Cydsa, S.A.B. de C.V. Financial Statements for the Years Ended December 31, 2007 and 2006, and Independent Auditors Report Dated March 7, 2008

Transcription

1 Cydsa, S.A.B. de C.V. Financial Statements for the Years Ended December 31, 2007 and 2006, and Independent Auditors Report Dated March 7, 2008

2 CYDSA, S. A. B. DE C. V. INDEPENDENT AUDITORS REPORT AND FINANCIAL STATEMENTS FOR 2007 AND 2006 CONTENTS PAGE Independent auditors report 1 Balance sheets 2 Statements of income 3 Statements of changes in shareholders equity 4 Statements of changes in financial position 5 Notes to financial statements 6

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4 CYDSA, S.A.B. DE C.V. BALANCE SHEETS AS OF DECEMBER 31, 2007 AND 2006 (In millions of Mexican pesos of purchasing power as of December 31, 2007) ASSETS Cash and cash equivalents $ 105 $ 5 Fund for refund companies in the chemical segment 56 Loans to subsidiaries Accounts receivable and other assets Current assets Loans to subsidiaries lnvestment in shares 3,543 3,358 Land Other assets Deferred income tax Total assets $ 4,968 $ 5,474 LIABILITIES Loans from subsidiaries 104 $ 311 Due to subsidiaries Other payables Current liabilities Due to subsidiaries 237 Total liabilities SHAREHOLDERS' EQUITY Capital stock 2,848 3,852 Additional paid-in capital Insufficiency in restatement of shareholders' equity (4,184) (5,184) Other equity accounts (78) (33) Retained earnings 5,679 5,577 Stock in trust (58) (58) Total shareholders' equity 4,686 4,633 $ 4,968 $ 5,474 The accompanying notes are an integral part of these financial statements. ^tit `i) Ing. Tomás González Sada Chairman of the Board, President and Chief Executive Officer C.P. José de Je s Montemayor Castillo Corporate Finance Director 2

5 CYDSA, S.A.B. DE C.V. STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (In millions of Mexican pesos of purchasing power as of December 31, 2007, except share and per share amounts) Equity in income (loss) of subsidiary companies, (net of operations with subsidiaries) $ 143 $ (7) Operating expenses (14) (12) Operating income (loss) 129 (19) Other (expenses) income net (16) 106 Comprehensive financing cost: Interest expenses, net (3) (8) Exchange gain 6 Monetary position loss (7) (9) (10) (11) Income before deferred income tax Deferred income tax (1) (59) Net income $ 102 $ 17 Income per common share: 1 $ 0.36 $ 0.06 The accompanying notes are an integral part of these financial statements. 1 In Mexican pesos, determined on the basis of a weighted average of 283,831,000 shares outstanding in 2007 and 279,965,339 in

6 CYDSA, S.A.B. DE C.V. STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (In millions of Mexican pesos of purchasing power as of December 31, 2007) Capital Stock Additional Paid-in Capital Insufficiency in Restatement of Shareholders Equity Other Equity Accounts Retained Earnings Stock in Trust Total Shareholders Equity Balances at January 1, 2006 $ 4,612 $ 479 $ (5,956) $ (31) $ 5,560 $ (58) $ 4,606 Issuance of capital stock Capitalization of the insufficiency in restatement of shareholders equity (807) 807 Comprehensive loss (35) (2) 17 (20) Balances at December 31, , (5,184) (33) 5,577 (58) 4,633 Capitalization of the insufficiency in restatement of shareholders equity (1,004) 1,004 Comprehensive income (4) (45) Balances at December 31, 2007 $ 2,848 $ 479 $ (4,184) $ (78) $ 5,679 $ (58) $ 4,686 The accompanying notes are an integral part of these financial statements. 4

