuentes, S.C., our Mexican counsel, under this provision a non-Mexican shareholder is deemed to have agreed not to invoke the protection of his own government by asking such government to interpose a diplomatic claim against the Mexican government with respect to the shareholder’s rights as a shareholder, but is not deemed to have waived any other rights he or she may have, including any rights under the United States securities laws, with respect to his or her investment in our Company. If the shareholder should invoke governmental protection, in violation of this agreement, his shares could be forfeited to the Mexican government.
Exclusive Jurisdiction
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Our bylaws provide that legal action relating to the execution, interpretation or performance of the bylaws shall be brought only in courts located in Mexico City.
Duration
. Our corporate existence under our bylaws shall be indefinite.
Dissolution or Liquidation
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Upon any dissolution, liquidation or split-up of our Company, our shareholders will appoint one or more liquidators at an extraordinary general shareholders’ meeting to wind up our affairs. In the event of a surplus upon dissolution, liquidation or split-up, a pro-rata payment per Ordinary Share will be made to each of our shareholders.
Redemption
.
Our bylaws provide that we may redeem our Ordinary Shares with distributable profits without reducing our capital stock by shareholder resolution at an extraordinary shareholders’ meeting. In accordance with Mexican law:
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any redemption shall be made on a pro-rata basis among all of our shareholders;
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to the extent that a redemption is effected through a public tender offer on the Mexican Stock Exchange, the shareholders’ resolution approving the redemption may empower the Board of Directors to specify the number of shares to be redeemed and appoint the related intermediary or purchase agent; and
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any redeemed shares must be cancelled.
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Share Repurchases
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As required by Mexican law, our bylaws provide that we may repurchase our shares on the Mexican Stock Exchange at the prevailing market prices. We are not required to create a special reserve for the repurchase of shares, nor do we need the approval of our Board to effect share repurchases. However, we must appoint a person or individuals responsible for effecting share repurchases. The amount of capital stock allocated to share repurchases is determined by our shareholders at a general ordinary shareholders’ meeting. Share repurchases must be charged to our net worth if the repurchased shares remain in our possession and to our capital stock if the repurchased shares are converted into treasury shares. The aggregate amount of resources allocated to share repurchases in any given year cannot exceed the total amount of our net profits in any given year. Our capital stock is reduced automatically in an amount equal to the theoretical value of any repurchased shares. If the purchase price of the shares is less than the theoretical value of the repurchased shares, our capital stock account will be affected by an amount equal to the theoretical value of the repurchased shares.
Delisting
.
In the event that the we decide to cancel the registration of our shares with the Mexican Securities Registry, or if the CNBV orders this deregistration, our shareholders who are deemed to have control will be required to make a tender offer to purchase the shares held by minority shareholders prior to such cancellation. Shareholders deemed to have control are those that own a majority of our common shares, have the ability to control our shareholders’ meetings, or have the ability to appoint a majority of the members of our Board of Directors. The price of the offer to purchase will generally be the higher of (x) the average trading price on the Mexican Stock Exchange during the last 30 days on which the shares were quoted prior to the date on which the tender offer is made and (y) the book value of the shares as reflected in our latest quarterly financial information filed with the CNBV and the Mexican Stock Exchange.
In accordance with the applicable regulations, in the event that our controlling shareholders are unable to purchase all of our outstanding shares pursuant to a tender offer, they must form a trust and contribute to it the amount required to secure payment of the purchase price offered pursuant to the tender offer to all of our shareholders that did not sell their shares pursuant to the tender offer. The trust may not exist for a period longer than six months.
Modification of Shareholders’ Rights.
The rights appurtenant to our Ordinary Shares may only be modified through a resolution adopted by at least 50% of our outstanding Ordinary Shareholders acting at a general extraordinary shareholders’ meeting.
Appraisal Rights and Other Minority Protections
.
Whenever our shareholders approve an amendment to our corporate purpose, jurisdiction of organization or the transformation of our corporate form, any dissenting shareholder is entitled, in terms of the General Corporations Law, to request a separation from the Company and receive the amount of his share participation in the Company through the reimbursement of his shares. The dissenting shareholder must exercise his appraisal rights 15 days following the conclusion of the shareholder’s meeting in which the matter was approved.
The protections afforded to minority shareholders under Mexican law are generally different from those in the United States and many other jurisdictions. Substantive Mexican law concerning fiduciary duties of directors has not been subject to extensive judicial interpretation in Mexico, unlike many states in the United States where duties of care and loyalty elaborated by judicial decisions helped to shape the rights of minority shareholders. Mexican civil procedure does not contemplate class actions or shareholder derivative actions, which permit shareholders in U.S. courts to file actions on behalf of other shareholders or to enforce rights of the corporation itself. Shareholders cannot challenge corporate actions taken at shareholders’ meetings unless they meet stringent procedural requirements.
As a result of these factors, it is generally more difficult for our minority shareholders to enforce rights against us, our directors or principal shareholders than it is for shareholders of a U.S. issuer.
In addition, under U.S. securities laws, as a foreign private issuer we are exempt from certain rules that apply to domestic U.S. issuers with equity securities registered under the U.S. Securities Exchange Act of 1934, including the proxy solicitation rules. We are also exempt from some of the corporate governance requirements of the New York Stock Exchange.
Under our current bylaws, if we decide to cancel, or the CNBV requires us to cancel, the registration of our Ordinary Shares in the NRS, our controlling shareholder will be required to initiate a tender offer for all Ordinary Shares held by minority stockholders at a price equal to the higher of the average trading price of the Ordinary Shares on the Mexican Stock Exchange during the 30-day period prior to the commencement of the tender offer or the book value of the Ordinary Shares. If any Ordinary Shares held by minority shareholders are not tendered pursuant to the tender offer, a trust will be established, into which our controlling shareholder would be required to contribute cash in an amount equal to the consideration for these remaining Ordinary Shares. Those minority shareholders who did not tender their Ordinary Shares in the tender offer have the right to tender their Ordinary Shares to the trust at the tender offer price for up to two years following the completion of the tender offer.
