Form 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 6-K

 


 

REPORT OF FOREIGN ISSUER

PURSUANT TO RULE 13a-16 OR 15b-16 OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of May, 2004

 


 

Irsa Inversiones y Representaciones Sociedad Anónima

(Exact name of Registrant as specified in its charter)

 


 

Irsa Investments and Representations Inc.

(Translation of registrant´s name into English)

 

Republic of Argentina

(Jurisdiction of incorporation or organization)

 

Bolívar 108

(C1066AAB)

Buenos Aires, Argentina

(Address of principal executive offices)

 

Form 20-F   *            Form 40-F       

 

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes                 No   *  

 



IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANÓNIMA

(THE “COMPANY”)

 

REPORT ON FORM 6-K

 

Attached is a copy of the English translation of the Quarterly Financial Statements for the period ended on March 31, 2004 filed with the Bolsa de Comercio de Buenos Aires and with the Comisión Nacional de Valores.


IRSA Inversiones y Representaciones

Sociedad Anónima and subsidiaries

 

Free translation of the

Unaudited Consolidated Financial Statements

For the nine-month period ended as of

March 31, 2004

In comparative format


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

 

Unaudited Consolidated Balance Sheets as of March 31, 2004 and June 30, 2003

In thousand of pesos (Notes 1, 2 and 3)

 

    

March 31,

2004


   

June 30,

2003


 

ASSETS

            

CURRENT ASSETS

            

Cash and banks

   92,259     87,182  

Investments (Note 8)

   58,548     139,105  

Mortgages and leases receivables, net (Note 5)

   39,042     35,594  

Other receivables (Note 6)

   105,777     12,147  

Inventories (Note 7)

   20,460     14,575  
    

 

Total Current Assets

   316,086     288,603  

NON-CURRENT ASSETS

            

Mortgages receivables, net (Note 5)

   2,717     2,777  

Other receivables (Note 6)

   139,397     123,926  

Inventories, net (Note 7)

   5,185     8,767  

Investments, net (Note 8)

   430,363     433,760  

Fixed assets, net (Note 9)

   1,210,017     1,197,521  

Intangible assets, net

   2,148     3,239  

Subtotal Non-Current Assets

   1,789,827     1,769,990  

Goodwill, net

   (10,521 )   (5,629 )
    

 

Total Non-Current Assets

   1,779,306     1,764,361  
    

 

Total Assets

   2,095,392     2,052,964  
    

 

LIABILITIES

            

CURRENT LIABILITIES

            

Trade accounts payable

   32,353     25,805  

Mortgages payable

   2,144     2,100  

Customer advances (Note 10)

   17,732     13,212  

Short term-debt (Note 11)

   89,473     87,434  

Salaries and social security charges

   4,707     5,393  

Taxes payable

   15,713     9,778  

Other liabilities (Note 12)

   20,317     28,736  
    

 

Total Current Liabilities

   182,439     172,458  
    

 

NON-CURRENT LIABILITIES

            

Trade accounts payable

   2,963     3,609  

Customer advances (Note 10)

   27,191     25,260  

Long term-debt (Note 11)

   520,804     592,104  

Taxes payable

   6,972     1,684  

Other liabilities (Note 12)

   6,671     7,331  
    

 

Total Non-Current Liabilities

   564,601     629,988  
    

 

Total Liabilities

   747,040     802,446  
    

 

Minority interest

   448,260     441,332  

SHAREHOLDERS´ EQUITY

   900,092     809,186  
    

 

Total Liabilities and Shareholders´ Equity

   2,095,392     2,052,964  
    

 

 

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

 

Eduardo Sergio Elsztain

President

 

1


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

 

Unaudited Consolidated Statements of Income

For the nine – month periods beginning on

July 1, 2003 and 2002

and ended March 31, 2004 and 2003

In thousand of pesos (Notes 1, 2 and 3)

 

    

March 31,

2004


   

March 31,

2003


 

Sales, leases and services

   162,309     168,116  

Cost of sales, leases and services

   (87,843 )   (114,259 )
    

 

Gross income

   74,466     53,857  

Selling expenses

   (12,892 )   (16,375 )

Administrative expenses

   (28,298 )   (25,742 )
    

 

Subtotal

   (41,190 )   (42,117 )

Torres de Abasto unit contracts´rescissions

   —       5  

Net loss in credit card trust

   (159 )   (3,778 )

Results from operations and holding of real estate assets (Note 13)

   —       10,139  
    

 

Operating income (Note 4)

   33,117     18,106  

Amortization of goodwill

   (2,198 )   (3,364 )

Financial results generated by assets:

            

Interest income

   3,846     15,505  

Interest on discount by assets

   1,675     —    

Financial results

   84,036     57,651  

Exchange gain (loss)

   12,530     (59,071 )

Loss on exposure to inflation

   —       (13,489 )
    

 

Subtotal

   102,087     596  

Financial results generated by liabilities:

            

Interest on discount by liabilities

   (331 )   31,233  

Discounts

   7,235     26,154  

Exchange (loss) gain

   (12,809 )   251,997  

Gain on exposure to inflation

   —       6,908  

Financial expenses

   (46,187 )   (38,297 )
    

 

Subtotal

   (52,092 )   277,995  
    

 

Financial results, net

   49,995     278,591  

Net loss in related companies

   (11,178 )   (2,248 )

Other income, net (Note 14)

   438     6,893  
    

 

Income before tax and minority interest

   70,174     297,978  

Income tax and asset tax

   (22,069 )   2,884  

Minority interest

   (2,874 )   (34,991 )
    

 

Income for the period

   45,231     265,871  

Earning per share

            

Basic (Note 24)

   0.206     1.271  

Diluted (Note 24)

   0.123     0.601  
    

 

 

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

 

Eduardo Sergio Elsztain

President

 

2


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

 

Unaudited Statements of Consolidated Cash Flows (1)

For the nine – month periods beginning on

July 1, 2003 and 2002

and ended March 31, 2004 and 2003

In thousand of pesos (Notes 1, 2 and 3)

 

    

March 31,

2004


   

March 31,

2003


 

CHANGES IN CHASH AND CASH EQUIVALENTS

            

Cash and cash equivalents as of beginning of year

   187,343     28,376  

Cash and cash equivalents as of end of period

   103,404     201,445  
    

 

Net (decrease) increase in cash and cash equivalents

   (83,939 )   173,069  
    

 

CAUSES OF CHANGES IN CASH AND CASH EQUIVALENTS

            

CASH FLOWS FROM OPERATING ACTIVITIES:

            

Income for the period

   45,231     265,871  

Plus (less) income tax and asset tax accrued for the period

   22,069     (2,884 )

Adjustments to reconcile net income to cash flow from operating activities:

            

•      Equity in earnings of affiliated companies

   11,178     2,248  

•      Minority interest in related companies

   2,874     34,991  

•      Results from repurchase O.N.

   —       (25,093 )

•      Allowances and provisions

   140     10,115  

•      Amortization and depreciation

   49,988     69,861  

•      Results from sale of fixed assets

   —       (2,132 )

•      Financial results

   (62,979 )   (335,412 )

Changes in operating assets and liabilities:

            

•      Decrease in current investments

   4,111     13,436  

•      Increase in non-current investments

   (11,756 )   (521 )

•      Increase in mortgages and leases receivables

   (8,110 )   (3,486 )

•      (Increase) / Decrease in other receivables

   (3,538 )   4,236  

•      Decrease in inventory

   4,606     36,688  

•      Increase in intangible assets

   (242 )   —    

•      Decrease in taxes payable, salaries and social security and customer advances

   (3,612 )   (6,556 )

•      Increase / (Decrease) in accounts payable

   5,902     (2,434 )

•      Increase in accrued interest

   9,183     33,509  

•      Decrease in other liabilities

   (10,051 )   (10,396 )
    

 

Net cash provided by operating activities:

   54,994     82,041  
    

 

CASH FLOWS FROM INVESTING ACTIVITIES:

            

•      Payment for acquisition of subsidiary companies and equity investees, net of cash acquired

   —       16,464  

•      Decrease from equity interest in subsidiary companies

   —       (52,203 )

•      Purchase of shares and options of Banco Hipotecario S.A.

   (127,281 )   —    

•      Sale of Banco Hipotecario S.A. shares

   46,031     —    

•      Payment for acquisition of undeveloped parcels of land

   (340 )   (651 )

•      Sale of fixed assets and intangible assets

   —       2,132  

•      Purchase and improvements of fixed assets

   (14,703 )   18,630  
    

 

Net cash used in Investing activities:

   (96,293 )   (15,628 )
    

 

CASH FLOWS FROM FINANCING ACTIVITIES:

            

•      Proceeds from short-term and long-term debt

   5,800     396,699  

•      Payment of short-term and long-term debt

   (66,159 )   (279,299 )

•      Decrease in minority shareholders

   (301 )   —    

•      Cash contribution from minority shareholders

   —       89  

•      Issuance of Common Stock

   23,706     —    

•      Payment of mortgages

   —       (9,648 )

•      Dividends paid

   (4,536 )   —    

•      Payment for seller financing

   (1,150 )   (1,185 )
    

 

Net cash (used in) provided by financing activities:

   (42,640 )   106,656  
    

 

Net (decrease) increase in cash and cash equivalents:

   (83,939 )   173,069  
    

 


(1) Includes cash, banks and investments with a realization term not exceeding three months.

 

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

 

Eduardo Sergio Elsztain

President

 

3


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

 

 

Unaudited Statements of Consolidated Cash Flows (Continued)

For the nine – month periods beginning on

July 1, 2003 and 2002

and ended March 31, 2004 and 2003

In thousand of pesos (Notes 1, 2 and 3)

 

    

March 31,

2004


  

March 31,

2003


Supplemental cash flow information

         

Non-cash activities:

         

•      Increase in fixed assets through a decrease in inventory

   40    1,212

•      Increase in inventory through a decrease in fixed assets

   2,606    13,879

•      Increase in inventory through a decrease in undeveloped parcels of lands

   10,748    —  

•      Increase in fixed assets through a decrease in undeveloped parcels of lands

   51,501    —  

•      Increase in intangible assets through a decrease in fixed assets

   31    —  

•      Issuance of credit card receivables

   4,368    2,057

•      Liquidation of credit card receivables

   1,322    1,940

•      Increase in non current other receivables through a decrease in inventory

   5,890    —  

•      Increase in other receivables through an increase in taxes payable

   3,178    —  

•      Decrease in short-term and long-term debt through an increase in other liabilities

   1,326    —  

•      Decrease in investments through an increase in mortgages and leases receivables

   —      1,970

•      Increase in customer advances through a decrease in other liabilities

   —      2,862

•      Increase in undeveloped parcels of land through a decrease in inventory

   —      14,210

•      Increase in fixed assets through an increase in mortgages

   —      3,989

•      Increase in inventory through a decrease in mortgages and leases receivables

   —      2,757

•      Increase in non current investments through a decrease in non current other receivables

   —      117

•      Increase in short-term and long-term debt through a decrease in other liabilities

   —      35,423

•      Increase in investments through a decrease in mortgages and leases receivables

   —      762

•      Conversion of negotiable obligations into shares

   21,969    —  

 

Eduardo Sergio Elsztain

President

 

4


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited consolidated financial statements

For the nine – month periods beginning on

July 1, 2003 and 2002

and ended March 31, 2004 and 2003

In thousand of pesos

 

NOTE 1: BASIS OF CONSOLIDATION – CORPORATE CONTROL

 

  a. Basis of consolidation

 

The Company has consolidated its Balance Sheets at March 31, 2004 and June 30, 2003 and the statements of income and cash flow for the periods ended March 31, 2004 and 2003 line by line with the financial statements of its controlled companies, following the procedure established in Technical Pronouncement No. 21 of the Argentine Federation of Professional Councils in Economic Sciences and approved by the Professional Council in Economic Sciences of the Autonomous City of Buenos Aires and the National Securities Commission.

 

All significant intercompany balances and transactions have been eliminated in consolidation.

 

The following table shows the data concerning the corporate control:

 

     DIRECT OR
INDIRECT % OF
CAPITAL


   DIRECT OR
INDIRECT % OF
VOTING SHARES


COMPANIES   

March 31,

2004


  

June 30,

2003


  

March 31,

2004


   June 30,
2003


Ritelco S.A.

   100,00    100,00    100,00    100,00

Palermo Invest S.A.

   66,67    66,67    66,67    66,67

Abril S.A.

   83,33    83,33    83,33    83,33

Pereiraola S.A.

   83,33    83,33    83,33    83,33

Baldovinos S.A.

   83,33    83,33    83,33    83,33

Hoteles Argentinos S.A.

   80,00    80,00    80,00    80,00

Buenos Aires Trade & Finance Center S.A.

   100,00    100,00    100,00    100,00

Alto Palermo S.A. (“APSA”)

   53,72    54,79    53,72    54,79

 

  b. Acquisition of related companies

 

During the year ended at June 30, 2003, the Company acquired 30.955% of the capital stock and registered, non-endorsable, convertible negotiable obligations issued by Valle de Las Leñas S.A., falling due on October 31, 2005, with a face value of US$ 3.7 million, for approximately US$ 2.4 million. On March 4, 2003, the Company sold all its shareholding and negotiable obligations in Valle de las Leñas S.A. for US$ 6.5 million.

 

5


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 2: CONSIDERATION OF THE EFFECTS OF INFLATION

 

The financial statements have been prepared in constant monetary units, reflecting the overall effects of inflation through August 31, 1995. As from that date, in accordance with professional accounting standards and the requirements of the control authorities, restatement of the financial statements has been discontinued until December 31, 2001. As from January 1, 2002, in accordance with professional accounting standards, recognition of the effects of inflation in these unaudited financial statements has been reestablished, considering that the accounting measurements restated due to changes in the purchasing power of the currency until August 31, 1995 as well as those arising between that date and December 31, 2001 are stated in currency of the latter date.

 

On March 25, 2003, the National Executive Branch issued Decree No. 664 establishing that the financial statements for years ending as from that date must be stated in nominal currency. Consequently, in accordance with Resolution No. 441 issued by the National Securities Commission, the Company discontinued the restatement of its financial statements as from March 1, 2003. This criterion is not in line with current professional accounting standards, which establish that the financial statements must be restated through to September 30, 2003. At March 31, 2004 however, this deviation has not had a material effect on the financial statements.

 

The rate used for restatement of items in these unaudited financial statements is the domestic wholesale price index published by the National Institute of Statistics and Census.

 

The following concepts are included together in the Statement of Income as “Financial results generated by assets” and “Financial results generated by liabilities”:

 

a. The result due to exposure to changes in the purchasing power of the currency

 

b. Other holding gains and losses arising during the period.

 

c. Financial results.

 

Comparative information

 

Certain amounts in the financials statements al June 30, 2003 and March 31, 2003 were reclassified for disclosure on a comparative basis with those for the period ended March 31, 2004.

 

6


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 3: SIGNIFICANT ACCOUNTING POLICIES

 

The financial statements of the subsidiaries mentioned in Note 1, have been prepared on a consistent basis with those applied by IRSA Inversiones y Representaciones Sociedad Anónima.

 

  a. Shares of Banco Hipotecario S.A.

 

The shares of Banco Hipotecario S.A. held by the Company and Ritelco S.A. (a wholly-owned subsidiary) have been valued at their quotation at the end of the period, less estimated selling expenses.

 

  b. Revenue Recognition

 

The Company’s revenues mainly stem from office rental, shopping center operations, development and sale of real estate, hotel operations and, to a lesser extent, from e-commerce activities.

 

See Note 4 for details on the Company’s business segments. As discussed in Note 1, the consolidated statements of income were prepared following the guidelines of Technical Resolution No. 21 of the F.A.C.P.C.E.

 

  Leases and services from shopping center operations

 

Leases with tenants are accounted for as operating leases. Tenants are generally charged a rent, which consists of the higher of (i) a monthly base rent (the “Base Rent”) and (ii) a specified percentage of the tenant’s monthly gross retail sales (the “Percentage Rent”) (which generally ranges between 4% and 8% of tenant’s gross sales).