7 CYDSA, S.A.B. DE C.V. STATEMENTS OF CHANGES IN FINANCIAL POSITION FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (In millions of Mexican pesos of purchasing power as of December 31, 2007) OPERATING ACTIVITIES: Net income $ 102 $ 17 Add (deduct) items not requiring funds: Amortizations 19 Equity in (loss) income of subsidiary companies (17) 141 Deferred income tax 1 59 Other non cash items 11 Sub-total Due to subsidiaries (350) 8 Other accounts receivable and payable 157 (43) Net resources (used in) generated by operating activities (107) 212 INVESTING ACTIVITIES: Fund for refund companies in the chemical segment 56 (56) Contractual obligation fund 7 Loans to subsidiaries 575 (128) Contribution of capital stock to subsidiaries (262) Net resources generated by (used in) investing activities 369 (177) FINANCING ACTIVITIES: Increase in capital stock 47 Other equity accounts 45 Financing of subsidiaries companies (207) (77) Net resources used in financing activities (162) (30) Increase in cash and cash equivalents Cash and cash equivalents at beginning of year 5 Cash and cash equivalents at end of year $ 105 $ 5 The accompanying notes are an integral part of these financial statements. 5

8 CYDSA, S.A.B. DE C.V. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (In millions of Mexican pesos of purchasing power as of December 31, 2007) 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION a) Cydsa, S.A.B de C.V. (the Company ) is a holding Company whose primary operations include the stock ownership of subsidiary companies in order to control their operating and financing activities. The principal activities of its subsidiaries include: production and marketing of chemical and plastic products and yarns. The Company does not have any employees. b) The income from operations is obtained by reducing the equity in income (loss) of subsidiary companies operating expenses. Although NIF B-3, Statement of Income, does not require it, this line item is included in the accompanying financial statements because it contributes to a better understanding of the Company s economic and financial performance 2. IMPORTANT EVENTS a) Quimobásicos, S.A. de C.V. s incineration project HFC-23 ( Quimobásicos ) Beginning in March 2006, Quimobásicos, subsidiary of Cydsa, S.A.B. de C.V,.invested in plant and equipment to enable it to potentially participate in the Protocol of Kyoto (the Protocol ), which uses a series of instruments that allows developed countries to accomplish their goals of reducing gas emmissions, with flexibility and reduced costs. Those organizations that participate in the Protocol and reduce or capture emissions of gases that damage the environment (GEI) will generate, under certain circumstances, Certified Emission Reduction (CER S) certificates, which can be sold to developing countries to credit their compliance with their obligations. The CER S can be negotiated directly in the market, given their ownership rights and protection under the regulation of the Convention Frame of the Climatic Change and the Protocol. b) Refinancing of Restructured Debt and Repurchase of Shares On September 27, 2007, the Company s subsidiary Valores Químicos, S.A. de C.V., a subholding of the Chemical and Plastics Bussines Segment, received a US$140 million syndicated loan with a 5-year term from Citigroup Global Markets Inc. as lead underwriter. This transaction was previously authorized at the general ordinary shareholders meeting of Cydsa S.A.B. de C.V., held on August 23, The loan proceeds were used to repay the entire balance of restructured debt of $893 (US$81.7 million), to repurchase the shares of Valores Químicos with a book value of $858 (US$78.6 million), for $627 (US$57.4 million) held by the creditor banks, and the remainder was used to finance working capital needs. The share repurchase generated a gain equivalent to the difference between the payment price and the repurchase liability recorded in 2007 of $166, net of income tax. c) Sale of Acrylic Fiber Fixed Assets In October 2007, Celulosa y Derivados, S.A. de C.V. ( Crysel ), a subsidiary of the Company, sold the fixed assets of Acrylic Fiber to Zoltek de México, S.A. de C.V., a subsidiary of Zoltek Corporation, located in the State of Missouri, USA. The sales price of those assets was $380, which generated a gain on sale of $27, net of income tax. As of December 31, 2006, such assets were carried at their net realizable value, which generating a loss of $288 net of income tax. 6