We are organized under the laws of Mexico. Substantially all of our directors and executive officers reside outside of the United States, all or a significant portion of the assets of our directors and executive officers reside outside of the United States and substantially all of our assets are located outside of the United States. As a result, it may be difficult for investors to effect service of process within the United States upon these individuals. It may also be difficult for investors to enforce against these individuals, either inside or outside the United States, judgments obtained against them in U.S. courts, or to enforce in U.S. courts judgments obtained against them in courts in jurisdictions outside the United States, in any action based on civil liabilities under the U.S. federal securities laws.
There is doubt as to the enforceability against these individuals in Mexico, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities predicated solely on U.S. federal securities laws. We have been advised by our Mexican counsel, Mijares, Angoitia, Cortés y Fuentes, S.C., that there is doubt as to the enforceability, in original actions in Mexican courts, of liabilities predicated solely on U.S. federal securities laws and as to the enforceability in Mexican courts of judgments of U.S. courts obtained in actions predicated upon the civil liability provisions of the U.S. federal securities laws.
Material Contracts
Acquisition of FASA
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On May 17, 2010 we entered into a Promise to Purchase Agreement with a group of entities controlled by Mr. Jose Codner Chijner to acquire up to 100% of the capital stock of Farmacias Ahumada, S.A., or FASA, for a total price of approximately $637 million. The entities controlled by Mr. Jose Codner Chijner hold approximately 37% of FASA’s outstanding shares. Pursuant to the agreement, through a subsidiary to be incorporated under Chilean law, we will launch a tender offer for all of the outstanding shares of FASA on the Santiago Stock Exchange at a price equal or greater than 1,642 Chilean Pesos, and the entities controlled by Mr. Codner will be required to tender their shares. The validity of the offer is conditioned upon the sale of at least fifty percent plus one of the outstanding shares of FASA. The transaction is also subject to the approval of our general shareholders
’
meeting and of the Mexican Antitrust Commission, among other conditions. A copy of an English translation of the agreement has been filed as an exhibit to this annual report.
The FASA Agreement provides that, if the Acquisition is not completed within the first three weeks of September, 2010, under certain circumstances, we could be subject to contractual penalties of approximately $50 million.
As a result of the FASA Acquisition, we could face an exchange rate risk against the Chilean Peso, since the financings to be obtained to fund the purchase price will be denominated in Pesos and Dollars and the payment of the purchase price will be in Chilean Pesos. In order to hedge the risk of changes in the exchange rate of the Mexican Peso versus the Chilean Peso, on May 20, 2010 we entered into a currency forward transaction with HSBC Mexico, S.A., Institucion de Banca Multiple, Grupo Financiero HSBC.
Exchange Controls and Restrictions on Foreign Investment
In the past, the Mexican economy has experienced balance of payments deficits, shortages in foreign currency reserves and other problems that have affected the availability of foreign currencies in Mexico. The Mexican government does not currently restrict or regulate the ability of persons or entities to convert Pesos into U.S. Dollars or other currencies. However, it has done so in the past and could do so again in the future. We cannot assure you that the Mexican government will not institute a restrictive foreign currency exchange control policy in the future. For a description of exchange rate information, see “Item 3. Key Information—Exchange Rate Information”.
Ownership by non-Mexicans of securities issued by Mexican Corporations is regulated by the
Ley de Inversión Extranjera
, or the Foreign Investment Law, and the
Reglamento de la Ley de Inversión Extranjera y del Registro Nacional de Inversiones Extranjeras
, or the Foreign Investment Regulations. The
Comisión Nacional de Inversiones Extranjeras
, or the Foreign Investment Commission, is responsible for the administration of the Foreign Investment Law and the Foreign Investment Regulations. The Foreign Investment Law, as amended, provides that the Company may have up to 100% of foreign participation without requiring any government authorizations. The Foreign Investment Law also requires us to register any foreign owner of our Ordinary Shares, including the depositary for our ADSs, with the National Registry of Foreign Investment, or the NRFI. We have registered The Bank of New York, the depositary for our ADSs, for this purpose.
In addition, as required by Mexican law, our bylaws provide that non-Mexican holders of our Ordinary Shares, including those held in the form of ADSs, formally agree with the Foreign Affairs Ministry:
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to be considered as Mexicans with respect to the Ordinary Shares that they acquire or hold, as well as to the property, rights, concessions, participation or interests owned by us or to the rights and obligations derived from any agreements we have with the Mexican government; and
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not to invoke the protection of their own governments. If a holder of our Ordinary Shares invokes the protection of its own government, the holder’s Ordinary Shares will be forfeited to the Mexican government.
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Mexican Tax Considerations
General
.
The following is a summary of the anticipated material Mexican tax consequences of the purchase, ownership and disposition of ADSs or Ordinary Shares by a person that is not a resident of Mexico, as defined below. The term “U.S. Holder” shall have the meaning ascribed below under the section “—U.S. Federal Income Tax Considerations”.
U.S. Holders should consult with their own tax advisors as to their entitlement to benefits afforded by the tax treaty between the United States and Mexico. Mexico has also entered into and is negotiating with various countries regarding other tax treaties that may have an effect on the tax treatment of ADSs or Ordinary Shares. Holders should consult with their tax advisors as to their entitlement to the benefits afforded by these treaties.
This discussion does not constitute, and shall not be considered as, legal or tax advice to holders. This discussion is for general information purposes only and is based upon the tax laws of Mexico as in effect on the date of this annual report, which are subject to change, including:
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the Federal Tax Code; and
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the Convention for the Avoidance of Double Taxation entered into and between Mexico and the U.S., which we refer to as the Tax Treaty.
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Holders should consult their own tax advisors as to U.S., Mexican or other tax consequences of the purchase, ownership and disposition of ADSs or Ordinary Shares.
