Cydsa, S.A.B. de C.V. and Subsidiaries

Transcription

1 Cydsa, S.A.B. de C.V. and Subsidiaries Consolidated 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. AND SUBSIDIARIES INDEPENDENT AUDITORS REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR 2007 AND 2006 CONTENTS PAGE Independent auditors report 1 Consolidated balance sheets 2 Consolidated statements of income 3 Consolidated statements of changes in shareholders equity 4 Consolidated statements of changes in financial position 5 Notes to consolidated financial statements 6

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4 CYDSA, S. A. B. DE C. V. AND SUBSIDIARIES CONSOLIDATED 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 $ 643 $ 247 Trade receivables net 1,370 1,365 Other receivables Inventories net Current assets from discontinued operations Current assets 3,154 2,483 Long-term receivables 28 Investment in shares Property, plant and equipment net 3,241 3,269 Amortizable expenses net Other assets Deferred income tax Long-lived assets from discontinued operations 950 1,674 Total assets $ 8,088 $ 8,277 LIABILITIES Current portion of long-term debt $ 118 $ 151 Trade payables Other payables Current liabilities from discontinued operations Current liabilities 1,318 1,249 Long-term debt 1, Employee retirement obligations Other accounts payable 6 Share repurchase 869 Long-term liabilities from discontinued operations Long-term liabilities 1,853 2,215 Total liabilities 3,171 3,464 Commitments and contingencies SHAREHOLDERS' EQUITY Majority shareholders' equity: Capital stock 2,848 3,852 Additional paid-in capital lnsufficiency 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 majority shareholders' equity 4,686 4,633 Minority shareholders' equity Total shareholders' equity 4,917 4,813 $ 8,088 $ 8,277 The accompaning y notes are an integral g part of these consolidated financial state,.,. /94\ /rill 49) VI?,/1' Ing. Tomás González Sada C.P. José de I-3V s Montemayor Castillo Chairman of the Board, President and Chief Cor te Finance Director Executive Officer 2

5 CYDSA, S. A. B. DE C. V. AND SUBSIDIARIES CONSOLIDATED 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) Net sales $ 6,186 $ 6,210 Cost of sales (4,320) (4,433) Operating expenses (1,193) (1,133) Operating income Other income net Comprehensive financing cost (197) (190) Income before income taxes Income taxes (191) (157) Income before discontinued operations Loss from discontinued operations, net of taxes (333) (329) Net income $ 158 $ 57 Net income of majority shareholders $ 102 $ 17 Net income of minority shareholders $ 158 $ 57 Majority income (loss) per common share 1 Income from continuing operations $ 1.53 $ 1.24 Loss from discontinued operations (1.17) (1.18) Majority net income per common share $ 0.36 $ 0.06 The accompanying notes are an integral part of these consolidated 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. AND SUBSIDIARIES CONSOLIDATED 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 Minority Interest Total Shareholders Equity Balances at January 1, 2006 $ 4,612 $ 479 $ (5,956) $ (31) $ 5,560 $ (58) $ 140 $ 4,746 Issuance of capital stock Capitalization of the insufficiency in restatement of shareholders equity (807) 807 Comprehensive income (35) (2) Balances at December 31, , (5,184) (33) 5,577 (58) 180 4,813 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) $ 231 $ 4,917 The accompanying notes are an integral part of these consolidated financial statements. 4

7 CYDSA, S. A. B. DE C.V. AND SUBSIDIARIES CONSOLIDATED 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: Income before discontinued operations $ 491 $ 386 Add (deduct) items not requiring funds: Depreciation and amortization Employee retirement obligations net 14 4 Deferred taxes 68 1 Other non-cash items (6) Gain from repurchase of shares (231) Sub-total Changes in working capital: Trade receivables (5) (112) Inventories (2) (53) Trade payables Other accounts receivable and payable 144 (85) Net resources generated by operating activities from continuing operations Discontinued operations Assets and liabilities from discontinued operations (466) 15 Net resources generated by operating activities INVESTING ACTIVITIES: Property, plant, equipment and other investing activities (158) (205) Contractual obligation fund 8 Discontinued operations 338 (341) Net resources generated by (used in) investing activities 180 (538) FINANCING ACTIVITIES: Payment and amortization in real terms of long-term debt 489 (291) Increase in capital stock 47 Repurchase of shares (638) (7) Net resources used in financing activities (149) (251) Increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year $ 643 $ 247 The accompanying notes are an integral part of these consolidated financial statements. 5