9 d) Impairment of Fixed Assets Within the Yarn Division During 2007, the Company performed an appraisal of idle fixed assets within its yarn division and recorded an impairment charge of $345, net of income tax. e) Authorization from the Energy Regulatory Commission On November 8, 2007, Almacenamiento Subterráneo del Istmo, S.A. de C.V., a subsidiary of the Company, received authorization from the Energy Regulatory Commission (ERC) to store natural gas underground in saline domes. In order to develop this project, the Company is working with a strategic partner, Saltec International, Inc., an American company with adequate experience in projects of this nature. The natural gas will be stored in caverns that were developed by the Company over the past 30 years to extract salt. They are located in the Tuzandépetl area, Municipality of Ixhuatlán del Sureste, in the state of Veracruz, Mexico. The Company still needs to finalize its technical and economic studies related to this project and to execute contracts with clients, in addition to obtaining financing. A minimum period of two years is needed to begin operations after concluding the technical and economic feasibility studies. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Explanation for translation into English - The accompanying financial statements have been translated from Spanish into English for use outside of Mexico. These financial statements are presented on the basis of Mexican Financial Reporting Standards ( MFRS, individually referred to as Normas de Información Financiera or NIFs). Certain accounting practices applied by the Company that conform with MFRS may not conform with accounting principles generally accepted in the country of use. The accompanying financial statements have been prepared in conformity with MFRS, which require that management make certain estimates and use certain assumptions that affect the amounts reported in the financial statements and their related disclosures; however, actual results may differ from such estimates. The Company s management, upon applying professional judgment, considers that estimates made and assumptions used were adequate under the circumstances. The significant accounting policies of the Company are as follows: a) Accounting changes NIF B-3, Statement of Income ( NIF B-3 ).- Now classifies revenues, costs and expenses into ordinary and non-ordinary. Ordinary items are derived from primary activities representing an entity s main source of revenues. Non-ordinary items are derived from activities other than those representing an entity s main source of revenues. Consequently, the classification of certain transactions as special and extraordinary was eliminated; these items are now part of other income and expenses and non-ordinary items, respectively. Statutory employee profit sharing ( PTU ) should now be presented as an ordinary expense and no longer presented as a tax on income. According to Interpretation of Financial Information Standards Number 4, Presentation of Statutory Employee Profit Sharing in the Statement of Income, ( INIF 4 ), PTU should be included within other income and expenses. NIF B-13, Events Subsequent to the Date of the Financial Statements ( NIF B-13 ).- Requires that asset and liability restructurings and waivers by creditors of their right to demand payment in the event an entity defaults on contractual obligations that occur in the period between the date of the financial statements and the date of their issuance only be disclosed 7

10 in a note to the financial statements and be recognized in the financial statements of the period in which such events actually take place. Through 2006, the effect was recognized retroactively when agreements or waivers were obtained in a subsequent period. NIF C-13, Related Parties ( NIF C-13 ).- Broadens the concept related parties to include a) the overall business in which the reporting entity participates; b) close family members of key management or prominent executives; and c) any fund created in connection with a laborrelated compensation plan. NIF C-13 also requires the following disclosures: 1) that the terms and conditions of consideration paid or received in transactions carried out between related parties be equivalent to those of similar transactions carried out between independent parties and the reporting entity, only if sufficient evidence exists; 2) benefits granted to the entity s key management or prominent executives. NIF D-6, Capitalization of Comprehensive Financing Result ( NIF D-6 ). - Establishes general capitalization standards, some of these standards include: a) mandatory capitalization of comprehensive financing cost ( CFC ) directly attributable to the acquisition of qualifying assets; b) when financing in domestic currency is used to acquire assets, yields obtained from temporary investments before the capital expenditure is made are excluded from the amount capitalized; c) a methodology to calculate capitalizable CFC relating to funds from generic financing; d) regarding land, CFC may be capitalized if land is developed, and e) conditions that must be met to capitalize CFC and rules indicating when CFC should no longer be capitalized. Application of the new NIFs did not have a significant impact on the Company s financial position, results of operations or related disclosures. Reclassifications.- The financial statements for the year ended December 31, 2006, have been reclassified to present $144 in investment in shares, that was previously classified in long- term receivables and deferred income tax in the balance sheets and $47 of deferred income tax, that was previously classified un equity in income (loss) of subsidiary companies, in the statements of income, to conform to the presentation of the 2007 financial statements. b) Recognition of the effects of inflation The Company restates its financial statements to Mexican peso purchasing power as of the most recent balance sheet date presented. Accordingly, the financial statements of the prior year, that are presented for comparative purposes, have also been restated to Mexican pesos of the same purchasing power and, therefore, differ from those originally reported in the prior year. Recognition of the effects of inflation results mainly in inflationary gains or losses on nonmonetary and monetary items that are presented in the financial statements under the following two line items: 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, restated at value equity, with the values that would have been obtained if factors arising from the National Consumer Price Index ( NCPI ) had been used. If the increase in restated costs exceeds inflation, there is a gain; if not, there is a loss. Monetary position result - Monetary position result, which represents the gain or loss incurred by the Company from holding monetary assets and liabilities during an inflationary period, whose purchasing power decreases while it holds its nominal value. This item is calculated by applying factors of the NCPI to the monthly net monetary position. Losses result from maintaining a net monetary asset position. 8