 

Furthermore, pursuant to the rent escalation clause in most leases, a tenant’s Base Rent generally increases between 4% and 7% each year during the term of the lease. Minimum rental income is recognized on a straight-line basis over the term of the lease. Certain lease agreements contain provisions, which provide for rents based on a percentage of sales or based on a percentage of sales volume above a specified threshold. The Company determines the compliance with specific targets and calculates the additional rent on a monthly basis as provided for in the contracts. Thus, these contingent rents are not recognized until the required thresholds are exceeded.

 

 

7


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 3: (Continued)

 

  b. Revenue Recognition (Continued)

 

  Leases and services from shopping center operations (Continued)

 

Generally, the Company’s lease agreements vary from 36 to 120 months. Law No. 24,808 provides that tenants may rescind commercial lease agreements after the initial nine months, upon not less than 60 days’ written notice, subject to penalties which vary from one to one and a half months rent if the tenant rescinds during the first year of its lease, and one month of rent if the tenant rescinds after the first year of its lease. The Company also charges its tenants a monthly administration fee, prorated among the tenants according to their leases, which varies from shopping center to shopping center, relating to the administration and maintenance of the common area and the administration of contributions made by tenants to finance promotional efforts for the overall shopping centers operations.

 

Administration fees are recognized monthly when earned. In addition to rent, tenants are generally charged “admission rights”, a non-refundable admission fee that tenants may be required to pay upon entering into a lease and upon lease renewal. Admission right is normally paid in one lump sum or in a small number of monthly installments. Admission rights are recognized using the straight-line method over the life of the respective lease agreements. Furthermore, the lease agreements generally provide for the reimbursement of real estate taxes, insurance, advertising and certain common area maintenance costs. These additional rents and tenant reimbursements are accounted for on the accrual basis.

 

  Credit card operations

 

Revenues derived from credit card transactions consist of commissions and financing income. Commissions are recognized at the time the merchants’ transactions are processed, while financing income is recognized when earned.

 

  Hotel operations

 

The Company recognizes revenues from its rooms, catering, and restaurant facilities as earned on the close of business each day.

 

  c. Intangible assets, net

 

Intangible assets are carried at cost adjusted for inflation, less accumulated amortization.

 

8


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 3: (Continued)

 

  Trademarks

 

Trademarks include the expenses and fees related to their registration.

 

  Pre-operating expenses

 

This item reflects expenses generated by the opening of new shopping malls restated into year-end currency. Those expenses are amortized by the straight-line method in periods ranging from 2 to 3 years for each shopping mall, beginning as from the date of inauguration.

 

  Advertising expenses

 

Advertising expenses relate to the Torres de Abasto project and the opening of Abasto Shopping adjusted for inflation at the end of the period. The expenses incurred in relation to Torres de Abasto project are recognized in the statement of income as determined under the percentage-of-completion method. Other advertising expenses are amortized under the straight-line method over a term of 3 years.

 

  Investment projects

 

Investment projects represent expenses primarily related to marketing efforts incurred by Alto Palermo S.A for the selling of merchandise through certain means of communication. These costs are amortized to income under the straight-line method as from the start up date of the project. These expenses are written off upon abandonment or disposal of project.

 

  Tenants list-Patio Bullrich

 

This item represents the acquired tenant list of the Patio Bullrich shopping mall restated for inflation at the end of the period and is amortized using the straight-line method over a five-year period.

 

Intangible assets include advertising costs incurred by the subsidiary APSA, that cannot be capitalized in accordance with current accounting standards, but which will be amortized in the coming year by the Company through application of transition rules.

 

The value of these assets, net of the provision recorded, does not exceed the estimated recoverable value at the end of the period.

 

9


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 3: (Continued)

 

  d. Goodwill

 

Negative goodwill represents the market value of net assets of the subsidiaries at the percentage participation acquired in excess of acquisition cost. Goodwill has been restated following the guidelines mentioned in Note 1.4. to the basic financial statements and amortization has been calculated by the straight-line method based on an estimated life of 18 years, considering the weighted average of the remaining useful life of identifiable assets of the issuer subject to depreciation.

 

Additionally, also included was the goodwill from the controlled company APSA, originating from the purchase of shares of Tarshop S.A., Inversha S.A., Pentigras S.A. and Fibesa S.A. which is amortized through the straight line method over a period of not more than 10 years.

 

Amortization has been classified under “Amortization of goodwill” in the Statements of Income.

 

NOTA 4: SEGMENT INFORMATION

 

The Company has determined that its reportable segments are those that are based on the Company’s method of internal reporting. Accordingly, the Company has five reportable segments. These segments are Development and Sales of properties, Office and other non-shopping center rental properties, Shopping centers, Hotel operations, and Others. As discussed in Note 1, the consolidated financial statements of income were prepared following the guidelines of Technical Resolution No. 21 of the F.A.C.P.C.E.

 

A general description of each segment follows:

 

  Development and sale of properties

 

This segment includes the operating results of the Company’s construction and ultimate sale of residential buildings business.

 

  Office and other non-shopping center rental properties

 

This segment includes the operating results of the Company’s lease and service revenues of office space and other non-retail building properties from tenants.

 

  Shopping centers

 

This segment includes the operating results of the Company’s shopping centers principally comprised of lease and service revenues from tenants. This segment also includes revenues derived from credit card transactions that consist of commissions and financing income.

 

10


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 4: (Continued)

 

  Hotel operations

 

This segment includes the operating results of the Company’s hotels principally comprised of room, catering and restaurant revenues.

 

  Financial operations and others

 

This segment primarily includes revenues and associated costs generated from the sale of equity securities, other securities-related transactions and other non-core activities of the Company. This segment also includes the results in equity investees of the Company relating to Internet, telecommunications and other technology-related activities of the Company.

 

The Company measures its reportable segments based on net income. Inter-segment transactions, if any, are accounted for at current market prices. The Company evaluates performance of its segments and allocates resources to them based on net income. The Company is not dependent on any single customer.

 

The accounting policies of the segments are the same as those described in Note 1 to the unaudited financial statements and in Note 3 to the unaudited consolidated financial statements.

 

11


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 4: (Continued)

 

The following information provides the operating results from each business unit:

 

As of March 31, 2004:

 

     Sales and
developments


   

Office and

Others (a)


    Shopping
centers


    Hotels

    Financial and
other
operations


   Total

 

Income

   16,951     10,929     103,398     31,031     —      162,309  

Cost

   (13,668 )   (6,159 )   (51,130 )   (16,886 )   —      (87,843 )

Gross income

   3,283     4,770     52,268     14,145     —      74,466  

Selling expenses

   (1,505 )   (522 )   (7,092 )   (3,773 )   —      (12,892 )

Administrative expenses

   (3,959 )   (2,890 )   (13,617 )   (7,832 )   —      (28,298 )

Net loss in credit card trust

   —       —       (159 )   —       —      (159 )

Results from operations and holding of real estate assets

   —       —       —       —       —      —    
    

 

 

 

 
  

Operating ( loss) / Income

   (2,181 )   1,358     31,400     2,540     —      33,117  
    

 

 

 

 
  

Depreciation and amortization (b)

   (1,349 )   4,456     39,736     4,252     —      47,095  
    

 

 

 

 
  

Addition of fixed assets and intangible assets

   744     48     13,602     959     —      15,353  

Non-current investments in other companies

   —       —       7,157     15,309     —      22,466  

Operating assets

   283,760     249,740     974,722     111,953     —      1,620,175  

Non- Operating assets

   48,419     42,614     62,439     3,885     317,860    475,217  

Total assets

   332,179     292,354     1,037,161     115,838     317,860    2,095,392  

Operating liabilities

   8,386     4,995     82,258     7,164     —      102,803  

Non-Operating liabilities

   134,225     120,598     209,179     38,579     141,656    644,237  

Total liabilities

   142,611     125,593     291,437     45,743     141,656    747,040  

(a) Includes offices, commercial and residential premises.

(b) Included in operating (loss) / income.

 

12


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 4: (Continued)

 

The following information provides the operating results from each business unit:

 

As of March 31, 2003

 

     Sales and
developments


   

Office and

Others (a)


    Shopping
centers


    Hotels

    Financial and
other
operations


   Total

 

Income

   44,497     14,498     83,079     26,042     —      168,116  

Cost

   (43,897 )   (7,204 )   (48,407 )   (14,751 )   —      (114,259 )

Gross income

   600     7,294     34,672     11,291     —      53,857  

Selling expenses

   (2,766 )   (502 )   (10,128 )   (2,979 )   —      (16,375 )

Administrative expenses

   (4,041 )   (2,524 )   (12,106 )   (7,071 )   —      (25,742 )

Torres de Abasto unit contracts´rescissions

   5     —       —       —       —      5  

Net loss in credit card trust

   —       —       (3,778 )   —       —      (3,778 )

Results from operations and holding of real estate assets

   10,139     —       —       —       —      10,139  
    

 

 

 

 
  

Operating Income

   3,937     4,268     8,660     1,241     —      18,106  
    

 

 

 

 
  

Depreciation and amortization (b)

   3,505     4,916     42,756     4,656     —      55,833  
    

 

 

 

 
  

Addition of fixed assets and intangible assets (c)

   4,294     49     3,449     5,627     —      13,419  

Non-current investments in other companies (c)

   —       —       8,527     13,387     —      21,914  

Operating assets (c)

   299,381     255,890     994,917     112,124     —      1,662,312  

Non-operating assets (c)

   43,859     37,487     54,029     3,030     252,247    390,652  

Total assets (c)

   343,240     293,377     1,048,946     115,154     252,247    2,052,964  

Operating liabilities (c)

   6,562     4,582     69,349     4,664     —      85,157  

Non-operating liabilities (c)

   154,084     138,190     224,640     42,290     158,085    717,289  

Total liabilities (c)

   160,646     142,772     293,989     46,954     158,085    802,446  

(a) Includes offices, commercial and residential premises.

(b) Included in operating income.

(c) At June 30, 2003.

 

13


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 5: MORTGAGES AND LEASES RECEIVABLES, NET

 

The breakdown for this item is as follows:

 

    

March 31,

2004


   

June 30,

2003


 
     Current

   

Non-

Current


    Current

   

Non-

Current


 

Debtors from sale of real estate

   1,649     1,166     3,805     1,789  

Unearned interest

   (18 )   (34 )   (67 )   (194 )

Debtors from rent and credit card

   39,637     1,628     45,973     1,236  

Rent in litigation

   22,294     —       22,054     —    

Debtors under legal proceedings

   1,500     —       2,338     —    

Checks to be deposited

   9,000     —       6,177     —    

Related parties

   57     —       137     —    

Trade accounts receivable for hotel activities

   3,088     —       1,877     —    

Less:

                        

Allowance for doubtful accounts

   (444 )   —       (593 )   —    

Allowance for doubtful leases

   (37,721 )   (43 )   (46,107 )   (54 )
    

 

 

 

     39,042     2,717     35,594     2,777  
    

 

 

 

 

NOTE 6: OTHER RECEIVABLES

 

The breakdown for this item is as follows:

 

    

March 31,

2004


   

June 30,

2003


 
     Current

  

Non-

Current


    Current

  

Non-

Current


 

Asset tax

   1,019    51,066     59    48,674  

Value Added Tax (VAT)

   1,012    1,665     310    2,542  

Related parties

   245    10     633    17  

Guarantee deposits

   362    87     890    693  

Prepaid expenses

   187    —       169    —    

Expenses to be recovered

   5,354    —       1,989    —    

Fund administration

   208    —       232    —    

Advances to be rendered

   4,720    —       824    —    

Gross sales tax

   346    415     252    318  

Deferred income tax

   —      60,729     —      66,134  

Sundry debtors

   2,380    —       2,079    —    

Operation pending settlement BH S.A.

   85,560    —       40    —    

Income tax prepayments and withholdings

   1,455    —       983    31  

Country club debtors

   462    —       462    —    

Rebilled condominium expenses

   —      —       651    —    

Trust accounts receivable

   944    2,014     —      433  

Tax credit certificates

   979    —       2,265    —    

Interest rate swap receivable

   359    18,790     307    8,172  

Mortgages receivables

   —      2,208     —      2,208  

Present value – other receivables

   —      (1,413 )   —      (3,106 )

Credit from barter of “Edificios Cruceros”

   —      5,640     —      —    

Allowance for doubtful accounts

   —      (2,208 )   —      (2,208 )

Other

   185    394     2    18  
    
  

 
  

     105,777    139,397     12,147    123,926  
    
  

 
  

 

14


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 7: INVENTORIES

 

The breakdown for this item is as follows:

 

    

March 31,

2004


  

June 30,

2003


     Current

  

Non-

Current


   Current

  

Non-

Current


Dique II

   —      —      5,648    —  

Minetti “D”

   42    —      42    —  

Madero 1020

   —      —      1,373    —  

Rivadavia 2768

   116    —      116    —  

Sarmiento 517

   —      —      245    —  

Torres Jardín

   245    —      245    —  

Abril/Baldovinos

   3,554    5,185    5,397    5,822

San Martín de Tours

   4,390    —      —      2,945

Benavidez (1)

   10,748    —      —      —  

Other

   181    —      396    —  

Torres de Abasto

   555    —      555    —  

Resale merchandise

   77    —      99    —  

Bonus merchandise

   87    —      105    —  

Other properties

   465    —      354    —  
    
  
  
  
     20,460    5,185    14,575    8,767
    
  
  
  

(1) Through its subsidiary Inversora Bolivar S.A., the Company granted an option to purchase this building, which was exercised in March 2004.

 

15


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 8: INVESTMENTS

 

The breakdown for this item is as follows:

 

    

March 31,

2004


  

June 30,

2003


Current

         

Cedro (1)

   81    128

Lebacs (1)

   —      1,361

Bocanova (1)

   264    305

Boden (1)

   50    1,329

IRSA I Trust Exchangeable Certificate (1)

   1,188    1,324

Time deposits and money markets

   6,946    27,505

Mutual funds (2)

   43,859    102,396

Tarshop Trust (1)

   6,116    4,719

Interest “Banco Ciudad de Bs. As. Bond” (1)

   13    —  

Other investments (1)

   31    38
    
  
     58,548    139,105
    
  

Non-current

         
           

Llao – Llao Resorts S.A.

   15,309    13,387

Banco de Crédito y Securitización S.A.

   7,007    7,007

Banco Hipotecario S.A.

   68,596    23,677

Pérez Cuesta S.A.C.I.

   5,159    5,628

E-Commerce Latina S.A

   1,998    2,899

IRSA I Trust Exchangeable Certificate

   5,612    8,777

Tarshop Trust

   6,899    2,567

“Banco Ciudad de Bs. As. Bond”

   867    —  

Art work

   37    37

Other

   11,138    —  
    
  
     122,622    63,979
    
  

Undeveloped parcels of land:

         

Constitucion 1111

   1,146    1,146

Dique IV

   6,160    6,160

Caballito plots of land

   13,616    13,616

Padilla 902

   71    71

Pilar

   3,109    3,109

Torres Jardín IV

   2,231    2,231

Puerto Retiro

   46,350    46,257

Benavidez (3)

   —      10,748

Santa María del Plata

   124,699    124,594

Pereiraola

   21,875    21,875

Bs. As. Trade and Finance Center S.A

   25,973    25,973

Air space Supermercado Coto

   9,080    9,080

Caballito

   26,000    26,000

Rosario

   —      51,501

Neuquén

   8,539    8,539

Alcorta Plaza

   15,953    15,950

Other parcels of undeveloped land

   2,939    2,931
    
  
     307,741    369,781
    
  
     430,363    433,760
    
  

(1) Not considered as cash for purposes of the unaudited statements of cash flow.
(2) Ps. 37,939 corresponding to the “Dolphin Fund PLC” at March 31, 2004 not considered as cash for purpose of the statement of cash flow and Ps. 1,721 corresponding to the NCH Development Partner fund at March 31, 2004 not considered as cash for purpose of the statement of cash flows.
(3) Through its subsidiary Inversora Bolivar S.A., the Company granted an option to purchase this building, which was exercised in March 2004.