For Mexican income tax purposes, the following principles apply regarding residency:
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Individuals are residents of Mexico if they have established their home or habitual abode in Mexico or, if they have established their principal place of residence outside Mexico, if their core of vital interests (
centro de intereses vitales
) is located in Mexico. Individuals’ core of vital interests will be deemed to be located in Mexico if, among other things,
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at least 50% of the individual’s aggregate annual income derives from Mexican sources; or
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the individual’s principal center of professional activities is located in Mexico.
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Individuals are residents of Mexico if they are state employees, regardless of the location of the individuals’ core of vital interests.
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Mexican nationals who filed a change of tax residence to a country or jurisdiction that does not have a comprehensive exchange of information agreement with Mexico in which his/her income is subject to a preferred tax regime pursuant to the provisions of the Mexican Income Tax Law, will be considered Mexican residents for tax purposes during the year of filing of the notice of such residence change and during the following three years.
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Unless otherwise proven, a Mexican national is deemed a resident of Mexico for tax purposes.
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Legal entities are residents of Mexico if they maintain their principal place of business or their place of effective management in Mexico.
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If non-residents of Mexico are deemed to have a permanent establishment in Mexico for tax purposes, all income attributable to the permanent establishment will be subject to Mexican taxes, in accordance with applicable Mexican tax law.
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The applicable corporate income tax rate was 28% in 2009. The income tax rate applicable from 2010 to 2012 is 30%, 29% for 2013 and 28% for 2014 and following years.
Dividends
. Under the provisions of the Mexican Income Tax Law (
Ley del Impuesto Sobre la Renta
), dividends paid to non-resident holders with respect to the ADSs or Ordinary Shares will not be subject to Mexican withholding tax.
Dividends paid from distributable earnings that have not been subject to taxation at the corporate level were subject to a dividend tax at an effective rate of 38.89% in 2009 (42.86% from 2010 to 2012, 40.85% for 2013 and 38.89% for 2014 and following years) at the corporate-level. The corporate-level dividend tax on the distribution of earnings is not final and may be credited against income tax payable during the fiscal year in which the dividend tax was paid and in the following two years. Dividends paid from distributable earnings, after corporate income tax has been paid with respect to these earnings, are not subject to this corporate-level dividend tax.
Sales or Other Dispositions
.
Gain on the sale or other disposition of ADSs or Ordinary Shares by a non-resident holder will generally not be subject to Mexican tax. Deposits and withdrawals of Ordinary Shares in exchange for ADSs will not give rise to Mexican tax or transfer duties.
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Gain on the sale of ADSs or Ordinary Shares by a non-resident holder will not be subject to any Mexican tax if the transaction is carried out through the Mexican Stock Exchange or other stock exchange or securities markets approved by the Mexican Ministry of Finance and Public Credit. Such exemption shall not apply to a person or group of persons that directly or indirectly holds 10% or more of the shares if, in a period of 24 months, such person sells 10% or more of the shares, through one transaction or through more than one simultaneous or successive transactions. In addition, such exemption will not apply to a person or group of persons who control the issuing company and sell their control through one or more transactions within a 24-month period.
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Gain on sales or other dispositions of the Ordinary Shares made in other circumstances generally would be subject to Mexican tax at a rate of 25% based on the total amount of the transaction or, subject to certain requirements applicable to the seller, at a rate of 28% (30% from 2010 to 2012, 29% in 2013 and 28% in 2014 and the following years), of gains realized from the disposition, regardless of the nationality or residence of the transferor, provided that the transferor is not a resident of a country with a preferred or territorial tax regime.
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For tender offers conducted on the Mexican Stock Exchange or other approved stock exchanges or securities markets, non-resident holders who held the Ordinary Shares as of the date they were initially registered with the CNBV may qualify for the above exemption to the extent that:
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five uninterrupted years have elapsed since the initial public offering of the Common Shares;
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our Ordinary Shares have a public float of at least 35% on the authorized stock exchanges or markets on which they were initially listed;
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the offer is for all shares representing our share capital and at the same price for all shareholders; and
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all shareholders are permitted to accept more competitive offers than those received prior to or during the tender offer period, without penalty.
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Under the Tax Treaty, a holder that is eligible to claim the benefits of the Tax Treaty and proves such eligibility will be exempt from Mexican tax on gains realized on a sale or other disposition of the Ordinary Shares, in a transaction that is not carried out through the Mexican Stock Exchange or such other approved securities markets, so long as the holder did not own, directly or indirectly, 25% or more of our share capital (including ADSs) during the twelve-month period preceding the sale or other disposition, as long as certain formal requirements are met.
Other Mexican Taxes
.
There are no estate, gift, or succession taxes applicable to the ownership, transfer or disposition of ADSs or Ordinary Shares. However, a gratuitous transfer of ADSs or Ordinary Shares may, in some circumstances, result in the imposition of a Mexican federal tax upon the recipient.
There are no Mexican stamp, issue, registration, or similar taxes or duties payable by non-resident holders of the ADSs.
U.S. Federal Income Tax Considerations
General
.
The following summary of U.S. Federal income taxes is based on U.S. Federal income tax laws in force on the date of this Form 20-F, which laws are subject to change, possibly with retroactive effect. It describes the principal U.S. Federal income tax consequences of the purchase, ownership and sale of ADSs or Ordinary Shares, as the case may be, by U.S. Holders. A “U.S. Holder” is a beneficial owner of ADSs or Ordinary Shares that, for U.S. Federal income tax purposes, is an individual who is:
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a citizen or resident of the United States;
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a corporation or other entity taxable as a corporation organized or created under the laws of the United States or any political subdivision thereof, as the case may be;
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an estate, the income of which is subject to U.S. Federal income tax, regardless of its source; or
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a trust, if a court within the United States is able to exercise primary supervision over its administration and one or more United States persons have the authority to control all substantial decisions of such trust.