11 c) Cash, and cash equivalents Cash and cash equivalents consist mainly of bank deposits in checking accounts and readily available daily investments of cash surpluses. Cash and cash equivalents are stated at nominal value plus accrued yields, which are recognized in results as they accrue. d) Land Land is initially recorded at acquisition cost and are restated using the NCPI. e) Derivative financial instruments The Company recognizes all assets or liabilities that arise from transactions with derivative financial instruments at fair value in the balance sheets, regardless of its intent for holding them. Fair value is determined using prices quoted on recognized markets. If such instruments are not traded, fair value is determined by applying recognized valuation techniques. While certain derivative financial instruments are contracted for hedging from an economic point of view, they are not designated as hedges because they do not meet all of the requirements and are instead classified as held-for-trading for accounting purposes. Changes in fair value are recognized in current earnings as a component of comprehensive financing result. f) Investment in shares The investment in subsidiary companies where the Company exercises significant influence are 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 MFRS B-10, Recognizing the Effects of Inflation in Financial Information. g) Restatement of capital stock and retained earnings Capital stock, retained earnings and net (loss) 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 balance sheet presented. h) Comprehensive 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 monetary position. i) Provisions Provisions are recognized for current obligations that result from a past event, are probable to result in the future use of economic resources, and can be reasonably estimated. j) Income taxes Income taxes are recorded in the results of the year in which they are incurred. Beginning October 2007, based on its financial projections, the Company must determine whether it will incur regular income tax ( ISR ) or the new Business Flat Tax ( IETU ) and, accordingly, recognizes deferred taxes based on the tax it will pay. Deferred taxes are calculated by applying the corresponding tax rate to the applicable temporary differences resulting from comparing the accounting and tax bases of assets and liabilities and including, if any, future benefits from tax loss carryforwards and certain tax credits. Deferred tax assets are recorded only when there is a high probability of recovery. 9

12 Tax on assets ( IMPAC ) paid that is expected to be recovered is recorded as an advance payment of ISR and is presented in the balance sheets increasing the deferred income tax asset. k) 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 comprehensive financing cost in the statements of income. l) Revenue recognition Revenues from services rendered are recognized in the period in which they are rendered. m) Basic earnings per share Basic earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding during the year. 4. ACCOUNTS RECEIVABLE AND OTHER ASSETS Due from subsidiaries $ 333 $ 506 Tax receivable from subsidiaries for the benefit of utilizing the consolidation method Receivables taxes 1 7 Other assets 17 $ 503 $ INVESTMENT IN SHARES a) The Company owns the entire stock of its subsidiaries except for Quimobásicos, S.A. de C.V., where it has a 51% interest. The Company uses the equity method to record its share in its subsidiaries yearend financial position and results of operations, audited by an independent public accountant. These financial statements are prepared to fulfill legal requirements. To properly evaluate the financial position and the results of operations of the economic entity Cydsa, S.A.B. de C.V. and subsidiaries, the Company s management has separately prepared and issued consolidated financial statements, which were audited by an independent public accountant. b) Summarized information of the Company and subsidiaries as of December 31 is as follows: Current assets $ 3,154 $ 2,483 Total assets 8,088 8,277 Current liabilities 1,318 1,249 Total liabilities 3,171 3,464 Net sales 6,186 6,210 Operating income Income before discontinued operations Net income

