A N N U A l R E P O R T

Transcription

1 A N N U A l R E P O R T

2 CYDSA s two business segments include: Chemicals and Plastics, and Yarns for Textiles. Headquartered in Monterrey, Mexico, the Company incorporates more than 20 subsidiaries located in 9 cities and serves customers in more than 30 countries. INDEX Financial Highlights 1 To Our Shareholders 2 Economic Environment 10 Chemical Division 14 Yarns Business 17 Board of Directors 18 Financial information: Management Analysis of CYDSA s Financial Statements 23 Independent Auditors Report 27 Consolidated Financial Statements 28 Notes to Consolidated Financial Statements 32

3 Financial Highlights Consolidated Sales Millions of Dollars Operating Cash Flow (EBITDA 1 ) Millions of Dollars Total Debt Millions of Dollars at December 31 st Results (Millions of Mexican Pesos with purchasing power as of December 31, 2005) Consolidated Sales Consolidated Sales (Millions of dollars) Export Sales (Millions of dollars) Export Sales / Consolidated Sales Operating Income Net Income (Loss) for Continuing Operations Net Loss Net Loss for Majority Interest Financial Position (Millions of Mexican Pesos with purchasing power as of December 31, 2005) Total Assets Total Debt (Millions of dollars) Debt Net of Cash 1 (Millions of dollars) Stockholders Equity Book Value per Share (pesos) 2 Cash Flow (Millions of Current Pesos) Operating Cash Flow (EBITDA) (Operating profit plus non-cash items) Operating Cash Flow (EBITDA) (Millions of dollars) Indicators Operating Income / Sales Net Income (Loss) for Continuing Operations / Sales Net Loss / Sales Operating Cash Flow (EBITDA) / Sales Operating Cash Flow (EBITDA) / Net Financial Cost (ratio) Total Debt / Shareholders Equity (ratio) Total Liabilities / Shareholders Equity (ratio) Net Working Capital 3 / Sales Total Personnel Exchange Rate (Pesos per US Dollar): Annual average End of year ,355 5, % 21% (99) (300) (970) (330) (990) 8,163 9, ,398 4, % 3.9% 6.6% (1.8%) (5.6%) (18.0%) 12.6% 9.5% % 11.2% 3,751 4, Debt Net of Cash corresponds to Total Debt minus Cash and Marketable Securities. It is expressed in US dollars as almost all of the debt is dollar denominated. 2 Based on 273,667,498 shares outstanding. 3 Due to the seasonal characteristic of several of CYDSA s markets, all measures related to Working Capital performance are computed with a methodology based on the last sales required to complete the balance of trade receivables, inventories and trade payables. Note: To allow comparability, figures are adjusted for Divestitures and Discontinued Operations. CYDSA S ANNUAL REPORT 2005

4 TO OUR SHAREHOLDERS It is a pleasure to inform you of the achievements attained during 2005 in CYDSA s financial condition and operating results. The restructuring of Bank and Notes Debt, finalized on January 19, 2005, concluded a significant phase in rebuilding the Group s financial flexibility. Similarly, the decisions for divestiture and suspension of operations implemented during 2005, essentially completed the plan to strengthen the competitive position of the Business Portfolio. Tomas Gonzalez Sada Chairman of the Board and Chief Executive Officer During 2005, the operating performance of CYDSA s Businesses became strongly influenced by significant increases in energy and petrochemicals prices and the volatility characterizing these markets. Hurricanes affecting the Gulf of Mexico intensified these conditions during the last months of the year. The results included shortages of petrochemical raw materials and additional increases in the prices of crude oil, natural gas and their derivatives. These events impacted CYDSA s Businesses results in a variety of ways: a) The scarcity of raw material forced temporary supply disruptions in several businesses causing reductions in shipments to certain markets during the final months of b) Several of CYDSA s Chemical and Plastic Businesses increased prices, offsetting the higher costs and improving profit margins on selected products. c) Crysel, CYDSA s Acrylic Fiber Business, competed globally against a number of international synthetic fiber and cotton producers. The exceptional cost increases in energy and acrylic fiber raw materials occurred only in North America. Competitive conditions prevented higher sales prices, as other international manufacturers did not experience this escalation in cost. Initially this situation reduced profit margins, finally precipitating a severe cash availability problem. As a result Crysel suspended operations on January 23 of Despite the negative effects of these extraordinary events, outside the control of CYDSA s management, the optimization of sales mix and control of operating expenses allowed for increased dollar pricing, higher profit margins and Operating Cash Flow (EBITDA 1 ) for most of CYDSA s Businesses during On January 19, 2005, CYDSA concluded the restructuring of its Bank and Notes Debt. This allowed the Group to comply with all conditions established in the Bank Debt Restructuring Agreement between debt holders, CYDSA and several of its subsidiaries, executed on March 16, This contract: a) Covered US$192.6 million in Bank Debt and b) Exchanged US$76.4 million of this obligation, previously assigned to the Fibers and Textile Products Segment, for shares in the Valores Quimicos subsidiary. 1- Operating Cash Flow or EBITDA refers to Profits before Total Financing Cost, Taxes, Employees Profit Sharing, Extraordinary items in the Statement of Operations, Depreciation and Amortization. EBITDA is equivalent to Operating Profit plus non-cash items. 2 CYDSA S ANNUAL REPORT 2005

5 Another significant element of the January 19, 2005 Agreement, covered approximately US$159 million in Cydsa, S.A. de C.V. s Medium Term Notes and their accrued interest. The Notes, issued in 1997 and restructured in 2002 were exchanged for CYDSA shares. The issuance of US$25.5 million of Convertible Debentures refinanced the accrued interest. Details of these transactions follow in the Restructuring of Bank and Notes Debt chapter of this report (page 7). In addition to contractual principal obligations, advanced payments covering Bank Debt and Convertible Debentures occurred in February, June and December of These disbursements liquidated the US$25.5 million Convertible Debentures and reduced CYDSA s year-end Bank Debt to US$120.1 million. The Management s Discussion and Analysis of CYDSA s Results of Operations and Financial Condition of this Report (page 23), presents information covering the improvement in the Group s financial position resulting from these actions. The progress in attaining a debt structure commensurate with the Group s financial capability, along with the operative improvements in the Business Portfolio, provide an improved perspective to increase Value Creation for CYDSA s Shareholders. The following chapters detail the 2005 progress and results 2 : Sales and Income. Operating Cash Flow (EBITDA 1 ). Net Cash Flow. Restructuring of Bank and Notes Debt. Outlook. Sales and Income In accordance with principles adopted by the Mexican Institute of Public Accountants, Sales, Costs and Operating Income figures for both 2004 and 2005 exclude results from Divested Businesses and Discontinued Operations. CYDSA, as articulated several years ago in its Strategic Plan, based the continuation of its Flexible Packaging and Fibers and Textile Products Businesses on the generation of positive cash flows. Failure to meet this criterion would mean the divestiture or suspension of operations for noncompliant units. Following these principles, and recognizing the effect of suspending the Acrylic Fiber Business (Crysel) on January 23, 2006, Consolidated Sales totaled 5,355 million pesos in 2005, 0.8% below the 5,398 million of the previous year. Domestic Sales reached 4,510 million pesos, increasing 5.9% over the 4,258 million achieved in As mentioned in the Economic Environment Section of this Report (page 10), the hurricanes affecting the Gulf of Mexico during August and September caused shortages of chemical and petrochemical raw materials. As a result, Export Sales decreased 20.0% to US$76 million, comprising 15.7% of total Sales. Export Sales in 2004 totaled US$95 million and represented 21.1% of all Sales. The following graph presents the recent history of CYDSA s Consolidated Sales in dollar terms. Results for 2005 totaled US$483 million, an increase of 7.1% from US$451 million the previous year. The discrepancy between the 2005 performance of sales in constant pesos and those in dollar terms derives from differences in the average inflation rate in Mexico of 4.0%, compared with 3.5% average peso appreciation. TOTAL CONSOLIDATED SALES Millions of Dollars % Millons of Pesos ,634 4,534 4,266 4,785 5,398 5,355 Note: To allow comparability, figures are adjusted for Divestitures and Discontinued Operations. 2- All figures are expressed in pesos with purchasing power as of December 31, 2005 (constant pesos), unless otherwise stated. Foreign exchange figures are expressed in US dollars. CYDSA S ANNUAL REPORT

6 Generally, the upward pricing trend of chemical and petrochemical products, offset the higher costs of key raw materials and energy. Consequently, most CYDSA Businesses improved margins on sales, primarily for products sold in the domestic market. In addition, strategies optimizing management functions in Businesses and Staff Areas reduced operating expenses. As a result, the Operating Income 3 of 452 million pesos in 2005 represents a significant growth over the 213 million generated the previous year. Despite higher interest rates, the reduction in Bank Debt and the appreciation of the peso against the US dollar, reduced Total Financing Cost from 198 million pesos in 2004 to 54 million in 2005, a reduction of 73%. Other Expenses for 2005 amounted to 21 million pesos, with 22 million in Taxes and Employees Statutory Profit Sharing. The resultant Net Income from Continuing Operations totaled 355 million pesos in 2005, greatly improved from the 99 million Loss experienced in Finally, after a 655 million pesos charge associated with Discontinued Operations, the Consolidated Net Loss of 300 million pesos, compared with a 970 million Loss in Management Analysis of CYDSA s Financial Statements of this Report (page 23), provide the basis for the 655 million of Loss for Discontinued Operations. These charges relate primarily with the following decisions: Consolidation of Yarn Operations in one Location. In the second half of 2004, supported by a logistics and commercial analysis oriented to optimize the production and sales mix, CYDSA initiated a process to improve the competitive position of the Yarn Business through consolidating the acrylic yarn manufacturing in one location. In January 2005, the suspension of operations in the San Luis Potosi plant, started the last phase of this project. Through the transfer of equipment and machinery, the output of four production facilities now resides in one industrial center located in Aguascalientes City. The consolidation allowed the Yarn Business to lower operating costs and gain higher capacity utilization. This Business utilizes a portion of the space made available upon the suspension of operations of the Home Textiles Business in Suspension of Operations of the BOPP Film and Folding Carton Businesses. In order to focus on areas with greater medium term potential, CYDSA s Strategic Plan established, several years ago, the possible divestiture of the three Businesses incorporated in the Packaging Division. The sale of the Printed and Laminated Film Business (Tultitlan Plant) in May 2004 resulted from this plan. Despite programs to improve sales mix and reduce fixed cost, increasing competition and higher raw materials and energy costs significantly reduced margins on the two other Packaging Businesses, Bioriented Polypropylene Film (Propirey) and Folding Carton (Litoenvases). Facing the risk of negative cash flows, in June 2005 the Group suspended operations of Propirey and Litoenvases, and minimized the financial resources required to implement this decision. Suspension of Operations of the Acrylic Fiber Business. CYDSA s Acrylic Fiber Business, globally recognized as Crysel, represented a traditionally competitive company with exports accounting for more than 50% of its production. This Business, operating since 1967 in El Salto, Jalisco, maintained a systematic productivity improvement philosophy. In recent years, Crysel experienced a severe reduction in profit margins. Descending cotton prices and escalating energy and raw materials costs associated with higher crude oil and natural gas prices, accounted for this decline. The Business reacted by lowering administrative expenses and reducing energy consumption and other variable production costs. Crysel also developed new higher value added products and minimized working capital requirements. Attempts to establish strategic alliances with domestic and foreign producers proved unsuccessful. 3- Operating Income or Loss (EBIT), equals Net Sales minus Cost of Sales and Operating Expenses. 4 CYDSA S ANNUAL REPORT 2005

