Corporacion Durango, S.A. de C.V.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 1-13148
Corporación Durango, S.A. de C.V.
(Exact name of Registrant as specified in its charter)
Durango Corporation
(Translation of Registrants name into English)
United Mexican States
(Jurisdiction of incorporation or organization)
Torre Corporativa Durango
Potasio 150
Ciudad Industrial
Durango, Durango, Mexico 34208
+52 (618) 829-1000
(Address and telephone number of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act: None
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report:
91,835,193 Series A Shares, without par value and 18,805,918 Series B Shares, without par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes o No þ
If this report is an annual or transition report, indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o Item 18 þ
If this is an annual report, indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes þ No o
INTRODUCTION
In this annual report, our company, we, us and our refer to Corporación Durango, S.A.
de C.V. and its consolidated subsidiaries, as the context may require. We are a corporation
organized under the laws of the United Mexican States, or Mexico.
Presentation of Financial Information
Currency and Exchange Rates
All references herein to peso, pesos, and Ps are to Mexican pesos, the official currency
of Mexico. All references to dollars, and US$ are to United States dollars.
On June 27, 2006, the exchange rate for pesos into dollars was Ps 11.4180 to US$1.00, based on
the official exchange rate published by the Mexican Central Bank (Banco de Mexico). The peso/dollar
exchange rate was Ps 10.6344 to US$1.00 as of December 31, 2005, Ps 11.1495 to US$1.00 as of
December 31, 2004 and Ps 11.2372 to US$1.00 as of December 31, 2003. The peso/dollar exchange rate
fluctuates, and the peso/dollar exchange rate at June 27, 2006 may not be indicative of future
exchange rates. See Item 3: Key InformationExchange Rate Information for information regarding
the noon buying rate for the purchase of dollars, expressed in nominal pesos per dollar, since
January 1, 2001, as reported by the Federal Reserve Bank of New York.
Financial Statements
We report our financial statements in pesos and prepare our financial statements in accordance
with generally accepted accounting principles in Mexico, or Mexican GAAP, which differ in
significant respects from generally accepted accounting principles in the United States, or U.S.
GAAP. Note 23 to our audited consolidated financial statements provides a description of the
principal differences between Mexican GAAP and U.S. GAAP applicable to our company and a
reconciliation to U.S. GAAP of our consolidated net income (loss) and total stockholders equity as
of December 31, 2005 and 2004 and for each of the three years in the period ended December 31,
2005. We have a fiscal year end of December 31.
Pursuant to Bulletin B-10, Recognition of the Effects of Inflation in Financial Information,
and Bulletin B-12, Statement of Changes in Financial Position, issued by the Mexican Institute of
Public Accountants (Instituto Mexicano de Contadores Públicos, A.C.), or MIPA, our audited
consolidated financial statements are reported in period-end pesos to adjust for the effects of
inflation. The presentation of financial information in period-end, or constant, currency units is
intended to eliminate the distorting effect of inflation on the financial statements and to permit
comparisons across comparable periods in comparable monetary units. Consequently, under Mexican
GAAP, non-monetary assets, with the exception of inventories and fixed assets of non-Mexican origin
and those of our non-Mexican subsidiaries, are restated using the National Consumer Price Index
(Indice Nacional de Precios al Consumidor), or the NCPI. Inventories are restated at current
replacement costs while fixed assets of non-Mexican origin are restated by the inflation of the
country of origin prior to translation to pesos at the period-end exchange rate.
We use Bulletin B-15, Foreign Currency Transactions and Translation of Financial Statements
of Foreign Operations, which prescribes the methodology for the translation and recognition of
inflation of the financial information of non-Mexican subsidiaries. Therefore, the peso amounts of
our revenues and expenses of our U.S. based subsidiaries may be impacted by the foreign exchange
rate fluctuations and inflation rates in the United States.
Except as otherwise indicated, financial data for all periods throughout this annual report
have been restated in constant pesos as of December 31, 2005.
Rounding
We have made rounding adjustments to reach some of the figures included in this annual report.
As a result, numerical figures shown as totals in some tables may not be an arithmetic aggregation
of the figures that preceded them.
1
Market Data
The Mexican government does not publish definitive data regarding the pulp and paper industry
on a regular basis. Accordingly, information contained in this annual report regarding national
production, imports, exports, apparent demand, market share and market position has been computed
by us and is based on our estimates which are derived from statistics accumulated by us and our
analysis of certain data obtained from the Mexican National Chamber for the Pulp and Paper Industry
(Cámara Nacional de la Industria de la Celulosa y el Papel), and certain assumptions made by us
based on our knowledge of the market and experience in the Mexican paper industry. Although we
believe that the data taken from third parties and used in this annual report is reliable, we have
not independently verified such data and take no responsibility for the accuracy of such data.
Similarly, while we believe our internal research and estimates to be reliable, they have not been
verified by any independent source and we cannot assure you as to their accuracy.
Special Note Regarding Forward-Looking Statements
This annual report contains forward-looking statements that involve substantial risks and
uncertainties, including, in particular statements about our plans, strategies and prospects under
the captions Item 5. Operating and Financial Review and Prospects and Item 4. Information on Our
Company. You can identify these statements by forward-looking words such as anticipate,
believe, could, estimate, expect, intend, may, should, will, and would or similar
words. You should read statements that contain these words carefully because they discuss our
future expectations, contain projections of our future results of operations or of our financial
position or state other forward-looking information. We believe that it is important to
communicate our future expectations to our investors. However, there may be events in the future
that we are not able to accurately predict or control. The factors listed below under the caption
Item 3. Key InformationRisk Factors, as well as any cautionary language in this annual report,
provide examples of risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
You should be aware that the occurrence of the events described in these risk factors and
elsewhere could have a material adverse effect on our business, financial condition and results of
operations. The forward-looking statements are subject to risks, uncertainties, and assumptions
about us, including, among other things:
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our substantial debt and significant debt service obligations; |
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the cyclicality of the paper and packaging industries; |
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the competitive nature of the industries in which we are operating; |
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our ability to keep key personnel required to operate our business; |
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developments in, or changes to, the laws, regulations and governmental
policies governing our business, including environmental liabilities; |
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changes in the dollar-peso exchange rate, interest rates and other domestic
and international market and industry conditions; |
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limitations on our access to sources of financing on competitive terms; |
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our need for substantial capital; and |
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interest rate levels. |
We do not intend to update or otherwise revise the forward-looking statements herein to
reflect circumstances existing after the date when made or to reflect the occurrence of future
events even in the event that any or all of the
2
assumptions underlying the forward-looking statements are shown to be in error, except as may
be required under applicable securities laws.
PART I
Item 1. Identity of Directors, Senior Management and Advisors.
Not applicable.
Item 2. Offer Statistics and Expected Timetable.
Not applicable.
Item 3. Key Information.
Selected Consolidated Financial Data
The following table set forth selected consolidated financial information for our company and
its consolidated subsidiaries at the dates and for each of the periods presented. The data does not
represent all of our financial information. You should read this information together with, and
this information is qualified in its entirety by reference to, our audited consolidated financial
statements at December 31, 2004 and 2005 and for the years ended December 31, 2003, 2004 and 2005,
including the notes thereto. The financial information at December 31, 2001, 2002 and 2003 and for
the years ended December 31, 2001 and 2002, has been derived from audited consolidated financial
statements as restated that are not included in this annual report.
The audited consolidated financial statements have been prepared in accordance with Mexican
GAAP, which differs in certain significant respects from U.S. GAAP. Note 23 to our audited
consolidated financial statements provides a description of the principal differences between
Mexican GAAP and U.S. GAAP applicable to our company and a reconciliation to U.S. GAAP of our
consolidated net income (loss) and total stockholders equity as of December 31, 2005 and 2004 and
for each of the three years in the period ended December 31, 2005.
Mexican GAAP requires that all financial information be presented in constant pesos (having
the same purchasing power for each period indicated taking into account inflation) as of the date
of the most recent balance sheet. Accordingly, all of the financial information included in this
annual report is presented in constant pesos as of December 31, 2005, unless otherwise noted.
Although the restatement of nominal peso amounts into constant peso amounts lessens the distorting
effect that inflation has on comparisons of financial statements over time, this restatement does
not wholly eliminate those distortions, and evaluation of period-to-period trends may be difficult.
References in this annual report to amounts in nominal pesos are to pesos that have not been
adjusted for inflation.
