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 February, 2005

 


 

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)

 

Bolivar 108

(C1066AAB)

Buenos Aires, Argentina

(Address of principal executive offices)

 


 

Form 20-F      T            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      T    

 



IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANÓNIMA

(THE “COMPANY”)

 

REPORT ON FORM 6-K

 

Attached is a copy of the English translation of the Unaudited Financial Statements for the period ended on December 31, 2004.


IRSA Inversiones y Representaciones

Sociedad Anónima and subsidiaries

 

Free translation of the

Unaudited Consolidated Financial Statements

For the six-month period ended

December 31, 2004

In comparative format

 

 


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

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

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

 

    

December 31,

2004


   

June 30,

2004


ASSETS

          

CURRENT ASSETS

          

Cash and banks

   78,412     93,096

Investments (Note 8)

   98,927     70,804

Mortgages and leases receivables, net (Note 5)

   54,048     34,431

Other receivables (Note 6)

   55,631     52,748

Inventories (Note 7)

   16,087     10,572
    

 

Total Current Assets

   303,105     261,651
    

 

NON-CURRENT ASSETS

          

Mortgages receivables, net (Note 5)

   3,959     2,836

Other receivables (Note 6)

   126,204     125,794

Inventories (Note 7)

   40,312     19,962

Investments (Note 8)

   553,198     524,434

Fixed assets, net (Note 9)

   1,350,615     1,265,666

Intangible assets, net

   6,098     2,427
    

 

Subtotal Non-Current Assets

   2,080,386     1,941,119

Goodwill, net

   (37,389 )   174
    

 

Total Non-Current Assets

   2,042,997     1,941,293
    

 

Total Assets

   2,346,102     2,202,944
    

 
    

December 31,

2004


   

June 30,

2004


LIABILITIES

          

CURRENT LIABILITIES

          

Trade accounts payable

   59,646     43,008

Mortgages payable

   2,234     2,218

Customer advances (Note 10)

   32,546     25,454

Short term-debt (Note 11)

   174,362     135,127

Salaries and social security charges

   7,454     7,981

Taxes payable

   19,766     11,641

Other liabilities (Note 12)

   35,745     30,593
    

 

Total Current Liabilities

   331,753     256,022
    

 

NON-CURRENT LIABILITIES

          

Trade accounts payable

   2,408     2,865

Customer advances (Note 10)

   33,697     28,802

Long term-debt (Note 11)

   458,796     468,807

Taxes payable

   12,343     6,207

Other liabilities (Note 12)

   36,523     10,150
    

 

Total Non-Current Liabilities

   543,767     516,831
    

 

Total Liabilities

   875,520     772,853
    

 

Minority interest

   430,009     470,237

SHAREHOLDERS’ EQUITY

   1,040,573     959,854
    

 

Total Liabilities and Shareholders’ Equity

   2,346,102     2,202,944
    

 

 

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

 

Saúl Zang          

Vicepresident acting as

President            

 

2


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Unaudited Consolidated Statements of Income

For the six–month periods beginning on

July 1, 2004 and 2003

and ended December 31, 2004 and 2003

In thousand of pesos, except “earnings per share” (Notes 1, 2 and 3)

 

     December 31,
2004


    December 31,
2003


 

Sales, leases and services

   185,245     124,081  

Cost of sales, leases and services

   (80,373 )   (68,473 )
    

 

Gross profit

   104,872     55,608  

Selling expenses

   (16,531 )   (9,436 )

Administrative expenses

   (29,900 )   (21,492 )
    

 

Subtotal

   (46,431 )   (30,928 )

Net gain (loss) in credit card trust

   882     (210 )
    

 

Operating income (Note 4)

   59,323     24,470  

Amortization of goodwill

   (981 )   (1,485 )

Financial results generated by assets:

            

Interest income

   1,912     2,931  

Interest on discount by assets

   117     654  

Gain on financial operations

   18,880     74,299  

Exchange gains

   1,215     14,130  
    

 

Subtotal

   22,124     92,014  

Financial results generated by liabilities:

            

Interest on discount by liabilities

   (132 )   (263 )

Exchange losses

   (4,070 )   (25,295 )

Financial expenses

   (27,666 )   (32,486 )
    

 

Subtotal

   (31,868 )   (58,044 )
    

 

Financial results, net

   (9,744 )   33,970  

Equity gain (loss) from related parties

   49,502     (8,909 )

Other income (expenses), net (Note 13)

   (4,939 )   195  
    

 

Income before taxes and minority interest

   93,161     48,241  

Income tax and asset tax

   (29,609 )   (14,427 )

Minority interest

   (6,792 )   (1,401 )
    

 

Net Income for the period

   56,760     32,413  

Earnings per share

            

Basic (Note 23)

   0.224     0.152  

Diluted (Note 23)

   0.121     0.101  

 

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

 

Saúl Zang          

Vicepresident acting as

President            

 

3


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Unaudited Consolidated Statements of Cash Flows (1)

For the six–month periods beginning on

July 1, 2004 and 2003

and ended December 31, 2004 and 2003

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

 

     December 31,
2004


    December 31,
2003


 

CHANGES IN CASH AND CASH EQUIVALENTS

            

Cash and cash equivalents as of beginning of year

   122,913     193,057  

Cash and cash equivalents as of end of period

   104,391     134,622  
    

 

Net decrease in cash and cash equivalents

   (18,522 )   (58,435 )
    

 

CAUSES OF CHANGES IN CASH AND CASH EQUIVALENTS

            

CASH FLOWS FROM OPERATING ACTIVITIES:

            

Net Income for the period

   56,760     32,413  

Plus income tax and asset tax accrued for the period

   29,609     14,427  

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

            

•      Equity in earnings of affiliated companies

   (49,502 )   8,909  

•      Minority interest in related companies

   6,792     1,401  

•      Allowances and provisions

   5,194     (115 )

•      Accrual for director’s fees

   3,562     —    

•      Amortization and depreciation

   35,975     34,586  

•      Financial results

   (8,634 )   (39,487 )

•      Results from sale of fixed assets

   —       (19 )

•      Results from sale of inventories

   (15,501 )   —    

Changes in operating assets and liabilities:

            

•      (Increase) Decrease in current investments

   (20,179 )   4,223  

•      Increase in non-current investments

   —       (640 )

•      Increase in mortgages and leases receivables

   (23,700 )   (10,272 )

•      Decrease (Increase) in other receivables

   13,676     (5,379 )

•      (Increase) Decrease in inventory

   (3,366 )   4,233  

•      Increase in intangible assets

   (1,821 )   (179 )

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

   411     6,431  

•      Increase in accounts payable

   12,832     7,201  

•      Increase in accrued interest

   5,941     2,075  

•      Decrease in other liabilities

   (9,697 )   (9,429 )
    

 

Net cash provided by operating activities

   38,352     50,379  
    

 

CASH FLOWS FROM INVESTING ACTIVITIES:

            

•      (Increase) Decrease from equity interest in subsidiary companies

   (4,163 )   618  

•      Increase in non-current investments

   (13,772 )   (11,801 )

•      Decrease in minority shareholding

   (16,698 )   —    

•      Purchase of shares of Banco Hipotecario

   —       (91,124 )

•      Sale of Banco Hipotecario S.A. shares

   —       28,577  

•      Payment for acquisition of undeveloped parcels of land

   (261 )   (126 )

•      Sale of fixed assets and intangible assets

   —       24  

•      Purchase and improvements of fixed assets

   (34,230 )   (6,306 )
    

 

Net cash used in investing activities

   (69,124 )   (80,138 )
    

 

CASH FLOWS FROM FINANCING ACTIVITIES:

            

•      Increase in short-term and long-term debt

   51,972     —    

•      Payment of short-term and long-term debt

   (52,014 )   (37,162 )

•      Dividends paid to minority shareholders

   (8,256 )   (4,536 )

•      Court - ordered deposit on loan

   (788 )   —    

•      Cash contribution from minority shareholders

   —       (2,123 )

•      Payment for seller financing

   —       (1,150 )

•      Issuance of common stock

   21,336     16,295  
    

 

Net cash provided by (used in) financing activities

   12,250     (28,676 )
    

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

   (18,522 )   (58,435 )
    

 


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

 

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

 

Saúl Zang          

Vicepresident acting as

President            

 

4


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Unaudited Consolidated Statements of Cash Flows (Continued)

For the six–month periods beginning on

July 1, 2004 and 2003

and ended December 31, 2004 and 2003

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

 

    

December 31,

2004


   

December 31,

2003


Supplemental cash flow information

          

Cash paid during the period for:

          

•      Interest

   25,816     21,876

•      Income tax

   640     510

Non-cash activities:

          

•      Increase in fixed assets through a decrease in inventory

   123     —  

•      Increase in inventory through a decrease in fixed assets

   4,604     2,606

•      Increase in intangible assets through a decrease in fixed assets

   2,108     —  

•      Issues of certificates

   —       —  

•      Liquidation of certificates

   —       1,322

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

   —       51,501

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

   25,979     —  

•      Increase in other liabilities through an increase in other receivables

   —       —  

•      Increase in other receivables through a decrease in inventory

   —       5,890

•      Increase in other receivables through a decrease in investments

   —       7,078

•      Retained interest in credit card receivables

   (7,245 )   —  

•      Liquidation of interest in credit card receivables

   3,370     —  

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

   —       1,326

•      Increase in fixed assets through a decrease in other receivables

   103     —  

•      Attached funds offset by allowances for contingencies

   185     —  

•      Increase in fixed assets through a decrease a long - term investments

   596     —  

•      Conversion of negotiable obligations into ordinary shares

   2,623     14,148

 

Saúl Zang          

Vicepresident acting as

President            

 

5


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Unaudited Consolidated Statements of Cash Flows (Continued)

For the six–month periods beginning on

July 1, 2004 and 2003

and ended December 31, 2004 and 2003

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

 

    

December 31,

2004


   

December 31,

2003


Acquisitions of subsidiary companies:

          

Mortgages and leases receivables

   1,489     —  

Other receivables

   4,761     —  

Fixed assets

   86,931     —  

Intangible assets

   12     —  

Trade accounts payable

   (983 )   —  

Customer advances

   (3,325 )   —  

Short-term and long-term debt

   (38,178 )   —  

Related parties

   (3,133 )   —  

Salaries and social security charges

   (203 )   —  

Taxes payable

   (754 )   —  

Dividends payable (includes $ 75,000 payable to Alto Palermo (APSA))

   (300 )   —  

Other liabilities

   (16,182 )   —  

Allowances

   (4,458 )   —  
    

 

Net non-cash assets acquired

   25,677     —  
    

 

Cash and cash equivalents acquired

   1,239     —  
    

 

Net assets acquired

   26,916     —  
    

 

Minority interest

   (8,398 )   —  

Equity value before the acquisition

   (5,087 )   —  

Higher value of fixed assets acquired

   1,558     —  
    

 

Purchase price of acquired subsidiary companies

   14,989     —  
    

 

Cash and cash equivalents acquired

   (1,239 )   —  

Seller financing

   (9,587 )   —  
    

 
     4,163     —  
    

 

 

Saúl Zang          

Vicepresident acting as

President            

 

6


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements

For the six–month periods beginning on

July 1, 2004 and 2003

and ended December 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 December 31, 2004 and June 30, 2004 and the statements of income and cash flows for the six-month periods ended December 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 by the National Securities Commission.

