FYTEK, S.A. DE C.V.
(a Mexican corporation)
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
CONTENTS
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Page
Report of independent auditors 1
Financial statements:
Balance sheet 2
Statement of income 3
Statement of changes in stockholders' equity 4
Statement of changes in financial position 5
Notes to financial statements 6-10
REPORT OF INDEPENDENT AUDITORS
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Monterrey, N.L., January 25, 1999
To the Stockholders of
Fytek, S.A. de C.V.
We have audited the balance sheets of Fytek, S.A. de C.V. as of December 31,
1998 and 1997, and the related statements of income, of changes in
stockholders's equity and of changes in financial position for the years then
ended. 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 were prepared in accordance with generally accepted
accounting principles. 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 aforementioned financial statements present fairly, in all
material respects, the financial position of Fytek, S.A. de C.V. at December 31,
1998 and 1997, and the results of its operations, the changes in its
stockholder's equity and the changes in its financial position for the years
then ended, in conformity with accounting principles generally accepted in
Mexico.
PricewaterhouseCoopers
FYTEK, S.A. DE C.V.
(a Mexican corporation)
BALANCE SHEET
AT DECEMBER 31, 1998 WITH COMPARATIVE FIGURES FOR 1997
Thousands of Mexican Pesos of December 31, 1998
Purchasing Power
1998 1997
---- ----
Assets
- ------
CURRENT ASSETS:
Cash and temporary investments Ps 2,758 Ps 4,249
Trade accounts receivable, less
allowance for doubtful accounts
of Ps244 in 1998 and
Ps39 in 1997 16,700 9,496
Other accounts receivable 2,171 299
Inventories (Note 3) 10,122 3,566
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Total current assets 31,751 17,610
CONSTRUCTIONS IN PROCESS 543 0
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Total assets Ps32,294 Ps17,610
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Liabilities and Stockholders' Equity
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CURRENT LIABILITIES:
Suppliers Ps12,277 Ps 331
Affiliated companies (Note 6) 11,159 13,312
Accounts payable and accrued expenses 854 313
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Total liabilities 24,290 13,956
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STOCKHOLDERS' EQUITY (Note 4):
Capital stock 3,086 3,086
Retained earnings 5,259 454
(Deficit) surplus on restatement
of capital (341) 114
---- ---
Total stockholders' equity 8,004 3,654
----- -----
Total liabilities and
stockholders' equity Ps32,294 Ps17,610
====== ======
The accompanying seven notes are an integral part of these financial statements.
FYTEK, S.A. DE C.V.
STATEMENT OF INCOME
FOR THE YEAR 1998 WITH COMPARATIVE FIGURES FOR 1997
Thousands of Mexican Pesos of December 31, 1998
Purchasing Power
1998 1997
---- ----
Net sales Ps70,467 Ps10,120
Cost of sales (59,658) (8,857)
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Gross margin 10,809 1,263
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Operating expenses:
Selling (1,805) (98)
Administrative (2,335) (541)
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(4,140) (639)
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Operating income 6,669 624
------ ------
Comprehensive financing income (expense):
Financial income, net 1,343 247
Exchange gain, net 1,007 18
Gain (loss) on monetary position 60 (145)
------ ------
2,410 120
------ ------
9,079 744
Other income, net 45
------ ------
Income before the following provision 9,124 744
Provision for income tax (Note 5) (4,319) (258)
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Net income for the year Ps 4,805 Ps 486
======== ========
The accompanying seven notes are an integral part of these financial statements.
FYTEK, S.A. DE C.V.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR 1998 WITH COMPARATIVE FIGURES FOR 1997
Thousands of Mexican Pesos of December 31, 1998
Purchasing Power
Surplus
(Deficit) (deficit)on
Capital retained restatement
stock earnings of capital Total
----- -------- ---------- -----
Balances at
December 31, 1996 Ps 88 (Ps 32) Ps 56
Changes in 1997:
Increase in capital
stock 2,998 2,998
Net income for
the year 486 486
Gain from holding non-
monetary assets Ps 114 114
----- ----- ----- -----
3,086 454 114 3,654
Balances at December 31, 1997
Changes in 1998:
Net income for the year 4,805 4,805
Loss from holding non-
monetary assets (455) (455)
----- ----- ----- -----
Balances at
December 31, 1998 Ps3,086 Ps5,259 (Ps 341) Ps8,004
(Note 4) ======= ======= ======= =======
The accompanying seven notes are an integral part of these financial statements.