7 These efforts failed to compensate for the continuous growth of energy costs in North America. Also Crysel became unable to obtain acrylonitrile, its primary raw material, at competitive international prices and terms of sales. These conditions deteriorated Crysel s competitiveness and prevented the generation of positive operating cash flows. As a result, CYDSA suspended operations of acrylic fiber production on January 23, In 2005, this Business sales totaled 1,698 million pesos, including exports of US$85 million. In accordance with Mexican accounting principles, the 2005 Financial Statements exclude Crysel s results and include the cost associated with the suspension as Discontinued Operations. Operating Cash Flow (EBITDA 1 ) In 2005, CYDSA s Operating Cash Flow reached 664 million current pesos, the equivalent of US$61 million or 12.6% of Sales. As demonstrated in the following chart, the amounts increased from US$43 million or 9.5% of Sales obtained in 2004 and represents the third consecutive annual growth. CYDSA s US$18 million increase in EBITDA 1 represents a 42% improvement over The recovery of sales margins on chemical and petrochemical products produced most of the gain. These events occurred primarily during the final months of the year and offset many unfavorable factors faced by the Group s Businesses. The following conditions describe the sources of this growth in Operating Cash Flow in Several of CYDSA s Businesses involve chemicals and petrochemical markets characterized by a cyclical pattern of international demand and pricing. These conditions affect both the final product and the raw materials used in their manufacture. Since 2002, recurring recessions in these products produced declining profit margin trends. During the first eight months of 2005, increases in chemical and petrochemical quotations, reduced the margin deterioration for some CYDSA Businesses. As explained in the Economic Environment section of this Report (page 10), two extremely strong hurricanes severely affected US oil and gas production, processing and distribution facilities in the Gulf of Mexico. Differing outcomes of these phenomena influenced the operating and financial activities of most of the Group s Businesses. Initially, the hurricanes impact on crude oil and natural gas production provoked a sharp rise in prices of petrochemical raw materials and energy. This situation added significantly to the costs of several CYDSA Businesses. Next, the supply of petrochemical products declined due to lack of crude oil and natural gas availability and damage to petrochemical plants and ports located in the Gulf of Mexico basin. This scarcity, forced some Group Businesses to temporarily suspend production, reducing sales volume. OPERATING CASH FLOW (EBITDA 1 ) Millions of Dollars Millions of Current Pesos Operating Cash Flow (EBITDA 1 ) / Consolidated Sales % 10.7% 3.6% 6.5% 9.5% 12.6% Note: To allow comparability, figures are adjusted for Divestitures and Discontinued Operations. CYDSA S ANNUAL REPORT

8 Finally, the growth in raw materials and energy costs, combined with shortages of chemicals and petrochemicals in North America, produced higher prices for processed products. Price increases, implemented primarily in the last two months of 2005, exceeded the impact of raw material and energy cost escalation as well as sales volumes lost to procurement shortages. These conditions, both favorable and unfavorable, affecting the margin on sales of the chemicals and petrochemicals, yielded a US$24 million increase in CYDSA s EBITDA 1. Another trend in the 2005 economic environment negatively affected CYDSA s performance. A key element in the restructuring of CYDSA s operations, focused on reducing fixed costs requiring cash outlays (cash fixed costs) in Businesses and Staff Areas. Strategies included redefining functions, applying new management practices and eliminating activities with limited opportunity for short-term Value Creation. These programs continued to yield savings when measured in constant pesos during However, the peso appreciation against the dollar eliminated the positive results and produced a US$6 million negative impact on the Group s EBITDA 1. In summary, CYDSA s US$18 million increase in Consolidated EBITDA 1 results from the US$24 million positive effect of chemical and petrochemical margins, offset by the US$6 million growth in cash fixed costs. This result explains CYDSA s US$61 million EBITDA 1 for 2005, compared with US$43 million the prior year. Net Cash Flow 4 The following table summarizes the Net Cash Flow for 2005, differentiated between amounts derived from Operations and the amount generated from Financial and Non-recurring Transactions. Operating Cash Flow (EBITDA 1 ) of US$61 million provides the initial input to Net Cash Flow from Operations. A requirement for Net Working Capital of US$33 million, represents the main operative outlay. This amount includes a US$10 million increase in Accounts Receivables and Inventories supporting higher sales prices. Procurement problems caused by the hurricane phenomena, affecting the chemical and petrochemical industries, lowered raw material purchases and several new vendors required cash payments. These actions reduced Accounts Payable to Suppliers by US$23 million, significantly increasing the investment in Net Working Capital. Other applications of cash included US$11 million in Net Interest Disbursements and Financial Discounts to Customers for Prompt Payments of US$2 million. Fixed Asset Investments totaled US$14 million and covered operational maintenance and productivity improvement projects. Other Operational Net Income contributed US$4 million. As a result, Net Cash Flow from Operations showed a positive US$5 million, after considering all of the normal Businesses requirements. NET CASH FLOW 2005 (Millions of Dollars) Net Cash Flow from Operations: Operating Cash Flow (EBITDA 1 ) 61 Investments in Net Working Capital Net Interest Disbursements (33) (11) Financial Discounts to Customers for Prompt Payments (2) Fixed Asset Investments (14) Other Operational Net Income 4 Net Cash Flow from Operations 5 Net Cash Flow from Financial and Non-recurring Transactions: Sale of Non-strategic Assets and other Net Extraordinar y Income 2 Fund to Comply with Contractual Commitments 35 Debt Payments on Principal (43) Non-recurring Transactions and Disbursements related with Operational and Financial Restructuring (6) Net Cash Flow from Financial and Non-recurring Transactions (2) Net Cash Flow 3 4- Figures corresponding to Cash Flow are expressed in current pesos, this is, without inflation effects adjustments, in order to reconcile the beginning and end of the year cash balances. Comparisons are expressed in U.S. dollars as most of the Interest Expense is dollar denominated. 6 CYDSA S ANNUAL REPORT 2005

9 The Net Cash Flow from Financial and Non-recurring Transactions includes US$12 million of the net proceeds, after deducting all applicable expenses, from the sale of Non-strategic real estate assets and Other Extraordinary Income. The latter include the amounts granted by the Montreal Protocol for the early cessation of CFC refrigerant gas production, and refunds of assets taxes. In December 2004, the Group created a Fund, guaranteeing the availability of cash to comply with contractual commitments in agreements with Banks and Noteholders. During 2005 the Fund balance of US$35 million provided resources for payments on Bank Debt and Convertible Debentures. Financial and non-recurring cash outflows include US$43 million for Bank Debt and Convertible Debentures Principal Payments. An additional US$6 million covered disbursements associated with Operational and Financial Restructuring, primarily covering personnel downsizing. In total, the Net Cash Flow from Financial and Non-recurring Transactions showed an outflow of US$2 million. The combination of the US$5 million surplus in Net Cash Flow from Operations and the outflow of US$2 million in Net Cash Flow from Financial and Non-recurring Transactions produced a positive Net Cash Flow for 2005 of US$3 million. Restructuring of Bank and Notes Debt As mentioned at the beginning of this Report, on January 19, 2005, CYDSA formalized the restructure of its Bank and Notes Debt. Elements included: The exchange of US$76.4 million in Bank Debt of the Group s textile companies for Valores Quimicos shares. The Creditor Banks, including Bancomext, received 16.45% of this Sub-holding company s equity and CYDSA s commitment to purchase these shares on or before January 11, The Balance Sheet reclassified this item from Bank Debt to Other Long Term Liabilities. The exchange of Notes with a principal of US$158,997,000 for 27,366,750 of CYDSA s Class A voting shares; and 136,833,749 Class C nonvoting shares. The latter become convertible into voting shares on May 1, Concurrent to this exchange, the issuance of US$25.5 million in Convertible Debentures with a May 1, 2008 maturity to finance the Notes accrued interest, pending payment. This maturity may be reduced one year if at least 70% of the debt principal remains unpaid by May 1, In accordance with principles adopted by the Mexican Institute of Public Accountants, subsequent events substantially affecting the financial statements with influence in the decision making of users and specifically, the formal restructuring of liabilities, require amendments to the financial statements. Following this rule, CYDSA s Financial Statements as of December 31, 2004, include the effects of the previously described debt restructuring, concluded on January 19, For this reason, the Bank and Notes Debt reported at endyear 2004 totaled US$163 million, with a long-term maturity profile ending at The Bank Debt Restructuring Agreement signed between CYDSA and the Creditor Banks on March 16, The Agreement extended and rescheduled principal payments of US$125 million in obligations of Valores Quimicos, with escalating disbursements beginning in March 2004 and ending in January CYDSA S ANNUAL REPORT

10 In 2005 the Group covered both programmed and advance payments on Bank Debt principal. Other disbursements liquidated US$25.5 million of Convertible Debentures. As a result, CYDSA s Bank Debt decreased to US$120 million at December 31, 2005, US$43 million or 26.4% lower than the US$163 million reported at year-end The next chart shows the 2005 Debt diminishing US$629 million or 84% from the total Debt as of December, 1993, and US$480 million or 80% from 2000, the first year of the strategy aimed at restructuring the Group s Business Portfolio. Contents of the 2005 Annual Report The sections devoted to the Operating Units of the Divisions include 2005 accomplishments for each of CYD- SA s Business Units and information relative to their products and markets (page 13). A special chapter covers the Economic Environment and its impact on CYDSA s markets (page 10). Management s Discussion and Analysis of CYDSA s Results of Operations and Financial Condition (page 23) precedes the Audited Financial Statements (page 28). Outlook CYDSA s Shareholders: The strategies implemented during the last several years strengthened the operational and financial structure of the Group s Business Portfolio. The positive results in 2005 occurred despite adverse conditions associated with the extraordinary increases in crude oil and energy prices. In the financial area, the conclusion of the Bank and Notes Debt restructure on January 19, 2005, represented a significant achievement. The new Bank Debt profile, in both amount and scheduled maturities, corresponds well with the Group s financial capabilities. During 2005 the Group covered all its contractual obligations. Additionally, advanced payments on principal, supported by a significant amount of non-operational cash flow generated mainly in 2004, allowed CYDSA to further reduce Bank Debt and liquidate the Convertible Debentures. Operationally, improvements in manufacturing, management and logistics processes produced positive outcomes. These activities exceeded the impact of price increases in energy and chemical and petrochemical raw materials, as well as procurement problems associated with the Gulf of Mexico hurricanes. As a result, Operating Cash Flow (EBITDA 1 ) improved for the third consecutive year. BANK AND NOTES DEBT Millions of Dollars at December 31 st Bank and Notes Debt Net of Cash Debt Net of Cash represents Total Debt minus Cash and Marketable Securities. It is expressed in US dollars, as almost all of the debt is dollar denominated. 8 CYDSA S ANNUAL REPORT 2005

11 The restructuring of CYDSA s Debt and Business Portfolio provides the capability to manage future uncertainties in both economic and market environments. The systematic improvement process continues to identify and implement opportunities enhancing the competitiveness of the Business Units. CYDSA s operations continue to develop innovative products and services to satisfy customer needs, while constantly improving the productivity and effectiveness of operational and administrative processes. Emphasis continues on developing e-business markets and strategies, utilizing logistics as a competitive advantage. CYDSA remains committed to meeting or exceeding all quality and environmental standards. Ecology considerations led to the suspension of chlorofluorocarbons (CFC s), manufactured by CYDSA s subsidiary Quimobasicos, a producer of refrigerant gases since On September 9, 2005, the International Day for the Preservation of the Ozone Layer, Quimobasicos ceased production of its CFC product line. The cessation occurred almost five years prior to Mexico s original commitment to the Montreal Protocol. Through this action, Mexico supported the United Nations Industrial Development Organization s mission of providing a cleaner and healthier world for future generations. Quimobasicos continues to produce and distribute other refrigerant gases, in compliance with all environmental safeguards, while continuing to service customers needs. In 2005, through the support of all employees, CYDSA strengthened the financial and competitive viability of its Business Portfolio. Debt restructuring represented the primary step toward attaining medium and longterm profitable growth. The year 2006 presents many economic and financial uncertainties, requiring attentive monitoring of the business environment to assure the proper decisions for continued improvement. The accumulated experience and professionalism of CYDSA s personnel, as well as the support of customers, suppliers and financial institutions, provide a sound platform to confront and resolve any adverse circumstances. Moreover, 2006 should represent another positive step in CYDSA s evolution to increase Value Creation for our Customers, Personnel and Shareholders. Sincerely, Tomas Gonzalez Sada Chairman of the Board and Chief Executive Officer CYDSA S ANNUAL REPORT