 

The consolidated financial statements for the six-month periods ended December 31, 2004 and 2003 have not been audited. The Company’s management considers that they include all the necessary adjustments to fairly present the results for the periods referred to.

 

The consolidated results for the six-month periods ended December 31, 2004 and 2003 do not necessarily reflect proportionality the Company’s consolidated results for the complete fiscal years.

 

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


    

December 31,

2004


   June 30,
2004


  

December 31,

2004


   June 30,
2004


COMPANIES                    

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

Llao LLao Resorts S.A.

   50,00    50,00    50,00    50,00

Buenos Aires Trade & Finance Center S.A.

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

Alto Palermo S.A. (“APSA”)

   60,68    53,81    60,68    53,81

(*) The above holdings do not contemplate the effects on the proportional equity value from the conversion of irrevocable contributions into shares.

 

7


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 1: (Continued)

 

  (1) In accordance with Technical Pronouncement No. 21 adopted by the Company during the year ended on June 30, 2004, the Company started to consolidate this subsidiary on a line-by-line basis, taking into account other indicators that must be analyzed to determine whether control exists. The financial statements presented in comparative form were restated accordingly.

 

  b. Acquisition and consolidation of related companies

 

On September 29, 2004, Alto Palermo (APSA) entered into a purchase-sale agreement for the purchase of 49.9% of the capital stock of Perez Cuesta S.A.C.I.. The operation was approved by the National Commission for the Defense of Competition on November 17, 2004. As a result of this acquisition, Alto Palermo S.A. (APSA) holds 68.8% of the capital stock of that company, the main activity of which is the operation of the Mendoza Plaza Shopping mall in the city of Mendoza.

 

Until the date of the above transaction, the Company held a 18.90% participation in the capital stock of Perez Cuesta S.A.C.I.

 

For purchase details, see note 26.

 

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. From that date and until December 31, 2001 the government discontinued the restatement of the financial statements due to a period of monetary stability. From January 1, 2002 up to February 28, 2003 the effects of inflation were recognized due to the existence of an inflationary period. As from that date, the restatement of the financial statements was discontinued.

 

This criterion is not in line with current professional accounting standards, which establish that the financial statements must be restated through September 30, 2003. However, due to the low materiality of inflation rates during the period from March to September 2003, this deviation has not had a material effect on the consolidated financial statements taken as a whole.

 

8


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 2: (Continued)

 

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

 

Comparative information

 

Balance sheet items at June 30, 2004 shown in these unaudited consolidated financial statements for comparative purposes arise from the audited annual consolidated financial statements corresponding to the year then ended.

 

The balances at December 31, 2004 of the Statements of Income, Changes in Shareholders’ Equity and Cash Flows are disclosed in comparative format with the previous financial year.

 

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

 

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. Note 1 to the basic financial statements details the most significant accounting policies. Below are the most relevant accounting policies adopted by the subsidiaries, which are not included in that note.

 

  a. Shares of Banco Hipotecario S.A.

 

Since June 30, 2004, as a consequence of the situation described in Note 16, the Company and Ritelco S.A. value the shares of Banco Hipotecario S.A. by the equity method of accounting.

 

  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 Operating 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.

 

9


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 3: (Continued)

 

  b. (Continued)

 

    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 calculate 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.

 

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 six 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”, 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.

 

10


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 3: (Continued)

 

  b. (Continued)

 

    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 each business day.

 

  c. Intangible assets, net

 

Intangible assets are carried at cost adjusted for inflation as mentioned in Note 2, less accumulated amortization. Included in the Intangible Assets caption are the following:

 

    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. 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.

 

    Property development expenses

 

Expenses incurred in relation to the selling of development properties, including advertising, commissions and other expenses, are charged to the results for the period in which the corresponding income is accrued, based on the percentage of completion method.

 

  d. Goodwill

 

Negative goodwill represents the market value of net assets of the subsidiaries at the percentage participation acquired in excess of acquisition cost. Negative 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 useful life of 20 years, considering the weighted-average of the remaining useful life of identifiable assets acquired subject to depreciation.

 

11


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 3: (Continued)

 

  d. (Continued)

 

Additionally, also included was the goodwill from the controlled company APSA, originating from the purchase of shares of Tarshop 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 sale of properties, Office and other non-shopping center rental properties, Shopping centers, Hotel operations, and Others. 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.

 

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.

 

    Hotel operations

 

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

 

12


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 4: (Continued)

 

    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 the banking activity, to Internet, telecommunications and other technology-related activities of the Company.

 

The Company measures its reportable segments based on operating 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 operating 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.

 

13


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 December 31, 2004:

 

     Sales and
developments


   

Office and

Others (a)


    Shopping
centers


    Hotels

    Financial and
other
operations


   Total

 

Revenues

   27,459     8,862     103,620     45,304     —      185,245  

Costs

   (11,672 )   (3,816 )   (40,627 )   (24,258 )   —      (80,373 )

Gross profit

   15,787     5,046     62,993     21,046     —      104,872  

Selling expenses

   (1,018 )   (418 )   (9,980 )   (5,115 )   —      (16,531 )

Administrative expenses

   (3,931 )   (3,171 )   (13,375 )   (9,423 )   —      (29,900 )

Net gain in credit card trust

   —       —       882     —       —      882  
    

 

 

 

 
  

Operating Income

   10,838     1,457     40,520     6,508     —      59,323  
    

 

 

 

 
  

Depreciation and amortization (b)

   130     3,261     27,792     4,600     —      35,783  
    

 

 

 

 
  

Addition of fixed assets and intangible assets

   335     —       31,628     2,267     —      34,230  

Non-current investments in other companies

   —       —       1,089     —       202,399    203,488  

Operating assets

   295,725     272,239     1,116,371     131,484     —      1,815,819  

Non- Operating assets

   66,330     61,062     21,480     1,672     379,739    530,283  

Total assets

   362,055     333,301     1,137,851     133,156     379,739    2,346,102  

Operating liabilities

   8,988     8,050     121,888     18,822     —      157,748  

Non-Operating liabilities

   110,903     112,697     224,625     37,700     231,847    717,772  

Total liabilities

   119,891     120,747     346,513     56,522     231,847    875,520  

(a) Includes offices, commercial and residential premises.
(b) Included in operating income.

 

14


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 December 31, 2003

 

     Sales and
developments


   

Office and

Others (a)


    Shopping
centers


    Hotels

    Financial and
other
operations


   Total

 

Revenues

   13,380     7,164     68,427     35,110     —      124,081  

Costs

   (11,095 )   (4,149 )   (34,194 )   (19,035 )   —      (68,473 )

Gross profit

   2,285     3,015     34,233     16,075     —      55,608  

Selling expenses

   (946 )   (374 )   (3,878 )   (4,238 )   —      (9,436 )

Administrative expenses

   (2,656 )   (2,015 )   (9,498 )   (7,323 )   —      (21,492 )

Net loss in credit card trust

   —       —       (210 )   —       —      (210 )
    

 

 

 

 
  

Operating (Loss) Income

   (1,317 )   626     20,647     4,514     —      24,470  
    

 

 

 

 
  

Depreciation and amortization (b)

   (1,592 )   2,962     26,649     4,001     —      32,020  
    

 

 

 

 
  

Addition of fixed assets and intangible assets (c)

   232     54     20,397     4,390     —      25,073  

Non-current investments in other companies (c)

   —       —       7,198     —       162,659    169,857  

Operating assets (c)

   295,869     275,849     992,036     131,478     —      1,695,232  

Non-operating assets (c)

   59,335     55,321     59,469     7,019     326,568    507,712  

Total assets (c)

   355,204     331,170     1,051,505     138,497     326,568    2,202,944  

Operating liabilities (c)

   6,598     6,652     94,386     14,330     —      121,966  

Non-operating liabilities (c)

   105,598     107,362     185,907     36,733     215,287    650,887  

Total liabilities (c)

   112,196     114,014     280,293     51,063     215,287    772,853  

(a) Includes offices, commercial and residential premises.
(b) Included in operating income.
(c) At June 30, 2004

 

15


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:

 

     December 31, 2004

    June 30, 2004

 
     Current

   

Non-

Current


    Current

   

Non-

Current


 

Debtors from sale of real estate

   1,643     901     772     1,062  

Unearned interest

   (18 )   (7 )   (13 )   (15 )

Debtors from rent and credit card

   43,581     3,161     28,423     1,834  

Debtors from leases under legal proceedings

   22,441     —       23,865     —    

Debtors from sales under legal proceedings

   2,423     —       2,495     —    

Checks to be deposited

   17,682     —       9,810     —    

Related parties

   205     —       79     —    

Trade accounts receivable for hotel activities

   6,604     —       4,299     —    

Less:

                        

Allowance for doubtful accounts

   (531 )   —       (485 )   —    

Allowance for doubtful leases

   (39,982 )   (96 )   (34,814 )   (45 )
    

 

 

 

     54,048     3,959     34,431     2,836  
    

 

 

 

 

NOTE 6: OTHER RECEIVABLES

 

The breakdown for this item is as follows:

 

     December 31, 2004

    June 30, 2004

 
     Current

   

Non-

Current


    Current

   

Non-

Current


 

Asset tax credits

   13,764     35,818     1,009     56,522  

Value added tax (“VAT”)

   489     1,622     1,010     1,428  

Related parties

   1,134     46     20,377     12  

Guarantee deposits

   284     5     500     33  

Prepaid expenses

   3,782     427     3,260     —    

Expenses to be recovered

   3,464     —       2,462     —    

Fund administration

   200     —       208     —    

Advances to be rendered

   59     —       1,213     —    

Gross sales tax

   505     573     407     438  

Deferred income tax

   —       54,024     —       53,339  

Debtors under legal proceeding

   106     —       119     —    

Sundry debtors

   2,499     —       2,139     —    

Operation pending settlement

   361     —       474     —    

Income tax prepayments and withholdings

   3,124     —       2,860     —    

Country club debtors

   366     —       412     —    

Trust accounts receivable

   258     2,276     870     433  

Advances to directors

   3,540     —       —       —    

Tax credit certificates

   —       —       563     —    

Interest rate swap receivable

   14,707     —       13,816     —    

Mortgages receivables

   —       2,208     —       2,208  

Present value – other receivables

   —       (1,095 )   —       (1,384 )

Credit from barter of “Edificios Cruceros” (1)

   5,878     —       —       5,836  

Tax on personal assets

   3,255     —       4,856     —    

Allowance for uncollectibility of tax on personal assets

   (3,255 )   —       (3,887 )   —    

Credit from barter of Benavidez (Note 25)

   —       8,818     —       8,755  

Pre-paid insurance

   206     —       —       —    

Credit from barter of Dique III

   —       23,600     —       —    

Premium on credit purchase option

   705     —       —       —    

Allowance for doubtful accounts

   —       (2,208 )   —       (2,208 )

Other

   200     90     80     382  
    

 

 

 

     55,631     126,204     52,748     125,794  
    

 

 

 


(1) See note 1.6.f. to the unaudited basic financial statements.