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At and for the year ended December 31, |
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2005 |
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2004 |
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2003 |
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2002 |
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2001 |
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(in millions of constant pesos, except per share data) |
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Statement of Income Data: |
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Mexican GAAP: |
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Net sales |
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Ps |
8,143.3 |
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Ps |
8,039.3 |
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Ps |
7,327.3 |
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Ps |
8,632.7 |
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Ps |
11,395.6 |
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Cost of sales |
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7,096.3 |
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6,889.5 |
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6,300.0 |
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7,402.1 |
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9,482.1 |
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Gross profit |
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1,047.0 |
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1,149.8 |
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1,027.3 |
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1,230.6 |
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1,913.5 |
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Selling, general and
administrative expenses |
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677.7 |
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694.1 |
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698.2 |
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675.1 |
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802.0 |
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Operating income |
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369.3 |
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455.7 |
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329.1 |
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555.5 |
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1,111.4 |
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Other income (expense) net |
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5.2 |
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(417.9 |
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(1,638.8 |
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(3,322.8 |
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478.0 |
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Net comprehensive financing
cost (result): |
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Interest expense |
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(592.4 |
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(1,158.3 |
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(1,288.1 |
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(1,219.1 |
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(1,202.0 |
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Interest income |
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42.6 |
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41.5 |
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44.7 |
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42.4 |
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75.2 |
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Exchange gain (loss) net |
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334.6 |
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62.6 |
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(892.8 |
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(1,085.0 |
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356.5 |
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Gain on monetary position |
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198.7 |
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469.4 |
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399.5 |
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440.4 |
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335.2 |
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3
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At and for the year ended December 31, |
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2005 |
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2004 |
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2003 |
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2002 |
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2001 |
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(in millions of constant pesos, except per share data) |
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Total net comprehensive
financing cost (result) |
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(16.5 |
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(584.8 |
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(1,736.7 |
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(1,821.3 |
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(435.0 |
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Income (loss) from continuing
operations before income
taxes, employee statutory
profit sharing, and equity in
income of associated
companies |
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357.9 |
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(547.1 |
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(3,046.3 |
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(4,588.6 |
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1,154.4 |
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Income tax benefit (expense) |
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(304.0 |
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502.7 |
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2.3 |
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721.5 |
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(44.5 |
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Employee statutory
profit-sharing expense |
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(0.7 |
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(1.9 |
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(1.2 |
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(5.3 |
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Income (loss) from continuing
operations before equity in
income of associated
companies |
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53.2 |
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(44.4 |
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(3,045.9 |
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(3,868.3 |
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1,104.5 |
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Equity in income of
associated companies |
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1.9 |
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2.7 |
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2.1 |
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2.2 |
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Income (loss) from continuing
operations |
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55.1 |
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(41.7 |
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(3,043.8 |
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(3,866.1 |
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1,104.5 |
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Income (loss) from
discontinued operations
net |
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108.8 |
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105.5 |
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(597.0 |
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(111.8 |
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166.2 |
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Extraordinary loss |
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(334.7 |
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Consolidated net income (loss) |
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163.9 |
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Ps |
63.9 |
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Ps |
(3,640.8 |
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Ps |
(3,977.9 |
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Ps |
936.1 |
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Basic and diluted earnings
per share (1) |
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Ps |
1.65 |
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Ps |
0.70 |
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Ps |
(39.10 |
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Ps |
(42.32 |
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Ps |
9.90 |
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Basic and diluted earnings
per share from continuing
operations (1) |
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Ps |
0.63 |
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Ps |
(0.48 |
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Ps |
(32.7 |
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Ps |
(41.16 |
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Ps |
11.69 |
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Weighted-average number of
shares outstanding |
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108,528,665 |
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91,834,192 |
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92,942,916 |
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94,072,122 |
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94,072,122 |
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U.S. GAAP: (2) (3)
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Net sales |
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Ps |
8,143.3 |
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Ps |
8,113.9 |
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Ps |
7,424.6 |
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Ps |
7,077.3 |
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Ps |
8,261.6 |
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Operating income (loss) |
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458.3 |
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473.0 |
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(114.8 |
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(119.1 |
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1,213.2 |
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Income (loss) before
provisions for income and
asset taxes, minority
interest, special items and
discontinued operations |
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566.9 |
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314.3 |
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(2,327.9 |
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(1,728.5 |
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379.4 |
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Net income (loss) |
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1,344.9 |
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756.9 |
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(2,760.1 |
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(2,101.6 |
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372.5 |
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Basic and diluted earnings
per share (4) |
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12.39 |
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8.24 |
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(29.70 |
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(22.34 |
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3.96 |
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Basic and diluted earnings
per share from continuing
operations (4) |
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11.38 |
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6.97 |
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(28.60 |
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(16.45 |
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3.09 |
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Balance Sheet Data: |
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Mexican GAAP: |
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Cash and cash equivalents |
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Ps |
700.4 |
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Ps |
859.9 |
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Ps |
697.9 |
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Ps |
250.8 |
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Ps |
572.5 |
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Total current assets |
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3,657.0 |
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3,946.6 |
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3,951.9 |
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3,989.4 |
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4,790.0 |
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Property, plant and
equipment, net |
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10,913.1 |
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11,433.2 |
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12,260.1 |
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13,002.4 |
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16,802.3 |
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Total assets |
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14,830.4 |
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15,988.2 |
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17,244.1 |
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19,536.8 |
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23,938.9 |
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4
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At and for the year ended December 31, |
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2005 |
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2004 |
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2003 |
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2002 |
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2001 |
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(in millions of constant pesos, except per share data) |
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Short-term debt, including
current portion of long-term
debt |
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257.6 |
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182.0 |
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9,405.3 |
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8,539.4 |
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688.1 |
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Long-term debt |
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6,505.1 |
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7,178.2 |
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422.1 |
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1,110.2 |
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8,076.3 |
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Common stock |
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5,445.3 |
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5,154.6 |
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5,154.5 |
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5,280.3 |
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5,280.3 |
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Total majority stockholders
equity |
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4,654.6 |
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1,583.9 |
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1,612.7 |
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4,916.6 |
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8,798.8 |
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Total minority stockholders
equity |
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58.3 |
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80.1 |
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|
73.7 |
|
|
|
77.3 |
|
|
|
47.3 |
|
Total stockholders equity
(net assets) |
|
|
4,712.9 |
|
|
|
1,663.9 |
|
|
|
1,686.4 |
|
|
|
4,993.9 |
|
|
|
8,846.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
Ps |
14,979.6 |
|
|
Ps |
15,691.0 |
|
|
Ps |
16,011.3 |
|
|
Ps |
19,093.9 |
|
|
Ps |
20,527.8 |
|
Total stockholders equity
(net assets) |
|
|
1,681.8 |
|
|
|
482.4 |
|
|
|
(254.7 |
) |
|
|
2,584.9 |
|
|
|
5,592.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican GAAP: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resources generated by (used
in) operating activities |
|
Ps |
143.1 |
|
|
Ps |
849.0 |
|
|
Ps |
(482.6 |
) |
|
Ps |
(174.0 |
) |
|
Ps |
1,126.9 |
|
Resources generated by (used
in) financing activities |
|
|
(551.1 |
) |
|
|
(625.7 |
) |
|
|
(60.7 |
) |
|
|
922.4 |
|
|
|
(597.8 |
) |
Resources generated by (used
in) investing activities |
|
|
248.5 |
|
|
|
(61.4 |
) |
|
|
990.4 |
|
|
|
(1,070.1 |
) |
|
|
(866.3 |
) |
Capital expenditures |
|
|
(134.8 |
) |
|
|
(214.2 |
) |
|
|
(114.7 |
) |
|
|
(493.1 |
) |
|
|
(920.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow provided by (used
in) operating activities |
|
Ps |
(53.7 |
) |
|
Ps |
796.4 |
|
|
Ps |
(343.5 |
) |
|
Ps |
423.2 |
|
|
Ps |
1,352.6 |
|
Cash flow provided by (used
in) financing activities |
|
|
(38.0 |
) |
|
|
(482.2 |
) |
|
|
(441.3 |
) |
|
|
1,491.7 |
|
|
|
(1,116.5 |
) |
Cash flow provided by (used
in) investing activities |
|
|
555.6 |
|
|
|
(56.3 |
) |
|
|
989.2 |
|
|
|
(1,574.2 |
) |
|
|
(571.6 |
) |
|
|
|
(1) |
|
See note 3u to our audited consolidated financial statements. |
|
(2) |
|
Amounts of sales and long-term debt under Mexican GAAP do not differ materially from these
amounts under U.S. GAAP. See note 23 to our audited consolidated financial statements. |
|
(3) |
|
The difference between net income (loss) under Mexican GAAP and U.S. Mexican GAAP primarily
reflects differing accounting treatment for minority interest, negative goodwill, deferred
income tax, employees statutory profit sharing and the effects of inflation on fixed assets.
See note 23 to our audited consolidated financial statements. |
|
(4) |
|
See note 23 to our audited consolidated financial statements. |
Dividends
Please see Item 8. Financial Information Dividend Policy.
Exchange Rate Information
The following table sets forth, for the periods indicated, the high, low, average and
period-end noon buying rate for the purchase of dollars, expressed in nominal pesos per dollar, as
reported by the Federal Reserve Bank of New York.