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This section applies only to U.S. holders who hold ADSs or Ordinary Shares as capital assets (generally, property held for investment) under the Internal Revenue Code of 1986, as amended (the “Code”). This section does not provide a complete analysis, listing or other description of all of the possible tax consequences of the purchase, ownership, sale or other disposition of ADSs or Ordinary Shares, as the case may be, and does not address tax consequences to persons with a special tax status such as dealers or traders in securities or currencies, U.S. Holders whose functional currency is not the U.S. Dollar, persons holding ADSs or Ordinary Shares as part of a hedge, straddle, conversion of other integrated transaction, certain U.S. expatriates, banks, insurance companies, real estate investment trust (REITs), regulated investment companies (RICs), tax-exempt entities, or persons owning at least 10% of the total combined voting power of our stock.
If a partnership holds ADSs or Ordinary Shares, the tax treatment of a partner in such partnership will generally depend upon the status of the partner and the activities of the partnership. A partner of a partnership holding ADSs or Ordinary Shares should consult his, her or its own tax advisor.
Investors should consult their tax advisors with respect to the tax consequences of the purchase, ownership, sale or other disposition of ADSs or Ordinary Shares, including consequences under foreign, state and local tax laws.
For U.S. Federal income tax purposes, a U.S. Holder of an ADS generally will be treated as the beneficial owner of 10 Ordinary Shares.
Taxation of Cash Distributions and Distributions of Stock
.
The gross amount of any distribution (other than in liquidation), including the fair market value of all distributions of ADSs or Ordinary Shares whenever a U.S. holder may elect to receive cash distributions in lieu of distributions of ADSs or Ordinary Shares, that a U.S. holder receives with respect to our ADSs or Ordinary Shares (before reduction for any Mexican tax, if any, withheld from such distributions) generally will be included in such holder
’
s gross income on the day on which the Depositary receives such distribution on behalf of the holder of the applicable ADSs or Ordinary Shares. Depending on the amount of the dividend and the amount of the U.S. Holder’s tax basis in the applicable ADSs or Ordinary Shares, distributions will be taxed in the following manner: to the extent that distributions paid by us with respect to the underlying Ordinary Shares do not exceed our current and accumulated earnings and profits (“E&P”), as calculated for U.S. Federal income tax purposes, such distributions will be taxed as dividends.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the “Act”), enacted on May 28, 2003, reduced the maximum rate of tax imposed on certain dividends paid prior to January 1, 2011 to U.S. Holders that are individuals to 15 percent (the “Reduced Rate”), so long as certain holding period requirements are met. In order for dividends paid by a foreign corporation to be eligible for the Reduced Rate, the foreign corporation must be a Qualified Foreign Corporation (a “QFC”) within the meaning of the Act and must not be a Passive Foreign Investment Company (a “PFIC”) in either the taxable year of the distribution or the preceding taxable year. We believe that we are, and will continue to be, a QFC and that we are not, and will not become, a PFIC. As a result, dividends paid prior to January 1, 2011 to individual U.S. Holders will generally constitute qualified dividend income (“QDI”) for U.S. Federal income tax purposes and are taxable at the Reduced Rate, provided that certain holding period and other requirements are satisfied. There can be no assurance, however, that we will continue to be considered a QFC or that we will not be classified as a PFIC in the future. Thus, there can be no assurance that our dividends will continue to be eligible for the Reduced Rate. Moreover, it is unclear whether the Reduced Rate will be repealed or extended prior to January 1, 2011 or, in the absence of legislative action, whether it will expire on such date. Special rules apply for purposes of determining the recipient’s investment income (which limits deductions for investment interest) and foreign income (which may affect the amount of foreign tax credit) and to certain extraordinary dividends. Each U.S. Holder that is an individual is urged to consult his, her or its tax advisor regarding the possible applicability of the Reduced Rate under the Act and the related restrictions and special rules.
Because we are not a U.S. corporation, dividends paid by us will not be eligible for the dividends received deduction generally allowable to corporations under the Code.
To the extent that distributions by us exceed our current and accumulated E&P, such distributions will be treated as a tax-free return of capital, by both individual and corporate U.S. Holders, to the extent of each such U.S. Holder’s basis in his, her or its ADSs or Ordinary Shares, and will reduce such U.S. Holder’s basis in the ADSs or Ordinary Shares (thereby increasing any gain or decreasing any loss on a disposition of the ADSs or Ordinary Shares).
To the extent that distributions exceed the U.S. Holders’ basis in the ADSs or Ordinary Shares, each such individual or corporate U.S. Holder will be taxed as having recognized gain on the sale or disposition of the ADSs or Ordinary Shares (see “Taxation of Sale or Other Disposition”, below).
We anticipate that any cash distributions on the ADSs and Ordinary Shares will be made in Pesos, and any dividends so paid generally will be included in a U.S. Holder’s gross income in a U.S. Dollar amount calculated by reference to the exchange rate in effect on the day the Depositary receives the dividend. It is expected that the ADS Depositary will, in the ordinary course, convert Pesos received by it as distributions in the Depository into U.S. Dollars. To the extent that the Depositary does not convert the Pesos into U.S. Dollars at the time that such U.S. Holder is required to take the distribution into gross income for U.S. Federal income tax purpose, such U.S. Holder may recognize foreign exchange gain or loss, taxable as ordinary income or loss, on the later conversion of the Pesos into U.S. Dollars. The gain or loss recognized will generally be based upon the difference between the exchange rate in effect when the Pesos are actually converted and the “spot” exchange rate in effect at the time the distribution is taken into account. Any gain will generally be treated as U.S.-source income for U.S. foreign tax credit limitation purposes.