 

16


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:

 

     December 31, 2004

   June 30, 2004

     Current

  

Non-

Current


   Current

  

Non-

Current


Dock 13

   1,578    —      37    —  

Dorrego 1916

   13    —      13    —  

Minetti “D”

   33    —      33    —  

Rivadavia 2768

   —      —      124    —  

Torres Jardín

   245    —      245    —  

V. Celina

   43    —      43    —  

Abril/Baldovinos

   4,114    3,328    3,239    4,548

San Martín de Tours

   7,879    —      4,744    —  

Torres de Abasto

   540    —      555    —  

Dique III

   —      18,059    —      —  

Resale merchandise

   304    —      138    —  

Bonus merchandise

   27    —      87    —  

Torres Rosario

   —      18,925    —      15,414

Other properties

   —      —      1,314    —  

Other inventories

   1,311    —      —      —  
    
  
  
  
     16,087    40,312    10,572    19,962
    
  
  
  

 

17


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:

 

    

December 31,

2004


  

June 30,

2004


Current

         

Cedro (1)

   17    67

Bocanova (1)

   —      266

Boden (1)

   40    32

IRSA I Trust Exchangeable Certificate (1)

   157    252

Time deposits and money markets

   21,619    25,837

Mutual funds (2)

   51,061    37,627

Tarshop Trust (1)

   2,869    6,677

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

   236    14

U. S. Treasury Bonds (1)

   22,886    —  

Other investments (1)

   42    32
    
  
     98,927    70,804
    
  

Non-current

         

Banco de Crédito y Securitización S.A.

   4,456    4,590

Banco Hipotecario S.A.

   197,943    158,069

Pérez Cuesta S.A.C.I.

   —      5,763

E-Commerce Latina S.A

   1,089    1,435

IRSA I Trust Exchangeable Certificate

   4,891    5,675

Tarshop Trust

   21,068    13,411

“Banco Ciudad de Bs. As. Bond”

   781    887

Art work

   40    37

Other

   25,699    11,517
    
  
     255,967    201,384
    
  

Undeveloped parcels of land:

         

Constitucion 1111

   1,261    1,261

Dique IV

   6,316    6,160

Caballito plots of land

   19,898    19,898

Padilla 902

   71    71

Pilar

   3,408    3,408

Torres Jardín IV

   2,568    2,568

Puerto Retiro

   46,323    46,424

Santa María del Plata

   124,881    124,783

Pereiraola

   21,875    21,875

Bs. As. Trade and Finance Center S.A

   —      25,979

Air space Supermercado Coto

   10,442    10,442

Caballito

   29,717    29,717

Neuquén

   9,983    9,983

Alcorta Plaza

   17,545    17,545

Other parcels of undeveloped land

   2,943    2,936
    
  
     297,231    323,050
    
  
     553,198    524,434
    
  

(1) Not considered as cash for purposes of the unaudited consolidated statements of cash flow.
(2) Ps. 44,907 and Ps 31,866 corresponding to the “Dolphin Fund PLC” at December 31, 2004 and June 30, 2004, not considered as cash for purpose of the consolidated statement of cash flow.

Ps. 1,794 and Ps. 1,781 corresponding to the NCH Development Partner fund at December 31, 2004 and June 30, 2004, not considered as cash for purpose of the consolidated statement of cash flows.

 

18


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:

 

    

December 31,

2004


  

June 30,

2004


Hotels

         

Llao-Llao

   30,749    30,827

Hotel Intercontinental

   56,069    57,447

Hotel Libertador

   36,981    37,795
    
  
     123,799    126,069
    
  

Office buildings

         

Avda. de Mayo 595

   4,369    4,419

Avda. Madero 942

   2,194    2,213

Edificios costeros (Dique II)

   19,545    19,726

Laminar Plaza

   30,855    31,126

Libertador 498

   42,289    42,679

Libertador 602

   2,605    2,628

Madero 1020

   2,618    4,047

Maipú 1300

   45,005    45,432

Reconquista 823

   17,571    17,733

Rivadavia 2768

   122    —  

Sarmiento 517

   119    121

Suipacha 652

   10,533    10,641

Intercontinental Plaza

   64,434    65,152

Costeros Dique IV

   19,954    20,123
    
  
     262,213    266,040
    
  

Commercial real estate

         

Alsina 934

   1,443    1,457

Constitución 1111

   490    494
    
  
     1,933    1,951
    
  

Other fixed assets

         

Abril

   1,993    1,944

Alto Palermo Park

   486    500

Thames

   3,042    3,197

Other

   3,253    3,470
    
  
     8,774    9,111
    
  

Shopping Center

         

Alto Avellaneda

   102,958    107,333

Alto Palermo

   219,947    229,117

Paseo Alcorta

   67,210    69,003

Abasto

   206,692    210,696

Patio Bullrich

   118,456    121,678

Buenos Aires Design

   22,165    23,381

Alto Noa

   28,739    29,589

Alto Rosario

   75,369    53,295

Mendoza Plaza Shopping

   88,014    —  

Other properties

   11,031    11,074

Other inventories

   13,315    7,329
    
  
     953,896    862,495
    
  

Total

   1,350,615    1,265,666
    
  

 

19


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 10: CUSTOMER ADVANCES

 

The breakdown for this item is as follows:

 

     December 31, 2004

   June 30, 2004

     Current

  

Non-

Current


   Current

  

Non-

Current


Admission rights

   15,623    22,767    11,495    17,444

Leases advances

   7,485    10,930    5,451    11,358

Customer advances

   8,220    —      8,508    —  

Advance for the sale of Torres Rosario land

   1,218    —      —      —  
    
  
  
  
     32,546    33,697    25,454    28,802
    
  
  
  

 

NOTE 11: SHORT AND LONG - TERM DEBT

 

The breakdown for this item is as follows:

 

     December 31, 2004

   June 30, 2004

     Current

  

Non-

Current


   Current

  

Non-

Current


Convertible bond APSA 2006 (1)

   —      46,209    —      53,578

Accrued interest- Convertible bond APSA 2006 (1)

   2,093    —      2,310    —  

Negotiable obligations APSA (2)

   53,888    —      74,630    —  

Accrued interest- Negotiable obligations APSA (2)

   1,753    —      2,116    —  

Bank debts (3)

   93,880    56,239    47,273    56,556

Accrued interest - bank debts (3)

   8,466    5,319    236    4,108

Bond 100 M. (4)

   —      255,365    —      255,922

Interest-Bond 100 M. (4)

   2,624    —      2,632    —  

Negotiable obligations 2009 - principal amount (5)

   11,135    87,000    5,528    91,915

Negotiable obligations 2009 - accrued interest (5)

   523    8,664    402    6,728
    
  
  
  
     174,362    458,796    135,127    468,807
    
  
  
  

(1) Corresponding to the Negotiable Bonds Convertible to stock (CNB) issued by APSA for a value of US$ 50 million, as detailed in Note 21 to the unaudited consolidated financial statements, net of the CNB underwritten by the Company for U$S 31,738 thousand, net of fees and expenses related to issue of debt to be accrued.
(2) Includes:
  (a) Ps. 48,400 thousand in unsecured general liabilities belonging to APSA, originally issued for a total value of V$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) $ 5,763 corresponding to guaranteed general obligations of Shopping Alto Palermo S.A. (SAPSA) as mentioned in Note 14, net of issuing expenses that were paid on maturity on January 13, 2005. The terms of the obligations required that SAPSA maintain certain financial ratios and conditions, certain indicators and levels of indebtedness as well as establishing limits to the obtaining of new loans.
(3) Includes mainly:
  (a) Ps. 60,383 corresponding to an unsecured loan falling due in the year 2009, as detailed in Note 5 to the unaudited financial statements.
  (b) $ 87,029 and $ 2,708 corresponding to other current and non-current bank loans, respectively.
  (c) On December 16, 2004 Ritelco S.A. was granted a loan by Refco Capital Markets, Ltd. for US$ 7,814 which is guaranteed by U.S. Treasury Bonds that are disclosed in the “Current Investments” caption of the balance sheet.
(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.

 

20


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:

 

     December 31, 2004

    June 30, 2004

 
     Current

   Non-current

    Current

   Non-current

 

Seller financing

   10,731    5,044     5,781    —    

Dividends payable

   2,081    —       2,379    —    

Related parties

   5,780    2,532     3,150    —    

Guarantee deposits

   849    2,731     503    3,030  

Provision for lawsuits

   6,490    10,961     6,439    6,549  

Directors´ fees

   3,650    —       6,862    —    

Rebilled condominium expenses

   345    —       368    —    

Directors´ deposits

   —      8     —      8  

Sundry creditors

   148    —       322    —    

Fund administration

   519    —       519    —    

Pending settlements for sales of plots

   116    —       149    —    

Contributed leasehold improvements (Note 28)

   1,431    15,241     212    690  

Donations payable

   2,410    —       3,029    —    

Present value – other liabilities

   —      (6 )   —      (139 )

Trust account payable

   283    —       282    —    

Other

   912    12     598    12  
    
  

 
  

     35,745    36,523     30,593    10,150  
    
  

 
  

 

NOTE 13: OTHER INCOME AND (EXPENSES), NET

 

The breakdown for this item is as follows:

 

    

December 31,

2004


   

December 31,

2003


 

Other income:

            

Gain from the sale of fixed assets and intangible assets

   7     19  

Recovery of allowance for doubtful accounts

   223     336  

Other

   977     1,247  
    

 

     1,207     1,602  
    

 

Other expenses:

            

Unrecoverable VAT

   (485 )   (405 )

Donations

   (133 )   (220 )

Loss from sale of fixed assets

   (35 )   —    

Contingencies for lawsuits

   (516 )   (144 )

Debit and credit tax

   (402 )   (494 )

Tax on personal assets

   (4,528 )   —    

Other

   (47 )   (144 )
    

 

     (6,146 )   (1,407 )
    

 

Other income and (expenses), net

   (4,939 )   195  
    

 

 

21


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 14: RESTRICTED ASSETS

 

Puerto Retiro S.A.: extension of the bankruptcy

 

On April 18, 2000, Puerto Retiro S.A. (indirect subsidiary of Palermo Invest 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 S.A. to sell or dispose in any manner the real estate property near Puerto Madero denominated “Planta 1” which was acquired from Tandanor S.A. (“Tandanor”) in June 1993.