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noon Buying Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
Year ended December 31, |
|
High |
|
Low |
|
Average(1) |
|
End |
2001 |
|
Ps |
9.97 |
|
|
Ps |
9.03 |
|
|
Ps |
9.34 |
|
|
Ps |
9.16 |
|
2002 |
|
|
10.42 |
|
|
|
9.00 |
|
|
|
9.67 |
|
|
|
10.43 |
|
2003 |
|
|
11.41 |
|
|
|
10.11 |
|
|
|
10.79 |
|
|
|
11.24 |
|
2004 |
|
|
11.64 |
|
|
|
10.81 |
|
|
|
11.31 |
|
|
|
11.15 |
|
2005 |
|
|
11.41 |
|
|
|
10.41 |
|
|
|
10.89 |
|
|
|
10.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noon Buying Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
Month Ended |
|
High |
|
Low |
|
Average(2) |
|
End |
December 31, 2005 |
|
Ps |
10.77 |
|
|
Ps |
10.41 |
|
|
Ps |
10.63 |
|
|
Ps |
10.63 |
|
January 31, 2006 |
|
|
10.64 |
|
|
|
10.44 |
|
|
|
10.54 |
|
|
|
10.44 |
|
February 28, 2006 |
|
|
10.53 |
|
|
|
10.43 |
|
|
|
10.48 |
|
|
|
10.45 |
|
March 31, 2006 |
|
|
10.95 |
|
|
|
10.46 |
|
|
|
10.75 |
|
|
|
10.45 |
|
April 30, 2006 |
|
|
11.16 |
|
|
|
10.86 |
|
|
|
11.05 |
|
|
|
11.09 |
|
May 31, 2006 |
|
|
11.30 |
|
|
|
10.84 |
|
|
|
11.09 |
|
|
|
11.29 |
|
June (through June 27) |
|
|
11.46 |
|
|
|
11.28 |
|
|
|
11.40 |
|
|
|
11.42 |
|
|
|
|
(1) |
|
Average of monthend rates. |
|
(2) |
|
Average of daily rates. |
Source: Federal Reserve Bank of New York.
On June 27, 2006, the noon buying rate was Ps 11.42 per US$1.00.
Risk Factors
We are subject to various risks resulting from changing economic, political, industry and
business and financial conditions that may affect our results of operations or financial condition,
including, but not limited to, the risks described below.
Risks Related the Paper and Packaging Industry and Our Business
We have substantial debt and may be unable to generate sufficient cash to service our debt.
At December 31, 2005, we had Ps 6,762.7 million (US$635.9 million) of total debt,
substantially all of which was denominated in dollars.
Our ability to make scheduled interest payments or to refinance our obligations with respect
to our indebtedness will depend on the financial and operating performance of our subsidiaries.
This performance, in turn, is subject to prevailing economic conditions in Mexico and the United
States and to financial, business and other factors beyond our control, including but not limited
to, fluctuations in international prices of our products as well as conditions in the paper and
packaging industry conditions. If our cash flow and capital resources are insufficient to fund our
debt service obligations, we may be forced to delay capital expenditures, or sell material assets
or operations, obtain additional capital or restructure our debt. Our operating performance, cash
flow, and capital resources may not always be sufficient to service our debt in the future. In the
event that we are required to dispose of material assets or operations or restructure our debt to
meet our debt service and other obligations, we cannot assure you as to the terms of any
transaction or how soon any transaction could be completed.
Our operations are and will continue to be restricted by covenants in our debt agreements.
We have entered into a common agreement, which we refer to as the Common Agreement, for the
benefit of the holders of our Series B Step Up Rate Senior Secured Guaranteed Notes Due 2012, or
2012 notes, and the creditors under the Restructured Credit Agreement, dated as of February 23,
2005, among Corporación Durango, S.A. de C.V., the Guarantors named therein, the Tranche A Holders
named therein, and The Bank of New York, as
Administrative Agent, or the Restructured Credit Agreement. The Common Agreement, as well as
some of our other
6
debt agreements, have negative covenants and other restrictions that will limit
our ability and the ability of our subsidiaries to:
|
|
|
incur additional debt; |
|
|
|
|
pay dividends, acquire shares of stock of our company or certain of our
subsidiaries, make payments on subordinated debt or make investments; |
|
|
|
|
make distributions from our subsidiaries; |
|
|
|
|
issue or sell capital stock of our company or certain of our subsidiaries; |
|
|
|
|
issue guarantees; |
|
|
|
|
sell or exchange assets; |
|
|
|
|
enter into sale and lease-back transactions; |
|
|
|
|
enter into transactions with stockholders and affiliates of our company; |
|
|
|
|
create liens on assets of our company or certain of our subsidiaries; and |
|
|
|
|
effect mergers. |
These negative covenants may have important consequences for our operations, including:
|
|
|
our ability to adjust to rapidly changing market conditions, thus making
us more vulnerable in the event the downturn in general economic conditions or our
business continues; and |
|
|
|
|
our ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes. |
We are vulnerable to cyclicality and fluctuations in pricing.
Our business is affected by trends in international prices and demand for paper and packaging
products. Prices for containerboard and, to a lesser extent, converted products such as corrugated
containers and multi-wall sacks have historically been subject to cyclical fluctuations. Pricing is
affected not only by demand for paper and packaging products, which correlates with real economic
growth, but also by current inventory levels of customers. In addition, the paper and packaging
industries are highly capital intensive and the impact of new production facilities may result in
imbalances between supply and demand. Any decrease in demand or increase in supply could adversely
affect the prices of our products and our net sales revenue.
We are vulnerable to competition in Mexico and the United States from producers of paper and
packaging products with substantial resources.
We face increasing competition in Mexico from international producers of paper and packaging
due in part to significantly enhanced market access for imported products. Actions by our
competitors, including any future increases in their capacity, may make it increasingly difficult
for us to maintain our domestic market share in paper and packaging products. Increased competition
from imports may have a material adverse effect on our company by driving down our prices and
decreasing our revenues. Many of our competitors in Mexico are large international paper producers
with substantial resources at their disposal.
We face substantial competition in the United States from a variety of producers of paper and
packaging products. Many of our competitors in the United States are substantially larger and have
substantially greater financial, manufacturing, technological and marketing resources than our
company.
7
We anticipate that we may experience increasingly intense competition from international
producers of paper and packaging products, both in Mexico and in the United States. There are no
assurances that we will be able to avoid lower pricing as a result of competitive pressure. Lower
pricing, changes made in response to competition and changes in consumer preferences may have an
adverse effect on our financial performance.
Our operations may be adversely affected by increases in the price of raw materials.
The cost of our supply of recycled fiber is directly affected by trends in international and
domestic prices of old corrugated containers, or OCC, and old newsprint, or ONP, which stem from
market fluctuations caused by factors beyond our control. Generally, demand and prices for finished
paper vary directly with demand and prices for these raw materials. In addition, the cost of OCC in
Mexico is affected both by inflation and exchange rates.
We might not be able to recoup any future increases in the costs of raw materials through
increases in sales prices for our products, which would adversely affect our operating income. We
cannot assure that raw material prices will not further increase in the future. Increases in the
prices of raw materials would increase our cost of sales and adversely affect our business results.
Our operations may be adversely affected by increases in the price of raw materials.
Fluctuations in energy costs may adversely affect our costs of operations and our revenues.
The price and supply of energy is unpredictable and fluctuates based on events beyond our
control, including, among others, geopolitical developments, supply and demand for oil and gas,
actions by OPEC and other oil and gas producers, war and unrest in oil producing countries and
regional production patterns. Because our plants and facilities use significant amounts of
electricity, natural gas and other forms of energy, increases in the cost of energy will increase
our operating expenses and may have a material adverse effect upon our business, financial
condition and results of operations.
Lack of water availability may adversely affect us.
Water is an essential raw material in the paper production process. Some of our plants satisfy
their water requirements through water wells licensed by the Mexican National Water Commission
(Comisión Nacional del Agua). The Mexican government has the power to limit our water consumption
and the volume of water that we may use according to our licenses, and it also has the power to
revoke such licenses, in the event of our breach of the licenses terms.
Although we believe that we are in compliance with our obligations under the licenses, we
cannot assure you that the licenses will not be revoked. We also cannot be certain that the terms
of any renewal of these licenses will be favorable, or that the volume of water that is currently
available for use in manufacturing our products will be sufficient to satisfy our production
requirements in the future. If our licenses are revoked, or the water that we may consume under our
licenses is not sufficient to satisfy our production requirements, it may have an adverse effect on
our cash flow, financial condition and operations.
We may be adversely affected by the imposition and enforcement of more stringent environmental and
safety requirements.
We are subject to strict environmental regulations in Mexico and in the United States. Changes
in environmental regulations, or changes in the policy of enforcement of existing environmental
regulations, could adversely affect us. Our Mexican operations are supervised by the Mexican
Ministry of the Environment and Natural Resources (Secretaría del Medio Ambiente y Recursos
Naturales) and our U.S. operations are supervised by the U.S. Environmental Protection Agency and
other federal, state and local regulatory agencies. These agencies are responsible for the
implementation of pollution control laws and regulations and could take action against us by
shutting down plants, revoking licenses, imposing fines or obligating us to clean up waste that we
produced, if we fail to comply with environmental regulations. It is also possible that the
relevant governmental agencies could issue additional regulations, could seek a more stringent
interpretation of existing regulations or could exercise stricter enforcement actions that would
require us to spend additional funds on environmental matters. In addition, the
8
enactment of new environmental laws or regulations in Mexico or the United States may cause us
to spend additional funds, which may be material, in order to comply with the new laws or
regulations.