8 CYDSA, S. A. B. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED 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) The consolidated financial statements include all the companies where Cydsa, S.A.B. de C.V. (collectively the Company ) exercises direct or indirect control. b) The principal activities of the subsidiaries include production and marketing of chemical and plastic products 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. c) Cydsa, S.A.B. 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) Significant intercompany amounts and transactions have been eliminated in these consolidated financial statements and the investment in associated companies where the Company exercises significant influence is accounted for using the equity method. e) The costs and expenses presented in the accompanying consolidated statements of income were classified based on their function. Consequently, cost of sales is presented separately from other costs and expenses. f) The income from operations is obtained from reducing the cost of sales and operating expenses from net sales. Although NIF B-3, Statement of Income, does not require it, this line item is included in the accompanying consolidated financial statements because it contributes to a better understanding of the Company s economic and financial performance. g) Quimobásicos, S.A. de C.V. s incineration project HFC-23 ( Quimobásicos ) Beginning in March 2006, Quimobásicos 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. The sale of CER S for fiscal years 2007 and 2006 generated gains of $243 (16 million euros) and $126 (8.4 million euros), respectively, and was recorded as revenue in the consolidated statements of income. 6

9 h) 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, which is presented in other income in the consolidated statement of income. i) 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, which is presented in the consolidated statement of income within loss from discontinued operations. As of December 31, 2006, such assets were carried at their net realizable value, which generating a loss of $288 net of income tax, which is presented in the 2006 consolidated statement of income within loss from discontinued operations,. j) 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, as a result of recording them to their net realizable value, which is presented in the consolidated statement of income under loss from discontinued operations. k) 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements have been prepared in conformity with Mexican Financial Reporting Standards ( 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 7

10 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. The effect of adopting this NIF was the reclassification of PTU of $1 in 2006 to other income net, in the consolidated statement of income. NIF B-13, Events Occurring After 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 consolidated financial statements and the date of their issuance only be disclosed in a note to the consolidated 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. Notes to the 2006 consolidated financial statements were amended to comply with the new provisions 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 MFRS 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 $66 of tax on assets within deferred income tax, that was previously classified in long- term receivables, to conform to the presentation of the 2007 consolidated financial statements. 8

11 b) Recognition of the effects of inflation The Company restates its consolidated financial statements to Mexican peso purchasing power as of the most recent balance sheet date presented. Accordingly, the consolidated 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 consolidated 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 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. 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 National Consumer Price Index ( NCPI ) to the monthly net monetary position. Gains (losses) result from maintaining a net monetary liability (asset) position, respectively. 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) 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. e) Property, plant and equipment Property, plant and equipment are initially recorded at acquisition cost and are restated using the NCPI. Depreciation is calculated using the straight-line method based on the remaining estimated useful lives of the related assets. f) 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 carrying amounts exceed the greater of the aforementioned amounts. The impairment indicators considered for these purposes are, among others, 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. g) Derivative financial instruments The Company recognizes all assets or liabilities that arise from transactions with derivative financial instruments at fair value in the consolidated balance sheets, regardless of its intent for holding them. Fair value is determined using prices quoted on recognized markets. If 9

12 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. h) Investment in associated companies The investment in associated 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. i) Employee retirement obligations Seniority premiums, pension plans and 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. j) 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 consolidated balance sheet presented. k) 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. l) 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. m) Statutory employee profit sharing (PTU) Statutory employee profit sharing is recorded in the results of the year in which it is incurred and presented under other income and expenses in the accompanying consolidated statements of income. Deferred PTU is derived from temporary differences between the accounting result and income for PTU purposes and is recognized only when it can be reasonably assumed 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 benefits will not be realized. n) 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 10

13 benefits from tax loss carryforwards and certain tax credits. Deferred tax assets are recorded only when there is a high probability of recovery. Tax on assets ( IMPAC ) paid that is expected to be recovered is recorded as an advance payment of ISR and is presented in the consolidated balance sheets increasing the deferred income tax asset. o) 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 consolidated statements of income. p) Revenue recognition Revenues are recognized in the period in which the risks and rewards of ownership of the inventories are transferred to customers, which generally coincides with the delivery of products to customers in satisfaction of orders. Gains related to the sales of the CER S certificates, are recognized when their ownership rights are transfered to third parties. q) Basic earnings per share Basic earnings per common share are calculated by dividing net income of majority stockholders by the weighted average number of common shares outstanding during the year. 3. CASH AND CASH EQUIVALENTS Cash $ 81 $ 88 Daily investments of cash surpluses $ 643 $ TRADE RECEIVABLES The balance of trade receivables was reduced by $78 in 2007 and $74 in 2006 by the allowance for doubtful accounts. 5. INVENTORIES Finished goods $ 328 $ 343 Work in process Raw materials and components Spare parts and accessories Other inventories $ 578 $