Dividends paid by us will generally be treated as foreign source income for U.S. foreign tax credit limitation purposes. Subject to certain limitations, U.S. Holders may elect to claim a foreign tax credit against their U.S. Federal income tax liability for foreign tax withheld (if any) from dividends received in respect of the ADSs or Ordinary Shares, as applicable. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends paid in respect of our ADSs or Ordinary Shares, as applicable, generally will be “passive income”, and therefore any U.S. Federal income tax imposed on these dividends cannot be offset by excess foreign tax credits that such U.S. Holders may have from foreign source income not qualifying as passive income. U.S. Holders who do not elect to claim a foreign tax credit may instead claim a deduction for foreign tax withheld (if any).
Distributions of Ordinary Shares and ADSs to U.S. Holders with respect to their holdings of Ordinary Shares and ADSs, as the case may be (such previously held ADSs or Ordinary Shares being “Old Stock”), that are pro-rata with respect to their holdings of Old Stock (and whenever a holder may not elect to receive cash distributions in lieu of distributions of ADSs or Ordinary Shares) will generally not be subject to U.S. Federal income tax (except with respect to cash received in lieu of fractional Ordinary Shares and ADSs, if any). The basis of the Ordinary Shares and ADSs so received will be determined by allocating the U.S. Holder’s adjusted basis in the Old Stock between the Old Stock and the Ordinary Shares and ADSs so received.
Taxation of Sale or Other Disposition
.
Unless a non-recognition provision applies, a U.S. Holder will recognize capital gain or loss upon a sale or other disposition of ADSs or Ordinary Shares in an amount equal to the difference between the amount realized on their disposition and such U.S. Holder’s basis in the ADSs or Ordinary Shares. Under current law, capital gains realized by corporate and individual taxpayers are generally subject to U.S. Federal income taxes at the same rate as ordinary income, except that long-term capital gains (i.e., where the U.S. Holder has a holding period greater than one year) realized by individuals, trusts and estates are subject to U.S. Federal income taxes at a reduced rate (15% prior to January 1, 2011). Certain limitations exist on the deductibility of capital losses by both corporate and individual taxpayers. Capital gains and losses on the sale or other disposition by a U.S. Holder of ADSs or Ordinary Shares generally should constitute gains or losses from sources within the U.S.
For cash basis U.S. Holders who receive foreign currency in connection with a sale or other taxable disposition of ADSs or Ordinary Shares, as applicable, the amount realized will be based on the U.S. Dollar value of the foreign currency received with respect to such ADSs or Ordinary Shares as determined on the settlement date of such sale or other taxable disposition.
Accrual basis U.S. Holders may elect the same treatment required of cash basis taxpayers with respect to a sale or other taxable disposition of ADSs or Ordinary Shares, as applicable, provided that the election is applied consistently from year to year. Such election may not be changed without the consent of the U.S. Internal Revenue Service. Accrual basis U.S. Holders who do not elect to be treated as cash basis taxpayers (pursuant to the U.S. Treasury Regulations applicable to foreign currency transactions) for this purpose may have a foreign currency gain or loss for U.S. Federal income tax purposes because of differences between the U.S. Dollar value of the foreign currency received prevailing on the date of the sale or other taxable disposition of ADSs or Ordinary Shares, as applicable, and the date of payment. Any such currency gain or loss generally will constitute a gain or loss from sources within the U.S. and generally will be treated as ordinary income or loss and would be in addition to gain or loss, if any, recognized on the sale or other taxable disposition of ADS or Ordinary Shares, as applicable.
Deposits, Withdrawals and Pre-Releases
.
Deposits and withdrawals by U.S. Holders of Ordinary Shares in exchange for ADSs and of ADSs in exchange for Ordinary Shares will not be subject to any U.S. Federal income tax. The U.S. Treasury Department, however, has expressed concerns that parties involved in transactions where depositary shares are pre-released may be taking actions that are not consistent with the claiming of foreign tax credits by the holders of the applicable ADSs. Accordingly, the analysis of the credibility of Mexican taxes described above could be affected by future actions that may be taken by the U.S. Treasury Department.
United States Backup Withholding and Information Reporting
.
In general, information reporting requirements will apply to payments of dividends on ADSs or Ordinary Shares and the proceeds of certain sales of ADSs or Ordinary Shares in respect of U.S. Holders other than certain exempt persons. A 28% backup withholding tax (31% for 2011 and thereafter) will apply to such payments if the U.S. Holder fails to provide a correct taxpayer identification number or other certification of exempt status or, with respect to certain payments, the U.S. Holder fails to report in full all dividend and interest income and the U.S. Internal Revenue Service notifies the payer of such under-reporting. Amounts withheld under the backup withholding rules may be credited against a holder’s U.S. Federal tax liability, and a refund of any excess amounts withheld under the backup withholding rules may be obtained by filing the appropriate claim form with the U.S. Internal Revenue Service.
Passive Foreign Investment Company Considerations
.
We believe that we are not currently, and we do not expect to become, a PFIC for U.S. Federal income tax purposes. Because this determination is made annually at the end of each of our taxable years and is dependent upon a number of factors, some of which are beyond our control, including the value of our assets and the amount and type of our income, there can be no assurance that we will not become a PFIC. In general, a corporation organized outside the United States will be treated as a PFIC for U.S. Federal income tax purposes in any taxable year in which either (a) at least 75% of its gross income is “passive income” or (b) on average at least 50% of the value of its assets is attributable to assets that produce passive income or are held for the production of passive income. If a U.S. Holder owns our ADSs or Ordinary Shares at a time when we become a PFIC and is not eligible to make or does not make certain elections with respect to our ADSs or Ordinary Shares, such U.S. Holder could be liable for additional taxes and interest charges upon certain distributions by us or upon a sale, exchange or other disposition of such shares at a gain, whether or not we continue to be a PFIC. In addition, under recently enacted legislation, if we were a PFIC for any taxable year after 2010, all U.S. Holders would be required to file an annual report with respect to their ADSs or Ordinary Shares.
Documents on Display
For further information pertaining to us and our Ordinary Shares and ADSs, please consult the filings we have made with the SEC. Statements contained in this annual report concerning the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to any filing we have made with the SEC, we refer you to the copy of the contract or document that has been filed. Each statement in this annual report relating to a contract or document filed as an exhibit to any filing we have made with the SEC is qualified in its entirety by the filed exhibit.