If we lose key members of our management team and are unable to attract other qualified personnel,
our business could be adversely affected.
Our success largely depends on the continuing contributions of our management team. Our
managers have been with our company for an average of 19 years. In particular, our chief executive
officer, chief operations officer, and chief financial officer have been with our company since our
founding. The loss of key personnel or our potential inability to attract and retain other
qualified managers could adversely affect us.
Our principal stockholders own 78.9% of our shares and may take actions not in the interest of
other holders of our shares
We are controlled by the Rincón family, which indirectly owns 78.9% of our outstanding voting
stock. See Item 7. Major Stockholders and Related Party Transactions. As a result, the Rincón
family has the power to elect the majority of our directors and determine the outcome of any action
requiring stockholder approval, including transactions with related parties, corporate
reorganizations and the timing and payment of any future dividends. The interests of the Rincón
family as stockholders may differ from the interests of other holders of our shares.
Risks Relating to Mexico
Political developments in Mexico may adversely affect our business.
Political events in Mexico may significantly affect our business. In the Mexican federal
elections held on July 2, 2000, Vicente Fox of the Partido Acción Nacional (the National Action
Party) or PAN, won the presidency. Although his victory ended more than 70 years of presidential
rule by the Partido Revolucionario Institucional (the Institutional Revolutionary Party), or PRI,
neither the PRI nor the PAN succeeded in securing a majority in the Mexican congress. In elections
in 2003 and 2004, the PAN lost additional seats in the Mexican congress and state governorships.
The resulting legislative gridlock, which is expected to continue at least until the Mexican
presidential elections in July 2006, has impeded the progress of structural reforms in Mexico,
which may adversely affect economic conditions in Mexico, and consequently, our business results.
The Mexican presidential election will result in a change in administration, as presidential
reelection is not permitted in Mexico. The presidential race is highly contested among a number of
different parties, including the PRI, the PAN and the Partido de la Revolución Democrática (the
Party of the Democratic Revolution) or PRD, each with its own political platform. As a result, we
cannot predict which party will prevail in the elections or whether changes in Mexican governmental
policy will result from a change in administration. Such changes may adversely affect economic
conditions or the industry in which we operate in Mexico and therefore our results of operations
and financial position.
Adverse economic developments in Mexico may adversely affect our financial condition and results of
operations.
We are a Mexican company with a substantial part of our operations and assets in Mexico. For
the year ended December 31, 2005, 79.5% of our total revenues were attributable to Mexico. In the
past, Mexico has experienced both prolonged periods of weak economic conditions and dramatic
deteriorations in economic conditions that have had a negative impact on our company. We cannot
assume that such conditions will not return or that such conditions will not have a material
adverse effect on our financial condition and results of operations.
Our business may be significantly affected by the general condition of the Mexican economy, or
by the rate of inflation in Mexico, interest rates in Mexico and exchange rates for the Mexican
peso. Decreases in the growth rate of the Mexican economy, periods of negative growth and/or
increases in inflation or interest rates may result in lower demand for our products, lower real
pricing of our products or a shift to lower margin products. Because a
9
large percentage of our costs and expenses are fixed, we may not be able to reduce costs and
expenses upon the occurrence of any of these events, and our profit margins may suffer as a result.
Downturns in the Mexican economy adversely affect us.
The majority of our customers are Mexican companies or individuals and a substantial part of
our operations and our assets are located in Mexico. For these reasons, our operations, results and
financial condition are dependent upon the level of economic activity in Mexico. Paper and
packaging prices in Mexico and our revenues are highly affected by the level of economic activity
in Mexico and the general purchasing power of individuals and companies. Mexican gross domestic
product, or GDP, grew by 1.4% in 2003, 4.2% in 2004 and 3.0% in 2005. If the Mexican economy
experiences a slow rate of growth, our business, financial condition and results of operations may
be adversely affected because our customers may reduce their consumption of our products.
Depreciation of the Mexican peso relative to the dollar may impair our ability to service our debt
and adversely affect our profitability.
The peso has depreciated substantially against the dollar in the past and may depreciate
significantly in the future. The value of the peso, based on the exchange rate calculated and
published by Banco de México (the Mexican Central Bank), declined by 7.6% against the dollar in
2003, and appreciated by 0.8% against the dollar in 2004 and by 4.6% against the dollar in 2005.
Depreciation of the peso relative to the dollar adversely affects our results of operations by
increasing our dollar-based costs, including our cost of borrowing, since the peso cost of interest
payments on our dollar-denominated indebtedness increases. For example, the 7.6% depreciation of
the peso against the dollar that occurred in 2003 generated an exchange loss of Ps 892.8 million
which was one of the factors leading to our net loss of Ps 3,640.8 million in 2003. Substantially
all of our indebtedness is denominated in dollars, while a majority of our revenues and operating
expenses are denominated in pesos. We do not have in place hedging arrangements with respect to
depreciation risk because we do not believe them to be cost effective for our company.
A severe devaluation or depreciation of the peso may also result in disruption of the
international foreign exchange markets and may limit our ability to transfer or to convert pesos
into dollars for the purpose of making timely payments of interest and principal on our
dollar-denominated indebtedness. While the Mexican government does not currently restrict, and
since 1982 has not restricted, the right or ability of Mexican or foreign persons or entities to
convert pesos into dollars or to transfer other currencies out of Mexico, the Mexican government
could institute restrictive exchange rate policies in the future, as it has done in the past.
Currency fluctuations may have an adverse effect on our financial condition, results of operations
and cash flows in future periods.
An increase in inflation may increase our operating costs but not our revenues.
Our profitability may be adversely affected by increases in inflation. Inflation in Mexico, as
measured by changes in the NCPI, as provided by the Mexican Central Bank, was 4.0% in 2003, 5.2% in
2004 and 3.3% in 2005. However, Mexico has experienced high levels of inflation in the past. High
levels of inflation would cause our operating costs to increase because approximately 82.5% of our
cost of goods sold and selling, general and administrative expenses are payable in pesos and
generally are based on short-term contracts, which may be subject to inflationary pressures.
However, the prices that we charge for our products are generally denominated in dollars or are
dollar-linked and may not increase at the same rate as our costs because the prices that we charge
our customers for products are either fixed by long-term contract or effectively limited by the
competitive nature of the markets in which we operate. If we are unable to pass on the increased
costs of our inputs to our customers, the real prices of our products will not keep pace with
inflation, and as a result, our operating income may decline.
Risks Relating to Our Series A Shares, CPOs and ADSs
The market for the ADSs and the Series A Shares is limited
The Series A Shares are listed on the Mexican Stock Exchange, which is Mexicos only stock
exchange. There is no public market outside of Mexico for the Series A Shares. The Mexican
securities market is not as large or as active as securities markets in the United States and
certain other developed market economies. As a result, the
10
Mexican securities market has experienced less liquidity and more volatility than has been
experienced in such other markets.
Prior to July 15, 2004, the ADSs were listed on the New York Stock Exchange, or the NYSE. On
May 25, 2004, following our filing of concurso mercantil, the NYSE announced the trading of our
ADSs would be suspended immediately. On July 15, 2004, our ADSs were delisted from the NYSE. Our
ADSs are presently being quoted, and have been quoted since May 27, 2004, on the Pink Sheets
Electronic Quotation Service, or the Pink Sheets, maintained by Pink Sheets LLC for the National
Quotation Bureau, Inc. The ticker symbol CDURQ has been assigned to our ADSs for over-the-counter
quotations.
Shares traded on the Pink Sheets generally experience lower trading volume than those traded
on the organized exchanges. The trading volume of the ADSs has decreased substantially since the
NYSE delisting and the transfer of the ADSs to the Pink Sheets. In addition, companies listed on
the Pink Sheets are not subject to the corporate governance standards adopted by the organized
exchanges. We have no plans to list our ADSs on any organized exchange in the United States. There
is no assurance that a significant trading market for the ADSs will develop on the Pink Sheets. If
an active trading market does not develop, holders of ADSs may be unable to sell their ADSs. In
addition, these market characteristics may adversely affect the market price of the ADSs.
Future sales of our Series A Shares directed by Banamex may affect the stock prices of our Series A
Shares and ADSs
Administradora Corporativa y Mercantil, S.A. de C.V., or ACM, and a trust organized for the
benefit of certain members of the Rincón family have pledged Series A Shares representing
approximately 28.0% of our issued and outstanding capital stock in favor of Banco Nacional de
México, S.A., or Banamex. Under the terms of the pledge agreements, Banamex has the right to cause
ACM and the trust to sell all or part of the Series A Shares held by ACM or the trust if the price
of the Series A Shares on the Mexican Stock Exchange meets or exceeds the peso equivalent of
US$1.50. Banamex may exercise this right at any time whether or not an event of default under these
pledge agreements has occurred. Any such sales could adversely affect the market price of the
Series A Shares and the ADSs.
Because our accounting standards are different from those in other countries, investors may find it
difficult to accurately assess our business and financial operations.