FYTEK, S.A. DE C.V.
STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE YEAR 1998 WITH COMPARATIVE FIGURES FOR 1997
Thousands of Mexican Pesos of December 31, 1998
Purchasing Power
1998 1997
---- ----
Operations
- ----------
Net income for the year Ps4,805 Ps 486
Changes in working capital
other than financing:
Trade accounts receivable (7,204) (9,496)
Inventories (7,011) (3,453)
Suppliers 11,946 331
Affiliated companies (2,153) 13,312
Other, net (1,331) 20
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Resources (used in)
provided by operations (948) 1,200
Financing:
- ----------
Increase in capital stock 2,998
Investment
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Construction in process (543) 0
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(Decrease) increase in cash and
temporary investments (1,491) 4,198
Cash and temporary investments
at beginning of year 4,249 51
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Cash and temporary investments at
end of year Ps2,758 Ps4,249
===== =====
The accompanying seven notes are an integral part of these financial statements.
FYTEK, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 COMPARATIVE WITH 1997
Thousands of Mexican Pesos of December 31, 1998
Purchasing Power
(except where otherwise indicated)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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The Company, a subsidiary of Novacorp, S.A. de C.V. is engaged in the
manufacture of chemical fibers; to carry out it activities, the Company leases
machinery and equipment to an affiliated company.
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in Mexico, including the standard
requiring comprehensive recognition of the effects of inflation on the financial
information. Consequently, all financial statements, including those of prior
periods presented for comparative purposes, are stated in constant pesos of
December 31, 1998 purchasing power.
The most important indexes (National Consumer Price Index - NCPI) used to
reflect the effects of general inflation on the financial statements were:
275.038, 231.886 and 200.388 at December 31, 1998, 1997, and 1996, respectively
(1994 = 100).
Following is a summary of the most significant accounting policies:
a. Transactions in foreign currency and exchange differences (Note 2)
- ---------------------------------------------------------------------
Monetary assets and liabilities in foreign currencies, mainly U.S. dollars
(US$), are stated in Mexican currency at the rates of exchange in effect at the
balance-sheet date. Exchange differences arising from changes in exchange rates
between the transaction and settlement dates or the balance-sheet date are
charged or credited to comprehensive financing income (expense).
b. Temporary investments
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These investments are stated at market value.
c. Inventories and cost of sales (Note 3)
- -----------------------------------------
Inventories are stated at estimated replacement cost, basically at the latest
purchase prices and production costs for the year. The amounts shown for
inventories do not exceed market value.
The cost of sales is determined based on the estimated replacement costs
prevailing on the dates when the sales were effected.
d. Comprehensive financing income (expense)
- -------------------------------------------
This item is determined by grouping together in the statement of income the
financial income and expense, exchange gains and losses, and the gain or loss on
monetary position.
The gain or loss on monetary position represents the effect of inflation, as
measured by the NCPI, on the Company's monthly net monetary assets or
liabilities during the year.
e. Income tax (Note 5)
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Income tax is recorded using interperiod allocation procedures under the partial
liability method. Under this method the effect on income tax of nonrecurring
timing differences between taxable income and financial pretax income which are
expected to reverse in an identifiable time period is recorded as deferred
income tax.
NOTE 2- FOREIGN CURRENCY POSITION
- ---------------------------------
At December 31, 1998 and 1997, the exchange rates were 9.88 and 8.05 nominal
pesos to the U.S. dollar, respectively. At January 25, 1999, date of issuance of
the audited financial statements, the exchange rate was 10.24 nominal pesos to
the dollar.
Amounts shown below in this note are expressed in thousands of U.S. dollars
(US$), since this is the currency in which most of the Company's foreign
currency transactions are carried out.