12 ECONOMIC ENVIRONMENT International Business and Trade Hiromi Yokoyama Deputy President Chief Representative for Asia-Pacific In 2005, robust progress continued expanding the international economic activity even though growth registered slightly lower rates than Excluding the weakness shown by the Euro Zone economies where Gross Domestic Product (GDP) increased 1.3% against 1.6% the previous year, all regions of the world evolved satisfactorily. Particularly in the US, supported by strong domestic consumption and private investment, the GDP grew 3.5% following the 4.2% registered in In China, foreign capital inflows continued impelling the investment expansion, producing a 9.9% growth in GDP, similar to 10.1% the previous year. Sustained economic growth of 2.8% in Japan compares with 2.3% in During recent years, the international crude oil markets experienced significant supply limitations, as well as speculation generated by political problems, adverse climate factors and the risk of terrorist attacks in some producing countries. Consequently, the increase in world energy demand derived from the 2005 economic growth greatly influenced the petroleum trade performance. Additionally, the imbalance between supply and demand intensified due to the hurricanes Katrina and Rita severely impacting, in August and September, US oil and gas extraction and refining facilities located in the Gulf of Mexico. In consequence, crude oil and derivatives quotations reached all time highs during September, increasing from the records set during the second quarter of the year. According to the US Department of Energy statistics, 2005 crude oil world prices averaged US$49.83 per barrel, 44% above the US$34.62 reported for 2004 and 84% higher if compared with the US$27.11 average in Despite the high level of natural gas production in the US, increasing imbalances between supply and demand, continued to make North America gas prices among the highest in the world. This situation continues to cause adverse effects on the Mexican economy, since south Texas quotations define natural gas prices in Mexico. From 2002 to 2004, the reference price for natural gas in Mexico increased 92% from an average of US$3.03 per million BTU s to US$5.83 respectively. Between January and August 2005 the average price reached US$6.27 per million BTU s. As in the case of crude oil, supply reductions caused by the negative impact of hurricanes Katrina and Rita on the production and distribution zones in the Gulf of Mexico, provoked staggering increases starting in September. Consequently, prices averaged US$11.70 per million BTU s during September-December of 2005, more than twice the US$5.83 level registered in Foreseeing this situation, a presidential decree published in Mexico on September 12, 2005, established a mechanism to limit the increase of natural gas prices sold by PEMEX to industrial consumers and domestic distributors. This temporary decree, in effect while US production of natural gas remained below normal levels, covered the last four months of Accordingly, the natural gas price in Mexico averaged US$8.20 per million BTU s from September to December. Including this figure, 2005 prices averaged US$6.95 per million BTU s, growing 19% over the US$5.83 the preceding year. In addition to the previously described upsurge on crude oil and natural gas prices, these exceptional natural phenomena caused significant increases in petrochemical and energy prices, as well as major distortions in normal US production and procurement patterns for many chemicals and petrochemicals. 10 CYDSA S ANNUAL REPORT 2005

13 As explained in the President s Letter, these conditions limited the recovery of CYDSA s profit margins in 2005, as many of the Group s businesses utilize high-energy consumption processes. The raw materials shortage also provoked reductions in product shipments to mainly export markets. Conversely, the upward trend in prices, primarily during the last months of the year, allowed some CYDSA s Businesses to improve their profit margins. Mexican Business Environment Aided by strong growth in the US economy, the Mexican business environment showed a positive performance in Weak economic activity and some volatility in financial indices characterized the first quarter. For the balance of the year, production activities gradually improved, while exchange and money markets strengthened. Foreign trade benefited from the international crude oil price increases in Oil exports totaled US$32 billion, growing 35% over Non-oil exports, primarily in manufactured goods for the US market, grew 11% to reach US$182 billion, despite the deceleration observed in US industrial production. In total, merchandise exports of US$214 billion rose 14% above the previous year. External purchases increased 12%, satisfying increased demand in consumer goods, raw materials and machinery, causing merchandise imports to reach US$221 billion. Finally, the total trade deficit of US$7 billion, diminished from the US$9 billion observed on On April 1, 2005, the Mexico-Japan Economic Partnership Agreement became effective. The principal objectives of the accord seek to liberalize and facilitate the trading of goods and services between the countries and to broaden investment opportunities and activities. The lower economic growth in the US influenced the performance of Mexican production activity. The 2.4% Mexican GDP increase in the first quarter of 2005 represented half of the 4.8% rate registered in the last quarter of For the remainder of the year, consumption expenditures and private investment accelerated, supported by lower interest rates. As a result, the Industrial sector grew 1.6%, and the Services sector 4.2%, while the Agricultural sector reported a decline of 1.5%. Overall, the 2005 Gross Domestic Product in Mexico increased 3.0%. While down from the 4.2% reported for 2004, the results represented the second best performance in the past five years, as shown in the following chart. Mexico. Gross Domestic Product Growth % annual 5.1% 6.8% 4.9% 3.9% 6.6% -0.2% 0.8% 1.4% 4.2% 3.0% CYDSA S ANNUAL REPORT

14 The inflation trend portrays the general behavior of financial variables in Contrasting with the rise during 2004, the growth rate of consumer prices decreased throughout 2005, particularly during the second half. Reductions in the prices of agricultural and imported products, offset the negative impact of increased cost of products and services administered by the Federal Government. Consequently, the 2005 inflation rate of 3.3%, as measured by the Consumer Price Index, represented the lowest level since the establishment of this measure in The following graph presents this data. The rising trend of Mexican interest rates continued through the third quarter of 2005, driven by increases in the US and the inflation control policies implemented in Mexico. Decreases during the last four months of the year in the 28-day Mexican Treasury Bills (CETES), produced a nominal December 2005 yield of 8.2%, down from the 8.5% at the end of The 2005 average, however, increased to 9.2%, well above the 6.8% experienced the previous year. The currency exchange market followed a pattern similar to inflation and interest rates. The peso ended 2005 at per dollar versus the previous year-end, appreciating 4.5%. The average exchange rate of pesos per dollar, appreciated 5.1% over the pesos average calculated for CYDSA s Markets Decreased demand in the domestic industrial sector and shortages in chemical and petrochemical raw materials caused by hurricanes in the Gulf of Mexico, negatively impacted several markets served by CYDSA s Business Units. The Chemicals and Plastics Segment experienced domestic demand increases for chlorine, caustic soda and their by-products. Sales weakened for edible salt, PVC resins, PVC pipes and fittings, and refrigerant gases. The Yarn Business, as well as the domestic Textile Industry, continued to suffer the adverse impacts of imported apparel and textiles. These goods, mostly of Chinese origin, frequently utilize unfair and often illegal trade practices. Consequently, CYDSA s domestic unit sales showed a weighted average decrease of 5.6% in Late in 2005, the reduced availability of raw materials and the escalating cost of petrochemicals and energy, forced CYDSA s exporting Businesses to limit shipments to selected international markets. This contributed to a weighted average unit export sales decrease of 31.8%. Overall, CYDSA s Total unit sales showed a weighted average reduction of 11.0% in Finally, increased oil exports again contributed favorably to government finances. As a result, the Public Sector deficit represented 0.09% of GDP in 2005, down from 0.31% the prior year. Mexico. Consumer Price Index % end of year 27.7% 15.7% 18.6% 12.3% 9.0% 4.4% 5.7% 4.0% 5.2% 3.3% CYDSA S ANNUAL REPORT 2005

15 OPERATIVE DIVISIONS CYDSA S ANNUAL REPORT

16 CHEMICAL DIVISION D uring 2005, the Chemical Division implemented a number of programs to offset the extraordinary increases in energy and petrochemical raw material costs. These initiatives, including strategies oriented to enhance operational competitiveness, include: Sales del Istmo, S.A. de C.V. (SISA) Edible Salt 1999 Shingo Prize for Excellence in Manufacturing, ISO and ISO Certified. Continued strengthening of the La Fina brand leadership position and presence in supermarket chains. Programs focused on promotion, advertising, logistics, customer service and end-consumer orientation. Reduced energy cost by investing in electrical generating systems limiting consumption during peak demand hours. Re-certifications of ISO and ISO and the renewal of the Clean Industry Certification granted by the Ministry for Environment and Natural Resources. PRODUCTS Edible and Industrial salts. MARKETS Domestic and exports primarily to USA and Central America. USES Table salt, food industry and industrial processes. TRADEMARKS La Fina, Bakara, Cisne, Marfil, Gallo. COATZACOALCOS PLANT Complejo Industrial Pajaritos. Coatzacoalcos, Ver. México Tel: +52 (921) MEXICO CITY OFFICE Viaducto Rio Becerra No. #287 Colonia Napoles, Delegacion Benito Juarez, Mexico, D.F Tel: +52 (55) sisa@cydsa.com 14 CYDSA S ANNUAL REPORT 2005

17 Industria Quimica del Istmo, S.A. de C.V. (IQUISA) Chlorine-Caustic Soda 1998 Mexican National Quality Award, 1998 (Coatzacoalcos Plant) and 2002 (Monterrey and Tlaxcala Plants) Shingo Prize for Excellence in Manufacturing, ISO and ISO Certified. New specialty products manufacturing facility and distribution center for chlorine and caustic soda, located in Hermosillo, Sonora. Reduced electricity consumption in production processes, increasing profit margins. The Coatzacoalcos, Monterrey and Tlaxcala plants received re-certifications for ISO , ISO-14001, National Sanitary Foundation and the National Chemical Industry Association s Integral Responsibility. The Monterrey and Tlaxcala plants renewed the Clean Industry Certification granted by the Ministry for Environment and Natural Resources. PRODUCTS Chlorine, liquid and gas; caustic soda, liquid and solid; chlorine in cylinders, sodium hypochlorite, synthetic hydrochloric acid and muriatic acid. MARKETS Domestic and exports to Central America. USES Chemical and petrochemical industries, textiles, cellulose, paper, pesticides, bleach, detergents and soaps, mining and extraction of metals, plastics, pigments and paints. MEXICO CITY OFFICE Rio Becerra #287, Col. Napoles, Mexico D.F Tel: +52 (55) MONTERREY OFFICE AND PLANT Av. Ruiz Cortines #2333 pte. Col. Pedro Lozano, Monterrey, N.L Tel: +52 (81) COATZACOALCOS PLANT Tel: +52 (921) TLAXCALA PLANT Tel: +52 (241) HERMOSILLO PLANT Tel: +52 (662) iquisa@cydsa.com Policyd, S.A. de C.V. PVC Resins 1996 Mexican National Quality Award, 1997 (Altamira Plant) and 2000 (La Presa Plant) Shingo Prize for Excellence in Manufacturing, ISO and ISO Certified. Implemented projects reducing energy consumption. Renegotiated raw materials supply contracts. Established strategic alliances with customers to enhance presence in the domestic market. Increased exports of differentiated products. The Altamira and La Presa plants received re-certifications for ISO , ISO and National Chemical Industry Association s Integral Responsibility. Renewed the Clean Industry Certification granted by the Ministry for Environment and Natural Resources. PRODUCTS Polyvinyl chloride (PVC), suspension: homopolymer and copolymer; dispersion paste. MARKETS Domestic and exports to Central and South America, Caribbean, USA, China and Africa. USES Construction industry, footwear, toys and general plastics. TRADEMARKS Vinycel. LA PRESA OFFICE AND PLANT Av. La Presa #8, Col. Lazaro Cardenas, San Juan Ixhuatepec Tlanepantla, Edo de Mexico, Tel: +52 (55) ALTAMIRA PLANT Km. 32 Carr. Tampico-Mante Altamira, Tamps. Mexico Tel. +52 (833) policyd@cydsa.com CYDSA S ANNUAL REPORT