13 6. SHAREHOLDERS EQUITY a) Pursuant to a resolution of the Board of Directors meeting held on November 28, 2007, the Restated Common Stock acccount was decreased by $1,004 ($1,000 in historical pesos) as a result of crediting the Insufficiency in Restatement of Shareholders Equity. b) Pursuant to a resolution of the general ordinary shareholders meeting held on April 25, 2007, the legal reserve was increased by $1. c) Pursuant to a resolution of the extraordinary shareholders meeting held on April 26, 2006, the Company s capital stock was decreased by $807 ($755 at historical pesos) with a corresponding credit to the Insufficiency in Restatement of Shareholders Equity. Additionally, the Company s capital stock increased by $47 ($44 in historical pesos). As a result of such resolutions, nominal capital stock was comprised of $1,029, as follows: 148,997,251 common, nominative, non-par value, Series A voting shares. 136,833,749 common, nominative, Series C shares, without par value and without voting rights, convertible into Series A shares with full voting rights on May 1, d) Pursuant to a resolution of the extraordinary shareholders meeting held on March 29, 2000, dividends of $58 ($39 par value) were declared due and payable; however, at December 31, 2007, they had not been paid yet. Such dividends will be paid when the Board of Directors decide to distribute them. e) Retained earnings include the statutory legal reserve. The General Corporate Law requires that at least 5% of net income of the year be transferred to the legal reserve until the reserve equals 20% of capital stock at par value (historical pesos). The legal reserve may be capitalized but may not be distributed unless the entity is dissolved. The legal reserve must be replenished if it is reduced for any reason. As of December 31, 2007 and 2006, the legal reserve, in historical pesos, was $31 and $30, respectively. f) The Company currently holds 2,000,000 Series A shares. They are held in a trust for the purpose of granting stock options to the Company s employees through a non-compensatory plan. The market value of the Cydsa, S.A.B. de C.V. Series A shares is $8.49 (Mexican pesos) at December 31, g) Shareholders equity, except restated paid-in capital and tax retained earnings will be subject to income tax payable by the Company at the rate in effect upon distribution. Any tax paid on such distribution may be credited against annual and estimated income taxes of the year in which the tax on dividends is paid and the following two fiscal years. h) The balances of the sharehoders equity tax accounts as of December 31, are as follows: Contributed capital account $ 3,255 $ 3,137 Net tax income account 2,319 2,236 Total $ 5,574 $ 5,373 As illustrated in the preceding table, the total amount of the balances of the shareholders equity tax accounts exceeds shareholders equity, according to the accompanying balance sheets. 11

14 i) Restated shareholders equity, as well as its historical value, is presented below: Historical value Restatement Restated value Historical value Restatement Restated value Capital stock Series A $ 536 $ 1,722 $ 2,258 $ 536 $ 2,726 $ 3,262 Capital stock Series C Additional paid-in capital Legal reserve Retained earnings (2,630) 8,028 5,398 (2,641) 8,023 5,382 Net income of the year Stock in trust (28)* (30) (58) (28)* (30) (58) * Corresponds to acquisition cost. j) Comprehensive income presented in the accompanying statements of changes in shareholders equity represents the Company s total activity during each year, and includes the net income of the year, plus other items, which, in accordance with MFRS, are presented directly in shareholders equity without affecting the statement of income. In 2007 and 2006, comprehensive income consisted of the results of holding non-monetary assets and the minimum pension liability adjustment. k) The result from holding nonmonetary assets of the period, valued in Mexican pesos of purchasing power as of the balance sheet date, amounted to a loss of $4 and $35 in 2007 and 2006, respectively. 7. FOREIGN CURRENCY BALANCES AND TRANSACTIONS a) The exchange rates per U.S. dollar at the end of each year were $ in 2007 and $ in The exchange rate at March 7, 2008, the issuance date of these financial statements, is $ per U.S. dollar. b) The Company s assets and liabilities include monetary items that will be collected or paid in foreign currencies. These items expressed in millions of U.S. dollars, are as follows: Monetary assets Monetary liabilities c) The Company had the following transactions denominated in foreign currencies (amounts expressed in millions of U.S. dollars): Interest income Interest expense Net (1.7) OTHER (EXPENSES) INCOME, NET Income received of the Protocol of Montreal $ $ 126 Other expenses (16) (20) $ (16) $

