Cemex 1999 Annual Report Download - page 65

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These options are exercisable quarterly over a period of 5 years, and they have an exercise price which increases
quarterly in dollars taking into account the funding cost in the market. For the sale of the options, the Company
received a premium equivalent to a percentage of the option price at the beginning of the program. As of
December 31, 1999, there are options not exercised for 4,527,369 ADS’s.
b) The Company has entered into foreign exchange forward contracts in order to protect itself from variations in
foreign exchange rates. These contracts have been designated as a hedge on the Company’s net investment in
foreign subsidiaries for up to US dollars 410 and 250 million as of December 31, 1999 and 1998, respectively.
The fair value effects arising from these instruments are recorded for as part of the translation effect of foreign
subsidiaries (see note 14E).
c) At December 31, 1999 the Company has outstanding call options for 1,229,260 of its ADS’s. The Company may
exercise these call options until October 15, 2000, at a weighted average strike price of US dollars 41.89 per ADS.
d) Regarding the public offer for warrants’ subscription made by the Company during December 1999, and the
related sale of CPO’s and shares of a subsidiary mentioned in note 2C, the Company, through a subsidiary,
carried out a hedge transaction by means of which forward contracts were entered into to repurchase the total
of CPO’s and shares over a period of three years, and prepaid toward the final price of the forward approximately
US dollars 439.9 million ($4,183.5 million). At maturity, the forward contracts provide the physical exchange of
the shares, and the effects are recognized as part of stockholders’ equity. In the financial statements as of
December 31, 1999, anticipated effect has been given to the liquidation of the forward for the portion
corresponding to the shares of the subsidiary, due to the prepayment of the forward and the withholding of all
economic and voting rights over such shares. Therefore, a net prepayment of approximately US dollars 51.7
million ($491.7 million), is reflected in Other Long-Term Accounts Receivable corresponding to the CPO’s
portion.
Additionally, during 1999, the Company terminated a derivative transaction from which gains or losses, depended on
the performance of its common shares in relation to the Price and Quotation Index in Mexico. The effects derived
from this transaction are included in the statements of income.
The estimated fair values of derivative financial instruments used to hedge the Company’s risks will fluctuate over
time, and are based on estimated settlement costs or quoted market prices. Fair values should not be viewed in
isolation, but rather in relation to the fair values of the underlying hedge transactions and the overall reduction in the
Company’s exposure to adverse fluctuations in foreign exchange rates and price of shares. The notional amounts of
derivatives summarized above do not necessarily represent amounts exchanged by the parties and, therefore, are not
a direct measure of the exposure of the Company though its use of derivatives. The amounts exchanged are calculated
on the basis of the notional amounts and the other items of the derivatives, which relate to interest rates, exchange
rates or other financial indexes.
16.- INCOME TAX (“IT”), BUSINESS ASSETS TAX (“BAT”), EMPLOYEES’ STATUTORY PROFIT SHARING
(“ESPS”) AND DEFERRED TAXES
In accordance with present tax legislation in Mexico, corporations must pay either Income Tax (“IT”) or Business
Assets Tax (“BAT”) depending on which amount is greater for their operations in Mexico. Both taxes recognize the
effects of inflation, in a manner different from generally accepted accounting principles. Employees’ Statutory Profit
Sharing (“ESPS”) is calculated on similar basis as Income Tax, but without recognizing the effects of inflation.
A) IT, BAT AND ESPS
The Company and its subsidiaries in Mexico consolidate for IT and BAT purposes. Beginning in 1999, the
determination of the consolidated IT for the Mexican companies will consider 100% of the taxable income or tax loss
of the holding company, and a maximum of 60% of the taxable income or tax loss of each of the subsidiaries. For the
period of 1999 and after, the taxable income of the subsidiaries that have tax loss carryforwards generated before 1999,
will be taken according to its equity participation at the end of the period. Therefore, the amounts of these items
included in the accompanying financial statements, in respect to the Mexican subsidiaries, represent the consolidated
result of these taxes. For ESPS purposes, the amount presented is the sum of the individual results of each company.
Income Tax benefit (expense) is summarized as follows:
1999 1998
CONSOLIDATED PARENT CONSOLIDATED PARENT
Current Income Tax $ (3,951,129) (3,605,974) (1,476,492) (1,131,179)
Received from subsidiaries — 364,805 — 1,929,457
Deferred taxes (5,166) — — —
Utilization of tax loss carryforwards 3,305,974 3,305,974 962,699 962,699
Effects of inflation (note 3B) — — 55,853 —
$ (650,321) 64,805 (457,940) 1,760,977