18 Plasticos Rex, S.A. de C.V. Pipes and Fittings ISO Certified. New PVC pipes manufacturing plant located in Merida, Yucatan, strengthened presence in southeastern Mexican markets. New northern Mexico projects increased Irrigation Systems market share. The Monterrey, Mexico City and Poncitlan plants received re-certifications for ISO The Poncitlan plant received the State Instruction and Training Excellence Award granted by the Jalisco State Government. PRODUCTS PVC pipes and fittings, irrigation systems, polyethylene pipes. MARKETS Domestic. USES Construction industry, agriculture and water distribution systems. TRADEMARKS Rexolit, Rex, Rex-Netafin, Unicople, Rex-ac, Ecotub, Ecoplus, Insta-Rex. MEXICO CITY PLANT Av. Romulo O Farril #434, Col. Olivar de los Padres, Mexico, D.F., Tel: +52 (55) MONTERREY PLANT Antigua Carretera a Roma Km. 5 San Nicolas, N.L Tel: +52 (81) PONCITLAN PLANT Km Carr. Guadalajara-Ocotlán Poncitlan, Jalisco Tel: +52 (391) MERIDA PLANT C.60 Diagonal No. 495, Col. Parque Industrial, Merida Yuc., Tel: +52 (999) plasticosrex@cydsa.com Quimobasicos, S.A. de C.V. Joint-venture with Honeywell (USA) Refrigerant Gases Environmental Excellence Award 2004, ISO and ISO Certified. On September 9, 2005, the International Day for the Preservation of the Ozone Layer, Quimobasicos ended production of its chlorofluorocarbons (CFC) product line. The cessation came almost five years earlier than Mexico s original commitment to the Montreal Protocol. Major facility modifications allow Quimobasicos to manufacture HCFC-22. The Business continues to service customer needs by producing and distributing refrigerant gases, compliant with all environmental safeguards. Re-certifications for ISO , ISO and National Chemical Industry Association s Integral Responsibility. Received the Environmental Excellence Award and renewed the Clean Industry Certification granted by the Ministry for Environment and Natural Resources. PRODUCTS Refrigerants and blowing agents. MARKETS Domestic and exports primarily Latin America. USES General Industry, commercial and domestic refrigeration, home appliances, pharmaceutical industry. TRADEMARKS Genetron. MONTERREY PLANT Av. Ruiz Cortines #2333 Pte. Monterrey, N.L. Mexico Tel: +52 (81) MEXICO CITY OFFICE Av. Norte Sur #12 Fracc. Alce Blanco, Naucalpan, Edo. de Mexico Tel: +52 (55) quimobasicos@cydsa.com 16 CYDSA S ANNUAL REPORT 2005

19 YARNS BUSINESS I N 2005, the Yarns Business concluded the project for consolidating the acrylic yarn manufacturing into one site. Through the transfer of equipment and machinery the output of four production facilities now resides in one complex located in Aguascalientes City, providing improved customer service. Derivados Acrilicos, S.A. de C.V. ACRYLIC YARNS ISO-9002 Certified. The main results of the project for consolidating the acrylic yarn manufacturing into one site include: Fixed cost reductions in administrative, sales, production and logistics areas. Increased manufacturing capacity utilization and improved efficiency of machinery and equipment. Increased profit margins by optimizing the product mix. Reduced inventory investment. PRODUCTS Acrylic yarns, acrylic blends with both natural and synthetic fibers, fancy yarn, knitting specialties and sewing threads. MARKETS Domestic and exports. USES Sweaters, baby clothes, polo-shirts, sportswear, socks, women s apparel and handcrafts. TRADEMARKS Dasa, San Marcos, Novacril, Quetzal, Cotton Like, Pill Guard, Festival, Hilatex, Filolastic, Dasalastic. UNITED STATES OFFICE Dasa Yarns Inc Las Cruces Dr. Suite #2 Laredo, Texas Tel: (956) AGUASCALIENTES PLANT Av. Adolfo Lopez Mateos #1502 Pte. Col. Circunvalacion Pte., Aguascalientes, Ags. Mexico Tel: (449) callcenterhilaturas@cydsa1.com.mx Call Center Mexico (800) CYDSA S ANNUAL REPORT

20 BOARD OF DIRECTORS Tomas Gonzalez Sada, Chairman* Chairman of the Board and Chief Executive Officer of CYDSA. Vice President of the Mexican Institute for Competitiveness; Honorary Consul of Japan at Monterrey, Mexico; Treasurer of the Fundacion Mar tinez Sada; Member of the Board of Trustees of Universidad Regiomontana; Member of the Mexican Businessmen Round Table (CMHN); and Member of the Board of Directors of Vitro and Regio Empresas. Herminio Blanco Mendoza** Former Mexican Secretary of Trade and Industry and former Chief Negotiator for the North American Free Trade Agreement. Founding Partner and President of Soluciones Estrategicas, a firm specialized in corporate consulting related to international commerce and assessment for international corporations interested on investing in Mexico. Member of the International Advisory Committee of Mitsubishi Corporation and the Board of Directors of Grupo Financiero Banorte and the Banco Latinoamericano de Expor taciones. Robert W. Chandler Jr.** Business Consultant. Former Director of Grupo Financiero Banorte. Former Member of the Board of Latin America Debt Management Associates of Miami, Florida and subsidiaries of Grupo Financiero Banor te. Adan Elizondo Elizondo, Examiner** Retired Chief Operating Officer of CYDSA. Member of the Board of Directors of Grupo Industrial Saltillo, Grupo Chapa and Seven Eleven Mexico, S.A. President of the Board of ENSIS Productos Inteligentes, S. de R.L. de C.V. and Edgar Elizondo y Cia, S. de R.L. de C.V. Member of the Board of Fundacion Ricardo, Andres y Jose Chapa, A.C.; Fomento Integral de Monterrey ABP and Orientacion Social Femenina de Monterrey, A.C. ABP. Alejandro Garza Lagüera** Member of the Executive Committee of Desarrollo Inmobiliario OMEGA, S.A. de C.V. Member of the Board of Directors of: VITRO; Instituto Tecnológico y de Estudios Superiores de Monterrey, Centro de Estudios en Economía y Educación, Wharton School Latin American Board, Joseph H. Lauder Institute of Pennsylvania. Armando Garza Sada** Corporate Development Director of ALFA and President of Alestra. Member of the Board of Directors of the Instituto Tecnologico y de Estudios Superiores de Monterrey. Member of the Board of ALFA, Grupo Gigante, Grupo Lamosa, El Puerto de Liverpool, MVS Comunicaciones and FEMSA. 18 CYDSA S ANNUAL REPORT 2005

21 Tomas Gonzalez Casas* Development Manager of Quimobasicos, CYDSA s subsidiar y. Member of the Board of Directors of Honda Tecnologico and Restaurantes GONHA. Pablo Gonzalez Sada* Chairman of the Board and Chief Executive Officer of Uniexcel Chemical Solutions. Chief Executive Officer of Aero Ser vicios Tecnicos Regiomontanos. Member of the Board of Directors of: Club Industrial and Regio Empresas. Member of the Board of: Cooperativa de Servicios Aereos North Airport, Instituto de Mandos Intermedios (IMI). Member of the Advisory Council of the University of Texas School of Business. Ricardo Guajardo Touche** Former Chairman of the Board of Grupo Financiero BBVA-Bancomer. Member of the International Capital Markets Advisory Committee of the Federal Reserve Bank of New York, the Board of Directors of the Tecnologico de Monterrey and President of the Centro de Estudios Economicos del Sector Privado. Member of the Board of FEMSA, ALFA, El Puerto de Liverpool, Grupo Bimbo and Grupo Aeropor tuario del Sureste. Humberto Jasso Barrera** President for Administrative Ser vices of Grupo Cydsa. Member of Cydsa s Executive Committee. Mario Laborin Gomez** Chief Executive Officer of Nacional Financiera and Member of the Mexican Presidential Cabinet. Member of the Board of Directors of the Mexican Stock Exchange, the Instituto Tecnologico y de Estudios Superiores de Monterrey and Chairman of Centro de Cirugia Ambulatoria. Member of the Board of Directors of Cerveceria Cuauhtemoc, TV Azteca, Grupo Accion, Farmacias Benavides, Transpor tacion Maritima Mexicana and Periodicos Healy. Abelardo Morales Puron, Examiner** Founding Par tner of Consultoria Financiera Corporativa, specializing in financial and strategic advisory to Industrial Groups and several State Governments of Mexico. Active in Real State and Tourism Developments. Advisor of Nacional Financiera, Mayazul and Harinas de Coahuila. * Patrimonial ** Independent CYDSA S ANNUAL REPORT

22 Alberto Mulas Alonso** Former President of Comision Nacional de Fomento a la Vivienda (Conafovi) of the Mexican Federal Government. Founding Par tner of CRESCE Consultores, a financial consulting company specializing in projects. Member of the Board of Directors of Banco Nacional de Comercio Exterior, Sociedad Hipotecaria Federal and Procura. Federico Patiño Marquez** Deputy General Director for Investment Banking of Nacional Financiera, with responsibilities for International Financing, Government Banking, Corporate Banking and Equity Investment areas. Adrian G. Sada Gonzalez** Chairman of the Board of Vitro Group. Member of the Board of Directors of: ALFA, Gruma, Regio Empresas, Wharton (Latin American Executive Board for the Wharton School of Finance), Consejo Mexicano de Hombres de Negocios (CMHN), Grupo de Industriales de Nuevo Leon. Alberto Santos de Hoyos** Chairman of the Board of Empresas Santos. President of: Inmobiliaria Centro Deportivo y Centro Santa Barbara. Member of the Board of Directors of: Banco de Mexico (Regional), ING Seguros Comercial America, Axtel, Madisa, Grupo Senda; Instituto Nuevo Amanecer ABP, Casa Paterna La Gran Familia, Andares ABP, ADMIC, Proexcel, Renace, Acciones por Mexico and Consejo de Desarrollo Social. Alejandro von Rossum Garza** Chief Operating Officer of Cydsa s Chemical Division. Member of Cydsa s Executive Committee. Member of the Board of Shingo Prize for Excellence in Manufacturing. Rodolfo Gracia del Bosque, Secretary Secretary of the Board of Directors of CYDSA. Member of: Barra Mexicana, Colegio de Abogados and Colegio de Abogados de Nuevo Leon. Associated member of American Bar Association. * Patrimonial ** Independent 20 CYDSA S ANNUAL REPORT 2005

23 COMITTEES OF THE BOARD OF DIRECTORS CYDSA, S.A. DE C.V. AUDIT COMMITTEE Alberto Santos de Hoyos, President Herminio Blanco Mendoza Mario Laborin Gomez Federico Patiño Marquez Tomas Gonzalez Sada COMPENSATION COMMITTEE Adrian Sada Gonzalez, President Herminio Blanco Mendoza Alejandro Garza Lagüera Humberto Jasso Barrera Tomas Gonzalez Sada FINANCE COMMITTEE Tomas Gonzalez Sada, President Armando Garza Sada Ricardo Guajardo Touche Pablo Gonzalez Sada Adrian Sada Gonzalez Alejandro von Rossum Garza Tomas Gonzalez Casas VALORES QUIMICOS, S.A. DE C.V. FINANCIAL RESTRUCTURE TERMS AND CONDITIONS COMMITTEE Tomas Gonzalez Sada, President Robert W. Chandler Jr. Abelardo Morales Puron Alberto Mulas Alonso Federico Patiño Marquez Tomas Gonzalez Casas Rodolfo Gracia del Bosque CYDSA S ANNUAL REPORT