 

16


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 9: FIXED ASSETS, NET

 

The breakdown for this item is as follows:

 

    

March 31,

2004


  

June 30,

2003


Hotels

         

Hotel Intercontinental

   55,475    57,177

Hotel Libertador

   38,264    39,890
    
  
     93,739    97,067
    
  

Office buildings

         

Avda. de Mayo 595

   4,045    4,112

Avda. Madero 942

   1,982    2,006

Edificios costeros (Dique II)

   17,696    17,937

Laminar Plaza

   27,676    28,021

Libertador 498

   35,006    35,444

Libertador 602

   2,458    2,488

Madero 1020

   3,773    6,433

Maipú 1300

   40,227    40,771

Reconquista 823

   16,850    17,075

Sarmiento 517

   203    166

Suipacha 652

   9,801    9,945

Alto Palermo Plaza

   —      2

Intercontinental Plaza

   62,699    63,728

Costeros Dique IV

   17,360    17,566
    
  
     239,776    245,694
    
  

Commercial real estate

         

Alsina 934

   1,464    1,485

Constitución 1111

   397    403
    
  
     1,861    1,888
    
  

Other fixed assets

         

Abril

   1,916    2,189

Alto Palermo Park

   417    420

Thames

   3,310    3,650

Other

   3,483    3,489
    
  
     9,126    9,748
    
  

 

17


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 9: (Continued)

 

    

March 31,

2004


  

June 30,

2003


Shopping Center

         

Alto Avellaneda

   99,315    105,133

Alto Palermo

   233,712    247,477

Paseo Alcorta

   69,908    72,690

Abasto

   212,713    221,314

Patio Bullrich

   123,238    127,803

Buenos Aires Design

   23,997    25,840

Alto Noa

   22,808    23,810

Rosario

   61,986    —  

Other properties

   10,623    10,743

Other

   7,215    8,314
    
  
     865,515    843,124
    
  

Total

   1,210,017    1,197,521
    
  

 

NOTE 10: CUSTOMER ADVANCES

 

The breakdown for this item is as follows:

 

    

March 31,

2004


  

June 30,

2003


     Current

  

Non-

Current


   Current

  

Non-

Current


Admission rights

   10,276    16,887    7,442    14,044

Leases advances

   4,870    10,304    4,183    11,216

Customer advances

   2,586    —      1,587    —  
    
  
  
  
     17,732    27,191    13,212    25,260
    
  
  
  

 

18


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 11: SHORT AND LONG TERM DEBT

 

The breakdown for this item is as follows:

 

    

March 31,

2004


  

June 30,

2003


     Current

  

Non-

Current


   Current

  

Non-

Current


Convertible bond APSA 2006 (1)

   —      51,795    —      55,550

Accrued interest- Convertible bond APSA 2006 (1)

   1,042    —      2,418    —  

Negotiable obligations APSA (2)

   24,080    49,567    3,640    73,617

Accrued interest- Negotiable obligations APSA (2)

   3,992    —      1,554    —  

Bank debts (3)

   49,002    56,326    71,138    91,464

Accrued interest - bank debts (3)

   228    3,360    3,032    —  

Bond 100 M. (4)

   —      262,752    —      279,235

Interest-Bond 100 M. (4)

   8,113    —      2,765    —  

Negotiable obligations 2009 - principal amount (5)

   2,673    91,542    —      92,238

Negotiable obligations 2009 - accrued interest (5)

   343    5,462    2,677    —  

Other

   —      —      210    —  
    
  
  
  
     89,473    520,804    87,434    592,104
    
  
  
  

(1) Corresponding to the Negotiable Bonds Convertible to stock (CNB) issued by APSA for a value of US$ 50 million, as detailed in Note 22 to the unaudited consolidated financial statements, net of the CNB underwritten by the Company for U$S 30,929 thousand, net of fees and expenses related to issue of debt to be accrued.
(2) Includes:
  (a) Ps. 49,621 thousand in unsecured general liabilities belonging to APSA, originally issued for a total value of V$N 85,000,000, which mature on 7 April 2005, on which date the principal will be amortized in full, net of issue expenses. The terms of the liabilities require APSA to maintain certain financial ratios and conditions, specific debt/equity ratios, and establish restrictions to the procurement of new loans.
  (b) Ps. 9,785 thousand corresponding to secured general liabilities of APSA originally issued for a value of US$ 40,000 thousand, and which mature on 13 January 2005, on which date the full amount of the principal will be amortized, net of issue expenses. As a detailed on Note 15 the current negotiable bonds are secured by the fiduciary assignment in the interest of the holders of the total share capital in Shopping Alto Palermo S.A. The terms of the liabilities require APSA to maintain certain financial ratios and conditions, specific debt/equity ratios, and establish restrictions to the procurement of new loans.
  (c) Ps. 15,901 thousand corresponding to secured general liabilities in Shopping Alto Palermo S.A. (SAPSA), as a detailed on Note 15, net of issue expenses. The terms of the liabilities require SAPSA to maintain certain financial ratios and conditions, specific debt/equity ratios, and establish restrictions to the procurement of new loans.
(3) Includes mainly:
  (a) US$ 20.3 million corresponding to an unsecured loan falling due in the year 2009, as detailed in Note 5 to the unaudited financial statements.
  (b) Ps. 35,553 thousand current, corresponding to a loan secured with real estate assets belonging to Hoteles Argentinos S.A., as detailed in Note 15 to the unaudited consolidated financial statements.
  (c) Ps. 11,804 thousand corresponding to other current bank loans.
(4) Corresponding to the issue of Convertible Negotiable Bonds of the Company for a total value of US$ 100 million as set forth in Notes 5 and 11 to the unaudited financial statements.
(5) Corresponding to the issue of Negotiable Bonds secured with certain Company assets maturing in the year 2009, as detailed in Note 5 and 10 b. to the unaudited financial statements.

 

19


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 12: OTHER LIABILITIES

 

The breakdown for this item is as follows:

 

    

March 31,

2004


   

June 30,

2003


 
     Current

   Non-current

    Current

   Non-current

 

Seller financing

   5,647    —       6,625    —    

Dividends payable

   2,703    —       1,521    1,182  

Related parties

   2,847    —       3,283    1  

Guarantee deposits

   532    1,490     726    977  

Provision for discounts

   9    —       9    —    

Provision for lawsuits and contingencies

   1,868    4,520     1,170    4,682  

Directors´ fees

   96    —       7,840    —    

Rebilled condominium expenses

   278    —       444    —    

Directors´ deposits

   —      8     —      8  

Fund administration

   491    —       491    —    

Operation pending settlement

   16    —       16    —    

Collections on behalf of third parties

   —      —       5    —    

Pending settlements for sales of plots

   359    —       113    —    

Contributed leasehold improvements

   212    743     212    902  

Donations payable

   2,877    —       4,827    —    

Present value – other liabilities

   —      (102 )   —      (433 )

Trust account payable

   283    —       —      —    

Other

   2,099    12     1,454    12  
    
  

 
  

     20,317    6,671     28,736    7,331  
    
  

 
  

 

NOTE 13: RESULTS FROM OPERATIONS AND HOLDINGS OF REAL ESTATE ASSETS

 

The breakdown for this item is as follows:

 

    

March 31,

2004


  

March 31,

2003


Results from transactions related to shares of real estate companies

   —      10,139

Results from holding of real estate assets

   —      —  
    
  

(1)

   —      10,139
    
  

(1) This item includes losses from the quotation of shares in real estate companies, premiums on issuance of shares earned and losses from the impairment of real estate assets.

 

20


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 14: OTHER INCOME, NET

 

The breakdown for this item is as follows:

 

    

March 31,

2004


   

March 31,

2003


 

Other income:

            

Gain on early redemption of debt

   —       12,936  

Gain from the sale of fixed assets and intangible assets

   134     2,132  

Recovery of allowance for doubtful accounts

   1,617     —    

Other

   1,195     685  
    

 

     2,946     15,753  
    

 

Other expenses:

            

Unrecoverable VAT

   (534 )   (800 )

Donations

   (395 )   (332 )

Contingencies for lawsuits

   (762 )   (3,871 )

Debit and credit tax

   (640 )   (841 )

Other

   (177 )   (3,016 )
    

 

     (2,508 )   (8,860 )
    

 

Other income, net

   438     6,893  
    

 

 

21


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 15: RESTRICTED ASSETS

 

Puerto Retiro S.A.: extension of the bankruptcy

 

On April 18, 2000, Puerto Retiro S.A. was notified of a filing made by the National Government, through the Ministry of Defense, to extend the petition in bankruptcy of Inversora Dársena Norte S.A. (Indarsa) to Puerto Retiro S.A Concurrently with the complaint, at the request of plaintiff, the bankruptcy court granted an order restraining the ability of Puerto Retiro to sell or dispose in any manner the real estate property purchased from Tandanor S.A. (“Tandanor”).

 

Indarsa had purchased 90% of the capital stock of Tandanor, a formerly state owned company privatized in 1991, engaged in the shipyard industry.

 

In June 1993, Tandanor sold the plot of land near Puerto Madero denominated “Planta 1” to Puerto Retiro S.A.

 

Indarsa did not comply with the payment of the outstanding price for the purchase of the stock of Tandanor, and therefore the Ministry of Defense requested the bankruptcy of Indarsa. Since the only asset of Indarsa were the shareholdings in Tandanor, the Ministry of Defense is pursuing to extend the bankruptcy to other companies or individuals which, according to its view, acted as an economic group, and therefore, requested the extension of the bankruptcy to Puerto Retiro which acquired Planta 1 from Tandanor. The lawsuit is at its first stages. Puerto Retiro S.A. answered the claim and appealed the preventive measures ordered. This appeal was overruled on December 14, 2000.

 

Puerto Retiro S.A. believes, pursuant to the advice of its legal advisors, that the plaintiff’s claim shall be rejected by the courts.

 

Hoteles Argentinos S.A.: mortgage loan

 

The Extraordinary Shareholders’ Meeting of Hoteles Argentinos S.A. held on January 5, 2001, approved taking a long-term mortgage loan from Bank Boston N.A. for a total of US$ 12,000,000 to be used to refinance existing debts. The term of the loan was agreed at 60 months payable in 19 equal and quarterly installments of US$ 300,000 and one final payment of US$ 6,300,000. The agreement was signed on January 26, 2001.

 

Interest is paid quarterly in arrears at an annual interest rate equivalent to LIBOR for year loans plus the applicable mark-up per the contract, which consists in a variable interest rate applicable in the nine month period ended March 31, 2004 it ranged between 5.8700% and 6.0713%.

 

The guarantee granted was a senior mortgage on a Company property, which houses the Hotel Sheraton Libertador Buenos Aires.

 

22


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 15: (Continued)

 

As a result of the current economic situation, the lack of credit and the crisis of the Argentine financial system, principal installments of US$ 300 thousand falling due on January 26, April 29, July 29, October 26, 2002, January 29, April 29, July 29, October 26, 2003, January 26 and April 26, 2004 respectively and the interest installment amounting to US$ 1,015 thousand falling due on July 29, October 26, 2002, January 29, April 29, July 29, October 29, 2003, January 26 and April 26, 2004 were not paid. Although Hoteles Argentinos’ Management is renegotiating the debt with its creditors, as failure to pay the installments when due entitles the bank to require acceleration of principal and interest maturities, the loan has been classified and is shown under current financial loans in these unaudited consolidated financial statements.

 

On March 5, 2004, BANKBOSTON N.A. formally notified Hoteles Argentinos S.A. that as from March 10, 2004 it assigned to Marathon Master Fund Ltd., domiciled at 461 Fifth Avenue, 10th floor, New York, NY 10017, USA, all the rights and obligations arising from the loan agreement entered into on January 26, 2001 between Hoteles Argentinos S.A. as borrower and BankBoston N.A., as lender, together with all the changes, guarantees and insurance policies related to that contract.

 

Consequently, all pending obligations of Hoteles Argentinos S.A. must be fulfilled in favor of the assignee, Marathon Master Fund Ltd.

 

Alto Palermo S.A.- Restricted assets.

 

  a) As of March 31, 2004, Shopping Neuquén S.A. includes Ps. 41,791 in financial loans, corresponding to a mortgage set up on acquired land for Ps. 3,314 thousand.

 

  b) On January 18, 2001, Shopping Alto Palermo S.A. issued negotiable obligations secured by all the shares representing its corporate capital transferred in trust in favor of their holders.

 

  c) At March 31, 2004, the Company holds funds under other current receivables amounting to Ps. 107,922 attached by the National Labor Court of First Instance No. 40 in relation to the case “Del Valle Soria, Delicia against New Shopping S.A.” claiming unfair dismissal and Ps. 185,424 restricted by the National Court on Civil Matters No. 6, Secretariat 12, in connection with the case “Metal Design SRL against Alto Palermo S.A. (APSA)” due to unpaid invoices.

 

  d) At March 31, 2004, the shares of Emprendimiento Recoleta S.A. are pledged.

 

  e) At March 31, 2004 there is a balance of US$ 50 million in the caption other non-current receivables corresponding to funds guaranteeing derivative instruments transactions.

 

23


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 16: TARSHOP CREDIT CARD RECEIVABLE SECURITIZACION

 

Alto Palermo S.A. has ongoing revolving period securitization programs through which Tarshop, a majority-owned subsidiary of APSA, transfers a portion of its customer credit card receivable balances to a master trust (the “Trust”) that issues certificates to public and private investors.

 

To the extent the certificates are sold to third parties, the receivables transferred qualify as sales for financial statement purposes and are removed from the company balance sheet. The remaining receivables in the Trust which have not been sold to third parties are reflected on the company balance sheet as a retained interest in transferred credit card receivables. Under these programs, the company acts as the servicer on the accounts and receives a fee for its services.

 

Under the securitization programs, the Trust may issue two types of certificates representing undivided interests in the Trust - Títulos de Deuda Fiduciaria (“TDF”) and Certificados de Participación (“CP”), which represent debt, and equity certificates, respectively. Interest and principal services are paid periodically to the TDF holders throughout the life of the security. CPs are subordinated securities which entitle the CP holders to share pro rata in the cash flows of the securitized credit card receivables, after principal and interest on the TDFs and other fees and expenses have been paid. During the revolving period no payments are made to TDF and CP holders. Principal collections of the underlying financial assets are used by the Trust to acquire additional credit card receivables throughout the revolving period. Once the revolving period ends, a period of liquidation occurs during which: (i) no further assets are purchased and (ii) all cash collections are used to fulfill the TDF service requirements and (iii) the remaining proceeds are used to fulfill the CPs service requirements.

 

The Company entered into two-years revolving-period securitization programs, through which Tarshop sold an aggregate amount of Ps. 102.7 million of its customer credit card receivable. Under the securitization programs, the Trusts issued Ps. 14.5 million nominal value subordinated CPs. Ps. 26.7 million 12% fixed-rate interest TDFs and Ps. 22.5 million 18% fixed-rate interest TDFs, and Ps. 17.1 million variable rate interest TDFs. Tarshop acquired all the CPs at an amount equal to their nominal value while the TDFs were sold to other investors through a public offering in Argentina except for Ps. 0.4 million, which were acquired by Tarshop S.A. As a credit protection for investors, Tarshop has established cash reserves for losses amounting to Ps. 1.3 million.

 

24


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 17: PURCHASE OF SHARES AND OPTION OF BANCO HIPOTECARIO S.A.

 

On December 30, 2003, the Company purchased 4,116,267 shares of Banco Hipotecario S.A. at US$ 2.3868 per share and 37,537 warrants at US$ 33.86 each, granting the right to purchase an additional total of 3,753,700 shares. This transaction implied a total disbursement of US$ 11.1 million.

 

Furthermore, on February 2, 2004, the Company and its subsidiary Ritelco exercised a substantial portion of the options acquired mentioned above, jointly with the options held before the end of the period. Accordingly, 4,774,000 shares for a total of Ps. 33.4 million were acquired.

 

Therefore, at the date of issuing these financial statements, the total holding amounted to 20,128,733 shares.

 

The Board of Directors intends to sell a portion of the shares acquired from Banco Hipotecario S.A (see Note 25).

 

NOTE 18: IRSA INTERNATIONAL LIMITED INVESTMENT´S IN IRSA TELECOMUNICACIONES N.V.