 

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

 

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 Puerto Retiro S.A.. Puerto Retiro S.A. answered the claim and appealed the preventive measures ordered. This appeal was overruled on December 14, 2000. The legal process has practically concluded its stages to allow the production of evidence. The next step will be the allegations and the issuing of a ruling in the original jurisdiction.

 

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 held on January 5, 2001, approved taking a long-term mortgage loan from Bank Boston N.A. for a total amount 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 that in the period ended December 31, 2004 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 14: (Continued)

 

As a result of the 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 and October 26, 2002; January 29, April 29, July 29 and October 29, 2003; January 29, April 29, July 29 and October 29, 2004 and the interest installments totaling US$ 1,514 thousand falling due on July 29 and October 26, 2002; January 29, April 29, July 29 and October 29, 2003; January 29, April 29, July 29, and October 29, 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. 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.

 

On December 16, 2004 Ritelco purchased the loan of US$ 12,950,598 that Hoteles Argentinos S.A. had from Marathon Master Fund, Ltd. for US$ 7,925,488.

 

Alto Palermo S.A.- Restricted assets.

 

  a) Under other current liabilities, Shopping Neuquén S.A. includes Ps. 42 thousand 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. These negotiable obligations were settled after the closing of the period.

 

  c) At December 31, 2004, the Company holds funds under other current receivables amounting to Ps. 108 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.

 

  d) The shareholding in Emprendimiento Recoleta S.A., owned by APSA (representing 51% of the equity) is pledged. The net consolidated assets for this holding amount to $ 8,878.

 

  e) At December 31, 2004 there is a balance of US$ 50 million in the caption other 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 14: (Continued)

 

  f) Guarantees and restricted assets of Pérez Cuesta S.A.C.I.:

 

Creditor


  

Debt at

12.31.04


  

Type of
guarantee


  

Pledged item


  

Book value at

12.31.04


Banco de Chile    24,960,290   

Mortgage

 

Assignment of concession contracts

  

Land, building and accessories in Mendoza Plaza Shopping

 

Assignment of rights arising from the concession contracts entered into between PEREZ CUESTA S.A.C.I. and Falabella S.A.

   78,048,634

 

—  

HSBC Bank Argentina S.A.    9,954,883    Assignment of concession contracts    Assignment of rights arising from the concession contract entered into between PEREZ CUESTA S.A.C.I. and Disco S.A.    —  
Banco de la Nación Argentina    3,406,324    Assignment of concession contracts    Assignment of rights arising from the concession contracts entered into between PEREZ CUESTA S.A.C.I. and Village Cinemas S.A., Neverland Park (Ares S.A.), Musimundo, Frávega, Blow Up, Inc. Montemar, Tersani, Oficina y Arte and Aeromóvil    —  
Banco General de Negocios S.A.    644,975    Assignment of concession contracts    Assignment of rights arising from the concession contracts entered into between PEREZ CUESTA S.A.C.I. and the following concession holders: Roberto Giordano, Farinatta, Ricky Sarkany, Cristóbal Colón, In Crescendo, Cloter, G-Shop, Caffarena, A Punto, Mr. Dog and Ferruccio Soppelsa    —  

 

24


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 15: TARSHOP CREDIT CARD RECEIVABLE SECURITIZACION

 

The Company 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.

 

NOTE 16: INCREASE IN OWNERSHIP 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 options at US$ 33.86 each, granting the later 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 year. Accordingly, 4,773,853 shares for a total of Ps. 33.4 million were acquired.

 

During the last quarter of 2004, the Company sold a participation in Banco Hipotecario S.A. (2,487,571 shares) to IFIS S.A. (indirect shareholder of the Company) at a unit price of Ps. 7.0 (market value), the total amount of the operation being US$ 6.1 million, generating a loss of Ps. 1.61 million.

 

Therefore, at the date of issuing these financial statements, the total holding amounted to 17,641,015 shares.

 

25


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 17: INVESTMENT 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.

 

In September and December 2000, the Company had made additional contributions to ITNV for US$ 3 million.

 

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.

 

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

 

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.

 

The investment in ITNV is valued at zero at the closing of the reported periods.

 

26


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 18: 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. (hereinafter the “Trustors”) and Banco Sudameris Argentina S.A. (hereinafter the “Trustee”) 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 of US$ 26,585,774 to the Trustee, in exchange for cash and the issuance by the Trustee of Participation Certificates issued by trustee. The different types of Participation Certificates issued by the Trustee are set out as follows:

 

    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.

 

    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.

 

27


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 18: (Continued)

 

    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 Flows, 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, receivables and debts in U.S. dollars 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 are 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 nominal value of the Participation Certificates Class D, with the new nominal value being Ps. 10,321,280.

 

At December 31, 2004, the value of Class D Participation Certificates amounted to Ps. 4,205 in IRSA, Ps. 670 in Inversora Bolívar S.A., and Ps. 173 in Baldovinos S.A.. Class A, B, and C Certificates have been totally amortized at the end of the period.

 

28


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 19: EXCHANGE AND OPTION CONTRACT

 

On September 7, 2004, Buenos Aires Trade & Finance Center S.A. and DYPSA, Desarrollos y Proyectos Sociedad Anónima signed an exchange and option contract whereby DYPSA proposed to acquire plots 1c) and 1e) belonging to the Company valued at US$ 8,030,000 and US$ 10,800,000, respectively, for the construction at its own expense and under its own responsibility of two housing buildings of 37 and 40 floors, parking lot and individual storage space. As consideration for the exchange of plot 1c), DYPSA agreed to deliver housing units, parking lots and storage spaces within a maximum term of 36 months, representing in the aggregate 28.50% of the housing unit area built in the first building.

 

Furthermore, DYPSA has an option to acquire plot 1e) mentioned above through an exchange, within a maximum term of 548 days counted as from the signing of the deed of conveyance of plot 1c) and subject to the progress of work agreed between the parties. In this case, DYPSA agreed to deliver within a maximum term of 36 months housing units, individual storage space and parking lots representing in the aggregate 31.50% of the housing unit area built in the second building.

 

These exchange transactions are subject to the approval of the project by Corporación Antiguo Puerto Madero (CAPM), which resolved favorably at the closing of this period.

 

On November 25, 2004 the deed of conveyance of title of the lot 1c) in favor of DYPSA was signed, establishing the consideration in kind and at the same time the option to acquire in barter lot 1e) by such company as explained in the first paragraph of this Note. In guarantee of this transaction, DYPSA set up a first degree mortgage for US$ 8,030,000 on lot 1c).

 

29


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 20: DERIVATIVE INSTRUMENTS

 

Interest rate swaps

 

Alto Palermo S.A. (APSA) 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.

 

At December 31, 2004 and 2003, APSA held only one derivative financial instrument outstanding, an interest swap valued at its estimated settlement cost. Differences generated by application of the mentioned valuation criteria were recognized in the results for the period.

 

In order to minimize its financing costs, 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. 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 APSA to reduce the net cost of its debt. However, subsequent to June 30, 2001, APSA 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, APSA 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. As of December 31, 2004 the interest rate swap had an estimated settlement cost (fair value) of US$ 45.24 million liability. Any difference payable or receivable is accrued and recorded as an adjustment to disbursements for interest in the Statement of Income. During periods ended December 31, 2004 and 2003, APSA recognized gains of Ps. 4.9 million and of Ps. 9.4 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

 

During the current half-year, Ritelco S.A. entered into future contracts for the purchase of silver. In accordance with its risk administration policies, Ritelco S.A. enters into future metal contracts for speculative purposes.

 

In guarantee of futures transactions, Ritelco S.A. maintains a guarantee deposit of $ 611 ($ 361 net of the holding results generated by the transactions).

 

The result generated during the six-month period ended December 31, 2004 corresponding to the silver future transactions amounted to Ps. 539 (equivalent to U$S 151) which is recorded in the line “Financial Results” in the Statement of Income.

 

30


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 21: ALTO PALERMO - ISSUANCE OF NEGOTIABLE OBLIGATIONS CONVERTIBLE FOR SHARES

 

On July 19, 2002, Alto Palermo S.A. issued Series I of Negotiable Obligations convertible for ordinary 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 can be converted at any time at the option of each holder into ordinary 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.

 

The Convertible Negotiable Obligations were paid in cash or through the exchange for obligations due from APSA at the time of the subscription.

 

APSA applied the funds obtained from the offering of securities to the 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 December 31, 2004, certain holders of Convertible Negotiable Obligations have exercised their right to convert them for a total US$ 2.72 million, generating the issuing of 78,042,363 ordinary shares with a face value of Ps. 0.1 each. The total amount of Convertible Negotiable Obligations at December 31, 2004 was US$ 47.28 million of which US$ 31.7 million correspond to IRSA’s holding which is eliminated in the consolidation.

 

31


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 22: ALTO PALERMO - COMMITMENT TO MAKE CONTRIBUTIONS AND OPTIONS GRANTED TO ACQUIRE SHARES IN RELATED COMPANIES

 

APSA and Telefónica de Argentina S.A. have committed 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, of which 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.

 

Additionally, E-Commerce Latina S.A. has granted Consultores Internet Managers Ltd., a special-purpose Cayman Islands’ corporation created to act on behalf of Altocity.com’s management and represented by an independent attorney-in-fact, an irrevocable option to purchase Class B shares of Altocity.com S.A. representing 15% of the latter’s capital, for an eight-year period beginning on February 26, 2000 at a price equal to the present and future contributions to Altocity.com S.A. plus a rate of 14% per year in dollars, capitalizable yearly.

 

NOTE 23: EARNINGS PER SHARE

 

Below is a reconciliation between the weighted-average number of ordinary shares outstanding and the diluted weighted-average number of ordinary shares. The latter has been determined considering the number of additional ordinary shares that would have been outstanding if the holders had exercised their right to convert the convertible negotiable obligations held by them into ordinary shares, for up to US$ 100,000,000.