We prepare our financial statements in accordance with Mexican GAAP. These principles differ
in significant respects from U.S. GAAP as further discussed in note 23 to our audited consolidated
financial statements. In particular, all Mexican companies must incorporate the effects of
inflation directly in their accounting records and published financial statements. The effects of
inflation accounting under Mexican GAAP are not eliminated in the reconciliation to U.S. GAAP. For
this and other reasons, the presentation of our financial statements and reported earnings may
differ from that of companies in other countries.
A principal objective of the securities laws of Mexico is to promote full and fair disclosure
of all material corporate information. The Series A Shares are listed on the Mexican Stock Exchange
and, as a listed Mexican company, we are required to report quarterly financial information to the
Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores), or
CNBV. However, there may be less publicly available information about issuers of securities listed
on the Mexican Stock Exchange, including our company, than would be regularly published by or about
U.S. companies subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended, or the Exchange Act.
The protections afforded to minority shareholders in Mexico are different from those afforded to
minority shareholders in the United States.
Under Mexican law, the protections afforded to minority shareholders are different from, and
may be less than, those afforded to minority shareholders in the United States. Mexican laws
concerning duties of directors are not well developed, there is no procedure for class actions as
such actions are conducted in the United States and there are different procedural requirements for
bringing shareholder lawsuits for the benefit of companies. Therefore, it
11
may be more difficult for minority shareholders to enforce their rights against us, our
directors or our controlling shareholders than it would be for minority shareholders of a United
States company.
Holders of ADSs are not able to vote at our shareholder meetings.
Holders of our ADSs may not vote at our shareholders meetings. Each of our ADSs represents two
CPOs and each CPO represents a financial interest in one Series A Share. Holders of CPOs are not
entitled to exercise any voting rights with respect to the Series A Shares held in the CPO Trust.
Such voting rights are exercisable only by the trustee, which is required by the terms of the trust
agreement to vote such Series A Shares in the same manner as the majority of the Series A Shares
that are not held in the CPO Trust that are voted at any shareholders meeting. Currently the
Rincón Family Trust owns a majority of the shares of Series A Shares that are not held in the CPO
Trust.
Holders of ADSs may not be entitled to participate in any future preemptive rights offering, which
may result in a dilution of such holders equity interest in our company.
Under Mexican law, if we issue new shares for cash as a part of a capital increase, we
generally must grant our stockholders the right to purchase a sufficient number of shares to
maintain their existing ownership percentage in our company. Rights to purchase shares in these
circumstances are commonly referred to as preemptive rights. We may not be legally permitted to
allow holders of ADSs in the United States to exercise preemptive rights in any future capital
increase unless (1) we file a registration statement with the United States Securities and Exchange
Commission, or the SEC, with respect to that future issuance of shares or (2) the offering
qualifies for an exemption from the registration requirements of the U.S. Securities Act of 1933,
as amended. At the time of any future capital increase, we will evaluate the costs and potential
liabilities associated with filing a registration statement with the SEC, as well as the benefits
of preemptive rights to holders of ADSs in the United States and any other factors that we consider
important in determining whether to file a registration statement.
We cannot make any assurances that we will file a registration statement with the SEC to allow
holders of ADSs in the United States to participate in a preemptive rights offering or that an
exemption from the registration requirements of the U.S. Securities Act of 1933, as amended, will
be available. As a result, the equity interests of holders of ADSs would be diluted to the extent
that ADS holders cannot participate in a preemptive rights offering.
The price of our Series A Shares and ADSs may be affected by economic developments in other
emerging market countries.
The market value of securities of Mexican companies is, to varying degrees, affected by
economic and market conditions in other emerging market countries. Mexican securities markets are,
to varying degrees, influenced by economic and market conditions in other emerging market
countries, especially those in Latin America. Although economic conditions are different in each
country, investors reaction to developments in one country may affect the securities markets and
the securities of issuers in other countries, including Mexico. We cannot assure you that the
market for Mexican securities will not continue to be affected negatively by events elsewhere,
particularly in emerging markets, or that such developments will not have a negative impact on the
market value of the Series A and ADSs.
Investors may experience difficulties in enforcing civil liabilities against us or our directors,
officers and controlling persons.
We are organized under the laws of Mexico, and most of our directors, officers and controlling
persons reside outside the United States. In addition, a substantial portion of our assets are
located outside the United States. As a result, it may be difficult for investors to effect service
of process within the United States on such persons or to enforce judgments against them, including
in any action based on civil liabilities under the U.S. federal securities laws. There is doubt as
to the enforceability against such persons in Mexico, whether in original actions or in actions to
enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws.
12
Item 4. Information on Our Company.
We are a vertically integrated producer of paper and packaging products with a distribution
network that links our strategically located facilities with our customers. We believe that these
factors, as well as our investment in modern manufacturing technology and our access to raw
materials as Mexicos only producer of unbleached virgin kraft pulp and one of Mexicos largest
users of recycled paper, based on information published by the Mexican National Chamber for the
Pulp and Paper Industry, allow us to be one of the industrys lowest cost producers. In 2005, our
total sales volume was 1,336.5 thousand short tons.
We are a strategically-focused paper company, supplying companies in the traditional Mexican
export sector and major manufacturers in Mexico, as well as the maquiladora sector. We produce and
supply paper to our converting facilities that in turn manufacture packaging products. Our products
include:
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Paper: containerboard (linerboard and corrugating medium), newsprint and uncoated free sheet; |
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Packaging: corrugated containers and multi-wall sacks; and |
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Other: plywood. |
We sell our products to a broad range of Mexican and United States manufacturers of consumable
and durable goods, including the maquiladora sector and Mexicos major exporters. Our customers in
the United States and Mexico include many of the largest industrial, construction, consumer,
agreicultural and media companies such as Pepsico, Vitro, El Universal, Apasco, Kimberly Clark,
Comisión Nacional de Libros de Texto Gratuitos and Chiquita. In Mexico, we produce containerboard,
corrugated containers, multi-wall sacks, newsprint, uncoated free sheet and plywood. In the United
States, we produce containerboard and corrugated containers.
Our net sales were Ps 8,143.3 million in 2005. In 2005, approximately 24.9% of our sales were
made in dollars, with the balance primarily dollar-linked. In 2005, 79.5% of our total sales were
made in Mexico and 20.5% were made in and into the United States.
We are a corporation (sociedad anónima de capital variable) operating under the laws of
Mexico. Our corporate domicile and principal executive offices are located at Torre Corporativa
Durango, Potasio 150, Ciudad Industrial, Durango, Durango, United Mexican States 34208, and our
telephone number is +52 (618) 829-1000.
Our agent for service of process in the United States is Durango McKinley Paper Company, 700
Sam Houston Rd., Mesquite, Texas 75149, Attention: Prudencio Calderón.
Paper and Packaging Industry Overview
There are four major groups of paper products produced by the paper industry:
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packaging paper, which includes linerboard, corrugating medium, kraft
paper, and tubing and folding cartons; |
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printing and writing paper, which includes newsprint, bond paper,
business and writing forms and other papers used for photocopying and commercial
printing; |
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sanitary paper; and |
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specialty paper. |
We produce products within the packaging paper and printing and writing paper categories.
13
North American Paper and Packaging Industry
Since mid-1995, the North American paper and packaging industry has experienced a prolonged
down-cycle characterized by continued price pressures, excess capacity and the inability of many
industry participants to earn satisfactory returns on capital. To maintain reasonable capacity
utilization, U.S. paper producers have generally maintained high export levels over the past three
years, including in the exports to Mexico. These exports have increased supply in the Mexican
market and kept pressure on Mexican paper prices during 2005.
Mexican Paper Industry
Apparent Demand for Paper Industry
Based on installed capacity, Mexicos paper industry is one of the largest in Latin America,
according to the 2005 annual report of the Mexican National Chamber for the Pulp and Paper
Industry. The total size of Mexicos paper industry in 2005, based on apparent demand, was 7,012
million short tons according to the 2005 annual report of the Mexican National Chamber for the Pulp
and Paper Industry. Mexican production is distributed among 64 plants. Apparent demand consists of
domestic production, as reported by manufacturers, plus imports, minus exports.
Apparent demand is a concept similar to consumption, but does not reflect increases and
reductions in inventories by customers. Apparent demand may not match consumption in any given
year; however, over a period of years, the two measures should tend to approximate one another.
Over the past decade, levels of apparent demand for paper have fluctuated according to changes
in gross domestic product. Thus, as gross domestic product increases, apparent demand also
increases.
Mexican Apparent Demand
for the Paper Industry
(all figures in thousands of short tons, except percentages)
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Aggregate |
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Apparent |
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% |
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% GDP |
Year |
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Production |
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Imports |
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Exports |
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Demand |
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Change |
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Change |
2001 |
|
|
4,272 |
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|
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1,884 |
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|
|
237 |
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|
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5,919 |
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1.1 |
% |
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(0.2 |
)% |
2002 |
|
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4,451 |
|
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|
1,997 |
|
|
|
227 |
|
|
|
6,221 |
|
|
|
5.1 |
% |
|
|
0.8 |
% |
2003 |
|
|
4,497 |
|
|
|
2,090 |
|
|
|
197 |
|
|
|
6,391 |
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|
2.7 |
% |
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1.4 |
% |
2004 |
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4,766 |
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|
2,227 |
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|
|
282 |
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|
|
6,711 |
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5.0 |
% |
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|
4.2 |
% |
2005 |
|
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4,904 |
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|
|
2,381 |
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|
|
273 |
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|
|
7,012 |
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4.5 |
% |
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3.0 |
% |
Source: 2005 Annual Report, Mexican National Chamber for the Pulp and Paper Industry
The dominant portion of the total market for paper products is the market for packaging paper.