 

In the fourth quarter of the year ended June 30, 2000, the Company had invested US$ 3.0 million, in the form of irrevocable capital contributions, into two unrelated companies, namely, Red Alternativa S.A., a provider of satellite capacity to Internet service providers, and Alternativa Gratis S.A., an Internet service provider (referred to herein as the “Companies”). At that date, the Companies were development stage companies with no significant operations.

 

Between July 2000 and August 2000, the Company, together with Dolphin Fund Plc, increased their respective investments in the above mentioned Companies, in exchange for shares of common stock. In a series of transactions, which occurred between August 2000 and December 2000, (i) the Company formed IRSA Telecomunicaciones N.V. (“ITNV”), a holding company organized under the laws of the Netherlands Antilles, for the purposes of completing a reorganization of the Companies (the “Reorganization”) and (ii) the Company, Dolphin Fund Plc and the previous majority shareholder of the Companies contributed their respective ownership interests in the Companies into ITNV in exchange for shares of common stock of ITNV.

 

25


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 18: (Continued)

 

In September and December 2000, the Company had made additional contributions to ITNV for US$ 3 million, generating an increase in its participation in the capital stock at that date of 62%.

 

As a result of the Reorganization, the Companies are now wholly owned subsidiaries of ITNV. Following the Reorganization, the Company held a 49.36% interest in ITNV.

 

On December 27, 2000, the shareholders of ITNV entered into an agreement with Quantum Industrial Partners LDC (“QIP”) and SFM Domestic Investment LLC (“SFM” and together with QIP referred to herein as the “Investors”) (the “Shareholders Agreement”), under which the Investors contributed US$ 4.0 million in cash in exchange for 1,751,453 shares of Series A mandatorily redeemable convertible preferred stock and an option to purchase 2,627,179 additional shares of mandatorily redeemable convertible preferred stock. Pursuant to the terms of the Shareholders Agreement, options were granted for a period up to five years and at an exercise price equal to the quotient of US$ 6.0 million by 2,627,179 preferred shares. On or after December 27, 2005, ITNV might be required, at the written request of holders of the then outstanding Series A preferred stock to redeem such holders’ outstanding shares of series A preferred stock for cash at the greater of (i) 200% of the original issue price multiplied by the number of preferred stock to be redeemed, and (ii) the fair market value of the common shares each holder of Series A preferred stock would have been entitled to receive if such holder had converted the number of Series A preferred stock to be redeemed into common stock at the redemption date; plus in the case of (i) and (ii), any accrued or declared but unpaid dividends.

 

NOTE 19: MORTGAGE RECEIVABLE SECURITIZATION

 

The Board of Directors of IRSA, in the meeting held on November 2, 2001, authorized the setting up of a financial trust for the securitization of Company receivables. The trust program for issuing participation certificates, under the terms of Law No. 24.441, was approved by the National Securities Commission by means of Resolution No. 13.040, dated October 14, 1999, as regards the program and in particular as regards the Trust called IRSA I following a decision of the Board of Directors dated December 14, 2001.

 

On December 17, 2001, IRSA, Inversora Bolívar S.A. and Baldovinos S.A., parties of the first part (hereinafter the “Trustors”) and Banco Sudameris Argentina S.A., party of the second part (hereinafter the “Trustee”), have agreed to set up the IRSA I Financial Trust under the Global Program for the Issuance of FIDENS Trust Values, pursuant to the contract entered into on November 2, 2001.

 

Under the above program, the trustors have sold their personal and real estate credits, secured with mortgages or arising from bills of sale with the possession of the related properties, for the total amount US$ 26,585,774 to the Trustee, in exchange for cash and the issuance by the Trustee of Participation Certificates for the same nominal value and in accordance with the following classes:

 

  Class A Participation Certificates (“CPA”): Nominal value of US$ 13,300,000, with a 15% fixed annual nominal yield, with monthly Service payments due on the 15th of each month or on the immediately following working day. These certificates grant the right to collect the following Services: (a) a fixed yield calculated on the Class’ principal balance, with monthly capitalization, payable monthly as from the total settlement of the CPAs, and (b) an amortization.

 

26


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 19: (Continued)

 

  Class B Participation Certificates (“CPB”): Nominal value of US$ 1,000,000, with a 15.50% fixed annual, nominal yield, with monthly Service payments due on the 15th of each month or on the immediately following working day. These certificates grant the right to collect the following Services: (a) a fixed yield calculated on the Class’ principal balance, with monthly capitalization, payable monthly as from the total settlement of the CPAs, and (b) an amortization equivalent to the sums paid as from the Last Service Payment Date on which the total settlement of the CPA Certificates may have taken place, net of their fixed yield.

 

  Class C Participation Certificates (“CPC”): Nominal value of US$ 1,600,000, with a 16% fixed annual nominal yield, with monthly Service payments due on the 15th of each month or on the immediately following working day. These certificates grant the right to collect the following Services: (a) a fixed yield calculated on the Class’ principal balance, with monthly capitalization, payable monthly as from the total settlement of the CPBs, and (b) an amortization equivalent to the sums paid as from the Last Service Payment Date on which the total settlement of the CPBs may have taken place, net of their fixed yield. The fixed yield will accrue as from the Cut-Off Date and will be capitalized on a monthly basis.

 

  Class D Participation Certificates (“CPD”): Nominal Value of US$ 10,685,774. These grant the right to collect monthly the sums arising from the Cash Flow, net of the contributions made to the Expense Fund, once the remaining classes have been fully settled.

 

The period for placing the Participation Certificates was from December 27, 2001 to January 15, 2002.

 

Pursuant to Decree No. 214/02, assets and debts in U.S. dollars or other foreign currencies in the Argentine financial system as of January 6, 2002, were converted to pesos at the rate of exchange of Ps. 1 per US$ 1 or its equivalent in another currency and was adjusted by a reference stabilization index (CER) / coefficient of salary fluctuation (CVS).

 

On July 21, 2003 an amendment was signed to the trust contract by which a system of proportional adjustment to the Participation Certificates was established to recognize the CER and CVS, and also to modify the face of the Participation Certificates Class D, with the new face value being Ps. 10,321,280.

 

At March 31, 2004, the Exchangeable Class C and D Participation Certificates amounted to thousand Ps. 5,659 in IRSA, thousand Ps. 948 in Inversora Bolívar S.A., and thousand Ps. 233 in Baldovinos S.A. Class A and B Certificates are totally amortized at the closing of the period.

 

27


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 20: CAPITAL REDUCTION IN PALERMO INVEST S.A. AND INVERSORA BOLIVAR S.A.

 

On November 9, 2001, IRSA Inversiones y Representaciones S.A. (“the Company”) and GSEM/AP Holdings L.P. (“GSEM”) entered into a first amendment to the Shareholders’ Agreement entered into on February 25, 1998, which was followed by a second amendment dated November 27, which established, among other issues, the following:

 

  a) The capital reduction of Palermo Invest S.A. by thousand Ps. 37,169.

 

  b) The unanimous approval of Palermo Invest S.A.’s shareholders of a cash dividend for a total amount in pesos equivalent to thousand US$ 19,702, provided this amount does not exceed, on the payment dates, the amount legally distributable. As stated in Decree No. 214/02, the dollar rate of exchange mentioned above has been left without effect.

 

  c) The assignment by the Company in favor of GSEM of rights proportional to the dividends mentioned in b) (called “IRSA Dividend Right”), in such a way that GSEM will have the right to collect all the dividends that may be approved (called “GSEM Dividend Right”), with the scope defined in point g).

 

  d) The Company’s obligation to pay a total amount of thousand US$ 13,135 to GSEM (called “GSEM Credit”), to be settled in two equal installments for a total amount of US$ 6,567 each, plus interest accrued at the time of payment, the first installment falling due on January 31, 2002 and the second on April 30, 2002.

 

  e) The entering into a Share Trust Agreement pursuant to which the Company has assigned in trust, under the terms of Law No. 24,441, in favor of the Trustee (ABN AMRO BANK N.V.), all the shares it owns in Palermo Invest S.A.. Under no circumstances, may the Trustee transfer, pledge or otherwise assign IRSA’s shares either wholly or partially to any Person, and it must at all times exercise the voting rights granted by the shares as indicated by IRSA. Under the trust provisions, GSEM is not empowered, at any time, to request the trustee to extinguish the right to redeem IRSA’s shares. Upon the Company’s total fulfillment of its obligations to GSEM, the trustee must return the shares to IRSA under the terms and conditions of the trust agreed with the Trustee.

 

  f) GSEM is empowered to collect all the distributions that Palermo Invest S.A. may resolve, provided the Company has not settled all the obligations generated in favor of GSEM, as provided in point d) above.

 

28


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 20: (Continued)

 

  g) Finally, the Company and GSEM/AP Holdings L.P. acknowledge that: i) all the amounts received in cash by GSEM from Palermo Invest S.A. on account of IRSA Dividend Right, must be considered as a reduction in the amount owed by IRSA under the GSEM Credit, and ii) all the amounts received in cash by GSEM on account of the GSEM Credit will oblige GSEM to return to IRSA the equivalent portion of IRSA Dividend Right, but if IRSA pays the total amount plus all accrued interest and reasonable costs to GSEM, IRSA may then recover its rights regarding the IRSA Dividend Right.

 

At 30 June 2003, the Company has settled all the installments referred to in item d) amounting to a total of Ps. 39,208 thousand, recording a profit of Ps. 25,962 thousand as a result of a remission by GSEM. Along these lines, at the date of issue of these unaudited financial statements, the aspects referred to in items c), e), f) and g) are null and void.

 

NOTE 21: DERIVATIVE INSTRUMENTS

 

The Company uses certain financial instruments to reduce its global financing costs. Furthermore, the Company has not used the financial instruments to hedge future operations or commitments

 

  Interest rate swaps

 

Interest rate swaps are used to hedge interest rate exposure. Liabilities generated by the interest rate swap have been valued at estimated settlement cost.

 

Differences generated by application of the mentioned criteria to assets and liabilities under swaps for derivatives were recognized in the results for the period.

 

In order to minimize its financing costs and manage interest rate exposure, APSA entered into an interest rate swap agreement to effectively convert a portion of its peso-denominated fixed- rate debt to peso-denominated floating rate debt.

 

29


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 21: (Continued)

 

At March 31, 2001 the Company had an interest rate swap agreement outstanding with an aggregate notional amount of Ps. 85.0 million with maturity in April 2005. This swap agreement initially allowed the Company to reduce the net cost of its debt. However, subsequent to June 30, 2001, the Company modified the swap agreement due to an increase in interest rates as a result of the economic situation. Under the terms of the revised agreement, the Company converted its peso-denominated fixed rate debt to U.S. dollar-denominated floating rate debt for a notional amount of US$ 69.1 million with maturity in April 2005, which as of March 31, 2004 has a fair value of US$ 43.43 million. Any difference payable or receivable is accrued and recorded as an adjustment to disbursements for interest in the Statement of Income. During the periods ended March 31, 2004 and 2003, APSA recognized a gain of Ps. 13.9 million and of Ps. 53.3 million, respectively.

 

The inherent risk to Alto Palermo S.A. from the swap agreement is limited to the cost of replacing that contract at current market rates. Alto Palermo S.A. considers that such cost would increase in the event of a continuing devaluation of the peso.

 

  Options contracts to purchase metals

 

In December 2003, Ritelco S.A. acquired gold and silver purchase contracts maturing in February and March 2004. Both operations were settled upon maturity and, consequently, the Company does not hold derivative instruments at year-end. In accordance with its risk administration policies, the Company enters into future metal contracts for speculative purposes.

 

The result from both future metal operations at March 31, 2004 amounts to Ps. 4.4 million which equals to US$ 1.5 million and are recorded in the line “Financial results generated by assets” in the Statement of Income.

 

30


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 22: ALTO PALERMO - ISSUANCE OF NEGOTIABLE OBLIGATIONS CONVERTIBLE FOR SHARES

 

On July 19, 2003, Alto Palermo S.A. issued Series I of Negotiable Obligations convertible for ordinary, book-entry shares, par value of Ps. 0.10 each, for up to US$ 50,000,000.

 

After the end of the period granted to exercise the accretion right, the Negotiable Obligations convertible for Shares for US$ 50,000,000 were fully subscribed and paid-up.

 

This issuance was resolved at the Ordinary and Extraordinary Meeting of Shareholders held on December 4, 2001, approved by the National Securities Commission Resolution No. 14.196 dated March 15, 2002 and authorized to list for trading on the Buenos Aires Stock Exchange on July 8, 2002.

 

The main issue terms and conditions of the convertible Negotiable Obligations are as follows:

 

  Issue currency: US dollars.

 

  Due date: July 19, 2006.

 

  Interest: at a fixed nominal rate of 10% per annum. Interest is payable semi-annually.

 

  Payment currency: US dollars or its equivalent in pesos.

 

  Conversion right: the notes will be converted at the option of each holder into ordinary book entry shares at a conversion price equivalent to the higher of the result from dividing the nominal value of the Company’s shares (Ps. 0.1) by the exchange rate and US$ 0.0324, which means that each Note is potentially exchangeable for 30,864 shares of Ps. 0.1 par value each.

 

  Right to collect dividends: the shares underlying the conversion of the negotiable obligations will be entitled to the same right to collect any dividends to be declared after the conversion as the shares outstanding at the time of the conversion.

 

31


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 22: (Continued)

 

The Convertible Negotiable Obligations were paid in cash or by using liabilities due from APSA on the subscription date.

 

The Company applied the funds obtains from the offering of securities to payment of expenses and fees relating to issuing and placement of convertible negotiable obligations, payment of liabilities with shareholders and repurchase of negotiables obligations Class A-2 and B-2 the latter belong to its subsidiary Shopping Alto Palermo S.A., thus fulfilling the plan for allocation of funds duly presented to the National Securities Commission.

 

At March 31, 2004, third party holders of Convertible Negotiable Obligations to ordinary Company shares, have exercised their right to convert them for a total US$ 930,590, generating the issuing of 27,568,130 ordinary shares with a face value of Ps. 0.1 each. As a result of conversions, the Company has recorded a loss of Ps. 11.8 million arising from 1.73 % dilution of its shareholding in APSA, which is disclosed in the “Net loss in related companies” line in the consolidated Statement of Income.

 

The total amount of Convertible Negotiable Obligations at March 31, 2004 was US$ 49.07 million.

 

NOTE 23: ALTO PALERMO - COMMITMENT TO MAKE CONTRIBUTIONS AND OPTIONS GRANTED TO ACQUIRE SHARES IN RELATED COMPANIES

 

The Company and Telefónica de Argentina S.A. have undertaken to make capital contributions in E-Commerce Latina S.A. for Ps. 10 million, payable during April 2001, according to their respective shareholdings, and, if approved by the Board of Directors of E-Commerce Latina S.A., to make an optional capital contribution for up Ps. 12 million for the development of new lines of business. Telefónica de Argentina S.A. would contribute 75% of that amount.

 

On April 30, 2001, Alto Palermo S.A. and Telefónica de Argentina S.A. made a contribution of Ps. 10 million, according to their respective shareholdings.

 

In addition, E-Commerce Latina S.A. has granted an irrevocable option to acquire Class B shares representing 15% of the corporate capital of Altocity.com S.A. in favor of Consultores Internet Managers Ltd., a company organized in the Cayman Islands, in order to act as representative of the Management of Altocity.com S.A. and represented by an independent lawyer. That option may be exercised during a term of 8 years as from February 26, 2000, at a price equivalent to current and future contributions to be made in Altocity.com S.A., plus interest to be accrued at a rate of 14% and to be capitalized annually.

 

32


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the unaudited consolidated financial statements (Contd.)

 

NOTE 24: EARNINGS PER SHARE

 

Below is a reconciliation between the weighted average of ordinary outstanding shares and the weighted average of diluted ordinary shares. The latter has been determined considering the possibility of holders of Negotiable Obligations convertible into Ordinary Shares of the Company for a nominal value of up to US$ 100,000,000, mentioned in Note 11 to the unaudited financial statements, exercising their right to convert the bonds held by them into shares.