 

     12.31.04

   12.31.03

Weighted - average outstanding shares

   253,758    213,469

Conversion of negotiable obligations

   315,726    347,782

Weighted - average diluted ordinary shares

   569,484    561,251

 

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

 

     12.31.04

   12.31.03

Result for calculation of basic earnings per share

   56,760    32,413

Exchange difference

   1,805    13,121

Interest

   10,230    11,401
    
  

Result for calculation of diluted earnings per share

   68,795    56,935
    
  

Net basic earnings per share

   0.224    0.152

Net diluted earnings per share

   0.121    0.101

 

32


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 24: PROVISION FOR UNEXPIRED CLAIMS AGAINST LLAO LLAO HOLDING S.A.

 

The company Llao Llao Holding S.A. (in the process of dissolution due to merger with IRSA Inversiones y Representaciones S.A.), predecessor of Llao Llao Resorts S.A. in the operation of the hotel complex “Hotel Llao Llao”, which was awarded by Resolution No. 1/91 issued by the National Parks Administration, was sued in 1997 by that Administration to obtain collection of the unpaid balance of the additional sale price, in Argentine external debt securities amounting to US$ 2,870,000. A ruling of the court of original jurisdiction sustained the claim. That ruling was appealed, and the Court of Appeals confirmed the judgment of the court of original jurisdiction, demanding payment from the company of the mentioned amount in Argentine external debt securities available at the date of the ruling, plus interest accrued through payment, and compensatory and punitive interest and lawyers’ fees.

 

On March 2, 2004, the Company made a deposit of Ps. 7,191 in Banco de la Ciudad de Buenos Aires in favor of the National Parks Administration and a transfer of Argentine external debt securities class FRB - FRB L+13/16 2005 for a total nominal value of US$ 4,127,000, equivalent to Ps. 1,964. The total amount settled on that date was Ps. 9,156.

 

The intervening court served notice to the plaintiff of payment made, and on June 30, 2004 the plaintiff presented a writing rejecting that payment, considering it partial settlement of the debt arising from the firm judgement filed in the records of the case, and requested the setting up of a time deposit with the funds paid, automatically renewable every thirty days, until final payment of the total debt.

 

The Court resolved the matter by considering notice to have been served; as regards the amount due, the plaintiff must conform the claim to current regulations. Until final resolution of the matter, Banco de la Ciudad de Buenos Aires was instructed to appropriate the funds to a renewable time deposit.

 

As a result of this situation, Management decided to increase the provision for unexpired claims to Ps. 4,643.

 

NOTE 25: OPTION FOR THE ACQUISITION OF BENAVIDEZ

 

On December 3, 2003, Inversora Bolívar S.A., and Desarrolladora El Encuentro S.A. (DEESA) signed a revocable option agreement for the acquisition of real property, whereby Inversora Bolívar S.A. granted an option to acquire land in Benavídez to DEESA.

 

In March 2004, DEESA notified Inversora Bolívar S.A. and the latter accepted exercise of the mentioned option. On May 21, 2004 an exchange deed was signed whereby DEESA agreed to pay US$ 3,980,000 to Inversora Bolívar S.A., of which US$ 979,537 were paid during the previous quarter and the balance of US$ 3,000,463 will be paid through the exchange of 110 residential plots already chosen and identified in the option contract mentioned in the first paragraph of this note. Furthermore, through the same act, DEESA

 

33


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 25: (Continued)

 

set up a first mortgage in favor of Inversora Bolívar S.A. on real property amounting to US$ 3,000,463 in guarantee of compliance with the operation and delivered US$ 500,000 to Inversora Bolívar S.A. corresponding to a deposit in guarantee and a performance bonds on the obligations undertaken. This balance will not accrue interest in favor of DEESA, and will be returned as follows: 50% at the time of certification of the progress of work and the remaining 50% upon certification of 90% of work progress.

 

NOTE 26: ACQUISITION OF SHARES IN MENDOZA PLAZA SHOPPING

 

On September 29, 2004, Alto Palermo S.A. entered into a purchase-sale contract covering 49.9% of the capital stock of Pérez Cuesta S.A.C.I. for US$ 5.3 million, of which US$ 1.77 million were paid on December 2, 2004. The remaining balance will be paid in two installments of US$ 1.77 million each on September 29, 2005 and 2006.

 

Through this acquisition, the Alto Palermo S.A. became holder of 68.8% of the capital stock of the above company, the main activity of which is the exploitation of the Mendoza Plaza Shopping center in the city of Mendoza.

 

The operation was notified to the National Commission for the Defense of Competition in compliance with the regulations of the Ministry of Economy, having been approved by that Commission on November 17, 2004.

 

On December 2, 2004 a final purchase agreement was signed, the shares were transferred and a special shareholders’ meetings was held, which decided the amendment of the by-laws to change the corporate name from Pérez Cuesta S.A.C.I. to Mendoza Plaza Shopping S.A..

 

At December 31, 2004 no indenture has been signed formalizing the amendment of the by-laws and its approval by the control authorities.

 

Simultaneously with the purchase-sale of the shares of Pérez Cuesta S.A.C.I., Alto Palermo S.A. entered into the following contracts:

 

    Put option with Banco de Chile, whereby the latter is entitled, although not obliged, to assign a mortgage loan agreement to the Company originally granted to Pérez Cuesta S.A.C.I amounting to US$ 15.5 million and a credit line fully disbursed to that company amounting to US$ 2.5 million; the debtor failed to comply with its payment obligations.

 

The loans are secured by the assigning in guarantee of rental payments to be made Falabella S.A. to Pérez Cuesta S.A.C.I.

 

The term for exercising the option is 60 days beginning on March 31, 2005 and the price of the assignment is US$ 8.5 million.

 

The Company assumed an irrevocable obligation to acquire the agreement if the assignor exercises the option, which must be formalized before a notary public.

 

34


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 26: (Continued)

 

    Call option with HSBC Bank Argentina S.A., whereby Alto Palermo S.A. is entitled, although not obliged, to acquire, and HSBC Bank Argentina S.A. assumes an irrevocable obligation to transfer, a loan agreement originally granted to Pérez Cuesta S.A.C.I. amounting to US$ 7.0 million which the latter failed to pay. The loan is secured through the assigning in guarantee of rental payments to be made by Angulo Hermanos S.A. and Garbarino S.A..

 

The term for exercising the option is 30 days beginning on March 1, 2005 and the price of the assignment is Ps. 7.2 million.

 

On December 3, 2004 the Company paid a premium of Ps. 705,000 corresponding to premiums as consideration for the commitment assumed by the assignor, which will be considered as payment on account of the price.

 

    Agreement with Inversiones Falabella Argentina S.A. establishing as follows:

 

  1. Capitalization terms were agreed in the event that Alto Palermo S.A. or one of its subsidiaries is assigned the loan from Banco de Chile or other bank loan and propose its capitalization through Company’s contributions.

 

  2. Upon maturity of the lease agreement currently in force between Pérez Cuesta S.A.C.I. and Inversiones Falabella, Alto Palermo S.A. will provide for the granting of an option to the latter for the renewal of the contract under the same terms as the current contract, with certain changes expressly established in the contract in force.

 

  3. In its capacity as surety, Alto Palermo S.A. will ensure payment by Pérez Cuesta S.A.C.I. to Falabella S.A. of the loan held by the former amounting to US$ 1.05 million, under the terms established in the contract.

 

  4. Inversiones Falabella Argentina S.A. will have an irrevocable right to sell its shares in Pérez Cuesta S.A.C.I. (put option) to Alto Palermo S.A., which may be exercised until the last business day of October 2008, for a total consideration of US$ 3.0 million according to the conditions expressly established in the contract.

 

NOTE 27: INAUGURATION OF ALTO ROSARIO SHOPPING

 

On November 9, 2004 Alto Palermo S.A. inaugurated a new shopping center, Alto Rosario Shopping, in the city of Rosario, Province of Santa Fe. An hypermarket was inaugurated in December; the third stage includes the opening of a cinema complex and a “Museo de los Niños” (Children’s Museum) scheduled for the first quarter of 2005.

 

The current shopping center commenced activities with a 99.1% store occupancy rate.

 

NOTE 28: GAINS TO BE MADE

 

In May 1996 Pérez Cuesta S.A.C.I. entered into a contract with Operadora de Estaciones de Servicios S.A. (O.P.E.S.S.A.) regarding the concession of the exploitation of services for sales of fuel, lubricants and car-washing to be provided on the premises of the shopping center. The duration of the contract is for 15 years, paying a price of Ps. 1,700 in advance, which accrues on the basis of the term of the agreement. At closing the amount of Ps. 1,585 was pending of accrual.

 

35


IRSA Inversiones y Representaciones Sociedad Anónima

and subsidiaries

Notes to the Unaudited Consolidated Financial Statements (Contd.)

 

NOTE 28: (Continued)

 

Additionally, the concessionaire made leaseholds improvements, which were capitalized as Fixed Assets, recognizing the related gain over the term of the contract. At closing the amount of Ps 343 was pending of accrual.

 

In March 1996 Village Cinema S.A. inaugurated ten theatres in the multiplex cinema system, with an approximate surface of 4,100 sq. m. This improvement of a building of Pérez Cuesta S.A.C.I. was capitalized as a fixed asset, with a balancing entry as deferred gains, recognizing the depreciation charges and the profits over a 50-year period. At closing the amount of Ps. 11,170 was pending of accrual.

 

On February 2, 1999 Pérez Cuesta S.A.C.I. entered into a contract with Riocruz S.C.S. (Tienda C&A), granting the latter a mutual right of way in perpetuity, for valuable consideration for the first ten years and subsequently free of charge. The price agreed for this easement is US$ 2,926, which accrues over a period of 10 years, as from April 1999, date on which it was registered with the Real Estate Record Office. At the end of the period the amount of unearned income totaled Ps. 2,780.

 

36


IRSA Inversiones y Representaciones

Sociedad Anónima

 

Free translation of the

Unaudited Financial Statements

For the six-month period ended

December 31, 2004

In comparative format


Name of the Company:   IRSA Inversiones y Representaciones Sociedad Anónima
Corporate domicile:   Bolívar 108 1o Floor – Autonomous City of Buenos Aires
Principal activity:   Real estate investment and development

 

Unaudited Financial Statements at December 31, 2004

compared with the same period of the previous year

Stated in thousand of pesos

Fiscal year No. 62 beginning July 1o, 2004

 

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 Exhibit C.