14 The balance of inventory was reduced by $17 in 2007 and $23 in 2006 by the allowance for slowmoving and obsolete inventory. 6. DERIVATIVE FINANCIAL INSTRUMENTS During 2006, the Company entered into an interest rate swap denominated in U.S. dollars amounting to US$67.8, which expired in The fixed exchange rate was $ Mexican pesos per U.S. dollar. The fair value as of December 31, 2006 was US$1.09 million, which is included in the consolidated balance sheet in other assets. The fluctuation in the fair value of $17 in 2007, and $24 in 2006 was recorded directly in the consolidated income statements within comprehensive financing cost as the Company did not formally designate it as a hedge for accounting purposes. 7. PROPERTY, PLANT AND EQUIPMENT Restated Value Net Accumulated Restated Restated Accumulated Depreciation Value Value Depreciation Net Restated Value Land $ 345 $ $ 345 $ 340 $ $ 340 Buildings 1,296 (777) 519 1,322 (769) 553 Property, plant and equipment 7,639 (5,356) 2,283 7,431 (5,215) 2,216 Construction in progress $ 9,374 $ (6,133) $ 3,241 $ 9,253 $ (5,984) $ 3, BANKS LOANS a) At December 31, consolidated long-term banks loans are as follows: Interest Rates* Amount Interest Rates* Amount U.S. dollar denominated loans with foreign financial institutions: Guaranteed bank loans (1) 7.76% $ 1, % $ 899 U.S. dollar denominated loans with Mexican financial institutions and their foreign agencies: Guaranteed bank loans 9.33% 182 Mexican peso denominated loans: Guaranteed bank loans 10.49% 252 1,570 1,081 Current portion of long-term debt Long-term debt $ 1,452 $ 930 (*) Weighted average rates (including income tax) as of December 31, 2007 and

15 (1) In 2007 this liability corresponds to debts with Citibank, N.A. Nassau Bahamas Branch, Banco Latinoamericano de Exportaciones, S.A., Israel Discount Bank of New York, Cooperatieve Centrale Raiffeissen-Boerenleenbank B.A. Rabobank Nederland New York Branch, Abn Amro Bank, N.V. and General Electric Capital Corporation. In 2006 this liability corresponds to debts with Citibank N.A., Citibank (Banamex USA) (previously California Commerce Bank), Comerica Bank, Standard Bank Plc (transferor BBVA Bancomer, S.A.) and General Electric Capital Corporation. b) Maturities of long-term bank loans as of December 31, 2007 are as follows: Year Amount 2009 $ and thereafter 935 $ 1,452 c) The syndicated loan agreement mentioned in Note 1 h) sets forth certain financial covenants. The Company was in compliance with such covenants as of December 31, EMPLOYEE RETIREMENT OBLIGATIONS The Company has a pension plan with defined benefits that cover an amount equivalent to 3 months and 20 days per year of service for its employees that retire at the age of 65. Mexican labor law also requires that the Company provide seniority premium benefits, which consist of a lump sum payment of 12 days wage for each year worked, calculated using the most recent salary, not to exceed twice the legal minimum wage established by law. The related liabilities and annual cost of such benefits are calculated by an independent actuary on the basis of formulas defined in the plans using the projected unit credit method. The summary of the Company s employee retirement obligations is as follows: Accumulated benefit obligation $ 377 $ 326 Projected benefit obligation $ 385 $ 335 Unrecognized transition obligation Unrecognized adjustments from experience 37 (16) Net projected liability $ 278 $ 262 Additional minimum liability $ 112 $ 76 Intangible pension asset Minimum pension liability in shareholders equity $ 45 $ 2 The unrecognized transition obligation is being amortized into earnings over 14 years; the period corresponding to the average remaining service lives of employees expected to receive the related benefits. Amortization of this item was $11 during 2007 and 2006, respectively. The intangible pension asset equiavelent to the prior service cost (including the transition obligation) is included in other assets in the consolidated balance sheets. The minimum pension liability in shareholders equity has been recorded because the prior service cost is lesser than the additional liability required. Net periodic pension cost from the Company s pension plan, severance payments and seniority premium benefits was $47 and $34 in 2007 and 2006, respectively. Benefit payments related to 13