The table below shows Mexican apparent demand from 2001 to 2005 for packaging paper in short tons.
In 2005, packaging paper accounted for 57.7% of Mexicos total paper production and 54.7% of
apparent demand for paper. Mexican production of packaging paper as a percentage of apparent demand
has declined from 77.2% in 2000 to 73.7% in 2005.
Mexican Apparent Demand for Packaging Paper
(all figures in thousands of short tons, except percentages)
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Aggregate |
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Apparent |
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% |
Year |
|
Production |
|
Imports |
|
Exports |
|
Demand |
|
Change |
2001 |
|
|
2,478 |
|
|
|
878 |
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|
|
73 |
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|
|
3,283 |
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|
|
2.9 |
% |
2002 |
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|
2,622 |
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|
928 |
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|
|
68 |
|
|
|
3,482 |
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|
6.1 |
% |
2003 |
|
|
2,645 |
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|
|
955 |
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|
54 |
|
|
|
3,546 |
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|
|
1.8 |
% |
2004 |
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|
2,788 |
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|
1,054 |
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|
111 |
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|
3,731 |
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5.2 |
% |
2005 |
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2,829 |
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|
1,114 |
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|
107 |
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3,836 |
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2.8 |
% |
Source: 2005 Annual Report, Mexican National Chamber for the Pulp and Paper Industry
14
The table below shows Mexican apparent demand in short tons from 2001 to 2005 for printing and
writing paper. In 2005, printing and writing paper accounted for 16.2% of Mexicos total paper
production and 19.1% of apparent demand for paper. Mexican production of printing and writing paper
as a percentage of apparent demand has declined from 68.3% in 2000 to 59.3% in 2005.
Mexican Apparent Demand for Printing and Writing Paper
(all figures in thousands of short tons, except percentages)
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Aggregate |
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Apparent |
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% |
Year |
|
Production |
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Imports |
|
Exports |
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Demand |
|
Change |
2001 |
|
|
726 |
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|
|
388 |
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|
15 |
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|
1,099 |
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(1.1 |
)% |
2002 |
|
|
769 |
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|
409 |
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22 |
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|
1,156 |
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5.2 |
% |
2003 |
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|
763 |
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|
|
448 |
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|
11 |
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|
1,200 |
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3.8 |
% |
2004 |
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|
761 |
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|
|
492 |
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|
20 |
|
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|
1,233 |
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|
2.8 |
% |
2005 |
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|
795 |
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|
|
569 |
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23 |
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1,341 |
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8.4 |
% |
Source: 2005 Annual Report, Mexican National Chamber for the Pulp and Paper Industry.
The table below shows Mexican apparent demand in short tons from 2001 to 2005 for newsprint in
short tons. In 2005, newsprint accounted for 5.8% of Mexicos total paper production and 6.3% of
apparent demand for paper. Mexican production of newsprint as a percentage of apparent demand
declined from 63.0% in 2000 to 47.9% in 2003, but recovered in 2004 and 2005 reaching 64.1% in
2005.
Mexican Apparent Demand for Newsprint
(all figures in thousands of short tons, except percentages)
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Aggregate |
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Apparent |
|
|
% |
|
Year |
|
Production |
|
|
Imports |
|
|
Exports |
|
|
Demand |
|
|
Change |
|
2001 |
|
|
263 |
|
|
|
210 |
|
|
|
23 |
|
|
|
450 |
|
|
|
0.9% |
|
2002 |
|
|
217 |
|
|
|
214 |
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|
|
|
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|
|
431 |
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|
(4.3)% |
|
2003 |
|
|
213 |
|
|
|
235 |
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|
3 |
|
|
|
445 |
|
|
|
3.3% |
|
2004 |
|
|
278 |
|
|
|
188 |
|
|
|
1 |
|
|
|
465 |
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|
4.5% |
|
2005 |
|
|
282 |
|
|
|
164 |
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6 |
|
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|
440 |
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(5.4)% |
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Source: 2005 Annual Report, Mexican National Chamber for the Pulp and Paper Industry.
Pricing
In the past three years, prices in Mexico for the types of paper that we make have been
influenced by a combination of factors, including:
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the rate of growth of the Mexican economy and the demand for packaging; |
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prevailing inflation rates in Mexico; |
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U.S. paper price levels; |
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prevailing international prices for paper and packaging; and |
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fluctuations in the peso/dollar exchange rate. |
Containerboard, newsprint and uncoated free sheet are commodities priced in relation to
international prices for paper, recycled fiber and pulp. Because the paper industry is highly
capital intensive, prices may also be affected by industry capacity utilization rates, by additions
of new capacity and by plant closures.
15
Prevailing international prices for containerboard decreased by 1.3% during 2003, and
increased by 26.0% in 2004 and approximately 3% in 2005. Prevailing international prices for
uncoated free sheet increased by approximately 8% in 2003, 2% in 2004 and 4% in 2005. Prevailing
international prices for newsprint increased by 5.2% in 2003, 7.7% during 2004 and approximately 7%
in 2005.
With generally low prices for containerboard in the United States over the last three years,
competition in Mexico from imports has increased. Changes in our prices for containerboard are
generally correlated to changes prevailing prices in the United States, although we and other
Mexican containerboard producers generally set prices at a discount to prevailing prices in the
United States.
The prices of corrugated containers and multi-wall sacks in Mexico are affected by prevailing
prices of containerboard, as well as the following factors:
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resistance specifications; |
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quality control; |
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customer service; |
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printing and graphics specifications; |
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volume of production runs; and |
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proximity to customers and industrial centers (due to the transportation cost of converted products). |
With generally low prices for packaging products in the United States over the last three
years, competition in Mexico from imports has increased. Changes in our prices for packaging
products are generally correlated to changes prevailing prices in the United States, although we
and other Mexican packaging producers generally set prices at a discount to prevailing prices in
the United States.
Tariffs
Under NAFTA, most of Mexicos tariffs were eliminated during or prior to 2003. As a result of
an antidumping complaint brought by the Mexican National Chamber for the Pulp and Paper Industry,
in August 2004 Mexico imposed provisional antidumping duties on one international producer of
newsprint of 18.2% and on another international producer of newsprint of 5.5%. Both of these
producers prevailed in this proceeding and the provisional antidumping duties were eliminated in
May 2005.
As a result of an earlier complaint filed by the Mexican National Chamber for the Pulp and
Paper Industry, in October 1998 Mexico imposed definitive antidumping duties on U.S. cut-size free
sheet paper. The duties ranged from 5.3% to 17.7%. In October 2003, Mexico initiated a review
proceeding to determine whether the antidumping duties should be continued or revoked. Pursuant to
that review proceeding, Mexico decided to continue the antidumping duties, at the previously
established rates, until October 2008.
History and Development of Our Company
We
were incorporated on January 22, 1982 for a period of 99 years. However, some of our underlying operating companies
have been in existence since 1975. We were formed in 1975 from the combination of a forest products
transportation company and a regional wholesaler of building products. Between 1987 and 2000 we
pursued a strategy of vertical integration, implemented by both acquisitions and internal
expansion, to attain our present position as Mexicos largest producer, in terms of capacity, of
containerboard and corrugated containers, based on information published by the Mexican National
Chamber for the Pulp and Paper Industry.
16
On October 8, 2001, our company, which was then named Grupo Industrial Durango, S.A. de C.V.,
merged with Corporación Durango, S.A. de C.V., or CODUSA. Our company, the surviving entity, was
subsequently renamed Corporación Durango, S.A. de C.V. Prior to the merger, CODUSA owned 59% of our
capital stock and all of the outstanding capital stock of Grupo Pipsamex, S.A. de C.V., or Grupo
Pipsamex, and Durango Paper Company. In connection with the merger, shares of our company were
issued to members of the Rincón family in exchange for their shares of CODUSA.
Significant Developments During 2005 and Recent Developments
Financial Restructuring
In November 2002, we defaulted on payments of principal and interest under our unsecured
indebtedness. In December 2002, we retained financial advisors to advise us in evaluating
debt-restructuring alternatives to implement a long-term solution to our capital structure and debt
service requirements. We also began discussions with our bank creditors and certain holders of our
debt securities.
On May 18, 2004, we filed a voluntary petition under Mexicos Business Reorganization Act (Ley
de Concursos Mercantiles, or the LCM) with the First Federal District Court in Durango, Mexico, or
the Mexican court. On May 20, 2004, our foreign representative, Gabriel Villegas Salazar, commenced
a proceeding under section 304 of the United States Bankruptcy Code with the United States
Bankruptcy Court for the Southern District of New York (the 304 Proceeding) on our behalf and on
behalf of guarantors of our existing unsecured financial indebtedness. None of our other
subsidiaries filed for concurso mercantil or other bankruptcy protection.