 

CAPITAL COMPOSITION (Note 9)

 

    

Authorized for

Public Offer of Shares


   In thousand of pesos

Type of stock


      Subscribed

   Paid up

Common stock,1 vote each    261,520,247    261,520    261,520

 

38


IRSA Inversiones y Representaciones Sociedad Anónima

 

Unaudited Balance Sheets as of December 31, 2004 and June 30, 2004

In thousand of pesos (Note 1)

 

    

December 31,

2004


  

June 30,

2004


ASSETS

         

CURRENT ASSETS

         

Cash and banks (Exhibit G)

   3,730    7,523

Investments (Exhibits C, D and G)

   15,193    14,576

Mortgages and leases receivables, net (Note 2 and Exhibit G)

   5,544    4,611

Other receivables (Note 3 and Exhibit G)

   19,407    14,980

Inventories (Note 4)

   9,877    5,430
    
  

Total Current Assets

   53,751    47,120
    
  

NON-CURRENT ASSETS

         

Mortgages receivables, net (Note 2)

   37    37

Other receivables (Note 3 and Exhibit G)

   69,902    74,682

Inventories (Note 4)

   272    233

Investments (Exhibits C, D and G)

   1,184,294    1,077,696

Fixed assets, net (Exhibit A)

   201,675    204,958
    
  

Total Non-Current Assets

   1,456,180    1,357,606
    
  

Total Assets

   1,509,931    1,404,726
    
  

LIABILITIES

         

CURRENT LIABILITIES

         

Trade accounts payable (Exhibit G)

   2,995    2,055

Mortgages payable (Exhibit G)

   2,234    2,218

Customer advances (Exhibit G)

   727    1,040

Short term-debt (Note 5 and Exhibit G)

   39,459    12,192

Salaries and social security charges

   603    802

Taxes payable (Exhibit G)

   5,809    2,177

Other liabilities (Note 6 and Exhibit G)

   4,697    5,751
    
  

Total Current Liabilities

   56,524    26,235
    
  

NON-CURRENT LIABILITIES

         

Long term-debt (Note 5 and Exhibit G)

   409,879    415,229

Customer advances

   984    1,312

Taxes payable

   777    817

Other liabilities (Note 6 and Exhibit G)

   1,194    1,279
    
  

Total Non-Current Liabilities

   412,834    418,637
    
  

Total Liabilities

   469,358    444,872
    
  

Minority interest

         

SHAREHOLDERS´ EQUITY

   1,040,573    959,854
    
  

Total Liabilities and Shareholders’ Equity

   1,509,931    1,404,726
    
  

 

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

 

Saúl Zang          

Vicepresident acting as

President            

 

39


IRSA Inversiones y Representaciones Sociedad Anónima

 

Unaudited Statements of Income

For the six – month periods beginning on

July 1, 2004 and 2003

and ended December 31, 2004 and 2003

In thousand of pesos (Note 1)

 

     December 31,
2004


    December 31,
2003


 

Sales, leases and services

   10,099     16,894  

Cost of sales, leases and services (Exhibit F)

   (5,159 )   (13,950 )
    

 

Gross profit

   4,940     2,944  

Selling expenses (Exhibit H)

   (585 )   (860 )

Administrative expenses (Exhibit H)

   (8,410 )   (4,487 )
    

 

Subtotal

   (8,995 )   (5,347 )

Results from operations and holding of real estate assets

   —       —    
    

 

Operating loss

   (4,055 )   (2,403 )

Financial results generated by assets:

            

Interest income

   4,757     5,625  

Exchange gain

   1,651     15,206  

Loss on exposure to inflation

   —       —    

Financial results

   3,620     18,178  

Interest on discount by assets

   (105 )   79  
    

 

Subtotal

   9,923     39,088  

Financial results generated by liabilities:

            

Discounts

   —       —    

Exchange loss

   (3,241 )   (21,759 )

Gain on exposure to inflation

   —       —    

Interest on discount by liabilities

   (5 )   34  

Financial expenses (Exhibit H)

   (17,596 )   (20,589 )
    

 

Subtotal

   (20,842 )   (42,314 )
    

 

Total financial results, net

   (10,919 )   (3,226 )

Net gain in related companies (Note 8.c.)

   76,999     41,249  

Other income and (expenses), net (Note 7)

   (3,820 )   (875 )
    

 

Income before tax

   58,205     34,745  

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

   (1,445 )   (2,332 )
    

 

Net Income for the period

   56,760     32,413  
    

 

 

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

 

Saúl Zang          

Vicepresident acting as

President            

 

40


IRSA Inversiones y Representaciones Sociedad Anónima

 

Unaudited Statements of Changes in Shareholders’ Equity

For the six – month periods beginning on

July 1, 2004 and 2003

and ended December 31, 2004 and 2003

In thousand of pesos (Note 1)

 

     Shareholders’ contributions

   Legal reserve

   Retained
deficit


   

Total as of

December 31,
2004


  

Total as of

December 31,
2003


     Common
Stock


   Inflation
adjustment of
common
stock


   Additional
paid-in-capital


   Total

          

Balances as of beginning of year

   248,803    274,387    595,505    1,118,695    19,447    (178,288 )   959,854    809,186

Issuance of common stock

   12,717    —      11,242    23,959    —      —       23,959    30,451

Net Income for the period

   —      —      —      —      —      56,760     56,760    32,413
    
  
  
  
  
  

 
  

Balances as of December 31, 2004

   261,520    274,387    606,747    1,142,654    19,447    (121,528 )   1,040,573     
    
  
  
  
  
  

 
    

Balances as of December 31, 2003

   229,290    274,387    582,663    1,086,340    19,447    (233,737 )        872,050
    
  
  
  
  
  

      

 

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

 

Saúl Zang          

Vicepresident acting as

President            

 

41


IRSA Inversiones y Representaciones Sociedad Anónima

 

Unaudited Statements of Cash Flows (1)

For the six – month periods beginning on

July 1, 2004 and 2003

and ended December 31, 2004 and 2003

In thousand of pesos (Note 1)

 

    

December 31,

2004


   

December 31,

2003


 

CHANGES IN CASH AND CASH EQUIVALENTS

            

Cash and cash equivalents as of beginning of year

   9,864     120,292  

Cash and cash equivalents as of end of period

   4,058     41,195  
    

 

Net decrease in cash and cash equivalents

   (5,806 )   (79,097 )
    

 

CAUSES OF CHANGES IN CASH AND CASH EQUIVALENTS

            

CASH FLOWS FROM OPERATING ACTIVITIES:

            

Net Income for the period

   56,760     32,413  

Plus income tax and asset tax accrued for the period

   1,445     2,332  

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

            

•      Equity in earnings of controlled and affiliated companies

   (76,999 )   (41,249 )

•      Allowances and provisions

   3,289     32  

•      Accrual for directors’s fees

   3,540     —    

•      Amortization and depreciation

   2,584     2,569  

•      Financial results

   (6,373 )   (2,893 )

Changes in operating assets and operating liabilities:

            

•      Decrease in current investments

   6,316     4,992  

•      Increase in non – current investments

   —       (610 )

•      (Increase) Decrease in mortgages and leases receivables

   (952 )   109  

•      Increase in other receivables

   (1,586 )   (3,572 )

•      (Increase) Decrease in inventory

   (3,205 )   3,861  

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

   (114 )   314  

•      Increase (Decrease) in accounts payable

   940     (252 )

•      Increase in accrued interest

   3,520     3,940  

•      Decrease in other liabilities

   (4,817 )   (7,259 )
    

 

Net cash used in operating activities

   (15,652 )   (5,273 )
    

 

CASH FLOWS FROM INVESTING ACTIVITIES:

            

•      Decrease from equity interest in subsidiary companies

   402     618  

•      Increase interest in subsidiary companies

   (1,175 )   (41,886 )

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

   —       (63,747 )

•      Sales of Banco Hipotecario S.A. shares

   —       28,577  

•      Purchase of shares of Alto Palermo S.A.

   (16,698 )   (2,718 )

•      Purchase of Negotiable Obligations issued by Alto Palermo S.A.

   (19,839 )   —    

•      Purchase and improvements of undeveloped parcels of lands

   (254 )   —    

•      Loans granted to related parties

   —       15,622  

•      Purchase and improvements of fixed assets

   (330 )   (435 )

•      Dividends collected

   8,288     5,464  
    

 

Net cash used in investing activities

   (29,606 )   (58,505 )
    

 

CASH FLOWS FROM FINANCING ACTIVITIES:

            

•      Increase (Decrease) of short – term and long – term debt

   18,002     (30,464 )

•      Repayment of debt for acquisition of shares in controlled companies

   —       (1,150 )

•      Loans obtained from related parties

   114     —    

•      Issuance of common stock

   21,336     16,295  
    

 

Net cash provided by (used in) financing activities

   39,452     (15,319 )
    

 

Net decrease in cash and cash equivalents

   (5,806 )   (79,097 )
    

 


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

 

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

 

Saúl Zang          

Vicepresident acting as

President            

 

42


IRSA Inversiones y Representaciones Sociedad Anónima

 

Unaudited Statements of Cash Flows (Continued)

For the six - month periods beginning on

July 1, 2004 and 2003

and ended December 31, 2004 and 2003

In thousand of pesos (Note 1)

 

    

December 31,

2004


  

December 31,

2003


Supplemental cash flow information

         

•      Interest paid

   13,310    11,256

•      Income tax paid

   —      —  

Non-cash activities:

         

•      Increase in inventory through a decrease in fixed assets

   1,404    2,606

•      Increase in fixed assets through a decrease in inventory

   123    —  

•      Conversion of unsecured convertible Notes into ordinary shares

   2,623    14,146

•      Conversion of convertible Notes of Alto Palermo S.A.

   3,676    —  

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

   —      1,326

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

   —      9,298

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

   —      14,200

•      Increase in other current liabilities through an increase in other receivables

   —      5,313

 

Saúl Zang          

Vicepresident acting as

President            

 

43


IRSA Inversiones y Representaciones Sociedad Anónima

 

Notes to the unaudited financial statements

For the six – month periods beginning on

July 1, 2004 and 2003

and ended December 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. 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 six-month periods ended December 31, 2004 and 2003 have not been audited. The Company’s Management estimates that all the necessary adjustments have been made to reasonably present the results of each period.

 

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

 

  1.2. Issuance of new technical pronouncement

 

On February 19, 2003, 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 amendments there to, became effective to the Company for the fiscal year ended June 30, 2004. Furthermore, the National Securities Commission has adopted that standard, making certain changes and establishing that it is applicable to fiscal years commenced as from April 1, 2004, admiting early application.