16 the Company s pension plan, severance payments and seniority premium benefits were $35 in 2007 and $24 in 2006, respectively. Net periodic pension cost is comprised as follows: Service costs $ 10 $ 11 Amortization of the transition obligation Amortization of prior service cost (3) (3) Amortization of variances in assumptions 16 1 Interest cost Net periodic pension cost $ 47 $ 34 Assumptions used: 2007 % 2006 % Discount rate 3.7% 4.5% Rate of increase in future compensation levels 0.5% 0.5% 10. 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) Cydsa, S.A.B. de C.V. 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,

17 g) Minority interest consists of the following: Capital stock $ 60 $ 60 Insufficiency in restated shareholders equity (171) (166) Retained earnings Net income Cumulative effect of deferred ISR (15) (15) $ 231 $ 180 h) 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. i) 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. j) Restated shareholders equity, as well as its historical value, is presented below: Historical value Restated value Historical value Restatement 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. k) Comprehensive income presented in the accompanying consolidated 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 consolidated statement of income. In 2007 and 2006, comprehensive income consisted of the results of holding non-monetary assets and the minimum pension liability adjustment. l) The result from holding nonmonetary assets of the period, valued in Mexican pesos of purchasing power as of the consolidated balance sheet date, amounted to a loss of $4 and $35 in 2007 and 2006, respectively. 15

18 11. 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 consolidated financial statements, is $ 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 Plant and equipment Monetary assets Monetary liabilities (non-bank loans) Bank loans c) The Company had the following transactions denominated in foreign currencies (amounts expressed in millions of U.S. dollars): Export sales and other revenues Import parchases (136.0) (128.2) (48.6) (29.7) Interest income Interest expense (10.0) (10.9) (9.2) (10.8) Balance of payments (57.8) (40.5) 12. TRANSACTIONS WITH RELATED PARTIES Employee benefits granted to executives of the Company were as follows: Short- and long-term compensation benefits $ 91 $ 81 Severance benefits COMPREHENSIVE FINANCING COST Interest expenses $ (206) $ (169) Interest income Early payment discount (21) (20) Loss from derivative financial instruments (17) (24) Exchange loss (17) (30) Monetary gain $ (197) $ (190) 16

19 14. OTHER INCOME, NET Impairment of fixed assets $ (1) $ (1) Gain from share repurchase 231 Debt restructuring (7) Other (expenses) income, net (24) 97 $ 206 $ 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 depreciation calculated 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. For ISR purposes, effective in 2005, cost of sales is deducted instead of inventory purchases. Taxpayers had the option, in 2005, to ratably increase taxable income over a period of 6 years by the tax basis of inventories as of December 31, 2004, determined in conformity with the respective tax rules, and taking into account inventory turnover. Such inventory was decreased by the undeducted inventory balance according to Rule 106, tax loss carryforwards, whose net balance as of December 31, 2007 and 2006 was $25 and $39, respectively. PTU paid is now fully deductible. 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. 17

20 b) Taxes on income are as follows: ISR: Current $ (123) $ (125) Deferred (68) (1) Cancellation of valuation allowance for recoverable IMPAC and tax loss carryforwards, net (31) $ (191) $ (157) c) The Company filed a request for a ruling with the Tax Administration Service ( SAT ) to be able to reduce from its consolidated income taxes, the ISR previously paid, corresponding to the 16.46% interest that third parties had in some Cydsa subsidiaries which the Company has owned since September This request was made, pursuant to Article 75 of the Income Tax Law. The SAT sent an official document whereby it resolved that the Company could apply such tax against consolidated income tax for the year and until such amount is completely utilized. The tax the Company can apply against its income tax in future years as of December 31, 2007 amounts to $132. d) The reconciliation of the statutory and effective ISR rates expressed as a percentage of income before taxes on income is: Statutory income tax rate 28.0% 29.0% Nondeductible expenses net of non-taxable income (4.5)% 2.3% Cancellation of valuation allowance for tax on assets (5.0)% Other 4.5% 2.6% Effective income tax rate 28.0% 28.9% e) The main items comprising the deferred ISR asset are: Deferred ISR asset: Property, plant and equipment $ 680 $ 884 Tax loss carryforwards (357) (736) Restated inventory as of 2004, not yet taxable 7 11 Reserves and other liabilities 104 (135) Sub-total Creditable income tax according to c) (132) Recoverable tax on assets (868) (658) Long-term deferred tax asset $ (566) $ (634) f) 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: 18