On August 13, 2004, we reached an agreement in principle with creditors collectively holding
approximately 68% of our unsecured debt regarding the terms of a proposed plan of reorganization
and a proposed new plan support agreement.
On August 25, 2004, the Mexican court declared that we had satisfied all of the requirements
to be a debtor under the LCM. On November 17, 2004, the Mexican court certified the list of
recognized claims in our concurso mercantil proceeding.
On December 23, 2004, the conciliator (conciliadora) appointed by the Mexican Federal
Institute of Commercial Reorganization Specialists (Instituto Federal de Especialistas de Concursos
Mercantiles) in our concurso mercantil proceeding submitted our plan of reorganization to the
holders of recognized claims and the plan was executed by us and the holders of recognized claims
representing approximately 65% of the total number of recognized claims.
The plan of reorganization provided that, in exchange for their debt, our unsecured financial
creditors would receive new debt equal to approximately 85% of the aggregate outstanding principal
amount of our unsecured debt. In addition to the new debt, the plan of reorganization provided that
our unsecured financial creditors would receive shares of our series B common stock, no par value,
or Series B Shares, representing an aggregate of approximately 17% of our capital stock on a fully
diluted basis.
On January 11, 2005, the conciliator submitted the executed plan of reorganization to the
Mexican court, and on February 7, 2005, the Mexican court approved the plan of reorganization.
On January 19, 2005, the U.S. bankruptcy court overseeing our 304 Proceeding entered an order
permanently enjoining our creditors from taking action against our company in respect of their
claims that were restructured in the concurso mercantil proceeding, as well as recognizing and
giving effect to our plan of reorganization and the order from the Mexican court confirming the
same.
On February 23, 2005, our plan of reorganization was consummated. As a result:
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Bank creditors of our company with claims against our company in the aggregate amount of
US$136.3 million (Ps 1,611.3 million) received 2,392,957 of our Series B Shares,
representing 2.16% of our issued and outstanding capital stock, and the principal amount of
the debt outstanding with respect to these claims was amended and restated under the
Restructured Credit Agreement. Under the Restructured Credit |
17
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Agreement, notes in an aggregate principal amount of US$116.1 million (Ps 1,294.6 million)
were issued to the holders of these claims. These notes bear interest at a rate of LIBOR
plus 2.75% per annum, payable quarterly in arrears, and the principal amount of these notes
will be amortized quarterly until the maturity of these notes on December 30, 2012. |
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Unsecured creditors of our company with claims against our company in the aggregate
amount of US$510.3 million (Ps 5,689.9 million) related to our 12 5/8% Senior Notes due
2003, or 2003 notes, our 13 1/8% Senior Notes due 2006, or 2006 notes, our 13 1/2% Senior
Notes due 2008, or 2008 notes, our 13 3/4% Senior Notes due 2009, or 2009 notes, and the
note issued under our Euro Commercial Paper Program, or ECP note, received 16,412,961 of
our Series B Shares, representing 14.84% of our issued and outstanding capital stock, and
an aggregate principal amount of US$433.8 million (Ps 4,836.5 million) of our 2012 notes in
respect to these claims. The 2012 notes bear interest at a rate of 7.50% per annum until
December 31, 2005, 8.50% per annum from January 1, 2006 through December 31, 2006, and
9.50% per annum thereafter, payable quarterly in arrears, and mature on December 30, 2012. |
Acquisition of Empaques del Norte
On April 11, 2005, our company entered into an agreement to acquire all of the capital stock
of Empaques del Norte, S.A. de C.V. for US$5.8 million (Ps 64.9 million). The purchase price was
paid in installments between April 2005 and May 2006. Empaques del Norte, S.A. de C.V. owns a
corrugated container plant with an annual production capacity of 25,000 short tons.
Acquisition of Líneas Aéreas
On April 18, 2005, our company purchased substantially all of the capital stock of Líneas
Aéreas Ejecutivas de Durango, S.A. de C.V., or Líneas Aéreas, for Ps 15.0 thousand from certain
members of the Rincón family and some of their children. Líneas Aéreas owns two business jets and
provides transportation services to our subsidiaries and third parties. In connection with this
transaction, we assumed a financial lease agreement with GE Capital Leasing with respect to one of
the business jets. We have entered into a contract to sell one of these business jets for US$6.0
million and expect that the closing under this contract will occur in July 2006.
Acquisition of Inmobiliaria Industrial
On June 28, 2005, our company acquired 99.99% of the capital stock of Inmobiliaria Industrial
de Durango, S.A. de C.V. for Ps 735.0 thousand. This company was owned by some of the members of
the Rincón family.
Sale of Chihuahua Particleboard Plant
On July 15, 2005, our subsidiaries, Ponderosa Industrial de México, S.A. de C.V., or
Ponderosa, and Compañía Forestal de Durango, S.A. de C.V., sold the assets of our Chihuahua
particleboard plant for Ps 334.4 million (US$30 million). As a result of this sale, the capacity
of our other segment was reduced by 200 thousands short tons, we ceased producing particleboard
and, as of the date of this annual report, we no longer have any discontinued operations.
Recapitalization of Series A Shares and Series B Shares
On January 25, 2006 and February 20, 2006, respectively, our board of directors and
shareholders approved a recapitalization of our company under which we created a new sole series of
common stock, no par value, and each of our outstanding Series A Shares and Series B Shares will be
converted into one newly issued share of common stock. Following this recapitalization:
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each of our outstanding CPOs will represent a financial interest in one share of our common stock; |
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each of our outstanding ADSs will continue to represent two CPOs; and |
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we expect that our common stock will be listed on the Mexican Stock Exchange. |
18
We expect that the new common stock will be publicly traded over the Mexican Stock Exchange,
subject to the approval of the CNBV and to the registration of the new common stock with the
National Stock Registry of the CNBV. If approved and registered by the CNBV, we expect that the
recapitalization and public trading of the new common stock will become effective within 15 days
following the date on which the CNBV grants its approval.
Debt Reduction Program
On February 27, 2006, we announced a debt reduction program to be undertaken during 2006. As
of June 27, 2006, we have prepaid US$66.4 million of our outstanding debt and made amortization and
payments at maturity of an additional US$4 million. The following are the most significant
pre-payments made under this debt redection program:
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we have prepaid US$47.0 million to Bancomext under certain outstanding loan agreements; |
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we have prepaid US$10.0 million to Bank of Albuquerque, representing the full amount
outstanding under our loan agreement with Bank of Albuquerque; |
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we have prepaid US$4.8 million to GE Capital Leasing under our capital leases,
representing the full amount outstanding under these leases; and |
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we have prepaid US$4.6 million to GE Capital Corporation under an outstanding capital
lease. |
We have financed these prepayments through the issuance and sale of capital stock of Pipsamex to
our majority stockholders, the proceeds from the divestiture of some minor non-strategic assets and
operating cash flow.
Tizayuca Mill Lease Agreement
On March 31, 2006, we purchased land and an industrial facility in Tizayuca, Hidalgo at which
a paper mill and converter are located for US$10.0 million. Effective March 31, 2006, we entered
into an operating lease agreement under which we lease machinery and equipment with installed
capacity of 200,000 short tons of linerboard and 100,000 short tons of corrugated boxes located at
the Tizayuca industrial facility. The lease agreement has a term of 7.5 years and requires
payments over its term of US$65.9 million. We have an option to purchase the machinery and
equipment for fair market value on the seventh anniversary of the commencement of this lease.
Subsidiaries and Operating Divisions
The following chart sets forth our organizational structure as of June 27, 2006.
19
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* CONICEPA =
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Compañía Norteamericana de Inversiones
en Celulosa y Papel, S.A. de C.V.
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(1)
(2)
(3)
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4.92% is controlled through Empaques de Cartón Titán
16.19% is controlled through Compañia Papelera de Atenquique
19.80% is controlled through Empaques de Cartón Titán, and
27.24% is controlled through Corporación Durango |
We are comprised of various operating divisions that are distinguished by product type as
follows:
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Paper: the Grupo Durango division, the Grupo Pipsamex division and Durango McKinley
Paper Company |
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Packaging: Titán and its subsidiaries, or the Titán Group, and Durango McKinley Paper Company |
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Other: Ponderosa |
Our operating divisions are:
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Grupo Durango. The Grupo Durango division produces containerboard. In 2005,
approximately 85% of the 651.1 thousand short tons of linerboard and corrugating medium
shipped by the Grupo Durango division was used to supply the Titán Group. The remainder of
its production was sold to third party manufacturers in Mexico and the United States. |
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Grupo Pipsamex. The Grupo Pipsamex division produces newsprint and bond paper. In 2005,
the Grupo Pipsamex division sold 142.4 thousand short tons of newsprint and 133.0 thousand
short tons of uncoated |
20
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free sheet. The Grupo Pipsamex divisions sales are predominantly to
the Mexican market with the balance primarily sold in the United States. |
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Durango McKinley. Durango McKinley Paper Company is a recycled linerboard manufacturer
located in the southwestern United States that serves the maquiladora region. Durango
McKinley Paper Company is a significant collector of OCC material, which is processed to
create recycled fiber. In 2005, approximately 81% of the paper needs of our packaging
operations in Texas were supplied by other paper producers that supplied this paper in
exchange for paper produced by Durango McKinley Paper Company. |
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Packaging. Our packaging division, which includes the packaging operations of Durango
McKinley Paper Company and the Titán Group, is a large paper-based packaging manufacturer.