24 FINANCIAL INFORMATION INDEX Management Analysis of Cydsa s Financial Statements 23 Independent Auditors Report 27 Consolidated Financial Statements 28 Notes to Consolidated Financial Statements CYDSA S ANNUAL REPORT 2005

25 Management s Discussion and Analysis of CYDSA s Results of Operations and Financial Condition The figures presented herein should be analyzed in conjunction with CYDSA s audited financial statements and notes. Unless otherwise indicated, the figures represent constant pesos, as of December 31, 2005, with foreign exchange figures expressed in US dollar terms. Discontinued Businesses In accordance with principles adopted by the Mexican Institute of Public Accountants, Operating Income, as well as Sales, Cost of Sales and Operating Expenses for both 2004 and 2005 exclude results from Divested and Discontinued Operations. Printed and Laminated Film represent a diivested business while discontinued businesses include Home Textiles, Bioriented Polypropylene Films, Folding Carton and Acrylic Fibers (Crysel). Results of Operations Total Sales CYDSA s Sales for 2005 totaled 5,355 million constant pesos, a decrease of 0.8% compared with figures reported in the prior year. In dollar terms, Sales reached US$483 million, a 7.1% growth from Sales by Business Segment The following chart depicts Sales by Business Segment. Sales for Chemicals and Plastics reached 4,942 million pesos in 2005, a 3.4% growth from the previous year. Increased pricing provided the majority of this gain. TOTAL SALES BY BUSINESS SEGMENT 2004 and 2005 (Millions of constant pesos) (NotE 1) 4,781 4, ,398 5, % 33.0% 0.8% Chemicals and plastics yarns CYDSA CONSOLIDATED Millions of dollars: Change 2005 vs. 2004: 11.7% 28.2% 7.1% Note 1: Consolidated Sales by Segment with inter-company transactions excluded. CYDSA S ANNUAL REPORT

26 During 2005, Yarn Sales of 413 million pesos, declined 33.0% from the amount reported in The decrease in the Yarn Business Segment resulted from sales volume declines in both domestic and export markets. Competition from imported Asian products, frequently using unfair market practices, contributed to the losses. Operating Income Gross Profit 1 for 2005 of 1,498 million pesos, exceeded by 13.7% the 1,317 million generated the previous year. Continuing austerity programs reduced Operating Expenses to 1,046 million in 2005, a reduction of 5.3% in real terms from the 1,104 million reported for As a result, 2005 Operating Profit (EBIT) of 452 million pesos increased 112.2%, from the 213 million achieved the prior year. Operating Cash Flow The 2005 Operating Cash Flow (EBITDA 2 ) of million current pesos rose 37.3% compared with million for The results in dollar terms equal US$61.2 million versus US$42.7 million in Total Financing Cost Total Financing Cost for 2005 of 54 million pesos reduced significantly from 198 million reported in As described in the following table, favorable impacts include the reduction in Net Financial Expense and the impact of Foreign Exchange. Financial Allowances to Clients and Monetary Gain produced unfavorable outcomes. The significant reduction of 216 million pesos in Net Financial Expense results primarily from the Restructuring of Bank Debt and the January 19, 2005 transaction capitalizing US$159 million of outstanding Medium Term Notes. Financing Allowances to Clients increased by 1 million pesos. During 2005, the Mexican peso appreciated 4.6% against the US dollar, producing an Exchange Gain of 68 million pesos. This represented a 56 million improvement from the 12 million noted during 2004, when the peso strengthened 0.8%. In 2005, Monetary Gain showed an unfavorable variance of 127 million. Lower inflation rates, 3.3% in 2005 compared with 5.2% for 2004, and the reduction in long-term debt, due to the capitalization of US$159 million of Medium Term Notes, caused the reduction Change (millions of pesos) Net Financial Expense (143) (359) 216 Financing Allowances to Clients (22) (21) (1) Net Foreign Exchange Gain Net Monetary Gain (127) Total Financing Cost (54) (198) Gross Profit is defined as Sales less Cost of Sales. 2 Operating Cash Flow or EBITDA equals Earnings before Total Financing Cost, Taxes & Profit Sharing, Depreciation and Amortization. EBITDA is equivalent to Operating Profit plus non-cash items. 24 CYDSA S ANNUAL REPORT 2005

27 Other Expenses, Net During 2005, Other Expenses, Net totaled 21 million pesos. Income from Continuing Operations before Taxes and Employee Statutory Profit Sharing Income from Continuing Operations before Taxes and Employee Statutory Profit Sharing results by subtracting from Operating Income of 452 million, the Total Financing Cost of 54 million and Other Expenses, Net of 21 million. The resultant 377 million pesos Income in 2005, compares with a 362 million pesos Loss from the previous year. Taxes and Employee Statutory Profit Sharing In 2005, Taxes and Employee Statutory Profit Sharing expenses reached 22 million pesos. Loss from Discontinued Operations (Net of Income Tax) The suspension of operations in three businesses (Acrylic Fibers, Bioriented Polypropylene Film and Folding Carton) produced a 655 million Loss (Net of Income Tax) in Net Loss CYDSA s Net Loss decreased from the 970 million reported for 2004 to 300 million in The 355 million Income from Continuing Operations reduced by the 655 million Loss from Discontinued Operations (Net of Income Tax), produced this result. Financial Condition A summary of the items comprising the Balance Sheets as of December 31 of each year appears below. Income from Continuing Operations In 2005, Income from Continuing Operations amounted to 355 million pesos, compared to a 99 million loss in Change Current Assets 2,400 2,990 (590) Fixed and Deferred Assets 5,763 6,642 (879) Total Assets 8,163 9,632 (1,469) Current Liabilities 1,589 1,807 (218) Long-Term Liabilities 2,176 3,130 (954) Total Liabilities 3,765 4,937 (1,172) Shareholders Equity 4,398 4,695 (297) CYDSA S ANNUAL REPORT

28 An explanation of changes in the Balance Sheet accounts, comparing December 31, 2005 with December 31, 2004, follows. Assets Current Assets Current Assets decreased 590 million pesos, from 2,990 million at year-end 2004 to 2,400 million at December 31, Cash repayments of Bank Debt and Medium Term Notes and lower Trade Receivables and Inventories, associated with Discontinued Operations, accounted for the change. Fixed and Deferred Assets Fixed and Deferred Assets totaled 5,763 million as of December 31, 2005, a decline of 879 million pesos compared to the previous year. This decrease stems primarily from the recognition of 2005 Depreciation and the write-down of the Fixed Assets in Discontinued Operations. Liabilities A January 19, 2005 agreement with the holders of the Medium Term Notes, provided for the exchange of US$159 million of these notes for CYDSA Shares. Newly issued Convertible Debentures covered the accrued interest. Based on the significance of this event and in accordance with principles adopted by the Mexican Institute of Public Accountants, the December 2004 Balance Sheet reflected these transactions. Therefore, when comparing the Liabilities at the close of 2005 against 2004, the debt decline associated with the capitalized Bonds does not appear. Following 2005 payments in February, June and a US$12.2 million outlay on December 15, CYDSA completely retired the Convertible Debentures, with a face value of US$25.5 million. Shareholders Equity CYDSA s Shareholders Equity of 4,398 million as of December 31, 2005, decreased 297 million, compared with 4,695 million on December 31, The Net Loss of the year, comprising 655 million associated with Discontinued Operations, represents the primary cause of the decline. CYDSA s Total Liabilities reduced by 1,172 million pesos, from 4,937 million as of the close of December 2004, to 3,765 million at the end of December The following schedule presents the items making up this decrease. Millions of pesos Payment of Bank Debt (209) Payment of Convertible Debentures (278) Reductions in Trade Payables (223) Reduced Liabilities Associated with Discontinued Operations (171) Other Items (291) Total Liabilities Reduction (1,172) 26 CYDSA S ANNUAL REPORT 2005

29 Independent Auditors Report Galaz, Yamazaki, Ruiz Urquiza, S.C. Lázaro Cárdenas 2321 Poniente, PB Residencial San Agustín Garza García, N.L. México Tel: +52 (81) Fax: +52 (81) To the Board of Directors and Shareholders of Cydsa, S.A. de C.V. We have audited the accompanying consolidated balance sheets of Cydsa, S.A. de C.V. and subsidiaries (the Company ) as of December 31, 2005 and 2004 and the related consolidated statements of operations, changes in shareholders equity and changes in financial position for the years then ended, all expressed in millions of Mexican pesos of purchasing power of December 31, These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Mexico. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and that they are prepared in accordance with accounting principles generally accepted in Mexico. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Cydsa, S.A. de C.V. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations, changes in their shareholders equity and changes in their financial position for the years then ended in conformity with accounting principles generally accepted in Mexico. The accompanying financial statements have been translated into English for the convenience of users. Galaz, Yamazaki, Ruiz Urquiza, S.C. Member of Deloitte Touche Tohmatsu C.P.C. Carlos H. Padilla Valdez March 10, 2006 March 31, 2006 with respect to Note 9 d) A member firm of Deloitte Touche Tohmatsu CYDSA S ANNUAL REPORT

30 CYDSA, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2005 AND 2004 (In millions of Mexican pesos of purchasing power as of December 31, 2005) ASSETS Cash and marketable securities $ 196 $ 175 Contractual obligation fund Trade receivables, net 1,161 1,161 Other receivables Inventories Current assets from discontinued operations Current assets 2,400 2,990 Long-term receivables Investment in shares Property, plant and equipment, net 3,497 3,601 Amortizable expenses, net Goodwill Other assets Deferred income tax Long-lived assets from discontinued operations 1,445 2,374 Total assets $ 8,163 $ 9,632 LIABILITIES Current portion of long-term debt $ 292 $ 86 Trade payables Interest payable 4 15 Other payables Current liabilities from discontinued operations Current liabilities 1,589 1,807 Long-term debt 985 1,778 Employee retirement obligations Other accounts payable Share repurchase Long-term liabilities from discontinued operations Long-term liabilities 2,176 3,130 Total liabilities $ 3,765 $ 4,937 Commitments and Contingencies SHAREHOLDERS EQUITY Majority shareholders equity: Capital stock $ 4,272 $ 4,272 Additional paid in capital Insufficiency in restatement of shareholders equity (5,514) (5,512) Other equity accounts (29) (20) Retained earnings 5,150 5,480 Stock in trust (54) (54) Total majority shareholders equity 4,269 4,593 Minority shareholders equity Total shareholders equity 4,398 4,695 $ 8,163 $ 9,632 The accompanying notes are a comprehensive part of these consolidated financial statements. Ing. Tomas Gonzalez Sada Chairman of the Board and Chief Executive Officer C.P. Jose de Jesus Montemayor Castillo Corporate Finance Director 28 CYDSA S ANNUAL REPORT 2005