15 9. INCOME TAXES a) In accordance with Mexican tax law, the Company is subject to ISR, and until 2007, to IMPAC. ISR is computed taking into consideration the taxable and deductible effects of inflation, such as on restated asset values. Taxable income is increased or reduced by the effects of inflation on certain monetary assets and liabilities through the inflationary component, which is similar to the gain or loss from monetary position. As of 2007, the tax rate is 28% and in 2006 it was 29%. Due to changes in the tax legislation, effective January 1, 2007, taxpayers who file tax reports and meet certain requirements may obtain a tax credit equivalent to 0.5% or 0.25% of taxable income. In 2007, IMPAC was calculated by applying 1.25% to the value of the assets of the year, without deducting any debt amounts. Through 2006, IMPAC was calculated by applying 1.8% on the net average of the majority of restated assets less certain liabilities, including liabilities payable to banks and foreign entities. IMPAC is payable only to the extent that it exceeded ISR payable for the same period. The Company is subject to ISR and, through 2007, IMPAC, together with its subsidiaries, on a consolidated basis. On October 1, 2007, the Business Flat Tax Law ( LIETU ) was enacted and went into effect on January 1, In addition, the Tax Benefits Decree and the Third Omnibus Tax Bill were published on November 5 and December 31, 2007, respectively, clarifying or expanding the transitory application of the law regarding transactions carried out in 2007 that will have an impact in IETU applies to the sale of goods, the provision of independent services and the granting of use or enjoyment of goods, according to the terms of the LIETU, less certain authorized deductions. IETU payable is calculated by subtracting certain tax credits from the tax determined. Revenues, as well as deductions and certain tax credits, are determined based on cash flows generated beginning January 1, LIETU establishes that the IETU rate will be 16.5% in 2008, 17% in 2009, and 17.5% as of The Asset Tax Law was repealed upon enactment of LIETU; however, under certain circumstances, IMPAC paid in the ten years prior to the year in which ISR is paid, may be refunded, according to the terms of the law. In addition, as opposed to ISR, the parent and its subsidiaries will incur IETU on an individual basis. Based on its financial projections, the Company determined that it will basically pay only ISR. Therefore, the enactment of IETU did not have any effects on its financial information, since it only recognizes deferred ISR. b) The reconciliation of the statutory and effective ISR rates expressed as a percentage of income before income taxes is: Statutory income tax rate 28.0% 29.0% Effect of inflation (1.1)% (16.0)% Nondeductible expenses net of non-taxable income (25.9)% 64.6% Effective income tax rate 1.0% 77.6% 13

16 c) The main items comprising the deferred ISR asset are: Deferred ISR asset: Land $ (48) $ (48) Tax loss carryforwards (446) (464) Reserves and other 4 Sub-total (494) (508) Recoverable tax on assets (113) (100) Long-term deferred tax asset $ (607) $ (608) d) The benefits of restated tax loss carryforwards and recoverable IMPAC for which the deferred ISR asset and prepaid ISR, respectively, have been recognized, can be recovered subject to certain conditions. Restated amounts as of December 31, 2007 and their expiration dates are as follows: Tax Loss Carryforwards: Year of Origin Amount Year of Expiration 2001 $ 1, $ 1,593 Tax on Assets: 10. CONTINGENCIES Year of Origin Amount Year of Expiration 2002 $ $ 113 a) The Company filed several lawsuits against the SAT claiming a refund of the favorable tax on assets balance of $100, including restatement and interest, for fiscal years 2002, 2003 and The Company s legal counsel believes there are sufficient and reasonable elements to obtain a favorable result to the Company. b) As a legal entity, the Company does not have any employees and is therefore not responsible for any labor liabilities. 11. SUBSEQUENT EVENT On January 29, 2008, the Company issued a notice and the beginning of a public offering period to purchase 25% of its outstanding shares. The purchase price offered was $10.30 pesos by share, both for Series A and Series C shares. The offering concluded on February 26, 2008, with the Company having acquired 37,249,305 and 34,208,445 of Series A and C, respectively, which amounted to 25% of the Company s previously outstanding shares. 14