 

44


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. From that date and until December 31, 2001 the Company discontinued the restatement of the financial statements due to a period of monetary stability. From January 1, 2002 up to February 28, 2003 the effects of inflation were recognized due to the existence of an inflationary period. As from that date, the restatement of the financial statements was discontinued.

 

This criterion is not in line with current professional accounting standards, which establish that the financial statements must be restated through September 30, 2003. However, due to the low materiality of inflation rates during the period from March to September 2003, this deviation has not had a material effect on the financial statements taken as a whole.

 

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.

 

  1.5. Comparative information

 

Balance sheet items at June 30, 2004 shown in these financial statements for comparative purposes arise from the audited annual financial statements corresponding to the year then ended.

 

Balances at December 31, 2004 shown in the Statement of Income, Changes in Shareholders’ Equity and Cash flows are shown on a comparative basis with those for the same period of the previous year.

 

45


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, 2002 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 have been 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, and mutual funds were valued at their net realization value.

 

  d. Trade receivables and accounts payable

 

Trade receivables and accounts payable have been 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 have been valued at the amount deposited and collected, respectively, net of operating costs, plus financial results accrued based on the internal rate of return estimated at that time.

 

46


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

  1.6. (Contd.)

 

  f. Other receivables and payables

 

Sundry current assets and liabilities have been valued at face value plus the financial results accrued at the closing of the corresponding period.

 

Sundry receivables and payables (Asset tax, deposits in guarantee, and accounts receivable in trust) 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.

 

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:

 

The units relating to the building called “Edificios Cruceros” have been valued according to the accounting measuring standards corresponding to inventories receivable and it has been disclosed under the current portion of other receivables.

 

Liabilities in kind:

 

The Company records a liability in kind corresponding to an obligation to deliver units to be built in relation to the “San Martín de Tours” property. This liability was valued at the higher of amounts received or the estimated cost of building of the units plus additional costs to transfer the assets to the creditor, and is shown as a current liability under “Mortgages payable”.

 

47


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

  1.6. (Contd.)

 

  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.

 

  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 mentioned 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. During the period ended December 31, 2004 interest costs of the property called “San Martín de Tours” were capitalized for $ 171. Previously in the financial period ended June 30, 2004 there have been no capitalizations of this item.

 

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 December 31, 2004, the Company maintains allowances for impairment of certain inventories, totaling Ps. 233 (identified as, 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 their estimated recoverable value.

 

  i. Long -term investments

 

    Investments in debt securities:

 

Investments in debt securities were valued based on the best estimate of the discounted amount receivable applying the corresponding internal 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.

 

48


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

  1.6.i.     (Contd.)

 

    Investments in shares of subsidiaries and related companies:

 

The long-term investments in subsidiaries and related companies detailed in Exhibit C have been valued by using the equity method of accounting based on the financial statements at December 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. and Banco Hipotecario S.A.

 

As a result of the purchase of shares and the exercise of the options mentioned in Note 16 to the consolidated financial statements, the Company has reevaluated the accounting criterion to be used for valuation of its participation in Banco Hipotecario S.A. and subsidiaries (Banco de Crédito y Securitización S.A.), originally recognized at net realization value and restated acquisition cost, respectively. Taking into account the current participation of the Company in these entities, the exercise of significant influence on their decisions and the intention to maintain the participation as a long-term investment, the Company has valued its investment in these companies by the equity method of accounting. In accordance with the regulations of the BCRA and the contracts signed as a result of Banco Hipotecario S.A.’s financial debt restructuring process, there are certain restrictions on the distribution of profits by Banco Hipotecario S.A. to the Company.

 

    Certificates of participation in IRSA I financial trust:

 

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

 

49


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

  1.6.i.     (Contd.)

 

    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 mentioned in Note 1.4., or estimated net realizable value, whichever is lower. Land and land improvements are transferred to inventories when construction commences.

 

At December 31, 2004 the Company maintains allowances for impairment of certain parcels of undeveloped land totaling Ps. 8,253 (identified as Padilla, Torres Jardín IV, Constitución 1111).

 

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 at the end of the period.

 

    Rental properties

 

Rental properties are carried at cost, adjusted for inflation as mentioned in Note 1.4., less accumulated depreciation and allowance for impairment at the end of the period. 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 reported periods.

 

50


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

  1.6.j.     (Contd.)

 

At December 31, 2004 the company maintains allowances for impairment of certain rental property, totaling Ps. 9,313 (identified as Avda. Madero 1020, Reconquista 823, Avda. Madero 942 Sarmiento 517, Suipacha 664, Av. de Mayo 595, Costitución 1111, Libertador 602, Rivadavia 2768, Libertador 498, and Costeros Dique IV).

 

    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 December 31, 2004 and the year ended June 30, 2004 were not material.

 

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 mentioned 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

Furniture and fixtures

   5

Computer equipment

   3

Vehicles

   5

 

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. 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 statements of income.

 

 

51


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

  1.6. (Contd.)

 

  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 issuance 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 December 31, 2004, the Company has estimated the 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 expensing the remaining balance.

 

52


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

  1.6. (Contd.)

 

  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 flows. 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. At the end of each year the Company estimated the recoverable value of its non-current assets, recording a charge due to impairment or reversing the provision.

 

For lawsuits: 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 issuance 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.

 

53


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

  1.6. (Contd.)

 

  p. Shareholders’ equity accounts

 

Movements in shareholders’ equity accounts have been restated following the guidelines detailed in Note 1.4. until February 28, 2003. Subsequent movements are stated in the currency of the month to which they correspond.

 

The “Common stock” account was stated at historical nominal value. The difference between value stated in constant currency, following the guidelines detailed in Note 1.4., and historical nominal value is shown under “Inflation adjustment of common stock” forming part of the shareholders’ equity.

 

  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.

 

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 results of such companies, with the adjustments for application of Technical Pronouncement 21.

 

  r. Advertising expenses

 

The Company generally charges the advertising and publicity expenses to results when they are incurred. Advertising and promotion expenses were approximately Ps. 151 and Ps. 148 for the periods ended December 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. Derivative financial instruments

 

In the past the Company used certain financial instruments to administer the risk related to its net investments in foreign activities and also as a complement to reduce its net financial costs. At present, the Company does not record operations with derivatives.

 

54


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 1: (Continued)

 

  1.6. (Contd.)

 

  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, as cash equivalents.

 

  w. Monetary assets and liabilities

 

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

 

55


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 2: MORTGAGES AND LEASES RECEIVABLES, NET

 

The breakdown for this item is as follows:

     December 31, 2004

   June 30, 2004

     Current

    Non-current

   Current

    Non-current

Mortgages and leases receivable

   727     37    405     37

Debtors under legal proceedings

   2,116     —      2,024     —  

Related parties (Note 8 a.)

   3,679     —      3,142     —  

Less:

                     

Allowance for doubtful accounts (Exhibit E)

   (978 )   —      (960 )   —  
    

 
  

 
     5,544     37    4,611     37
    

 
  

 

 

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

 

 

56


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:

 

     December 31, 2004

    June 30, 2004

 
     Current

   

Non-

current


    Current

   

Non-

current


 

Asset tax credits (Note 1.6.n.)

   21     20,488     —       19,329  

Value added tax (“VAT”)

   52     —       8     —    

Related parties (Note 8 a.)

   9,153     38     13,939     8  

Guarantee deposits

   —       5     —       33  

Expenses to be recovered

   254     —       242     —    

Gross sales tax

   1     —       6     —    

Income tax prepayments and withholdings

   5     —       16     —    

Trust accounts receivable

   —       361     —       361  

Tax credit certificates

   —       —       563     —    

Advances to directors

   3,540     —       —       —    

Present value

   —       (921 )   —       (816 )

Deferred income tax (Note 12)

   —       49,931     —       49,931  

Credit from barter of “Edificios Cruceros” (1)

   5,878     —       —       5,836  

Tax on personal assets

   3,255     —       3,893     —    

Allowance for uncollectibility of tax on personal asset (Exhibit E)

   (3,255 )   —       (3,887 )   —    

Pre-paid insurance

   200     —       —       —    

Other

   303     —       200     —    
    

 

 

 

     19,407     69,902     14,980     74,682  
    

 

 

 


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

 

NOTE 4: INVENTORIES

 

The breakdown for this item is as follows:

 

     December 31, 2004

   June 30, 2004

     Current

  

Non-

current


   Current

  

Non-

current


Real estate for sale

   9,877    272    5,430    233
    
  
  
  
     9,877    272    5,430    233
    
  
  
  

 

The value recorded are disclosed net of the effect of the allowance for impairment, as mentioned in Note 1.6.o.

 

57


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:

 

     December 31, 2004

   June 30, 2004

     Current

  

Non-

current


   Current

  

Non-

current


Bank loans (2)

   6,852    53,531    3,401    56,556

Bank loans - Accrued interest (2)

   323    5,319    229    4,108

Negotiable Obligations – 2009 principal amount (3)

   11,135    87,000    5,528    91,915

Negotiable Obligations - 2009 -accrued interest (3)

   523    8,664    402    6,728

Convertible Negotiable Obligations - 2007 (1)

   2,624    255,365    2,632    255,922

Other financial loans

   18,002    —      —      —  
    
  
  
  
     39,459    409,879    12,192    415,229
    
  
  
  

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$ 86.2 million, net of issue expenses.
2. Corresponds to 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 December 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 December 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.