 

Weighted average outstanding shares total 213,469.

Conversion of securities into debt.

Weighted average diluted ordinary shares total 561,251.

 

Below is a reconciliation between net income used for calculation of the basic and diluted earnings per share.

 

     31.03.04

   31.03.03

 

Result for calculation of basic earnings per share

   45,231    265,871  

Exchange difference

   6,560    (55,000 )

Interest

   16,741    9,072  

Income tax

   —      16,075  
    
  

Result for calculation of diluted earnings per share

   68,532    236,018  
    
  

Net basic earnings per share

   0.206    1.271  

Net diluted earnings per share

   0.123    0.601  

 

NOTE 25: SUBSEQUENT EVENTS

 

On May 7, 2004, Ritelco S.A. sold a participation of 2,444,571 shares of Banco Hipotecario S.A. to IFIS at a unit price of Ps. 7.0. The total amount of the operation is US$ 6.0 million and generated a loss of Ps. 1.6 million.

 

33


IRSA Inversiones y Representaciones

Sociedad Anónima

 

Free translation of the

Unaudited Financial Statements

For the nine-month period ended as of

March 31, 2004

In comparative format


IRSA Inversiones y Representaciones Sociedad Anónima

 

Name of the Company:

  

IRSA Inversiones y Representaciones S.A.

Corporate domicile:

  

Bolívar 108 1º Floor – Autonomous City of Buenos Aires

Principal activity:

  

Real estate investment and development

 

Unaudited Financial Statements at March 31, 2004

compared with the same period of the previous year

Stated in thousand of pesos

Fiscal year No. 61 beginning July 1º, 2003

 

DATE OF REGISTRATION WITH THE PUBLIC REGISTRY OF COMMERCE

 

Of the By-laws:

  

June 25, 1943

Of last amendment:

  

July 2, 1999

Registration number with the Superintendence of Corporations:

  

4,337

Duration of the Company:

  

Until April 5, 2043

 

Information related to subsidiary companies is shown in Schedule C.

 

CAPITAL COMPOSITION (Note 9)


          In thousands of pesos

Type of stock


  

Authorized for Public Offer of

Shares


   Subscribed

   Paid up

Common stock,1 vote each

   238,252,537    238,253    238,253
    
  
  

 

35


IRSA Inversiones y Representaciones Sociedad Anónima

 

Unaudited Balance Sheets as of March 31, 2004 and June 30, 2003

In thousand of pesos (Note 1)

 

    

March 31,

2004


  

June 30,

2003


ASSETS

         

CURRENT ASSETS

         

Cash and banks (Schedule G)

   19,282    54,569

Investments (Schedules C, D and G)

   17,498    79,569

Mortgages and leases receivables (Note 2)

   3,325    2,889

Other receivables (Note 3 and Schedule G)

   74,180    20,035

Inventories (Note 4)

   5,096    8,172
    
  

Total Current Assets

   119,381    165,234
    
  

NON-CURRENT ASSETS

         

Mortgages receivables (Note 2)

   73    256

Other receivables (Note 3 and Schedule G)

   74,326    87,443

Inventories (Note 4)

   304    3,382

Investments, net (Schedules C, D and G)

   971,469    883,664

Fixed assets, net (Schedule A)

   181,037    185,854

Intangible assets, net (Schedule B)

   —      —  
    
  

Total Non-Current Assets

   1,227,209    1,160,599
    
  

Total Assets

   1,346,590    1,325,833
    
  

LIABILITIES

         

CURRENT LIABILITIES

         

Trade accounts payable (Schedule G)

   1,766    2,323

Mortgages payable (Schedule G)

   2,144    2,100

Customer advances

   710    899

Short - term debt (Note 5 and Schedule G)

   12,985    38,581

Salaries and social security payable

   575    559

Taxes payable (Schedule G)

   5,341    3,011

Other liabilities (Note 6 and Schedule G)

   2,336    10,495
    
  

Total Current Liabilities

   25,857    57,968
    
  

NON-CURRENT LIABILITIES

         

Long - term debt (Note 5 and Schedule G)

   419,442    457,838

Customer advances

   —      18

Taxes payable

   45    74

Other liabilities (Note 6 and Schedule G)

   1,154    749
    
  

Total Non-Current Liabilities

   420,641    458,679
    
  

Total Liabilities

   446,498    516,647
    
  

SHAREHOLDERS ‘EQUITY (As per relevant statement)

   900,092    809,186
    
  

Total Liabilities and Shareholders’ Equity

   1,346,590    1,325,833
    
  

 

The accompanying notes and schedules are an integral part of these unaudited financial statements.

 

Eduardo Sergio Elsztain

President

 

36


IRSA Inversiones y Representaciones Sociedad Anónima

 

Unaudited Statements of Income

For the nine – month periods beginning on

July 1, 2003 and 2002

and ended March 31, 2004 and 2003

In thousand of pesos (Note 1)

 

    

March 31,

2004


   

March 31,

2003


 

Sales, leases and services

   20,861     36,213  

Cost of sales, leases and services (Schedule F)

   (16,502 )   (31,715 )
    

 

Gross income

   4,359     4,498  

Selling expenses (Schedule H)

   (1,011 )   (1,394 )

Administrative expenses (Schedule H)

   (6,533 )   (5,949 )
    

 

Subtotal

   (7,544 )   (7,343 )

Results from operations and holding of real estate assets

   —       10,141  
    

 

Operating results

   (3,185 )   7,296  

Financial results generated by assets:

            

Interest income

   8,143     1,849  

Exchange gain (loss)

   12,413     (60,537 )

Loss on exposure to inflation

   —       (10,790 )

Gain on financial operations

   20,082     12,008  

Interest on discount of assets

   697     —    
    

 

Subtotal

   41,335     (57,470 )

Financial results generated by liabilities:

            

Discounts

   7,235     26,154  

Exchange (loss) gain

   (10,476 )   200,572  

Gain on exposure to inflation

   —       2,621  

Interest on discount of liabilities

   17     31,233  

Financial expenses (Schedule H)

   (29,747 )   (34,040 )
    

 

Subtotal

   (32,971 )   226,540  
    

 

Financial results, net

   8,364     169,070  

Equity in earnings of controlled and affiliated companies (Note 8 c.)

   44,091     42,237  

Other expenses, net (Note 7)

   (1,024 )   (1,619 )
    

 

Income before tax

   48,246     216,984  

Income tax and asset tax ( Notes 1.6 m., n. and 12)

   (3,015 )   48,887  
    

 

Income for the period

   45,231     265,871  
    

 

 

The accompanying notes and schedules are an integral part of these unaudited financial statements.

 

Eduardo Sergio Elsztain

President

 

37


IRSA Inversiones y Representaciones Sociedad Anónima

 

Unaudited Statements of Changes in Shareholders’ Equity

For the nine – month periods beginning on

July 1, 2003 and 2002

and ended March 31, 2004 and 2003

In thousand of pesos (Note 1)

 

Items


  Shareholders’ contributions

  Reserved
Earnings


  Retained
deficit


   

Total as of

March 31,
2004


 

Total as of

March 31,
2003


  Common
Stock


  Treasury
stock


  Inflation
adjustment
of common
stock


  Inflation
adjustment
of treasury
stock


  Additional
paid-in-
capital


  Total

  Legal reserve

     

Balances as of beginning of year

  212,013   —     274,387   —     569,489   1,055,889   19,447   (266,150 )   809,186   522,720

Issuance of common stock

  26,240   —     —     —     19,435   45,675   —     —       45,675   —  

Income for the period

  —     —     —     —     —     —     —     45,231     45,231   265,871
   
 
 
 
 
 
 
 

 
 

Balances as of March 31, 2004

  238,253   —     274,387   —     588,924   1,101,564   19,447   (220,919 )   900,092   —  
   
 
 
 
 
 
 
 

 
 

Balances as of March 31, 2003

  212,000   —     274,387   —     569,481   1,055,868   19,447   (286,724 )   —     788,591
   
 
 
 
 
 
 
 

 
 

 

The accompanying notes and schedules are an integral part of these unaudited financial statements.

 

Eduardo Sergio Elsztain

President

 

38


IRSA Inversiones y Representaciones Sociedad Anónima

 

Unaudited Statements of Cash Flows (1)

For the nine – month periods beginning on

July 1, 2003 and 2002

and ended March 31, 2004 and 2003

In thousand of pesos (Note 1)

 

    

March 31,

2004


   

March 31,

2003


 

CHANGES IN CHASH AND CASH EQUIVALENTS

            

Cash and cash equivalents as of beginning of year

   120,292     5,034  

Net (decrease) increase in cash and cash equivalents

   (99,314 )   139,103  
    

 

Cash and cash equivalents as of end of period

   20,978     144,137  
    

 

CAUSES OF CHANGES IN CASH AND CASH EQUIVALENTS

            

CASH FLOWS FROM OPERATING ACTIVITIES:

            

Income for the period

   45,231     265,871  

Plus (less) income tax and asset tax accrued for the period

   3,015     (48,887 )

Adjustments to reconcile net income to cash flow from operating activities:

            

•      Equity in earnings of controlled and affiliated companies

   (44,091 )   (42,237 )

•      Allowances and provisions

   58     169  

•      Amortization and depreciation

   3,761     5,600  

•      Financial results

   (26,921 )   (213,125 )

Changes in assets and liabilities:

            

•      Decrease (Increase) in current investments

   9,517     (4,572 )

•      Increase in non-current investments

   (610 )   (24,671 )

•      Decrease in mortgages and leases receivables

   100     6,265  

•      Decrease in other receivables

   7,526     18,090  

•      Decrease in inventory

   2,829     18,889  

•      (Decrease) Increase in taxes payable, salaries and social security and customer advances

   (4,412 )   2,037  

•      Decrease in accounts payable

   (557 )   (1,013 )

•      Increase in accrued interest

   11,045     17,158  

•      (Decrease) Increase in other liabilities

   (7,942 )   1,956  
    

 

Net cash (used in) provided by operating activities

   (1,451 )   1,530  
    

 

CASH FLOWS FROM INVESTING ACTIVITIES:

            

•      Decrease from equity interest in subsidiary companies

   1,047     10,343  

•      Increase interest in subsidiary companies

   (42,040 )   (20,641 )

•      Purchase of shares and options of Banco Hipotecario S.A.

   (77,873 )   —    

•      Sale of shares of Banco Hipotecario S.A.

   35,656     —    

•      Purchase of Alto Palermo S.A. shares

   (2,952 )   —    

•      Sale of Alto Palermo S.A. shares

   3,273     —    

•      Loans received (granted) to related parties

   13,367     (32,057 )

•      Purchase and improvements of undeveloped parcels of land

   (105 )   (78 )

•      Purchase and improvements of fixed assets

   (753 )   (3,923 )

•      Dividends collected

   5,464     —    
    

 

Net cash used in investing activities

   (64,916 )   (46,356 )
    

 

CASH FLOWS FROM FINANCING ACTIVITIES:

            

•      Proceeds from short-term and long-term debt

   —       356,295  

•      Payment of short-term and long-term debt

   (55,503 )   (171,181 )

•      Payment for seller financing

   (1,150 )   (1,185 )

•      Issuance of common stock

   23,706     —    
    

 

Net cash (used in) provided by financing activities

   (32,947 )   183,929  
    

 

Net (decrease) increase in cash and cash equivalents

   (99,314 )   139,103  
    

 


(1) Includes cash, banks and investments with a realization term not exceeding three months.

 

The accompanying notes and schedules are an integral part of these unaudited financial statements.

 

Eduardo Sergio Elsztain

President

 

39


IRSA Inversiones y Representaciones Sociedad Anónima

 

Unaudited Statements of Cash Flows (Continued)

For the nine month periods beginning on

July 1, 2003 and 2002

and ended March 31, 2004 and 2003

In thousand of pesos (Note 1)

 

    

March 31,

2004


  

March 31,

2003


Supplemental cash flow information

         

Non-cash activities:

         

•      Increase in inventory through a decrease in fixed assets

   2,606    12,013

•      Increase in fixed assets through a decrease in inventory

   40    153

•      Increase in undeveloped parcels of land through a decrease in inventory

   —      25,319

•      Decrease in other receivable for APSA bond

   —      81,967

•      Decrease in short and long term debt through an increase in other payable

   1,326    —  

•      Increase in inventory through a decrease in mortgages receivables

   —      896

•      Decrease in non-current investments through an increase in other receivables

   2,220    —  

•      Increase in non-current investments through a decrease in other receivables

   —      456

•      Increase in other current receivables through an increase in current taxes payable

   2,854    —  

•      Increase in fixed assets through an increase in mortgages payable

   —      931

•      Increase in other non-current receivables through a decrease in inventory

   5,890    —  

•      Conversion of negotiable obligations into shares

   21,969    —  

•      Decrease in short-term and long-term debt through a decrease in other receivables

   —      7,417

•      Increase in non-current investments through a decrease in other receivables

   14,200    —  

 

Eduardo Sergio Elsztain

President

 

40


IRSA Inversiones y Representaciones Sociedad Anónima

 

Notes to the unaudited financial statements

For the nine – month periods beginning on

July 1, 2003 and 2003

and ended March 31, 2004 and 2003

In thousand of pesos

 

NOTE 1: SIGNIFICANT ACCOUNTING POLICIES

 

Below are the most relevant accounting standards used by the Company to prepare these unaudited financial statements:

 

1.1. Issuance of new technical pronouncements

 

The Professional Council in Economic Sciences of the Autonomous City of Buenos Aires approved Technical Pronouncements No. 16: “Conceptual framework for professional accounting standards”, No. 17: “Professional accounting standards: development of some general application issues”, No. 18 : “Professional accounting standards: development of some particular application issues”, No. 19: “Amendments to Technical Pronouncements Nos. 4, 5, 6, 8, 9, 11 and 14” and 20: “Derivatives and hedging transactions”, through Resolutions C 238/01, C 243/01, C 261/01, C 262/01 and C 187/02, respectively; establishing that those Technical Pronouncements and amendments to them will come into force for fiscal years commencing as from July 1, 2002, except for TR 20, whose effective date tallies with the financial years commencing January 1, 2003.

 

The National Securities Commission has adopted the mentioned Technical Pronouncements, incorporating certain amendments, to be in effect as from years commenced on January 1, 2003.

 

Furthermore, the Professional Council in Economic Sciences of the Autonomous City of Buenos Aires approved Technical Pronouncement No. 21: “Equity Method Value – consolidation of financial statements – information to disclose on related parties” through Resolution M.D. No. 5/2003. This Technical Pronouncement and the modifications it incorporates, became effective for financial years beginning as from April 1, 2003. Furthermore, the National Securities Commission has adopted it, making certain changes and establishing that it is applicable as from fiscal years commenced on April, 2004, accepting advance application.

 

The principal changes incorporated by the new Technical Pronouncements, which have had a material effect on the financial statements of the Company, are as follows:

 

  Incorporation of strict guidelines for purposes of comparison against recoverable values.

 

  Obligatory requirement regarding application of the deferred tax method for recognition of income tax.

 

  Incorporation of new disclosure requirements, including information by segment, earnings per share and comparative information to be filed.

 

  Adoption of an accounting model in which the intention of the Company prevails in defining the valuation criteria to be adopted. Furthermore, receivables and payables were recognized in general at their discounted values.

 

41


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

  Determination of guidelines for recognition, measurement and disclosure of derivatives and hedge operations.

 

  Research, development, trademarks, advertising, reorganization and other costs cannot be capitalized. Only organization and pre-operating costs that meet certain requirements can be capitalized.

 

  Change of method for recognition of business combinations (acquisitions, pooling of interests, spin-offs and mergers).

 

  Incorporation of guidelines to be followed to determine whether certain transactions (financial instruments issued by the Company, irrevocable contributions, preferred shares) must be classified under liabilities or shareholders’ equity.

 

A detail of effect on results at March 31, 2003 from application of the new accounting standards is included in the following table:

 

Item


  

Effect on results at
31.03.03
(comparative)

Ps.