31 CYDSA, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (In millions of Mexican pesos of purchasing power as of December 31, 2005) Net sales $ 5,355 $ 5,398 Cost of sales (3,857) (4,081) Operating expenses (1,046) (1,104) Operating income Total financing cost (54) (198) Other expenses, net (21) (377) Income (loss) from continuing operations before taxes and employee statutory profit sharing 377 (362) Taxes and employee statutory profit sharing (expense) benefit (22) 263 Income (loss) from continuing operations 355 (99) Loss from discontinued operations, net of taxes (655) (464) Cumulative effect of change in restatement method for machinery and equipment, net of taxes (407) Net loss $ (300) $ (970) Net loss of majority shareholders $ (330) $ (990) Net income of minority shareholders $ (300) $ (970) Loss per common share: Note 1 Income (loss) from continuing operations $ 1.23 $ (1.10) Loss from discontinued operations (2.49) (4.32) Cumulative effect of change in restatement method for machinery and equipment (3.79) Majority net loss $ (1.26) $ (9.21) The accompanying notes are a comprehensive part of these consolidated financial statements. Note 1: In Mexican pesos, determined on the basis of a weighted average of 263,569,939 shares outstanding in 2005 and 107,466,999 in In 2004, the shares related to the increase in capital stock were not included because the latter was subscribed on January 19, 2005, date the restructuring was settled. CYDSA S ANNUAL REPORT

32 CYDSA, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (In millions of Mexican pesos of purchasing power as of December 31, 2005) Capital Stock Additional Paid-in Capital Insufficiency in Restatement of Shareholders Equity Other Equity Accounts Retained Earnings Stock in Trust Minority Interest Total Shareholders Equity Balances at January 1, 2004 $ 2,598 $ 270 $ (6,093) $ (25) $ 6,470 $ (54) $ 81 $ 3,247 Debt capitalization 1, ,831 Cumulative effect of change in restatement method for machinery and equipment Net comprehensive loss 60 5 (990) 7 (918) Balances at December 31, , (5,512) (20) 5,480 (54) 102 4,695 Debt capitalization Net comprehensive loss (2) (9) (330) 27 (314) Balances at December 31, 2005 $ 4,272 $ 444 $ (5,514) $ (29) $ 5,150 $ (54) $ 129 $ 4,398 The accompanying notes are a comprehensive part of these consolidated financial statements. 30 CYDSA S ANNUAL REPORT 2005

33 CYDSA, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (In millions of Mexican pesos of purchasing power as of December 31, 2005) OPERATING ACTIVITIES: Income (loss) from continuing operations $ 355 $ (99) Add (deduct) items not requiring funds: Depreciation and amortization Deferred income tax (8) (269) Goodwill amortization 99 Fixed asset impairment Gain on sale of fixed assets (4) Loss on sale of shares 20 Other virtual items 5 46 Sub-total Changes in working capital: Trade receivables (237) Inventories (63) 68 Trade payables (223) 81 Other accounts receivable and payable (10) (320) Net resources generated by operating activities before discontinued operations 274 (9) Discontinued operations 202 (10) Assets and liabilities from discontinued operations Net resources generated by operating activities INVESTING ACTIVITIES: Property, plant, equipment, and deferred assets (150) (118) Contractual obligation fund 284 (299) Share divestiture 5 Discontinued operations (263) 175 Net resources generated by (used in) investing activities (129) (237) FINANCING ACTIVITIES: Payment and amortization in actual terms of long-term debt (587) (2,637) Dividends paid to minority shareholders (3) Increase in capital stock 17 1,831 Stock (repurchase) debt (63) 875 Discontinued operations (4) (146) Resources used in financing activities (637) (80) Increase (decrease) in cash and marketable securities 21 (204) Cash and marketable securities at beginning of year Cash and marketable securities at end of year $ 196 $ 175 The accompanying notes are a comprehensive part of these consolidated financial statements CYDSA S ANNUAL REPORT

34 CYDSA, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (In millions of Mexican pesos of purchasing power as of December 31, 2005) 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION a) The consolidated financial statements include all the companies where Cydsa, S.A. de C.V. (collectively called the Company ) exercises direct or indirect control. b) The principal activities of the subsidiaries include production and marketing of chemical and plastic products; fibers, and yarns. The principal consolidated operating companies are: Sales del Istmo, S.A. de C.V. Industria Química del Istmo, S.A. de C.V. Policyd, S.A. de C.V. Plásticos Rex, S.A. de C.V. Quimobásicos, S.A. de C.V. Derivados Acrílicos, S.A. de C.V. Masterpak, S.A. de C.V. (ceased operations in June 2005) Celulosa y Derivados, S.A. de C.V. (suspended operations in December 2005) c) Cydsa, S.A. de C.V. owns the entire stock of its subsidiaries except for Quimobásicos, S.A. de C.V., where it has a 51% interest. d) Suspension of activities at the subsidiar y Celulosa y Derivados S.A. de C.V. (Cr ysel). Although efforts have been made such as: administrative cost reductions; searches for strategic alliances with Mexican and foreign manufacturers; development of new greater value added products; working capital reduction; among others, the constant increase in energy prices in North America, combined with the impossibility to obtain its principal raw material, acrylonitrile, at international prices and terms, rapidly deteriorated Crysel s competitiveness and prevented it from holding positive operating cash flows. Thus, Cr ysel suspended its activities in December In 2005, Crysel recognized a fixed asset and spare parts inventory impairment loss, in addition to adjustments for estimated severance payments and allowances for doubtful accounts, amounting to $450, net of income taxes, presented in the consolidated statement of operations within discontinued operations. e) Masterpak, S.A. de C.V. (Masterpak) closing. In June 2005, Masterpak, S.A. de C.V. ceased operations permanently. Masterpak was engaged in manufacturing and converting polypropylene films, in addition to converting corrugated cardboard. Previously, in 2004, Masterpak s Printed and Laminated Film (Tultitlán Plant) assets and business operations had been sold to Bemis Flexible Packaging de México, S.A. de C.V., a subsidiary of Bemis Company, Inc., thereby recognizing a loss net of tax of $145 in The final effect of the closing in 2005 was a loss of $29, net of income taxes, presented in the consolidated statement of operations in discontinued operations. 32 CYDSA S ANNUAL REPORT 2005

35 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements have been translated from Spanish into English for use outside of Mexico. Cydsa s accounting policies are in accordance with Accounting Principles Generally Accepted in Mexico (MEX GAAP) issued by the Mexican Institute of Public Accountants (IMCP). Certain accounting practices applied by the Company that conform with MEX GAAP may not conform with accounting principles generally accepted in the country of use. The significant accounting policies of the Company are summarized as follows: a) New accounting policies. Severance payments at the end of the work relationship Effective Januar y 1, 2005, the Company adopted the revised provisions to Bulletin D-3, Labor Obligations ( D-3 ) related to recognition of the liability for severance payments at the end of the work relationship for reasons other than restructuring, which is recorded using the projected unit credit method, based on calculations by independent actuaries. D-3 grants the option to immediately recognize, in current earnings, the resulting transition asset or liability, or to amortize it over the average remaining labor life of employees. Through December 31, 2004, severance payments were charged to results when the liability was determined to be payable. The accrued liability as of January 1, 2005 calculated by independent actuaries is $32. The Company chose to record such amount as a transition liability to be amortized using the straight-line method over 10 years, which represents the average labor life of employees expected to receive such benefits. b) Inflationar y Accounting. The consolidated financial statements of the Company have been prepared in accordance with Bulletin B-10, Recognition of Effects of Inflation on Financial Information, issued by the IMCP. All consolidated financial statements of the prior year, that are presented for comparative purposes, have been restated to constant pesos as of purchasing power of the most recent balance sheet presented. The following is a description of the items that have been restated and the methods used: Inventories and Cost of Sales - Inventories are valued in the consolidated balance sheet at replacement cost without exceeding net realizable value. Cost of sales is determined based on the actual cost at the date of the sale. Property, Plant and Equipment - Fixed assets are restated at the lower of indexed value or use value. Commencing in 2004, the Company changed its method for restating foreign fixed assets. The Company will now apply the indexation method, which is calculated by applying factors derived from the National Consumer Price Index (NCPI) to the net fixed asset replacement values as of December 31, 1996, determined by valuations performed by independent expert appraisers. The Company will no longer apply the specific indexation method, which consists of using the inflation rate of the asset s country of origin and the exchange rate at year end. Depreciation is calculated using the straight-line method based on the remaining useful lives of the related assets. In 2005, the Company analyzed its fixed assets in detail together with its technical personnel and third party appraisers. The result was an amendment of the useful lives of its assets. Such amendment resulted in a $23 depreciation expense reduction for the year ending December 31, CYDSA S ANNUAL REPORT

36 Impairment of Long-lived Assets in Use - The Company reviews the carrying amounts of long-lived assets in use when an impairment indicator suggests that such amounts might not be recoverable, considering the greater of the present value of future net cash flows or the net sales price upon disposal. Impairment is recorded when the carr ying amounts exceed the greater of the amounts mentioned above. The impairment indicators considered for these purposes are, among others, the operating losses or negative cash flows in the period if they are combined with a history or projection of losses, depreciation and amortization charged to results, which in percentage terms in relation to revenues are substantially higher than that of previous years, obsolescence, reduction in the demand for the products manufactured, competition and other legal and economic factors. Investment in Associated Companies The investment in associated companies is accounted for using the equity method, which includes cost of acquisition plus equity in undistributed earnings (losses) subsequent to their acquisition, and restated shareholders equity. This restatement is inherent to the equity method because the financial statements of the associated company are also prepared pursuant to Bulletin B-10. Insufficiency in Restatement of Shareholders Equity - Insufficiency in restatement of shareholders equity represents the accumulated result of holding non-monetary assets and is expressed in Mexican pesos of purchasing power at the balance sheet date. This item is calculated by comparing the increase in the investment in shares and inventories restated at replacement costs, with the values that would have been obtained if factors arising from the NCPI had been used. If the increase in restated costs exceeds inflation, there is a gain; if not, there is a loss. Restatement of Capital Stock and Retained Earnings - Capital stock, retained earnings and net (loss) or income are restated using the increase in factors arising from the NCPI from the respective dates such capital was contributed or income generated to the date of the most recent consolidated balance sheet presented. Total Financing Cost - This item represents the actual financing cost incurred by the Company during the year, including the effect of inflation on its net monetary position. This item primarily includes interest income and expense, exchange loss (gain) and the gain (loss) on net monetar y position. Gain (loss) on Net Monetary Position - When prices are increasing, holding monetary assets results in a loss of general purchasing power, because a given amount of money will buy less at the end of a year. Similarly, liabilities are associated with a gain of general purchasing power, because the amount of money required to settle the liability represents a decrease in the amount of purchasing power. The gain or loss is obtained by applying the NCPI to the net monetary position at each period end. c) Cash, Marketable Securities and Contractual Obligation Fund. Cash is stated at its nominal value and marketable securities at acquisition cost plus accrued interest. The contractual obligation fund represents segregated cash to be used in paying derivative instruments arising from the bank restructuring. d) Amor tizable Expenses. Amortizable expenses are recorded at original historical cost and the related amortization is computed using the straight-line method. This item is restated by applying the NCPI to the original historical cost. 34 CYDSA S ANNUAL REPORT 2005