21 Tax Loss Carryforwards: Year of Origin Amount Year of Expiration 1999 $ $ 1,274 Tax on Assets: Year of Origin Amount Year of Expiration 1998 $ $ DISCONTINUED OPERATIONS Assets and liabilities of discontinued operations have been separately disclosed in the consolidated balance sheets, as follows: Assets Cash $ 407 $ 56 Trade receivables-net. 5 8 Other current assets Property, plant and equipment net 719 1,560 Deferred income taxes Other non-current assets 10 Total assets of discontinued operations $ 1,383 $ 1,770 Liabilities Trade accounts payable $ 6 $ 12 Other payables Other non-current liabilities Total liabilities of discontinued operations $ 43 $ 106 Discontinued operations have also been separately identified in the consolidated statements of income in order to present comparative figures for all periods presented. A summary of the Company s discontinued operations is presented below: 19

22 Sales $ $ 43 Cost of sales (6) (61) Operating expenses (16) (41) Operating loss (22) (59) Other expenses net (440) (417) Comprehensive financing (cost) income (1) 14 Loss before income taxes (463) (462) Income tax benefit Net loss 17. COMMITMENTS AND CONTINGENCIES $ (333) $ (329) a) The Company received an official letter from the SAT informing it that a prejudicial action had been filed challenging the precedence of the tax on assets refund of $394 granted by the authorities for fiscal years 1996,1997,1998 and Similarly, the Company filed several lawsuits against the SAT claiming a refund of interest related to such refund. The Company s legal counsel believes it has a strong position to sustain the judgement. b) The Company filed several lawsuits against the SAT claiming a refund of the favorable tax on assets balance of $474, including restatement and interest, for fiscal years 2001, 2002, 2003 and The Company s legal counsel believes there are sufficient and reasonable elements to obtain a favorable result to the Company. c) As of December 31, 2007, bank debts with a total value of $1,570 were collateralized by fixed assets with a book value of $1,796. d) As of December 31, 2007, the Company had recorded a warranty obligation of $7, to cover the quality of products sold to customers. e) The Company has lease agreements for offices, land, and other fixed assets. Rental expense amounted to US$7.3 million in 2007 and US $6.6 million in The agreements contain fixed-term lease clauses. Future minimum rentals due under the leases are as follows, in millions of U.S. dollars: Years Amount and thereafter

23 18. 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. 19. INFORMATION BY BUSINESS SEGMENT a) The Company is divided into two business segments, as described below with their primary 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: 2007 Chemicals and Plastics Yarns Corporate and Eliminations Discontinued Operations Consolidated Information Net sales by segment $ 5,819 $ 369 $ 160 $ $ 6,348 Net intersegment sales Net consolidated sales 5, ,186 Operating income (241) 673 Assets 4, ,383 8,088 Liabilities 1, , ,171 Capital expenditures (153) (4) (1) (158) Depreciation and amortization Chemicals and Plastics Yarns Corporate and Eliminations Discontinued Operations Consolidated Information Net sales by segment $ 5,809 $ 399 $ 172 $ $ 6,380 Net intersegment sales Net consolidated sales 5, ,210 Operating income (226) 644 Assets 4,431 1, ,770 8,277 Liabilities 2, ,464 Capital expenditures (203) (2) (205) Depreciation and amortization

24 c) Export sales by segment are summarized as follows (in millions of U.S. dollars): Chemicals and Plastics Yarns 2007 Consolidated Information % United States and Canada Central and South America Asia Europe Total Chemicals and Plastics Yarns 2006 Consolidated Information % United States and Canada Central and South America Asia Europe Total 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, Taxes on Income 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 22

25 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 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 consolidated financial statements, the Company has not fully assessed the effects of adopting these new standards on its financial information. 21. FINANCIAL STATEMENTS ISSUANCE AUTHORIZATION On March 7, 2008, the issuance of the consolidated financial statements was authorized by C.P. José de Jesús Montemayor Castillo, Corporate Finance Director of the Company. These consolidated 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. ******* 23