 

Recording of adjustment and prior years’ results in subsidiaries and related companies under long-term investments (*)

   (3,401 )

Application of the deferred tax method (vs. current tax)

   49,931  

Discount of liabilities

   21,713  
    

Total

   68,243  
    


(*) Related to the application of the deferred tax method (vs. current tax) and recognition of financial derivatives at estimated settlement cost.

 

1.2. Preparation and presentation of financial statements

 

These unaudited financial statements are stated in Argentine pesos and were prepared in accordance with disclosure and valuation criteria contained in the Technical Pronouncements issued by the Argentine Federation of Professional Councils in Economic Sciences, approved with certain amendments by the Professional Council in Economic Sciences of the Autonomous City of Buenos Aires, in accordance with the resolutions issued by the National Securities Commission.

 

The unaudited financial statements corresponding to the nine-month periods ended March 31, 2004 and 2003 have not been audited.

 

Company Management estimates that all the necessary adjustments have been made to reasonably present the results of each period.

 

The results for the nine-month periods ended March 31, 2004 and 2003, do not necessarily reflect proportionately the Company’s results for the complete financial years.

 

42


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

1.3. Use of estimations

 

The preparation of the unaudited financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses for the period. Estimates are used when accounting for allowance for doubtful accounts, depreciation, amortization, impairment of long-lived assets, income taxes and contingencies. Future actual results could differ from the estimates and assumptions prepared at the date of these unaudited financial statements.

 

1.4. Recognition of the effects of inflation

 

The financial statements have been prepared in constant monetary units, reflecting the overall effects of inflation through August 31, 1995. As from that date, in accordance with professional accounting standards and the requirements of the control authorities, restatement of the financial statements has been discontinued until December 31, 2001. As from January 1, 2002 in accordance with professional accounting standards, recognition of the effects of inflation in these unaudited financial statements has been re-established, considering that the accounting measurements restated due to changes in the purchasing power of the currency until August 31, 1995 as well as those arising between that date and December 31, 2001 are stated in currency of the latter date.

 

On March 25, 2003, the National Executive Branch issued Decree No. 664 establishing that the financial statements for years ending as from that date must be stated in nominal currency. Consequently, in accordance with Resolution No. 441 issued by the National Securities Commission, the Company discontinued the restatement of its financial statements as from March 1, 2003. This criterion is not in line with current professional accounting standards, which establish that the financial statements must be restated through to September 30, 2003. At March 31, 2004 this deviation has not had a material effect on the financial statements.

 

The rate used for restatement of items in these unaudited financial statements is the domestic wholesale price index published by the National Institute of Statistics and Census.

 

The following concepts are included together in the Statement of Income as “Financial results generated by assets” and “Financial results generated by liabilities”:

 

a. The result of exposure to changes in the purchasing power of the currency.

 

b. Other holding gains and losses arising during the period.

 

c. Financial results.

 

1.5. Comparative information

 

According to the new Technical Pronouncements mentioned in Point 1.1, the Balance Sheet is disclosed in comparative format with the year ended June 30, 2003.

 

Certain amounts in the financial statements at March 31, 2003 and June 30, 2003 were reclassified for disclosure on a comparative basis with those for the current period.

 

43


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

  1.6. Valuation criteria

 

  a. Cash and banks

 

Cash on hand has been valued at face value.

 

  b. Foreign currency assets and liabilities

 

Foreign currency assets and liabilities were valued at period-end exchange rates.

 

Operations denominated in foreign currency are converted into pesos at the rates of exchange in effect at the date of settlement of the operation. Operations in foreign currency are shown in the Statement of Income under Financial results, net.

 

In accordance with Decree 214/02, certain assets and liabilities denominated in US dollars or other foreign currencies existing at January 6, 2003 were converted into pesos at the parity of Ps. 1 per US$ 1 and adjusted through application of the reference stabilization index (CER).

 

  c. Short-term investments

 

Time deposits were valued at placement value plus financial results accrued based on the internal rate of return determined at that moment.

 

Short-term investments in debt securities, shares and mutual funds were valued at their net realization value.

 

Participation certificates class C in the IRSA I financial trust were valued at acquisition cost plus accrued interest.

 

  d. Trade receivables and accounts payable

 

Trade receivables and accounts payable were valued at the price applicable to spot operations at the time of the transaction plus interest and implicit financial components accrued at the internal rate of return determined at that moment.

 

  e. Financial receivables and payables

 

Financial receivables and payables were valued at the amount deposited and collected, respectively, net of operating costs, plus financial results accrued based on the rate estimated at that time.

 

At June 30, 2003 certain financial loans were valued at their discounted value, calculated at the rate accepted by the creditor to receive advance payment, as the Company settled the loan before maturity.

 

44


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

  f. Other receivables and payables

 

Sundry receivables and payables (Asset tax, corporations sect. 33 Law No. 19.550, deposits in guarantee, accounts receivable in trust and customer advances) were valued based on the best estimate of the amount receivable and payable, respectively, discounted at the interest rate applicable to freely available savings accounts published by the Argentine Central Bank in effect at the time of incorporation to assets and liabilities, respectively. Deferred tax assets and liabilities have not been discounted.

 

As established by the regulations of the National Securities Commission and as mentioned above, deferred tax assets and liabilities have not been discounted. This criterion is not in accordance with current accounting standards in effect in the Autonomous City of Buenos Aires, which require that those balances be discounted. The effect resulting from this difference has not had a material impact on the financial statements.

 

Credits in kind:

 

Right to receive goods to be produced:

 

The units relating to the building called “Edificios Cruceros” have been valued according to the accounting measuring standards corresponding to inventories receivable.

 

Liabilities in kind:

 

Obligation to deliver assets to be manufactured:

 

Units committed for delivery related to the property identified as “San Martín de Tours” were valued at the higher of the value of the sums received or the production cost of the assets to be delivered plus additional costs necessary to place the assets at the disposal of the creditor.

 

Stock exchange transactions to be settled:

 

Stock exchange transactions to be settled have been valued according to the accounting measuring standards corresponding to assets receivable.

 

  g. Balances corresponding to financial transactions and sundry receivables and payables with related parties

 

Receivables and payables with related parties generated by financial transactions and other sundry transactions were valued in accordance with the terms agreed by the parties.

 

45


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

  h. Inventory

 

A property is classified as available for sale upon determination by the Board of Directors that the property is to be marketed for sale in the normal course of business over the next several years.

 

Residential, office and other non-retail properties completed or under construction are stated at cost, adjusted for inflation, as defined in Note 1.4., or estimated net realizable value, whichever is lower. Costs include land and land improvements, direct construction costs, construction overhead costs, interest on indebtedness and real estate taxes. Selling costs are deferred and charged to expense in the period in which the related revenue is earned, as determined under the percentage-of-completion method. Total contract costs are charged to expense in the period in which the related revenue is earned, as determined under the percentage-of-completion method. No interest costs were capitalized during the period ended at March 31, 2004 and the year ended at June 30, 2003.

 

Properties held for sale are classified as current or non-current based on the estimated date of sale and the time at which the related receivable is expected to be collected by the Company.

 

At March 31, 2004, the Company had not set up an allowance for impairment of value of Inventories.

 

At the end of the previous fiscal year, as mentioned in Note 1.6.o., the Company set up allowances for impairment of certain inventories (identified as Avda. Madero 1020, Rivadavia 2768, Minetti D, Torres Jardín, Sarmiento 517 and parking lots in Dock 13).

 

The accounting value of inventories, net of allowances set up, does not exceed estimated recoverable value.

 

  i. Long -term investments

 

i.a. Investments in debt securities:

 

Investments in debt securities were valued based on the best estimate of the discounted amount receivable applying the corresponding rate of return estimated at the time of incorporation to assets, as the Company will hold them to maturity. The value thus obtained does not exceed the respective estimated recoverable value at the end of the period.

 

46


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

i.b. Investments in shares of subsidiaries and related companies:

 

The long-term investments in subsidiaries and related companies detailed in Schedule C, except for investments in Banco de Crédito y Securitización S.A. and in Banco Hipotecario S.A., which do not exceed 20% of the capital stock, were valued by the equity method of accounting based on the financial statements at March 31, 2004 issued by them.

 

The accounting standards used by the subsidiaries to prepare their financial statements are the same as those used by the Company.

 

The accounting standards used by the related companies to prepare their financial statements are those currently in effect.

 

This item also includes the lower or higher value paid for the purchase of shares in subsidiaries and related companies which exceeds or is below the market value of the assets acquired and goodwill related to the subsidiary Alto Palermo S.A.

 

The investments for less than 20% of the capital stock of corporations in which the Company does not exercise significant influence are generally recognized at market value, with the resulting income or losses being recorded in profit and loss accounts or at restated purchase cost if no market value exists.

 

  Certificates of participation in IRSA I financial trust:

 

The certificates of participation in IRSA I financial trust have been valued at the cost resulting from apportioning the participation certificate holding to the trust assets in the case of class D.

 

  Undeveloped parcels of lands:

 

The Company acquires undeveloped land in order to provide an adequate and well-located supply for its residential and office building operations. The Company’s strategy for land acquisition and development is dictated by specific market conditions where the Company conducts its operations.

 

Land held for development and sale and improvements are stated at cost adjusted for inflation at the end of the period, as defined in Note 1.4., or estimated net realizable value, whichever is lower. Land and land improvements are transferred to inventories when construction commences.

 

At March 31, 2004, the Company had not set up an impairment of value of undeveloped parcels of lands.

 

47


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

As mentioned in Note 1.6.o., at June 30, 2003 the Company recognized an impairment in connection with certain parcels of undeveloped land (identified as Padilla 902, Pilar, Constitución 1111). Furthermore, at June 30, 2003 the allowance set up on Santa María del Plata amounting to Ps. 8,528 has been reversed.

 

The values thus obtained, net of the allowances recorded, do not exceed their respective estimated recoverable values at the end of period.

 

  j. Fixed assets

 

Fixed assets, net comprise primarily of rental properties and other property and equipment held for use by the Company.

 

Fixed assets value, net of allowances set up, does not exceed estimated recoverable value.

 

  Rental properties

 

Rental properties are carried at cost, adjusted for inflation, as defined in Note 1.4., less accumulated depreciation. Costs incurred for the acquisition of the properties are capitalized. Accumulated depreciation is computed under the straight-line method over the estimated useful lives of the assets, which generally are estimated to be 50 years for buildings. Expenditures for ordinary maintenance and repairs are charged to results in the period incurred. Significant renovations and improvements, which improve or extend the useful life of the asset are capitalized and depreciated over its estimated remaining useful life. At the time depreciable assets are retired or otherwise disposed of, the cost and the accumulated depreciation of the assets are eliminated from the accounts and the resulting gain or loss is disclosed in the statement of income.

 

The Company capitalizes interest on long-term construction projects. No interest costs were capitalized during the period ended March 31, 2004 and the year ended June 30, 2003.

 

At March 31, 2004 the company had not set up an impairment of value of fixed assets.

 

As mentioned in Note 1.6.o., at June 30, 2003, the Company recognized an impairment on certain rental property (identified as Avda. Madero 1020, Reconquista 823, Avda. Madero 942 and Sarmiento 517).

 

  Software obtained or developed for internal use

 

The Company capitalizes certain costs associated with the development of computer software for internal use. Costs capitalized during the period ended March 31, 2004 and the year ended June 30, 2003 were not material.

 

48


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

These costs are being amortized on a straight-line basis over a period of 3 years.

 

  Other properties and equipment

 

Other property and equipment properties are carried at cost, adjusted for inflation, as defined in Note 1.4., less accumulated depreciation. Accumulated depreciation is computed under the straight-line method over the estimated useful lives of the assets, as specified below:

 

Asset


 

Estimated useful life (years)


Leasehold improvements

 

On contract basis

Facilities

 

10

Machinery and equipment

 

10

Furniture and fixtures

 

5

Computer equipment

 

3

 

The cost of maintenance and repairs is charged to expense as incurred. The cost of significant renewals and improvements are added to the carrying amount of the respective assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts.

 

  k. Intangible assets

 

Intangible assets are carried at cost, adjusted for inflation at the end of the period as defined in Note 1.4., less accumulated amortization.

 

Intangible assets accounting value, does not exceed estimated recoverable value.

 

  Deferred Financing Cost

 

Expenses incurred in connection with the issuance of debt and proceeds of loans have been deferred and are being amortized using the interest method over the life of the related issuances. In the case of redemption of this notes, the related expenses are amortized using the proportional method.

 

Amortization has been recorded under financial results in the Statement of Income.

 

49


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

  Selling and advertising expenses

 

Expenses incurred relating to the marketing of developing properties, including advertising, commissions and other expenses, are charged to expense in the period in which the related revenue is earned, as determined under the percentage-of-completion method.

 

  l. Customer advances

 

Customer advances represent payments received in advance in connection with the sale and rent of properties.

 

  m. Income tax

 

The Company has recognized the charge for income tax by the deferred tax liability method, recognizing timing differences between measurements of accounting and tax assets and liabilities (See Note 12).

 

To determine deferred assets and liabilities, the tax rate expected to be in effect at the time of reversal or use has been applied to timing differences identified and tax loss carryforwards, considering the legal regulations approved at the date of issue of these unaudited financial statements.

 

Since it is unlikely that future taxable income will fully absorb tax loss carryforwards, the Company has recorded an impairment on a portion of that credit.

 

  n. Asset Tax

 

The Company calculates Asset tax by applying the current 1% rate on computable assets at the end of the period. This tax complements income tax. The Company’s tax obligation in each year will coincide with the higher of the two taxes. However, if Asset tax exceeds income tax in a given year, that amount in excess will be computable as payment on account of income tax arising in any of the following ten years.

 

At March 31, 2004, the Company estimated asset tax recognizing under other receivables (non-current) the amount estimated to be offset as payment on account of income tax in future years in accordance with current regulations, and expensed the balance.

 

50


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

  o. Allowances and Provisions

 

Allowance for doubtful accounts: the Company provides for losses relating to mortgage, lease and other accounts receivable. The allowance for losses is recognized when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the terms of the agreements. The allowance is determined on a one-by-one basis considering the present value of expected future cash flow. While management uses the information available to make evaluations, future adjustments to the allowance may be necessary if future economic conditions differ substantially from the assumptions used in making the evaluations. Management has considered all events and/or transactions that are subject to reasonable and normal methods of estimations, and the unaudited financial statements reflect that consideration.

 

For impairment of assets: the Company regularly evaluates its non-current assets for recoverability. The Company considers that an impairment loss is recorded whenever the recoverable value is lower than book value. Impairment losses must be expensed against the result for the period. The recoverable value is mainly calculated using independent appraisals or projections of future cash flows.

 

For contingencies and sundry risks: the Company has certain contingent liabilities with respect to existing or potential claims, lawsuits and other proceedings, including those involving labor and other matters. The Company accrues liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are based on developments to date, the Company’s estimates of the outcomes of these matters and the Company’s lawyers’ experience in contesting, litigating and settling other matters.

 

As the scope of the liabilities becomes better defined, there may be changes in the estimates of future costs, which could have a material effect on the Company’s future results of operations and financial condition or liquidity.

 

At the date of issue of these unaudited financial statements, Management understands that there are no elements to foresee potential contingencies having a negative impact on these unaudited financial statements.

 

  p. Shareholders’ equity accounts

 

Movements in shareholders’ equity accounts have been restated following the guidelines detailed in Note 1.4.

 

The “Common stock” account was stated at historical nominal value. The difference between value stated in constant currency and historical nominal value is shown under “Inflation adjustment of common stock” forming part of the shareholders’ equity.

 

51


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

  q. Results for the period

 

The results for the period are shown as follows:

 

Income accounts are shown in currency of the month to which they correspond, and have been restated as mentioned in Note 1.4.

 

Charges for assets consumed (fixed asset depreciation, intangible asset amortization and cost of sales) were determined based on the values recorded for such assets.

 

Results from investments in controlled and affiliated companies was calculated under the equity method, by applying the percentage of the Company’s equity interest to the income - (loss) of such companies.

 

  r. Advertising expenses

 

The Company generally charges the advertising and publicity expenses to results when they are incurred, except for the advertising and publicity expenses related to the sale of real estate projects. Advertising and promotion expenses were approximately Ps. 165 thousand and Ps. 119 thousand for the periods ended March 31, 2004 and 2003, respectively.