At December 31, the company had the following foreign currency assets and
liabilities:
1998 1997
---- ----
Monetary assets US$738 US$324
Monetary liabilities (78) 0
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Foreign currency monetary position US$660 US$324
====== ======
Nonmonetary assets US$ 45
======
During 1998 and 1997 the transactions for goods export in foreign currency were
US$2,443 and US$227, respectively.
NOTE 3 - INVENTORIES
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At December 31, this caption comprised the following:
1998 1997
---- ----
Finished goods Ps 7,435 Ps 1,927
Work in process 2,058 1,639
Materials and supplies 629
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Estimated replacement cost Ps10,122 Ps 3,566
======== ========
NOTE 4 - STOCKHOLDERS' EQUITY
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At December 31, 1998 the restated figures of stockholders' equity were as
follows:
Nominal Restated
amount Restatement amount
------ ----------- ------
Capital stock Ps2,445 Ps641 Ps3,086
Retained earnings 5,191 68 5,259
Deficit on restatement
of capital 0 (341) (341)
------ ------ ------
Ps7,636 Ps368 Ps8,004
======= ===== =======
The capital stock is variable with a fixed minimum of Ps50 and an unlimited
maximum. At December 31, 1998, the subscribed and paid-in capital stock of
Ps2,445, was represented by 24,450 Series A common, nominative, shares of one
hundred nominal pesos par value each.
Dividends paid from previously taxed earnings are not subject to any additional
tax (at December 31, 1998 these earnings amounted to approximately Ps8,234). For
dividends paid from retained earnings which have not previously been taxed, a
tax equivalent to 53.85% of the dividend will be payable by the Company. In the
event dividends are paid to individuals or to residents abroad arising or not
from previously taxed earnings they will also be subject to a maximum
withholding tax equivalent to 7.69%.
In the event of capital stock reductions, any excess of stockholders' equity
over capital contributions plus net taxable income and net reinvested taxable
income, calculated in accordance with the procedures established by the Mexican
Income Tax law, is accorded the same tax treatment as dividends.
The deficit on restatement of capital comprises principally the accumulated loss
from holding nonmonetary assets and represents the difference resulting from
restating these assets by the specific cost method and their restatement based
on inflation measured in terms of the NCPI.
NOTE 5 - INCOME TAX
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The net charge to income for taxes was as follows:
1998 1997
---- ----
Income tax (Ps4,319) (Ps287)
Extraordinary item - Income tax
reduction from realization of
tax loss carryforwards from
prior years 29
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(Ps4,319) (Ps258)
======= =====
Taxable income differs from accounting income due to: (a) permanent differences
mainly comprising items recorded to reflect the effects of inflation, and (b)
recurring timing differences affecting accounting and taxable income in
different periods, basically the deduction of inventory purchases for tax
purposes and certain provisions. In accordance with Mexican generally accepted
accounting principles no deferred tax effect is recognized for such timing
differences.
NOTE 6 - RELATED PARTIES
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The financial statements includes the following significant transactions with
ALFA companies and other related parties:
1998 1997
---- ----
Purchase of raw and other materials (Ps41,583) (Ps7,533)
Cost of administrative and
technical services (5,400) (1,103)
Rentals of property, machinery
and equipment (6,762) (815)
Balances with affiliated companies included in the balance sheet derive from
these transactions.
NOTE 7 - YEAR 2000
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As many computer systems use only two digits to represent the year, they may be
unable to accurately identify date data between the years 1900 and 2000.
Consequently, remedial action where necessary must be implemented to avoid any
disruption in the Company's business operations as a result of possible
miscalculations or systems failures.
In order for the systems to be Year 2000 compliant, among other factors, a
timely identification of critical issues, together with appropriate remedial
action to be taken by the Company's management and its main customers and
suppliers (external agents), is necessary.
The Company has developed various plans intended to mitigate the aforementioned
problem. Specialized personnel is working to adjust the main computer
applications affecting the Company's business operations, such as those related
to control of trade accounts receivable, production, distribution, treasury,
communications, etc. Additionally, management has been in contact with related
external agents, who may also be affected as a consequence of the Year 2000
problem, in order to discuss the current situation and determine the effects, if
any, which the relationship with these agents might have on the Company's
operations.
The accumulated cost of dealing with the Year 2000 issue, incurred by a related
party, has been charged to its income for the year.