37 e) Goodwill. The difference between the acquisition cost and book value of the shares issued by the subsidiaries is determined at the acquisition date and is restated using the NCPI published by Banco de México. As of January 1, 2005, goodwill ceased to be amortized under the provisions of bulletin B-7 Business Acquisitions ( B-7 ) and is now subject to impairment tests when applicable. f) Financial Instruments. Financial assets and liabilities resulting from any kind of financial instrument, except for investments in financial instruments held to maturity, are valued at fair value and are presented in the consolidated balance sheets. The effects of the valuation of a financial asset or financial liability are recognized in the consolidated statement of operations of the respective period. Investments in financial instruments held to maturity are valued at acquisition cost. The costs and returns from investments in financial instruments are recognized in the consolidated results of the year in which they occur. Expenses, premiums and discounts on the issuance of debt financial instruments are amortized based on the straight-line method, over the period of time that these financial instruments are outstanding. Derivative financial instruments identified as hedges are valued using the same valuation criteria for the assets or liabilities hedged, and the effects of their valuation are recognized in the consolidated results of operations, net of costs, expenses or revenue from the assets or liabilities whose risks are being hedged. g) Employee Retirement Obligations. Seniority premiums, pension plans and, beginning in 2005, severance payments at the end of the work relationship, are recognized as costs over employee years of service and are calculated by independent actuaries using the projected unit credit method at net discount rates. Accordingly, the liability is being accrued which, at present value, will cover the obligation from benefits projected to the estimated retirement date of the Company s employees. Through December 31, 2004, severance payments at the end of the work relationship were charged to results when the liability was determined to be payable. h) Revenue Recognition. Revenues are recognized in the period in which the risks and rewards of ownership are transferred to customers, which generally coincides with the deliver y of products to customers in satisfaction of orders. i) Foreign Currency Transactions. Foreign currency transactions are recorded at the applicable exchange rate in effect at the transaction date. Monetary assets and liabilities denominated in foreign currency are translated into Mexican pesos at the applicable exchange rate in effect at the balance sheet date. Exchange fluctuations are recorded as a component of net total financing cost in the consolidated statements of operations. CYDSA S ANNUAL REPORT

38 j) Use of Estimates. The preparation of consolidated financial statements in conformity with MEX GAAP requires that management make certain estimates and use certain assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Although these estimates are based on management s best knowledge of current events, actual results may differ. k) Taxes and Employee Statutor y Profit Sharing. Provisions for income tax and employee statutory profit sharing are recorded in the consolidated results of the year in which they are incurred. Deferred income taxes are recognized for temporar y differences. Deferred income tax assets and liabilities are recognized for temporary differences resulting from comparing the accounting and tax bases of assets and liabilities plus any future benefits from tax loss carryforwards. Tax on assets paid that is expected to be recoverable, is recorded as an advance payment of income tax and is presented in the balance sheet decreasing the liability or increasing the deferred income tax asset. Deferred employee statutor y profit-sharing is recognized for temporar y differences resulting from comparing the net accounting income for the year and the taxable income, only when it can reasonably assume that such difference will generate a liability or benefit, and there is no indication that circumstances will change in such a way that the liabilities will not be paid or the benefits will not be realized. The effects of inflation do not affect the determination of deferred employee statutory profit sharing because they qualify as permanent differences. 3. TRADE RECEIVABLES The balance of trade receivables was reduced by $79 in 2005 and $72 in 2004 by the allowance for doubtful accounts. 4. INVENTORIES Finished goods $ 268 $ 243 Work in process Raw materials and components Spare parts and accessories Other inventories $ 493 $ 426 The balance of inventory was reduced by $28 in 2005 and $25 in 2004 by the allowance for slow-moving inventor y and obsolete inventor y. 36 CYDSA S ANNUAL REPORT 2005

39 5. LONG-TERM RECEIVABLES The balance as of December 31, 2004 primarily includes $114 from the support program provided by the Multilateral Montreal Protocol Fund. 6. PROPERTY, PLANT AND EQUIPMENT, NET Restated Value Net Restated Restated Value Value Accumulated Depreciation Accumulated Depreciation Net Restated Value Land $ 338 $ $ 338 $ 379 $ $ 379 Buildings 1,223 (695) 528 1,224 (681) 543 Property, plant and equipment 8,045 (5,520) 2,525 7,999 (5,397) 2,602 Construction in progress $ 9,712 $ (6,215) $ 3,497 $ 9,679 $ (6,078) $ 3, AMORTIZABLE EXPENSES Organization and installation costs $ 8 $ 11 Costs, expenses and fees related to debt restructuring Other amortizable expenses Net amortizable expenses $ 69 $ FOREIGN CURRENCY TRANSACTIONS a) The exchange rates per U.S. dollar at the end of each year were $ in 2005 and $ in The exchange rate at March 10, 2006, date of issuance of these consolidated financial statements, was $ per U.S. dollar. b) The Company s assets and liabilities include inventories and fixed assets of foreign origin and other monetary items that will be collected or paid in foreign currencies. These items expressed in millions of U.S. dollars, are as follows: Inventories Fixed assets Monetary assets Monetary liabilities (non-bank loans) Bank loans CYDSA S ANNUAL REPORT

40 c) The Company had the following transactions denominated in foreign currencies (amounts expressed in millions of U.S. dollars): Export sales and other revenues Purchases (115.1) (136.9) (39.1) (41.6) Interest income Interest expense (11.3) (28.8) (11.0) (28.4) Balance of payments (50.1) (70.0) 9. LIABILITIES a) At December 31, consolidated long-term bank debt is as follows: U.S. dollar denominated loans with foreign financial institutions: Interest rate * 2005 Interest rate * Guaranteed bank loans (1) 8.41% $ % $ 917 Convertible debt (2) 5.26% 294 U.S. dollar denominated loans with Mexican financial institutions and their foreign agencies: Guaranteed bank loans 8.45% % ,277 1,864 Current portion of long-term-debt Long-term debt $ 985 $ 1,778 (*) Weighted average of the current rates (including income tax, if applicable) as of December 31, 2005 and (1) This liability corresponds to debts with Banco Nacional de México, BBVA-Bancomer, California Commerce Bank, Comerica Bank, Citibank, N.A. and Banco Nacional de Comercio Exterior, S.N.C. (2) This liability relates to the convertible debt, which was totally repaid in b) Maturities of long-term bank debt: Year Amount 2006 $ and thereafter 452 $ 985 c) The restructuring agreement sets forth the obligation to make mandatory early payments in the event cash in excess remains, pursuant to a formula provided, as well as other extraordinar y revenues. Such agreement sets forth the obligations to do and not to do, as well as to fulfill certain financial ratios. Such obligations were complied with at December 31, d) Debt prepayment. In March 31, 2006, the Company prepaid a portion of the previously restructured debt. Due to this prepayment, the financial debt of US$12.2 millions is presented within the short term section of the consolidated balance sheet. 38 CYDSA S ANNUAL REPORT 2005

41 10. STOCK REPURCHASE As a result of the bank restructuring agreement dated March 16, 2004, the Company reached an agreement with the banks to repurchase the entire % of shares on a date that would not exceed The price the Company will pay upon repurchase will be the original subscription value ($875) plus a yield calculated from 2006 to 2011 at 1.5%. 11. DERIVATIVE FINANCIAL INSTRUMENTS The derivative instruments the Company currently holds are primarily currency call options to hedge the risks related to exchange rate fluctuations. Currency call options are contracts in which the third party has the obligation to pay at a future date, an amount equivalent to the contract amount plus the difference between the market exchange rate on the maturity date and a fixed rate, provided this results in a positive spread. The currency call options are recorded in total financing cost at the market exchange rate. The Company had at December 31, 2005 and 2004, currency call options outstanding for an amount of (US$) two million each year. 12. COMMITMENTS AND CONTINGENCIES a) The Company received an official letter from the Tax Administration Ser vice (SAT) informing it that a prejudicial action had been filed challenging the precedence of the tax on assets refund of $58 granted by the authorities for fiscal year The Company s legal counsel believes there are sufficient arguments to get a favorable award. b) Other assets in the consolidated balance sheets include an item for possible ecological land contingencies where some industrial plants are located, in addition to labor contingencies. c) As of December 31, 2005, bank debts with a total value of $1,277 were collateralized by fixed assets with a book value of $4,889. d) As of December 31, 2005, the Company had outstanding guarantees of $127, the majority of which secure the quality and deliver y of products to customers. e) Quimobásicos, S.A. de C.V., a subsidiary of Cydsa, is continuing with its gradual reduction program, until it ceases the entire production of refrigerant gases (CFCs) in accordance with the Montreal Protocol. It applied for assistance through a program for underdeveloped countries offered by the Multilateral Fund (the Fund ) from this Protocol. As a result, Cydsa will receive an amount which would compensate future cash flows and income, as well as costs and expenses generated by the CFC production cessation, provided Cydsa complies with the production limits indicated in the program, and the Fund s Executive Committee approves it. f) The Company has lease agreements for offices, land, and other assets. Rental expense amounted to US$1.4 million in 2005 and US$1.4 million in The agreements contain fixed term lease clauses. Future minimum rentals due under the leases are as follows: Year Millions of U.S. Dollars and thereafter 1.0 CYDSA S ANNUAL REPORT

42 13. EMPLOYEE RETIREMENT OBLIGATIONS Pension and retirement plans, seniority premium benefits and termination indemnity plans, based on actuarial calculations per formed by independent actuaries, are summarized below: Accumulated benefit obligation $ 297 $ 289 Projected benefit obligation $ 310 $ 305 Unrecognized transition obligation Amortizable adjustments from experience (15) 5 Net projected liability $ 233 $ 215 Additional liability $ 66 $ 70 Intangible asset Decrease in shareholders equity continuous operations Decrease in shareholders equity discontinued operations 10 Total decrease in shareholders equity $ 29 $ 20 The unrecognized transition liability is charged to the consolidated results of operations over 17 years; the period corresponding to the average remaining service lives of employees expected to receive the benefits of the plan. Amortization was $11 and $10 during 2005 and 2004, respectively. The intangible assets are included in other assets in the consolidated balance sheets. The decrease in other comprehensive loss in shareholders equity is generated because the sum of the transition obligation and the unrecognized adjustments is lower than the required additional liability and is presented net of income tax in the consolidated balance sheets. Net period costs were $36 in 2005 and $31 in Seniority premiums, termination, pension, and retirement plan benefit payments were $15.6 in 2005 and $28 in The effective interest rates used were: 2005 % 2004 % Present value of projected benefit obligation discounts 4.0 % 5.0% Salaries and wages increase rate 1.0 % 1.0% 40 CYDSA S ANNUAL REPORT 2005

43 14. SHAREHOLDERS EQUITY a) Pursuant to a resolution of the extraordinary shareholders meeting held on September 15, 2004, the Company s capital stock was increased by $1,984 and subscribed on January 19, 2005, date the debt restructuring was settled. The increase was as follows: $279 for 27,366,750 common nominative, non-par value, voting Series A shares. $1,395 for 136,833,749 nominative, Series C shares, without par value, and without voting rights, necessarily convertible into Series A shares with full voting rights on May 1, $310 as capital approved to convert debt into shares, unsubscribed and not paid, consisting in 360,367,834 Treasury stock. These shares were cancelled at the Extraordinary Shareholders Meeting held March 6, b) At December 31, 2005, capital stock consists of 136,833,749 common nominative Series A shares with voting rights and without par value, and 136,833,749 nominative Series C Shares without voting rights and without par value, necessarily convertible into Series A shares with full voting rights on May 1, c) Pursuant to a resolution of the extraordinary shareholders meeting held on March 29, 2000, dividends of $54 ($39 par value) were declared due and payable; however, at December 31, 2005, they had not been paid yet. Such dividends will be paid when the Board of Directors decides to distribute them. d) Cydsa, S.A. de C.V. currently has 2,000,000 Series A shares in a trust fund set up primarily to grant purchase options to the employees in a non-compensating plan. The market value of these Series A shares at December 31, 2005 is $3.20 (Mexican pesos) per share. e) Minority interest consists of the following: Capital stock $ 56 $ 56 Insufficiency in restated shareholders equity (157) (154) Retained earnings Net income Cumulative effect of deferred income tax (13) (13) $ 129 $ 102 f) Distribution of earnings and asset restatements, in addition to capital stock reimbursement when capitalized are subject to income tax at the rate in effect when the dividend is distributed, provided they do not arise from what the law calls Restated capital contribution and Net tax income accounts. The income tax rate was 30% in 2005 and will decrease to 29% in 2006 and 28% in 2007 and thereafter. Any tax paid on such distribution, may only be credited against the income tax payable of the year in which the tax on the dividend is paid and the two fiscal years following such payment. CYDSA S ANNUAL REPORT