 

  s. Pension information

 

The Company does not maintain any pension plans. Argentine laws provide for pension benefits to be paid to retired employees from government pension plans and/or privately managed funds plan to which employees may elect to contribute.

 

  t. Financial derivatives

 

The Company uses various financial derivatives as a complement to reduce its global financial costs.

 

The Company has not used financial instruments to hedge transactions foreseen or firm commitments. To be eligible for hedging, the Company must be exposed to currency or interest rate risk, and the financial instrument must reduce the exposure and be designated as such. In addition, for hedging purposes, the significant characteristics and expected terms of the planned transaction must be identified and the expected transaction must be probable. Financial instruments that can be recorded as hedging instruments must maintain a high correlation between the hedging instrument and the item being hedged at the beginning and during the entire hedging period.

 

52


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

The Company formally documents all the relationships between hedging instruments and hedged items, as well as its risk management objective and strategy before embarking on hedging transactions. This process includes detailing all the derivatives designated for hedging of specific assets and liabilities in the balance sheet or specific firm commitments or planned transactions. The Company also evaluates both at the beginning of the hedging transaction and on an ongoing basis whether the derivatives used in hedging transactions are very effective to offset fluctuations in the market values or cash flows of the items hedged. If it is determined that a derivative is not very effective for hedging or that it has stopped being an effective cover, the Company would discontinue the recording of such hedging instrument in the future.

 

  u. Revenue recognition

 

  u.1. Sales of properties

 

The Company records revenue from the sale of properties classified as inventory when all of the following criteria are met:

 

  the sale has been consummated;

 

  there is sufficient evidence to demonstrate the buyer’s ability and commitment to pay for the property;

 

  the Company’s receivable is not subject to future subordination; and

 

  the Company has transferred the property to the buyer.

 

The Company uses the percentage-of-completion method of accounting with respect to sales of development properties under construction effected under fixed-price contracts. Under this method, revenue is recognized based on the ratio of costs incurred to total estimated costs applied to the total contract price. The Company does not commence revenue and cost recognition until such time as the decision to proceed with the project is made and construction activities have begun.

 

The percentage-of-completion method of accounting requires the Company’s management to prepare budgeted costs in connection with sales of properties/units. All changes to estimated costs of completion are incorporated into revised estimates during the contract period.

 

  u.2. Leases

 

Revenues from leases are recognized on a straight –line bases over the life of the related lease contracts.

 

  v. Cash and cash equivalents

 

The Company considers all highly liquid investments with original maturities of three months or less, consisting primarily in mutual funds.

 

53


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

  w. Result from operations and holding of real estate

 

The results from operations and holding of real estate assets include the results provided by the valuation and sale of shares in real estate investment companies.

 

  x. Monetary assets and liabilities

 

Monetary assets and liabilities are stated at their face value plus or minus the related financial gain or loss.

 

NOTE 2: MORTGAGES AND LEASES RECEIVABLES

 

The breakdown for this item is as follows:

 

    

March 31,

2004


  

June 30,

2003


     Current

    Non-current

   Current

    Non-current

Mortgages and leases receivable

   1,065     73    841     256

Debtors under legal proceedings

   1,201     —      1,488     —  

Related parties (Note 8 a.)

   1,991     —      1,508     —  

Less:

                     

Allowance for doubtful accounts (Schedule E)

   (932 )   —      (948 )   —  
    

 
  

 
     3,325     73    2,889     256
    

 
  

 

 

As of March 31, 2004 and June 30, 2003, current and non-current receivables from the sale of real estate are secured by first degree mortgages in favor of the Company.

 

54


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 3: OTHER RECEIVABLES

 

The breakdown for this item is as follows:

 

    

March 31,

2004


   

June 30,

2003


 
     Current

  

Non-

current


    Current

  

Non-

current


 

Asset tax (Note 1.6.n.)

   —      19,155     2    18,235  

Value Added Tax (VAT)

   5    —       193    —    

Related parties (Note 8 a.)

   10,086    10     15,959    20,383  

Guarantee deposits

   —      38     —      38  

Expenses to recover

   4,232    —       1,059    —    

Gross sales tax

   5    —       4    —    

Income tax prepayments and withholdings

   14    —       5    —    

Operating pending settlement BH S.A.

   58,627    —       40    —    

Trust accounts receivable

   —      361     —      361  

Credit Fiscal Certificates

   979    —       2,265    —    

Present Value

   —      (809 )   —      (1,505 )

Deferred income tax (Note 12)

   —      49,931     —      49,931  

Credit from barter of “Edificios Cruceros” (1)

   —      5,640     —      —    

Other

   232    —       508    —    
    
  

 
  

     74,180    74,326     20,035    87,443  
    
  

 
  


(1) Secured with first mortgage in favor of the Company.

 

NOTE 4: INVENTORIES

 

The breakdown for this item is as follows:

 

    

March 31,

2004


  

June 30,

2003


     Current

  

Non-

current


   Current

  

Non-

current


Real estate for sale

   5,096    304    8,172    3,382
    
  
  
  
     5,096    304    8,172    3,382
    
  
  
  

 

The value recorded at March 31, 2004 and June 30, 2003 includes the valuation allowance, as mentioned in Note 1.6.o.

 

55


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 5: SHORT AND LONG TERM DEBT

 

The breakdown for this item is as follows:

 

    

March 31,

2004


  

June 30,

2003


     Current

  

Non-

current


   Current

  

Non-

current


Bank loans (2)

   1,645    56,326    30,464    86,365

Bank loans - Accrued interest (2)

   211    3,360    2,509    —  

Negotiable Obligations – 2009 principal amount (3)

   2,673    91,542    —      92,238

Negotiable Obligations - 2009 -accrued interest (3)

   343    5,462    2,677    —  

Convertible Negotiable Obligations - 2007 (1)

   8,113    262,752    2,765    279,235

Other financial loans

   —      —      166    —  
    
  
  
  
     12,985    419,442    38,581    457,838
    
  
  
  

 

In November 2002 the Company refinanced financial loans amounting to US$ 103.4 million. The new conditions are substantially different from the original conditions, and therefore the Company has written off the original loans and recognized a new debt discounted at a rate reflecting the market appraisals on the money time value and risks inherent to the debt. Accordingly, at March 31, 2003, the Company has recognized net income amounting to Ps. 38.2 million, resulting from considering the difference between the discounted value of the new debts at the market rate (8% p.a.) and the book value of refinanced debts at the moment of refinancing.


1. According to Note 11, these tally with the convertible negotiable obligations to stock (CNB) for a total amount of US$ 100 million which as of the current date amounts to US$ 92.5 million, net of issue expenses.
2. Corresponds an unsecured loan for a total of US$ 51 million, which falls due on 20 November 2009, with the principal being amortized in 20 quarterly installments with a two-year grace period. US$ 35 million of the principal accrue interest at the LIBO rate over three months plus 200 basis points, and US$ 16 million accrue interest at a fixed rate that is progressively increased. On July 25, 2003 the Company redeemed the mentioned US$ 16 million for US$ 10.9 million. In addition, on March 17, 2004, the Company redeemed US$ 12 million for a total amount of US$ 8.6 million. Consequently, at March 31, 2004, principal (net of interest to be accrued at a market rate of 8% p.a.) amounts to US$ 20.3 million.

 

The terms of the loan require the Company to maintain certain financial ratios and conditions, specific debt/equity ratios, moreover, they also restrict certain investments, the making of payments, the procurement of new loans and the sale of certain assets and other capital investments.

 

3. Corresponds with the Negotiable Bonds secured by the assets described in Note 10.b. for US$ 37.4 million, which mature on 20 November 2009, and have quarterly interest payments at the LIBO rate over three months plus 200 basis points. Consequently, at March 31, 2004 the Company recorded a total balance of US$ 32.9 million, which correspond to US$ 37.4 million discounted at a market rate equivalent to 8% p.a.

The terms of the loan require the Company to maintain certain financial ratios and conditions, specific debt/equity ratios; they also restrict certain investments, the making of payments, the procurement of new loans and the sale of certain assets and other capital investments.

 

56


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 6: OTHER LIABILITIES

 

The breakdown for this item is as follows:

 

    

March 31,

2004


   

June 30,

2003


 
     Current

  

Non-

current


    Current

  

Non-

current


 

Seller financing

   —      —       1,099    —    

Related parties (Note 8 a.)

   1    —       426    —    

Guarantee deposits

   375    1,232     474    807  

Provision for discounts (Schedule E)

   3    —       3    —    

Provision for lawsuits (Schedule E)

   279    —       247    —    

Directors´ fees

   —      —       4,674    —    

Directors’ deposits

   —      8     —      8  

Fund administration

   1    —       —      —    

Operating pending settlement

   —      —       1    —    

Donations payable

   1,469    —       3,269    —    

Trust account payables

   92    —       —      —    

Collections on behalf of third parties

   —      —       5    —    

Present Value

   —      (86 )   —      (66 )

Other

   116    —       297    —    
    
  

 
  

     2,336    1,154     10,495    749  
    
  

 
  

 

57


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 7: OTHER EXPENSES, NET

 

The breakdown for this item is as follows:

 

    

March 31,

2004


   

March 31,

2003


 

Other income:

            

Results from sale of fixed assets

   62     1  

Other

   129     64  
    

 

     191     65  
    

 

Other expenses:

            

Unrecoverable VAT

   (345 )   (464 )

Donations

   (262 )   (326 )

Debit and credit tax

   (452 )   (528 )

Lawsuits

   (32 )   (166 )

Other

   (124 )   (200 )
    

 

     (1,215 )   (1,684 )
    

 

Total other expenses, net

   (1,024 )   (1,619 )
    

 

 

NOTE 8: BALANCES AND TRANSACTIONS WITH INTERCOMPANY

 

a. The balances as of March 31, 2004 and June 30, 2003 with controlled, affiliated and related companies are as follows:

 

    

March 31,

2004


  

June 30,

2003


Abril S.A. (1)

         

Current mortgages and leases receivables

   —      3

Alternativa Gratis S.A. (4)

         

Current mortgages and leases receivables

   4    5

Alto Palermo S.A. (1)

         

Current mortgages and leases receivables

   148    2

Other current receivables

   1,945    2,048

Current accounts payable

   70    120

Other current liabilities

   1    1

Altocity.Com S.A. (4)

         

Current mortgages and leases receivables

   2    92

Other current receivables

   —      26

Baldovinos S.A. (1)

         

Current mortgages and leases receivables

   325    613

Banco Hipotecario S.A. (4)

         

Non-current investments

   16,466    7,793

Operating pending settlement

   58,627    —  

Banco de Crédito y Securitización S.A (4)

         

Non-current investments

   7,007    7,007

 

58


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 8:

 

a.(Continued)

 

    

March 31,

2004


   

June 30,

2003


Cresud S.A.C.I.F. (2)

          

Current mortgages and leases receivables

   38     1

Other current receivables

   —       188

Current accounts payable

   5     62

Dolphin Fund Management S.A. (4)

          

Current mortgages and leases receivables

   —       22

Other current receivables

   —       19

Current accounts payable

   —       109

Fibesa S.A. (4)

          

Other current receivables

   —       9
            

Current accounts payable

   2     2

Hoteles Argentinos S.A. (1)

          

Current accounts payable

   2     2

Inversora Bolívar S.A. (1)

          

Current mortgages and leases receivables

   1,458     732

Other current receivables

   648     1,336

Current accounts payable

   14     98
     a )    

Llao Llao Resorts S.A. (3)

          

Other current liabilities

   —       425

Palermo Invest S.A. (1)

          

Other current receivables

   4,731     2,366

Other non-current receivables

   —       2,366

Advances employees (4)

          

Managers, Directors and other current Staff of the Company

   98     95

Managers, Directors and other non- current Staff of the Company

   10     14

Red Alternativa S.A. (4)

          

Current mortgages and leases receivables

   6     34

Other current receivables

   —       3

Ritelco S.A. (1)

          

Other current receivables

   —       7,344

Other non-current receivables

   —       18,003

SAPSA (4)

          

Other current receivables

   2,664     2,465

Tarshop S.A. (4)

          

Current mortgages and leases receivables

   10     4

Other current receivables

   —       60

(1) Subsidiary.
(2) Shareholder.
(3) Equity investee
(4) Related party

 

59


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 8: (Continued)

 

  b. Results on controlled, affiliated and related companies during the periods ended March 31, 2004 and 2003 are as follows:

 

     Period

   Sales and
service fees


   Leases

   Holding
results


   Recovery of
expenses


  

Interest

Earned


  

Interest

Lost


Related parties

                                  

Alto Palermo S.A.

   2004    565    —      —      —      145    —  
     2003    —      —      —      —      1,914    —  

Altocity.Com S.A.

   2004    42    100    —      —      —      —  
     2003    —      73    —      —      —      —  

Alternativa Gratis S.A.

   2004    29    —      —      —      —      —  
     2003    —      —      —      —      —      —  

Cresud S.A

   2004    323    —      —      —      —      —  
     2003    —      —      —      —      —      197

Econentworks Argentina S.A.

   2004    —      —      —      —      —      —  
     2003    —      —      —      —      —      —  

Red Alternativa S.A.

   2004    13    112    —      —      —      —  
     2003    —      85    —      44    —      —  

Tarshop S.A.

   2004    101    48    —      —      —      —  
     2003    —      27    —      —      —      —  

Dolphin Found Management S.A.

   2004    18    —      2,041    —      2    —  
     2003    —      —      —      —      —      32

Abril S.A.

   2004    13    —      —      —      —      —  
     2003    13    —      —      —      —      —  

Llao Llao Resorts S.A.

   2004    —      28    —      —      —      —  
     2003    —      —      —      —      —      34

Inversora Bolívar S.A.

   2004    1,072    126    —      —      —      —  
     2003    —      —      —      580    —      —  

Valle de las Leñas S.A.

   2004    —      —      —      —      —      —  
     2003    —      —      —      —      76    —  

Shopping Alto Palermo S.A.

   2004    —      —      —      —      199    —  
     2003    —      —      —      —      66    —  

Banco Hipotecario S.A.

   2004    —      —      16,866    —      —      —  
     2003    —      —      —      —      —      —  

Ritelco S.A.