We are subject to the informational requirements of the Securities Exchange Act of 1934 and, in accordance with these requirements, we file reports and other information with the SEC. These reports and other information, as well as any related exhibits and schedules, may be inspected, without charge, at the public reference facility maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of these reports and other information may also be obtained from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C., 20549, at prescribed rates. These reports and other information may also be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
We furnish The Bank of New York, the depositary for our ADSs, with annual reports in English. These reports contain audited consolidated financial statements that have been prepared in accordance with Mexican FRS, and include reconciliations of net income and stockholders’ equity to U.S. GAAP. These reports have been examined and reported on, with an opinion expressed by, an independent auditor. The depositary is required to mail our annual reports to all holders of record of our ADSs. The deposit agreement for the ADSs also requires us to furnish the depositary with English translations of all notices of shareholders’ meetings and other reports and communications that we send to holders of our Ordinary Shares. The depositary is required to mail these notices, reports and communications to holders of record of our ADSs.
As a foreign private issuer, we are not required to furnish proxy statements to holders of our ADSs in the United States.
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Item 11
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Quantitative and Qualitative Disclosures about Market Risk
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We are exposed to a number of different market risks arising from our normal business activities and risk management activities. We do not enter into or hold any market risk sensitive instruments for trading purposes. Market risks arise from the possibility that changes in interest rates or currency exchange rates will adversely affect the value of our financial assets, liabilities or expected future cash flows.
Interest Rate Risk
We are subject to market risks due to interest fluctuations in Mexico. In addition, in the past, we have occasionally entered into swap arrangements and other hedge transactions, and will continue to consider doing so in the future to reduce our exposure to interest rate risks. As of December 31, 2009, we had $63.6 million Brazilian Real (Ps. 476.1 million) in outstanding short-term debt, related to the Drogasmil acquisition in Brazil that is subject to interest rate risk. As of December 31, 2009, we were not party to any arrangements to reduce our exposure to interest rate risk. See Note 20(d) to our consolidated financial statements.
Foreign Exchange Rate Risk
As of December 31, 2009, we had no interest-bearing liabilities in U.S. Dollars. To the extent that we incur U.S. Dollar-denominated debt in the future, we would be subject to foreign exchange rate risk.
As of December 31 2009, our interest-bearing liabilities reached Ps. 2,382.7 million, a portion of which are held in long-term liabilities that we incurred to fund our acquisition in Brazil. Nevertheless, the majority of such interest-bearing liabilities are in Pesos. As of December 31, 2009, we were not party to any arrangements to reduce our exposure to foreign exchange rate risk. See Note 10 to our consolidated financial statements.
As a result of the FASA Acquisition and the financing to be obtained in connection therewith, we could face an exchange rate risk against the Chilean Peso, since the financings to obtained to fund the purchase price will be denominated in Pesos and Dollars and the payment of the purchase price will be in Chilean Pesos. In order to hedge the risk of changes in the exchange rate of the Peso versus the Chilean Peso, on May 20, 2010 we entered into a currency forward transaction with HSBC Mexico, S.A., Institucion de Banca Multiple, Grupo Financiero HSBC.
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Item 12
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Description of Securities Other than Equity Securities
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Item 12A
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Debt Securities
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Not applicable.
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Item 12B
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Warrants and Rights
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Not applicable.
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Item 12C
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Other Securities
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Not applicable
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Item 12D
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American Depositary Shares
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The Bank of New York Mellon, or the Depositary, serves as the depositary for our ADSs. ADS holders are required to pay various fees to the Depositary, and the Depositary may refuse to provide any services for which a fee is assessed until the applicable fee has been paid.
ADS holders are required to pay the Depositary amounts in respect of expenses incurred by the Depositary or its agents on behalf of ADS holders, including expenses arising from compliance with applicable law, taxes or other governmental charges, facsimile transmission, or conversion of foreign currency into U.S. Dollars. In both cases, the Depositary may decide in its sole discretion to seek payment by either billing holders or by deducting the fee from one or more cash dividends or cash distributions.
ADS holders are also required to pay additional fees for certain services provided by the Depositary, as set forth in the table below:
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Fees Payable by ADS holders:
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Depositary Service:
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$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
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Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property
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Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
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$.02 (or less) per ADS
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Any cash distribution to ADS registered holders
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$.02 (or less) per ADS per calendar year
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Depositary services
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The Depositary pays us an agreed amount, which includes reimbursements for certain expenses we incur in connection with the ADS program. These reimbursable expenses include legal and accounting fees, listing fees, investor relations expenses and fees payable to service providers for the distribution of material to ADR holders. For the year ended December 31, 2009, this amount was $188,167.
PART II
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Item 13
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Defaults, Dividend Arrearages and Delinquencies
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Not applicable.
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Item 14
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Material Modifications to the Rights of Security Holders and Use of Proceeds
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Not applicable.
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Item 15
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Controls and Procedures
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(a)
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Disclosure Controls and Procedures
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As of the end of the period covered by this report, the Company’s management (under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer) conducted an evaluation pursuant to Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on such evaluation, such officers have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures (which include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure) are not effective to provide reasonable assurance that information required to be disclosed by the Company (including its consolidated subsidiaries) in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.
In connection with the foregoing, our subsidiary CSB Drogarias, S.A., has deficiencies in its IT General Computer Controls related to administration of user access levels to the financially significant applications which have resulted in users with unauthorized and excessive access to sensitive transactions that will preclude the Company from preventing or detecting a material misstatement in a timely basis. In addition, such
subsidiary’s IT systems are not capable of maintaining and generating the necessary inventory information for our auditors to be able to audit
Drogarias’ inventory balance as of December 31, 2009. Moreover, Droguerias lacks controls related to assessing certain contingencies.