44 g) Restated shareholders equity, as well as its historical value, are shown below: Historical Historical Restatement Restated value value Restatement Restated Capital stock Series A $ 390 $ 2,487 $ 2,877 $ 390 $ 2,487 $ 2,877 Capital stock Series C 1, ,395 1, ,395 Paid-in capital Legal reserve Retained earnings (2,312) 7,627 5,315 (1,377) 7,682 6,305 Net loss (329) (1) (330) (935) (55) (990) Stocks in trust (28)* (26) (54) (28)* (26) (54) * Share acquisition cost h) Net comprehensive loss presented in the accompanying Consolidated Statements of Changes in Shareholders Equity represents the Company s total activity during each year, and includes the net loss of the year, plus other items, which, in accordance with MEX GAAP, are presented directly in shareholders equity without affecting the Consolidated Statement of Operations. In 2005, and 2004, comprehensive loss consisted of the results of holding non-monetary assets and the additional liability for retirement benefits. i) The result from holding non-monetary assets of the period, valued in Mexican pesos of purchasing power of the consolidated balance sheet date, amounted to a loss of $2 in 2005 and a gain of $91 in TOTAL FINANCING COST Interest expenses $ (163) $ (377) Interest income Financing allowances to clients (22) (21) Exchange loss in currency call options (2) (1) Exchange gain Monetary gain $ (54) $ (198) 16. OTHER EXPENSES, NET a) This item includes the following: Amortization of goodwill $ $ (99) Fixed asset impairment (19) (356) (Loss) gain on sale of shares (20) 18 Gain on sale of fixed assets 4 Restructuring expenses (16) (55) Debt restructuring (22) 18 Other income $ (21) $ (377) 42 CYDSA S ANNUAL REPORT 2005

45 b) During 2004, due to a decrease in profitability and to the low utilization of some of its subsidiaries fixed assets, the Company performed a valuation of such assets in order to adjust them to net realizable value. As a result of such valuation the Company recorded an impairment loss on certain fixed assets of $317. c) During 2004, independent appraisers determined the realizable value of the fixed assets no longer in use. As a result of the appraisal, a loss related to the impairment of the machinery and equipment was recorded of $39. d) In accordance with its divestiture and cost and expense reduction plans, Cydsa has reduced its personnel, paying severance and early retirements of $20 in 2005 and $25 in TAXES AND EMPLOYEE STATUTORY PROFIT SHARING a) The Company computes its income tax on a consolidated basis in accordance with the Income Tax Law. This procedure makes it possible to use tax losses to offset taxable income of the Company s majority interest to determine income tax on the basis of net consolidated taxable income. This procedure allows Cydsa, S.A. de C.V. to entirely compensate the tax results of the interest it held in the capital stock of its subsidiaries. b) As of December 31, 2005, the Company had tax loss carryforwards that could be offset against future taxable income, in accordance with the Income Tax Law. There is also Tax on Assets that may be recovered in the future. The amounts and the years of expiration are as follows: Tax loss carryforwards: Year of origin Amount Year of expiration 2001 $ 1, $ 2,572 Tax on assets: Year of origin Amount Year of expiration 1996 $ $ 404 CYDSA S ANNUAL REPORT

46 c) The provision for income tax and employee statutor y profit-sharing consists of the following: Income tax: Current $ (30) $ (6) Deferred (117) 116 Creditable income tax according to e) 125 Cancellation of allowance for recoverable tax on assets and tax loss carryforwards, net 153 Amount credited to the consolidated results of operations $ (22) $ 263 d) The income tax rate was 30% in 2005 and 33% in The rate in 2006 will be 29% and 28% in 2007 and thereafter. To calculate the deferred income tax as of December 31, 2005, the Company applied the different rates that will be effective beginning January 1, 2006 to the temporary differences, according to their estimated date of reversal. The result from applying the different rates is presented in the chart below in effect of change in statutory rate on deferred income tax. e) In October 2004, the Company filed a request for a ruling with the SAT to be able to reduce from its consolidated income taxes, the income tax paid previously, corresponding to the 40% interest Bayer A.G., had in Industrias Cydsa Bayer, S.A. de C.V. (currently Industrias Cydsa Istmo, S.A. de C.V.), owned by the Company since This request was made pursuant to Article 75 of the Income Tax Law. On December 6, 2005, the SAT sent an official document whereby it resolved that the Company could apply such tax against the consolidated income tax for the year it declares consolidated income tax and until it is used up. The tax the Company can apply against its income tax amounts to $125. f) The reconciliation of the statutory income tax rate and the effective income tax rate declared in the Statement of Operations is as follows: Statutory income tax rate 30.0 % 33.0 % Reserve for tax loss carryforwards (33.5)% Divestiture in subsidiaries 9.4 % Non-deductible expenses (Non-taxable income) 2.0% (7.7)% Effect of change in statutory rate on deferred income tax 7.3% 9.2% Cancellation of allowance for recoverable tax on assets and tax loss carryforwards, net 32.5% Others (3.8)% Effective income tax rate 5.8% 72.6% 44 CYDSA S ANNUAL REPORT 2005

47 g) The deferred income tax shown on the consolidated balance sheet as of December 31, 2005 and 2004 was comprised of the following items: Deferred income tax liabilities (assets): Property, machinery and equipment $ 799 $ 1,054 Tax loss carryforwards (720) (1,216) Inventories (9) 101 Reserves and other (66) 81 Sub-total 4 20 Creditable income tax according to e) (125) Tax on assets (404) (254) Long-term deferred tax asset $ (525) $ (234) 18. DISCONTINUED OPERATIONS AND DIVESTITURES In the consolidated balance sheets, assets and liabilities of discontinued operations have been identified separately, as follows: Assets: Cash $ 32 $ 133 Trade receivables, net Other current assets Fixed assets 1,393 2,216 Deferred income taxes Other non current assets 4 37 Total assets $ 1,829 $ 3,150 Liabilities: Current portion of long-term debt $ $ 4 Trade payables Account payables Other non current liabilities Total liabilities $ 341 $ 512 The consolidated statement of operations has also been restructured with the purpose of presenting discontinued operations. A breakdown of results derived from discontinued operations is presented below: Sales $ 1,671 $ 2,162 Cost of sales (1,776) (2,083) Operating expenses (211) (224) Operating loss (316) (145) Total financing benefit (cost) 8 (30) Other expenses, net (599) (507) Loss before income taxes (907) (682) Income taxes Net loss $ (655) $ (464) CYDSA S ANNUAL REPORT

48 19. INFORMATION BY BUSINESS SEGMENT: a) The Company is divided into two business segments, as described below with their primar y products: Chemicals and Plastics: Salt, chlorine and caustic soda, PVC and PVC product manufacturing, PVC pipes and fittings, pressurized irrigation systems, and refrigerant gases. Yarns: threads for knitting and sewing. b) The relevant information by business segment is as follows: Chemicals and Plastics Yarns 2005 Corporate and Eliminations Discontinued Operations Consolidated Information Net sales by segment $ 4,942 $ 413 $ 165 $ $ 5,520 Net intersegment sales Net consolidated sales 4, ,355 Income (loss) from operations 718 (27) (239) 452 Assets 3,957 1, ,829 8,163 Liabilities 2, ,765 Capital expenditure (149) (1) (150) Depreciation and amortization Chemicals and Plastics Yarns 2004 Corporate and Eliminations Discontinued Operations Consolidated Information Net sales by segment $ 4,778 $ 617 $ 20 $ $ 5,415 Net intersegment sales Net consolidated sales 4, ,398 Income (loss) from operations 282 (66) (3) 213 Assets 3,860 1,619 1,003 3,150 9,632 Liabilities 3, ,937 Capital expenditure Depreciation and amortization CYDSA S ANNUAL REPORT 2005

49 c) Export sales by segment are summarized as follows (in millions of U.S. dollars): Chemicals and Plastics Yarns 2005 Consolidated Information United States and Canada Central and South America Asia Europe Total % 2004 Chemicals and Consolidated Yarns Plastics Information % United States and Canada Central and South America Asia Europe Total NEW ACCOUNTING PRINCIPLES As of May 31, 2004, the Mexican Institute of Public Accountants ( IMCP ) formally transferred the function of establishing and issuing financial reporting standards to the Mexican Board for Research and Development of Financial Reporting Standards ( CINIF ), consistent with the international trend of requiring this function be per formed by an independent entity. Accordingly, the task of establishing bulletins of MEX GAAP and circulars issued by the IMCP was transferred to CINIF, who subsequently renamed standards of MEX GAAP as Normas de Información Financiera (Financial Reporting Standards, or NIFs ), and determined that NIFs encompass (i) new bulletins established under the new function; (ii) any interpretations issued thereon; (iii) any MEX GAAP bulletins that have not been amended, replaced or revoked by the new NIFs; and (iv) International Financial Reporting Standards ( IFRS ) that are supplementary guidance to be used when MEX GAAP does not provide primar y guidance. One of the main objectives of CINIF is to achieve greater concurrence with IFRS. To this end, it started by reviewing the theoretical concepts contained in MEX GAAP and establishing a Conceptual Framework ( CF ) to support the development of financial reporting standards and to serve as a reference in solving issues arising in the accounting practice. The CF is formed by eight financial reporting standards, which comprise the NIF-A series. The NIF-A series, together with NIF B-1, were issued on October 31, Their provisions are effective for years beginning January 1, 2006, superseding all existing MEX GAAP series A bulletins. The new NIFs are as follows: NIF A-1 Structure of Financial Reporting Standards NIF A-2 Fundamental Principles NIF A-3 Users Needs and Financial Statement Objectives NIF A-4 Qualitative Characteristics of Financial Statements NIF A-5 Basic Elements of Financial Statements NIF A-6 Recognition and Valuation NIF A-7 Presentation and Disclosure NIF A-8 Supplementar y Standards to MEX GAAP NIF B-1 Accounting Changes CYDSA S ANNUAL REPORT

50 The most significant changes established by these standards are as follows: In addition to the statement of changes in financial position, NIF A-3 includes the statement of cash flows, which should be issued when required by a particular standard. NIF A-5 includes a new classification for revenues and expenses: ordinary and extraordinary. Ordinary revenues and expenses are derived from transactions or events that are within the normal course of business or that are inherent in the entity s activities, whether frequent or not; extraordinary revenues and expenses refer to unusual transactions and events, whether frequent or not. NIF A-7 requires the presentation of comparative financial statements for at least the preceding period. Through December 31, 2004, the presentation of prior years financial statements was optional. The financial statements must disclose the authorized date for their issuance, and the name(s) of the officer(s) or administrative body(ies) authorizing the related issuance. NIF B-1 establishes that changes in particular standards, reclassifications and correction of errors must be recognized retroactively. Consequently, basic financial statements presented on a comparative basis with the current year that might be affected by the change, must be adjusted as of the beginning of the earliest period presented. At the date of issuance of these financial statements, the Company has not fully assessed the effects of adopting these new standards on its financial information. 48 CYDSA S ANNUAL REPORT 2005

51 DESIGN: INFOBRAND PRINTING: EARTHCOLOR

52 Avenida Ricardo Margain Zozaya #565 B Col. Parque Corporativo Santa Engracia Garza Garcia, Nuevo Leon Mexico Internet address: cydsa@cydsa.com - Policyd (1997) Altamira - Industria Quimica del Istmo (1998) Coatzacoalcos - Sales del Istmo (1999) - Policyd (2000) La Presa - Industria Quimica del Istmo (2002) Monterrey, Tlaxcala - Policyd (1996) Altamira - Industria Quimica del Istmo (1998) Coatzacoalcos