   2004    —      —      —      —      659    —  
     2003    —      —      —      —      —      —  

Personal loans

   2004    —      —      —      —      4    —  
     2003    —      —      —      —      14    —  
         
  
  
  
  
  

Total 2004

        2,176    414    18,907    —      1,009    —  
         
  
  
  
  
  

Total 2003

        13    185    —      624    2,070    263
         
  
  
  
  
  

 

  c. The composition of intercompany gain is as follows:

 

     Income

     March 31, 2004

   March 31, 2003

Equity in earnings of controlled and affiliated companies

   43,077    42,227

Amortization of intangible assets and investments

   1,014    10
    
  
     44,091    42,237
    
  

 

60


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 9: COMMON STOCK

 

  a. Common stock

 

As of March 31, 2004, IRSA’s capital stock was as follows:

 

     Par Value

   Approved by

   Date of record with the
Public Registry of
Commerce


      Body

  Date

  

Shares issued for cash

   —      First Meeting for IRSA’s Incorporation   04.05.1943    06.25.1943

Shares issued for cash

   16,000    Extraordinary Shareholders´ Meeting   11.18.1991    04.28.1992

Shares issued for cash

   16,000    Extraordinary Shareholders´ Meeting   04.29.1992    06.11.1993

Shares issued for cash

   40,000    Extraordinary Shareholders´ Meeting   04.20.1993    10.13.1993

Shares issued for cash

   41,905    Extraordinary Shareholders´ Meeting   10.14.1994    04.24.1995

Shares issued for cash

   2,000    Extraordinary Shareholders´ Meeting   10.14.1994    06.17.1997

Shares issued for cash

   74,951    Extraordinary Shareholders´ Meeting   10.30.1997    07.02.1999

Shares issued for cash

   21,090    Extraordinary Shareholders´ Meeting   04.07.1998    04.24.2000

Shares issued for cash

   54    Board of Directors´ Meeting   05.15.1998    07.02.1999

Shares issued for cash

   9    Board of Directors´ Meeting (2)   04.15.2003    04.28.2003

Shares issued for cash

   4    Board of Directors´ Meeting (2)   05.21.2003    05.29.2003

Shares issued for cash

   172    Board of Directors´ Meeting (2)   08.22.2003    Pending

Shares issued for cash

   27    Board of Directors´ Meeting (2)   08.22.2003    Pending

Shares issued for cash

   918    Board of Directors´ Meeting (2)   12.31.2003    Pending

Shares issued for cash

   22    Board of Directors´ Meeting (2)   12.31.2003    Pending

Shares issued for cash

   92    Board of Directors´ Meeting (2)   12.31.2003    Pending

Shares issued for cash

   6,742    Board of Directors´ Meeting (2)   12.31.2003    Pending

Shares issued for cash

   662    Board of Directors´ Meeting (2)   12.31.2003    Pending

Shares issued for cash

   46    Board of Directors´ Meeting (2)   12.31.2003    Pending

Shares issued for cash

   26    Board of Directors´ Meeting (2)   12.31.2003    Pending

Shares issued for cash

   77    Board of Directors´ Meeting (2)   12.31.2003    Pending

Shares issued for cash

   8,493    Board of Directors´ Meeting (3)   12.31.2003    Pending

Shares issued for cash

   23    Board of Directors´ Meeting (2)   03.31.2004    Pending

Shares issued for cash

   6    Board of Directors´ Meeting (2)   03.31.2004    Pending

Shares issued for cash

   1,224    Board of Directors´ Meeting (2)   03.31.2004    Pending

Shares issued for cash

   999    Board of Directors´ Meeting (2)   03.31.2004    Pending

Shares issued for cash

   1    Board of Directors´ Meeting (2)   03.31.2004    Pending

Shares issued for cash

   968    Board of Directors´ Meeting (2)   03.31.2004    Pending

Shares issued for cash

   4    Board of Directors´ Meeting (2)   03.31.2004    Pending

Shares issued for cash

   1,193    Board of Directors´ Meeting (2)   03.31.2004    Pending

Shares issued for cash

   512    Board of Directors´ Meeting (2)   03.31.2004    Pending

Shares issued for cash (1)

   20    Board of Directors´ Meeting (2)   03.31.2004    Pending

Shares issued for cash (1)

   4,013    Board of Directors´ Meeting (3)   03.31.2004    Pending
    
             
     238,253              
    
             

 

The Ordinary and Extraordinary Shareholder’s Meeting held on 5 November 2002 and its recess held on 27 November 2002, approved the distribution of 4,587,285 treasury stock proportionately with the shareholders’ holdings and, in accordance with the resolution issued by the Board of Directors on 11 December 2002, such stock was made available to the shareholders as from 19 December 2002.


(1) The shares were issued after the date of closing of the financial statements.
(2) Conversion of negotiable obligations mentioned in Note 11.
(3) Exercise of options mentioned in Note 11.

 

61


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 9: (Continued)

 

  b. Treasury stock

 

The Company repurchases periodically outstanding ordinary shares when it considers that their price is undervalued on the market.

 

During the periods ended March 31, 2004 and 2003 no treasury shares were bought.

 

  c. Restriction on the distribution of profits

 

In accordance with the Argentine Corporations Law and the Company’s By-laws, 5% of the net and realized profit for the year calculated in accordance with Argentine GAAP plus (less) prior year adjustments must be appropriated by resolution of the shareholders to a legal reserve until such reserve equals 20% of the Company’s outstanding capital. This legal reserve may be used only to absorb losses.

 

  d. Non-contributory Management Stock Ownership Plan

 

On October 30, 1997, the shareholders authorized the Company to enter into a Non-contributory Management Stock Ownership Plan (“NMSOP”) with eight executive officers of the Company (the “Beneficiaries”), pursuant to which the Beneficiaries were granted the right to purchase up to 24 million shares of common stock (the “Participation Shares”), at a purchase price equal to Ps. 1.0 per share, subject to the implementation of an Equity Participation Agreement (“EPA”). Under Argentine law, the Company established a special purpose trust in this connection (the “Trust”).

 

The Beneficiaries were required to purchase the Participation Shares available, if any, within 24 months of any capital increase. The Trust has an original term of nine years. According to the terms of the NMSOP and the Trust, Beneficiaries are not entitled to receive any distributions (either in the form of shares, cash or other) from the Trust during its term, although, Beneficiaries are allowed to cause the Trust to sell their designated shares of common stock held by the Trust in certain cases. In addition, the Company was not allowed to grant any loans or otherwise assist the Beneficiaries in financing the purchase of the Participation Shares.

 

On April 7, 1998, the Company’s shareholders, at an extraordinary shareholders’ meeting, approved a capital increase of 24 million shares to permit the Beneficiaries to purchase all of the Participation Shares to which they were entitled under the EPA.

 

The BASE and the CNV approved the capital increase on June 4, 1999, and on August 31, 1999 the Beneficiaries acquired 21,090,024 shares at Ps. 1.0 per share.

 

At March 31, 2004, all the shares held by the trust were sold in accordance with the terms of the contract and, therefore, no shares in trust are recorded.

 

62


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 10: RESTRICTED ASSETS

 

  b) The Labor Court N° 55 decided the distress of units N° 14 and 20 located in Sarmiento 517, property of the Company, in connection with a lawsuit in which the Company is co-defendant.

 

  c) The Company has mortgaged the following real estate: Dock 2 M10 (1l) buildings A and B, Torre Jardín IV, Dock IV, Reconquista 823, 9 activity units at Suipacha 652, 58 activity units at Madero 1020 and 14 plots of the land owned in the district of Caballito, in connection with the secured negotiable bonds referred to in Note 5.3. By means of Minutes No. 1445 dated August 14, 2003 of the Board of Directors´ Meeting, it was resolved to lift and release the mortgages on these properties, substituting them for new mortgages on the following properties: 13 functional units al Libertador 498, 71 supplementary units al Laminar Plaza and 19 supplementary units al Dique IV.

 

  d) The Company has a first mortgage on the property identified as “San Martín de Tours” amounting to US$ 750,000, as performance bond for the construction of the building and transfer of title on the units to be exchanged in favor of Establecimientos Providence S.A.

 

NOTE 11: CONVERTIBLE NEGOTIABLE OBLIGATION

 

On March 8, 2002, the Ordinary and Extraordinary Meeting of Shareholders resolved:

 

  a) Approving the issuance of Negotiable Obligations Convertible into Ordinary Shares of the company (“ONC”) for up to a face value of US$100,000,000 (one hundred million pesos), for a term of 5 (five) years, at a fixed interest rate of 6% to 12% per annum, payable half-periodly in arrears.

 

  b) Approving a subscription option for the ONC holders to subscribe ordinary shares of the company at 1 (one) share per Ps.1 (one peso) of ONC face value, paying in cash Ps.1(pesos one) as subscription price, during 15 (fifteen) days after the conversion term has expired, including the corresponding capital increase.

 

  c) Suppressing the preferential subscription and accretion rights, or reducing the term to exercise the preference, as provided by section 12 of the Negotiable Obligations Law and other applicable regulations.

 

63


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 11: (Continued)

 

  d) Amending article nine (9) of the bylaws to partially adapt its contents to the market circumstances arising from the amendment approved, by replacing 1) the 20% percentage referred to in the amendment to the bylaws, by the percentage indicated in Decree 677/01, i.e., 35%; and 2) eliminating the negotiable obligations or other convertible debt securities, as well as the warrants, from the calculation mentioned in Article Nine of the Bylaws.

 

The public offering and listing of the above-mentioned negotiable obligations was approved by Resolution No. 14316 of the National Securities Commission dated September 24, 2002 and the Buenos Aires Stock Exchange, authorizing the issuance for up to US$ 100,000,000 of securities consisting of negotiable obligations convertible for ordinary shares, bearing interest at an annual rate of 8% and falling due in 2007 and which, at the time of their conversion, provide the right to options to subscribe 100,000,000 ordinary shares. Furthermore, the conversion price and the price of Warrants have been set as follows:

 

  a) The conversion price is 0.5571 shares (5.5713 GDS), while the price of the Warrant is 0.6686 shares (6.6856 GDS).

 

  b) The holder is entitled to exchange each Negotiable Obligation issued by IRSA for 1.7949 shares (0.1795 GDS) and has an option to purchase the same number of shares at the exercise price set for the Warrant.

 

As a result of the distribution of 4,587,285 treasury stock, the Company has adjusted the conversion price of its Convertible Negotiable Bonds in accordance with the terms of the issue. Thus, the conversion price of the Negotiable Bonds fell from US$ 0.5571 to US$ 0.54505 and the price of execution of the warrants dropped from US$ 0.6686 to US$ 0.6541. Said adjustment came into force on 20 December 2002.

 

The Convertible Negotiable Obligations and options will fall due on November 14, 2007.

 

The convertible negotiable bonds were underwritten in full and were paid in cash and assigned to restructure or partially settle the Company´s financial debt al the time of such subscription. Consequently, Note 5 of the financial statements shows the Company’s financial debt after the restructuring and placement mentioned above.

 

On March 31, 2004, holders of Convertible Negotiable Obligations had exercised their right to convert them for a total of US$ 7.5 million, giving rise to the issuing of 13,746,921 ordinary shares of Ps. 1 face value each as disclosed in Note 9.

 

Furthermore, at March 31, 2004, options to subscribe Company shares amounting to US$ 8.2 million were exercised, giving rise to the issue of 12,506,343 ordinary shares of Ps. 1 par value each, as mentioned in Note 9.

 

The total amount of Convertible Negotiable Obligations at March 31, 2004 is US$ 92,507,920.

 

 

64


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 12: INCOME TAX – DEFERRED TAX

 

The evolution and breakdown of deferred tax assets and liabilities are as follows:

 

Items


   Balances at the
beginning of
year


    Changes for
the period


    Balances at
period-end


 

Non-current deferred assets and liabilities

                  

Investments

   1,968     (11,345 )   (9,377 )

Trade receivables

   207     63     270  

Other receivables

   469     (194 )   275  

Inventories

   100     526     626  

Fixed assets

   (28 )   (483 )   (511 )

Intangible assets

   8     —       8  

Tax loss carryforwards

   68,466     10,603     79,069  

Financial debt

   11,092     (4,003 )   7,089  

Other debt

   1,837     (1,698 )   139  

Provisions

   87     11     98  

Allowances for deferred assets

   (34,275 )   6,520     (27,755 )
    

 

 

Total non-current

   49,931     —       49,931  
    

 

 

Total net deferred assets

   49,931     —       49,931  
    

 

 

 

Net assets at the end of the period derived from the information included in the above table amount to Ps. 49,931 thousand.

 

Deferred assets have been provided for in the portion estimated not to be absorbed based on projections of results for future years.

 

65


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 12: (Continued)

 

Below is a reconciliation between income tax expensed and that resulting from application of the current tax rate to the accounting profit for the periods ended March 31, 2004 and 2003, respectively:

 

Items


  

31.03.04

Ps.


   

31.03.03

Ps.


 

Result for the period (before income tax)

   48,246     216,984  

Current income tax rate

   35 %   35 %
    

 

Result for the period at the tax rate

   16,886     75,944  

Permanent differences at the tax rate:

            

—  Restatement into uniform currency

   (15,419 )   (26,801 )

—  Donations

   92     —    

—  Amortization of goodwill

   9     123  

—  Equity in earnings of controlled and affiliated companies

   3,177     (8,066 )

—  Holding result on Participation Certificates F.F.

   (88 )   (19 )

—  Expired tax loss carryforward

   —       557  

—  Cost of sale ARSA / BARSA

   —       (39 )

—  Directors´ Fees

   (9 )   218  

—  Sundry permanent differences

   1,872     —    

Recovery of allowance for deferred assets.

   (6,520 )   (91,848 )
    

 

Total income tax charge for the period (*)

   —       (49,931 )
    

 

Difference

   —       —    
    

 


(*) Difference with the income tax charge of the Statements of Income belongs to asset tax charge.

 

Unexpired income tax loss carryforward pending use at the end of the period amount to Ps. 225,911 thousand according to the following detail:

 

Generated in


  

Amount

Ps.


  

Year of expiry


2002

   211,160    2007

2004

   14,751    2009

Total tax loss carryforward

   225,911     

 

66


IRSA Inversiones y Representaciones Sociedad Anónima

 

Fixed Assets

For the nine – month period beginning on

July 1, 2003

and ended March 31, 2004

compared with the year ended June 30, 2003

In thousand of pesos

 

Schedule A

 

                      Depreciation

       
                          For the period/year

           

Items


  Value at beginning
of year


 

Increases

and

transfers


 

Deductions and

Transfers


   

Value as of end of

The year/period


  Accumulated as of
beginning of year


 

Increase,

deductions

And

Transfers


   

Rate

%


 

Amount

(1)


  Accumulated as
of the year/
period end


 

Net carrying

Value as of

March 31, 2004


 

Net carrying
value as of

June 30, 2003


Furniture and fixtures

  1,514   —     —       1,514   1,512   —       20   —     1,512   2   2

Computer equipment

  4,193   130   —       4,323   3,983   —       33.33 / 20   190   4,173   150   210

Leasehold improvements

  5,692   614   —       6,306   3,902   —       10   457   4,359   1,947   1,790

Real Estate:

                                               

Alsina 934

  1,776   —     —       1,776   291   —       2   21   312   1,464   1,485

Av. de Mayo 595

  5,586   —     —       5,586   1,474   —       2   67   1,541   4,045   4,112

Av. Madero 942

  2,462   —     —       2,462   456   —       2   24   480   1,982   2,006

Constitución 1111

  584   —     —       584   181   —       2   6   187   397   403

Costeros Dique IV

  18,190   —     —       18,190   624   —       2   206   830   17,360   17,566

Dique 2M10 (1I)Edif.A

  19,050   —     —       19,050   1,113   —       2   241   1,354   17,696   17,937

Laminar Plaza

  29,948   —     —       29,948   1,927   —       2   345   2,272   27,676   28,021

Libertador 498

  41,443   9   —       41,452   5,999   —       2   447   6,446   35,006   35,444

Libertador 602

  2,866   —     —       2,866   378   —       2   30   408   2,458   2,488

Madero 1020

  7,801   —     (3,171 )   4,630   1,368   (565 )   2   54   857   3,773   6,433

Maipú 1300

  47,246   —     —       47,246   6,475   —       2   544   7,019   40,227   40,771

Reconquista 823

  20,813   —     —       20,813   3,738   —       2   225   3,963   16,850   17,075

Sarmiento 517

  217   40   —       257   51   —       2   3   54   203   166

Suipacha 652

  13,249   —     —       13,249   3,304   —       2   144   3,448   9,801   9,945
   
 
 

 
 
 

 
 
 
 
 

Total as of March 31, 2004

  222,630   793   (3,171 )   220,252   36,776   (565 )   —     3,004   39,215   181,037   —  
   
 
 

 
 
 

 
 
 
 
 

Total as of June 30, 2003

  238,192   5,069   (20,631 )   222,630   33,884   (1,147 )   —     4,039   36,776   —     185,854
   
 
 

 
 
 

 
 
 
 
 

(1) The accounting application of the depreciation for the period is set forth in Schedule H,

 

67


IRSA Inversiones y Representaciones Sociedad Anónima

 

Intangible Assets

For the nine-month period beginning on

July 1, 2003

and ended March 31, 2004

compared with the year ended June 30, 2003

In thousand of pesos

 

Schedule B

 

Items


  Values of origin

  Amortization

  Net carrying value as of

  Balances as
of beginning
of year


  Additions

  Deductions

   

Balances as
of end of

the period /
year


 

Accumulated
as of
beginning

of year


  Additions

  Deductions

 

Amount

(1)


 

Accumulated
as of end of

the period /
year


  March 31,
2004


  June 30,
2003


Development property expenses

  177   —     —       177   177   —     —     —     177   —     —  

Deferred financing cost

  3,216   —     —       3,216   3,216   —     —     —     3,216   —     —