As a consequence, the audit report by our independent auditors on the Company’s internal control over financial reporting as of December 31, 2009, expressed an adverse opinion on the effectiveness of the
Group’s internal control over financial reporting. See the audit report by our independent auditor on page F-5.
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(b)
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Management’s Report on Internal Control over Financial Reporting
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Management’s Report on Internal Control over Financial Reporting is included under Item 18 on page F-2.
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(c)
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Attestation Report of the Registered Public Accounting Firm
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The report of Salles, Sáinz-Grant Thorton, S.C., an independent registered public accounting firm, on management’s assessment of our internal control over financial reporting is included under Item 18 on page F-4.
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(d)
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Changes to Internal Control over Financial Reporting and Remediation Activities update
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Our management team has continued working to address and correct the deficiencies that aggregated into a material weakness and that are identified in management’s report on internal control over financial reporting. The Company has performed the purchase price allocation of the consideration paid for the acquisition of Drogasmil, except for the value of inventories, however management of the Company carried out a goodwill impairment test during the last quarter of 2009. As a result of such test, the Company has assessed goodwill impairment during the last quarter of 2009 in the amount of Ps. 210 millions.
The Company, at the holding company level, is also reviewing and will revise, if necessary, its internal controls over financial reporting to ensure that it is in a position to react promptly to deficiencies that may arise in the future as a result of integrating an acquired entity. Management, in connection with Drogasmil, is also taking certain steps to improve accounting systems, train accounting personnel, revise and implement additional accounting and internal control processes and procedures at Drogasmil.
During the review and remediation process we may also find other deficiencies or material weaknesses, in addition to the ones already identified. Our management is devoting considerable efforts to resolving these deficiencies; however, we cannot assure you that we will resolve these deficiencies or any other deficiencies that may arise in the future in a timely manner.
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Item 16A
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Audit Committee Financial Expert
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At our annual ordinary shareholders’ meeting held on April 30, 2010, our shareholders reelected appointed the following individuals as members of the Audit Committee: Mr. Julio Madrazo García, Mr. Gabriel Alarcón Velázquez and Mr. Juan Carlos Peralta del Río. Our Board of Directors has ratified Mr. Julio Madrazo García as Chairman of the audit committee. Our Board of Directors determined that Mr. Julio Madrazo García, Mr. Gabriel Alarcón Velázquez and Mr. Juan Carlos Peralta del Río are “financial experts” in accordance with the Mexican Securities Market Law and the Mexican Stock Exchange. We believe that Mr. Gabriel Alarcón Velázquez qualifies as an “audit committee financial expert” within the meaning of this Item 16A.
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Item 16B
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Code of Ethics
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We have adopted a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, and persons performing similar functions, as well as to our directors and other officers and employees. On December 2, 2009, our code of ethics was amended in its entirety in order to conform it to amendments to the legal framework adopted in recent years, as well as to implement formal improvements to the text. Our code of ethics is available on our web site at www.casasaba.com. Since its adoption, our code of ethics has not been amended and no waivers have been granted thereunder; however, any amendment to the code of ethics or waiver thereto shall be disclosed on our web site at the same address.
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Item 16C
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Principal Accountant Fees and Services
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For the year ended December 31,
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(Ps. millions)
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Audit Fees
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Ps.
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5.1
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Ps.
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9.0
|
|
|
Audit-Related Fees
|
|
|
2.6
|
|
|
|
0.4
|
|
|
Other Fees
|
|
|
0.0
|
|
|
|
0.0
|
|
|
Total
|
|
Ps.
|
7.7
|
|
|
Ps.
|
9.4
|
|
Audit Fees
.
The amount set forth as Audit Fees in the table above represents fees billed to us by Salles Sáinz-Grant Thornton, S.C., our independent auditor. The firm was appointed at the shareholders meeting and was hired to render tax and financial audit.
Audit-Related Fees
.
The amount set forth as Audit-Related Fees in the table above represents fees billed to us by Salles Sainz-Grant Thornton, S.C. in connection with their review of our consolidated financial statements.
Pre-Approval Policies and Procedures
.
Our Audit Committee has not adopted pre-approval policies and procedures under which all non-audit services provided by our external auditors must be pre-approved by the Audit Committee. However, any matter that is submitted to the Audit Committee for approval must be approved at a meeting and the members of the Board of Directors must be informed.
|
Item 16D
.
|
Exemptions from the Listing Standards for Audit Committees
|
Not applicable.
|
Item 16E
.
|
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
|
Not applicable.
|
Item 16F
.
|
Change in Registrant’s Certifying Accountant
|
Not applicable.
|
Item 16G
.
|
Corporate Governance
|
Significant Differences in Corporate Governance Standards
Pursuant to Rule 303A.11 of the Listed Company Manual of the NYSE, we are required to provide a brief summary of the significant ways in which our corporate governance practices differ from those required for U.S. companies under the NYSE listing standards.
Since we are Mexican corporation with shares listed on the Mexican Stock Exchange, our corporate governance standards are governed by our corporate bylaws, the Mexican Securities Market Law and the regulations issued by the Mexican Banking and Securities Commission. In order to comply with the above mentioned laws and regulations, as a public company listed on the Mexican Stock Exchange since December 2003, we are required by the Mexican Banking and Securities Commission to disclose annually the extent to which our corporate governance practices comply with those issued by the Mexican Banking and Securities Commission as general guidelines and which are collected in the Mexican Code of Enhanced Corporate Practices (
Código de Mejores Prácticas Corporativas
), or the Code. This Code was originally created by a group of Mexican business leaders and was acknowledged by the Mexican Banking and Securities Commission in December 2003. Under Mexican legislation, we are not compelled to comply with the guidelines contained in the Code, although compliance is highly recommended by the authorities and disclosure as to the degree of our compliance therewith is mandatory.
|
NYSE Standards
|
|
|
Our Corporate Governance Practice
|
|
|
|
|
|
|
A majority of the Board of Directors must be independent. Exception for “controlled companies,” which would include our Company if we were a U.S. issuer.