 

58


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:

 

     December 31, 2004

    June 30, 2004

 
     Current

  

Non-

current


    Current

  

Non-

current


 

Related parties (Note 8.a)

   134    5     24    —    

Guarantee deposits

   441    1,187     377    1,286  

Provision for lawsuits (Exhibit E)

   272    —       284    —    

Directors´ fees (Note 8.a)

   3,540    —       4,325    —    

Directors’ deposits (Note 8.a)

   —      8     —      8  

Fund administration

   1    —       1    —    

Donations payable (Note 8.a)

   —      —       569    —    

Trust account payables

   92    —       —      —    

Present value

   —      (6 )   —      (15 )

Other

   217    —       171    —    
    
  

 
  

     4,697    1,194     5,751    1,279  
    
  

 
  

 

NOTE 7: OTHER INCOME (EXPENSES), NET

 

The breakdown for this item is as follows:

 

    

December 31,

2004


   

December 31,

2003


 

Other income:

            

Results from sale of fixed assets

   6     11  

Other

   125     62  
    

 

     131     73  
    

 

Other expenses:

            

Unrecoverable VAT

   (207 )   (251 )

Donations

   (90 )   (220 )

Debit and credit tax

   (354 )   (348 )

Lawsuits

   (15 )   (7 )

Tax on personal assets

   (3,255 )   —    

Other

   (30 )   (122 )
    

 

     (3,951 )   (948 )
    

 

Total other income (expenses), net

   (3,820 )   (875 )
    

 

 

59


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 8: INTERCOMPANY BALANCES AND TRANSACTIONS

 

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

 

     December 31,
2004


   June 30,
2004


Abril S.A. (1)

         

Current mortgages and leases receivables

   2    2

Alternativa Gratis S.A. (3)

         

Current mortgages and leases receivables

   4    16

Alto Palermo S.A. (1)

         

Current mortgages and leases receivables

   563    610

Other current receivables

   2,101    2,025

Current investments

   4,274    4,185

Non-current investments

   94,548    91,487

Current accounts payable

   87    88

Other current liabilities

   20    19

Altocity.Com S.A. (3)

         

Current mortgages and leases receivables

   7    4

Current accounts payable

   2    —  

Baldovinos S.A. (1)

         

Current mortgages and leases receivables

   4    —  

Banco Hipotecario S.A. (3)

         

Non-current investments

   109,567    87,392

Banco de Crédito y Securitización S.A (3)

         

Non-current investments

   4,456    4,590

Buenos Aires Trade and Finance Center S.A. (1)

         

Current mortgages and leases receivables

   4    —  

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

         

Current mortgages and leases receivables

   135    1

Current accounts payable

   19    1

Long – term debt – Convertible Notes

   134,928    132,942

Dolphin Fund Management S.A. (4)

         

Current mortgages and leases receivables

   20    —  

Other current receivables

   —      4,915

Emprendimiento Recoleta S.A. (1)

         

Current accounts payable

   —      5

Fibesa (1)

         

Current mortgages and leases receivables

   4    4

Current accounts payable

   2    2

 

60


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the unaudited financial statements (Continued)

 

NOTE 8: (Continued)

 

a.(Continued)

 

     December 31,
2004


   June 30,
2004


Fundación IRSA (4)

         

Other current liabilities

   —      569

Hoteles Argentinos S.A. (1)

         

Current accounts payable

   2    2

Inversora Bolívar S.A. (1)

         

Current mortgages and leases receivables

   2,900    2,455

Other current receivables

   —      38

Current accounts payable

   11    9

Llao Llao Resorts S.A. (1)

         

Current mortgages and leases receivables

   2    —  

Other current liabilities

   —      5

Other non-current liabilities

   5    —  

Nuevas Fronteras S.A. (1)

         

Current accounts payable

   1    1

Palermo Invest S.A. (1)

         

Other current receivables

   4,084    4,084

Pereiraola S.A. (1)

         

Current mortgages and leases receivables

   4    —  

Advances employees (4)

         

Managers, Directors and other current Staff of the Company

   90    104

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

   38    8

Puerto Retiro S.A. (3)

         

Current mortgages and leases receivables

   8    —  

Red Alternativa S.A. (3)

         

Current mortgages and leases receivables

   8    49

Ritelco S.A. (1)

         

Other current liabilities

   114    —  

Shopping Alto Palermo S.A. (1)

         

Other current receivable

   2,878    2,773

Current accounts payable

   —      9

Tarshop S.A. (1)

         

Current mortgages and leases receivables

   14    1

Estudio Zang, Bergel & Viñes (4)

         

Current accounts payable

   88    18

Directores (4)

         

Long – term debt – Convertible Notes

   372    370

Other current liabilities

   3,540    4,325

Other non-current liabilities


   8    8

(1)    Subsidiary.

         

(2)    Shareholder.

         

(3)    Equity investee

         

(4)    Related party

         

 

61


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 six month periods ended December 31, 2004 and 2003 are as follows:

 

     Period

   Sales and
service fees


   Leases
earned


   Holding
results


   Recovery of
expenses


   Cost of
services


   Leases
lost


  

Interest

Earned


   Fees

   Donations

  

Interest

Lost


Related parties

                                                      

Alto Palermo S.A.

   2004
2003
   748
377
   —  
—  
   —  
—  
   —  
—  
   134
—  
   —  
—  
   4,596
4,502
   —  
—  
   —  
—  
   —  
—  

Altocity.Com S.A.

   2004
2003
   19
37
   19
85
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  

Alternativa Gratis S.A.

   2004
2003
   19
19
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  

Palermo Invest S.A.

   2004
2003
   —  
—  
   —  
—  
   —  
—  
   2
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  

Cresud S.A

   2004
2003
   141
256
   —  
—  
   —  
—  
   —  
—  
   60
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   5,473
5,846

Red Alternativa S.A.

   2004
2003
   13
10
   88
75
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  

Tarshop S.A.

   2004
2003
   41
85
   35
32
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  

Dolphin Found Management S.A.

   2004
2003
   —  
19
   —  
—  
   2,390
2,800
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  

Abril S.A.

   2004
2003
   11
8
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  

Llao Llao Resorts S.A.

   2004
2003
   —  
—  
   31
12
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  

Inversora Bolívar S.A.

   2004
2003
   601
588
   84
—  
   —  
—  
   94
40
   —  
—  
   156
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  

Shopping Alto Palermo S.A.

   2004
2003
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   105
135
   —  
—  
   —  
—  
   3
—  

Banco Hipotecario S.A.

   2004
2003
   —  
—  
   —  
—  
   —  
19,501
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  

Ritelco S.A.

   2004
2003
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
800
   —  
—  
   —  
—  
   14
20

Personal loans

   2004
2003
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   2
3
   —  
—  
   —  
—  
   —  
—  

Fundación IRSA

   2004
2003
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   22
20
   —  
—  

Estudio Zang, Bergel y Viñes

   2004
2003
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   —  
—  
   291
111
   —  
—  
   —  
—  
         
  
  
  
  
  
  
  
  
  

Total 2004

        1,593    257    2,390    96    194    156    4,703    291    22    2,782
         
  
  
  
  
  
  
  
  
  

Total 2003

        1,399    204    22,301    40    —      —      5,440    111    20    3,058
         
  
  
  
  
  
  
  
  
  

 

  c. The composition of Net gain in related companies is as follows:
     Income

     December 31,
2004


    December 31,
2003


Equity in earnings of controlled and affiliated companies

   77,680     40,595

Amortization of intangible assets and investments

   1,193     654

Tax on APSA dividends

   (1,874 )   —  
    

 
     76,999     41,249
    

 

 

62


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the Unaudited Financial Statements (Continued)

 

NOTE 9: COMMON STOCK

 

  a. Common stock

 

As of December 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

   20    Board of Directors´ Meeting (2)    03.31.2004    Pending

Shares issued for cash

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

Shares issued for cash

   275    Board of Directors´ Meeting (2)    06.30.2004    Pending

Shares issued for cash

   9,175    Board of Directors´ Meeting (2)    06.30.2004    Pending

Shares issued for cash

   550    Board of Directors´ Meeting (2)    06.30.2004    Pending

Shares issued for cash

   550    Board of Directors´ Meeting (3)    06.30.2004    Pending

Shares issued for cash

   9,450    Board of Directors´ Meeting (3)    09.30.2004    Pending

Shares issued for cash

   4    Board of Directors´ Meeting (2)    12.31.2004    Pending

Shares issued for cash

   229    Board of Directors´ Meeting (2)    12.31.2004    Pending

Shares issued for cash

   688    Board of Directors´ Meeting (2)    12.31.2004    Pending

Shares issued for cash

   45    Board of Directors´ Meeting (2)    12.31.2004    Pending

Shares issued for cash

   46    Board of Directors´ Meeting (2)    12.31.2004    Pending

Shares issued for cash

   363    Board of Directors´ Meeting (2)    12.31.2004    Pending

Shares issued for cash

   249    Board of Directors´ Meeting (2)    12.31.2004    Pending

Shares issued for cash (1)            

   1,643    Board of Directors´ Meeting (3)    12.31.2004    Pending
    
              
     261,520               
    
              

(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.

 

 

63


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 December 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.

 

NOTE 10: RESTRICTED ASSETS

 

  a. 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, pending in court No. 55.

 

  b. The Company has mortgaged the following real estate: 13 functional units al Libertador 498, 71 supplementary units al Laminar Plaza and 19 supplementary units al Dique IV, in connection with the secured negotiable bonds referred to in Note 5.3..

 

  c. 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.

 

64


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the Unaudited Financial Statements (Continued)

 

NOTE 11: CONVERTIBLE NEGOTIABLE OBLIGATIONS

 

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.

 

  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.

 

65


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the Unaudited Financial Statements (Continued)

 

NOTE 11: (Continued)

 

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 at 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 December 31, 2004, holders of Convertible Negotiable Obligations had exercised their right to convert them for a total of US$ 13.8 million, giving rise to the issuance of 25,371,758 ordinary shares of Ps. 1 face value each as disclosed in Note 9.

 

Furthermore, at December 31, 2004, options to subscribe Company shares amounting to US$ 15.8 million were exercised, giving rise to the issuance of 24,149,216 ordinary shares of Ps. 1 par value each, as mentioned in Note 9.

 

The total amount of Convertible Negotiable Obligations at December 31, 2004 is US$ 86,172,381.

 

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


    Reclass.
between def.
tax and income
tax previous
year


    Changes for
the period


    Balances at
period-end


 

Non-current deferred assets and liabilities

                        

Investments

   (6,706 )   (72 )   (956 )   (7,734 )

Trade receivables

   (53 )   33     (5 )   (25 )

Other receivables

   278     —       37     315  

Inventories

   740     7     1,034     1,781  

Fixed assets

   (674 )   —       (1,107 )   (1,781 )

Intangible assets

   8     —       —       8  

Tax loss carryforwards

   87,189     (1,973 )   8,252     93,468  

Financial debt

   7,166     —       (3,770 )   3,396  

Other debt

   142     344     (25 )   461  

Provisions

   99     —       (4 )   95  

Allowances for deferred assets

   (38,258 )   1,661     (3,456 )   (40,053 )
    

 

 

 

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.

 

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

 

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

 

66


IRSA Inversiones y Representaciones Sociedad Anónima

Notes to the Unaudited Financial Statements (Continued)

 

NOTE 12: (continued)             

Items


  

12.31.04

Ps.


   

12.31.03

Ps.


 

Result for the period (before income tax)

   58,205     34,745  

Current income tax rate

   35 %   35 %
    

 

Result for the period at the tax rate

   20,372     12,161  

Permanent differences at the tax rate:

            

- Restatement into constant currency

   (10,681 )   (13,032 )

- Donations

   32     77  

- Amortization of goodwill

   (18 )   6  

- Equity in earnings of controlled and affiliated companies

   (13,863 )   3,133  

- Holding result on Participation Certificates F.F.

   (437 )   (192 )

- Directors’ Fees

   —       (9