17 12. NEW ACCOUNTING PRINCIPLES In 2007, the Mexican Board for Research and Development of Financial Information Standards (CINIF) issued the following NIFs, which became effective for fiscal years beginning on January 1, 2008: NIF B-2, Statement of Cash Flows NIF B-10, Effects of Inflation NIF B-15, Translation of Foreign Currencies NIF D-3, Employee Benefits NIF D-4, Income Taxes Some of the significant changes established by these standards are as follows: NIF B-2, Statement of Cash Flows. This NIF establishes general rules for the presentation, structure and preparation of a cash flow statement, as well as the disclosures supplementing such statement, which replaces the statement of changes in financial position. NIF B-2 requires that the statement show a company s cash inflows and outflows during the period. Line ítems should be preferably presented gross. Cash flows from financing activities are now presented below those from investing activities (a departure from the statement of changes in financial position). In addition, NIF B-2 allows entities to determine and present their cash flows from operating activities using either the direct or the indirect method. NIF B-10, Effects of Inflation. CINIF defines two economic environments: a) inflationary environment, when cumulative inflation of the three preceding years is 26% or more, in which case, the effects of inflation should be recognized using the comprehensive method; and b) non-inflationary environment, when cumulative inflation of the three preceding years is less than 26%, in which case, no inflationary effects should be recognized in the financial statements. Additionally, NIF B-10 eliminates the replacement cost and specific indexation methods for inventories and fixed assets, respectively, and requires that the cumulative gain or loss from holding non-monetary assets be reclassified to retained earnings, if such gain or loss is realized; the gain or loss that is not realized will be maintained in shareholders equity and charged to current earnings of the period in which the originating item is realized. NIF B-15, Translation of Foreign Currencies. NIF B-15 eliminates classification of integrated foreign operations and foreign entities and incorporates the concepts of accounting currency, functional currency and reporting currency. NIF B-15 establishes the procedures to translate the financial information of a foreign subsidiary: i) from the accounting to the functional currency; and ii) from the functional to the reporting currency, and allows entities to present their financial statements in a reporting currency other than their functional currency. NIF D-3, Employee Benefits. This NIF includes current and deferred PTU. Deferred PTU should be calculated using the same methodology established in NIF D-4. It also includes the career salary concept and the amortization period of most items is reduced to five years, as follows: Items will be amortized over a 5-year period, or less, if employees remaining labor life is less than the: - Beginning balance of the transition liability for severance and retirement benefits - Beginning balance of past service cost and changes to the plan - Beginning balance of gains and losses from severance benefits, according to actuarial calculations, should be amortized against the results of

18 - Beginning balance of gains and losses from retirement benefits, according to actuarial calculations, should be amortized over a 5-year period (net of the transition liability), with the option to fully amortize such item against the results of NIF D-4, Income Taxes. This NIF relocates accounting for current and deferred PTU to NIF D-3, eliminates the permanent difference concept, redefines and incorporates various definitions and requires that the cumulative ISR effect be reclassified to retained earnings, unless it is identified with some of the other comprehensive income items that have not been applied against current earnings. 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. 13. FINANCIAL STATEMENTS ISSUANCE AUTHORIZATION On March 7, 2008, the issuance of the financial statements was authorized by C.P. José de Jesús Montemayor Castillo, Corporate Finance Director of the Company. These financial statements are subject to the approval of the general ordinary shareholders meeting, who may modify the financial statements, based on provisions set forth by the General Corporate Law. ****** 16