|
|
The Mexican Securities Market Law requires that listed companies have at least 25% of independent directors. The 25% of the members of our Board are independent under the Mexican Stock Exchange Law. Our Board of Directors is not required to make a determination as to the independence of our directors. The applicable definition of independence, which differs in certain respects from the definition applicable to U.S. issuers under the NYSE standard, prohibits, among other relationships, an independent director from being an employee or officer of the Company or an independent director from being a shareholder that may have influence over the Company. It also prohibits certain relationships between the Company and the independent director, entities with which the independent director is associated and family members of the independent director.
|
|
|
|
|
|
Non-management directors must meet at executive sessions without management.
|
|
Our non-management directors are not required to meet in executive sessions. Executive sessions are not recommended by the Mexican Code of Enhanced Corporate Practices. Our Chief Executive Officer is a member of our Board of Directors.
|
|
|
|
|
|
Nominating/corporate governance committee of independent directors required. Exception for “controlled companies,” which would include our Company if we were a U.S. issuer.
|
|
We are not required to have a nominating corporate governance committee, and such committee is not recommended by the Mexican Code of Enhanced Corporate Practices.
|
|
|
|
|
|
Compensation committee of independent directors required. Exception for “controlled companies,” which would include our Company if we were a U.S. issuer.
|
|
We are not required to have a compensation committee, and currently we do not have one.
|
|
|
|
|
|
Audit committee satisfying the independence and other requirements of Rule 10A-3 under the Exchange Act and the NYSE independence standards.
|
|
We have a three member audit committee, which are independent under applicable Mexican standards and for Rule 10A-3. Members of our audit committee do not need to satisfy the NYSE independence standards that are not required by Rule 10A-3. Our audit committee does not have a written charter.
|
|
|
|
|
|
Equity compensation plans require shareholder approval, subject to limited exemptions.
|
|
Shareholder approval is not required under Mexican law or our bylaws for the adoption and amendment of an equity-compensation plan. However, regulations of the Mexican Banking and Securities Commission require shareholder approval under certain circumstances.
|
|
|
|
|
|
Corporate governance guidelines and code of conduct and ethics required, with disclosure of any waiver for directors or executive officers.
|
|
The practices for our Board of Directors, including committees and compensation of directors, are described in this annual report. We have adopted a code of ethics applicable to all of our directors and executive officers, which is available at http://www.casasaba.com.
|
|
|
|
|
|
CEO Certifications must certify to the NYSE each year that the CEO is not aware of any violation by the Company of the NYSE corporate governance listing standards. Additionally CEO’s must notify the NYSE in writing if any executive officer becomes aware of any material non-compliance with the new listing standards.
|
|
We are required to disclose each year our degree of compliance with the Code of Enhanced Corporate Governance Practices, and the truthfulness of such disclosure must be certified by the Chairman of the Board of Directors; however there is no such concept as a violation of the Code of Enhanced Corporate Governance Practices since compliance with these is not mandatory. Furthermore, other than the disclosure provided by our CEO in this annual report, the CEO is not required to provide notification of any non-compliance of which he may be aware of.
|
PART III
|
Item 17
.
|
Financial Statements
|
We are furnishing financial statements pursuant to the instructions to Item 18 of Form 20-F.
|
Item 18
.
|
Financial Statements
|
The following financial statements, together with the report of Salles Sáinz-Grant Thornton, S.C. thereon, are filed as part of this Annual Report.
|
|
|
|
|
|
|
Index to Consolidated Financial Statements
|
F-1
|
|
Management’s Report on Internal Control over Financial Reporting
|
F-2
|
|
Report of Independent Registered Public Accounting Firm
|
F-3
|
|
Attestation Report of the Registered Public Accounting Firm
|
F-5
|
|
Consolidated Balance Sheets as of December 31, 2008 and 2009
|
F-7
|
|
Consolidated Statements of Income for each of the years ended
December 31, 2007, 2008 and 2009
|
F-8
|
|
Consolidated Statements of Stockholders’ Equity for the years ended
December 31, 2007, 2008 and 2009
|
F-9
|
|
Consolidated statement of changes in financial position for the year ended December 31, 2007
|
F-10
|
|
Consolidated Cash Flow Statement for the years ended December 31, 2008 and 2009
|
F-11
|
|
Notes to the Consolidated Financial Statements
|
F-12
|
All supplementary schedules relating to the Company are omitted because they are not required or because the required information, where material, is contained in our audited consolidated financial statements or the notes thereto.
Documents filed as an exhibit to this annual report are as follows:
|
Exhibit
Number
|
Description of Exhibits
|
|
1.1
|
Amended and Restated Bylaws (English translation) (incorporated by reference to the annual report on Form 20-F for the year ended December 31, 2008 (File No. 1-12632) filed on July 15, 2009).
|
|
|
|
|
4.1
|
Stock Purchase and Sale Promise Agreement*
|
|
|
|
|
8.1
|
List of Subsidiaries of the Registrant.*
|
|
|
|
|
12.1
|
Certification of the Principal Executive Officer of Grupo Casa Saba, S.A.B. de C.V. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|
|
|
|
12.2
|
Certification of the Principal Financial Officer of Grupo Casa Saba, S.A.B. de C.V. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|
|
|
|
13.1
|
Certification of the Principal Executive and Financial Officer of Grupo Casa Saba, S.A.B. de C.V. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
* Filed herewith.
SIGNATURE
GRUPO CASA SABA, S.A.B. DE C.V., hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
|
Dated: June 30, 2010
|
GRUPO CASA SABA, S.A.B. DE C.V.
|
|
|
|
|
|
|
|
|
By:
|
/s/ Gabriel Saba D’jamus
|
|
|
|
Name: Gabriel Saba D’jamus
|
|
|
|
Title: Chief Executive Officer
|
|
|
|
|
|
|