The packaging divisions 2005 sales of 708.6 thousand short tons consisted almost entirely
of corrugated containers and multi-wall sacks. The Grupo Durango division supplies
approximately 97% of the Titán Groups containerboard requirements. Waste material
generated in production of corrugated containers is sold back to the Grupo Durango division
for recycling and to produce pulp. The Titán Groups sales are primarily to Mexico and the
export sector. |
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Ponderosa. Ponderosa, a forest-based building products manufacturer, markets its
products throughout the NAFTA region. In 2005, Ponderosas continuing operations sold 9.7
thousand short tons of plywood. |
The Grupo Durango division, Durango McKinley Paper Company and the Titán Group are vertically
integrated with the Grupo Durango division and Durango McKinley Paper Company supplying
substantially all of the containerboard used by our packaging division. This integration enables us
to limit purchases from external suppliers and reduce costs.
Our Products
General
Our main product groups are:
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Papercontainerboard (linerboard and corrugating medium), newsprint and uncoated free
sheet (bond, book stock, miscellaneous free sheet); |
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Packagingcorrugated containers and multi-wall sacks; and |
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Otherplywood. |
The total capacity of our continuing operations by product and number of mills and plants as
of December 31, 2005, and our actual production for the periods indicated, is as follows:
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Production at December 31, |
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Installed Capacity at |
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Mills/ |
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Product Type |
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December 31, 2005 |
|
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Plants |
|
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2005 |
|
|
2004 |
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2003 |
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|
(in thousands of short |
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tons per year) |
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(in thousands of short tons) |
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Paper: |
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Containerboard |
|
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900.0 |
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6 |
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924.0 |
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891.8 |
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859.9 |
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Newsprint |
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160.0 |
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1 |
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148.1 |
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160.4 |
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131.0 |
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Uncoated free sheet |
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155.0 |
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1 |
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|
155.4 |
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133.1 |
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143.5 |
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Total Paper |
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1,215.0 |
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8 |
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1,227.5 |
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1,185.4 |
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1,134.3 |
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Packaging: |
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Corrugated containers |
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917.0 |
(1) |
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19 |
(1) |
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662.8 |
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632.5 |
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627.6 |
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Multi-wall sacks |
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66.0 |
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3 |
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43.6 |
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39.2 |
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36.9 |
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Total Packaging |
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983.0 |
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22 |
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706.4 |
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671.6 |
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664.6 |
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Other products (2) |
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58.0 |
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3 |
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|
9.9 |
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|
10.5 |
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10.2 |
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Total Production |
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2,256.0 |
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33 |
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1,943.8 |
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1,867.5 |
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1,809.1 |
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21
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(1) |
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Includes 58,000 tons of capacity at our Titán Tlalnepantla Plant. On December 30, 2005, we
suffered a casualty loss at this plant as a result of a fire. This plant has been out of
service since that date. We expect to reopen this plant by the end of 2006. |
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(2) |
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Does not include the capacity or production of our Chihuahua particleboard mill as we include
the results of our Chihuahua particleboard mill in discontinued operations. |
The total sales volume of our continuing operations to third-parties and net sales by product
for the periods indicated is as follows:
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|
|
|
|
|
December 31, |
Product Type |
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2005 |
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2004 |
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2003 |
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|
|
Sales volume |
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Net Sales |
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|
Sales volume |
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|
Net Sales |
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Sales volume |
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Net Sales |
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(in thousands |
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(in millions of |
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|
(in thousands |
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(in millions of |
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(in thousands |
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(in millions of |
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of short tons) |
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constant pesos) |
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of short tons) |
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constant pesos) |
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of short tons) |
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constant pesos) |
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Paper: |
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|
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Containerboard |
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342.8 |
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Ps |
1,381.3 |
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341.6 |
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Ps |
1,575.9 |
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|
312.7 |
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|
Ps |
1,252.6 |
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Newsprint |
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142.4 |
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|
936.7 |
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158.1 |
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955.4 |
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130.8 |
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734.2 |
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Uncoated free sheet |
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133.0 |
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1,172.1 |
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|
121.1 |
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1,023.2 |
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|
124.4 |
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|
|
1,000.8 |
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Total Paper |
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618.1 |
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3,490.1 |
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620.7 |
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3,554.5 |
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|
|
567.9 |
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|
|
2,987.6 |
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|
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|
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|
|
|
|
|
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|
|
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Packaging: |
|
|
|
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Corrugated containers |
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|
665.1 |
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4,153.0 |
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632.2 |
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4,027.0 |
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|
615.6 |
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3,928.3 |
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Multi-wall sacks |
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42.0 |
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388.9 |
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39.9 |
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347.2 |
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35.9 |
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|
|
319.6 |
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Paper tubes (1) |
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1.5 |
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10.9 |
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0.4 |
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3.2 |
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Total Packaging |
|
|
708.6 |
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4,552.8 |
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|
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672.1 |
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4,374.2 |
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|
|
652.0 |
|
|
|
4,251.0 |
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Other products |
|
|
9.7 |
|
|
|
100.4 |
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|
|
11.7 |
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|
|
110.5 |
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|
|
10.8 |
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|
|
88.7 |
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|
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Total Sales Volume |
|
|
1,336.5 |
|
|
Ps |
8,143.3 |
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|
|
1,304.5 |
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|
Ps |
8,039.3 |
|
|
|
1,230.7 |
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|
Ps |
7,327.3 |
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|
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|
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(1) |
|
In April 2003, we sold our paper tube manufacturing operation to Tubos y Especialidades
de México, S.A. de C.V., a related party, eliminating our production of paper tubes. In
January, 2005, we purchased machinery to manufacture paper tubes. |
Paper Products
Below is a description of our paper products and their usage.
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Product Description and Usage |
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Containerboard
|
|
We produce linerboard and corrugating medium,
white-top and mottled white linerboard and paper, and
high-performance linerboard. Our products are used by
corrugated container manufacturers in the production
of a wide variety of corrugated containers. |
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Newsprint
|
|
We produce standard, peach and improved newsprint. Our
products are used by newspaper and magazine publishers
and advertisers for newspapers, books, advertisements,
and magazines. |
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|
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Uncoated free sheet
|
|
We produce bond, forms, tablet, copy, and book stock
and miscellaneous free sheet. Our products are used by
consumer goods and office supplies producers for
printing and writing paper, office supplies, and
educational books. |
We are able to produce a wide variety of paper products, in terms of weight and resistance,
and we can use virgin and recycled fiber as raw material in different proportions to achieve the
characteristics required by our customers. We sell our linerboard in rolls of varying widths
depending on the capacity of the converting machinery on which it will be used.
22
Packaging Products
Below is a brief description of our packaging products and their usage.
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Product Description and Usage |
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|
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Corrugated containers
|
|
We produce corrugated containers manufactured in
converting plants from containerboard. Our products
are used by consumer, industrial and agricultural
goods producers to ship products including home
appliances, electronics, spare parts, grocery
products, produce, books, tobacco and furniture. |
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Multi-wall sacks
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|
We produce flat, expandable, glued, sewn and
laminated sacks. Our products are used by cement,
powdered foods and chemicals manufacturers for
delivery of cement, flour, powdered food, chemical
products, gypsum and lime products. |
We produce a wide range of corrugated containers depending on the product to be shipped, its
size and weight and the distance the product is to be shipped. Our multi-wall sacks are
high-resistance containers that are designed to be used reliably in adverse conditions of filling,
handling, transportation, warehousing and distribution. The multi-wall sacks we manufacture are
made from paper produced from virgin pulp which gives our sacks their superior strength.
Other Products
We produce pine plywood. Our pine plywood is used in the construction industry in Mexico and
the United States. Other uses are for signs, doors, concrete pouring, and toys.
Customers
We primarily sell our products in Mexico and the United States. In 2005, 79.5% of our total
sales were made in Mexico and 20.5% were made in and into the United States.
Our major customers in Mexico and the United States include:
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Paper |
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Packaging |
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Other Products |
Mexico:
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Mexico:
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Mexico: |
El Universal
Compañía
Periodística
Nacional, S.A. de
C.V.
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Grupo Vitro, S.A. de C.V.
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Maderería El Cueramo, S.A. de C.V. |
Duro Bag
Comisión Nacional
de Libros de Texto
Gratuitos
|
|
Grupo Pepsico, S.A. de C.V.
Kimberly Clark de Mexico,
S.A. de C.V.
|
|
Mexicana Pacific, S.A. de C.V.
Triplay Alameda, S.A. de C.V.
Aglomerados y Triplay VIC, S.A. de C.V. |
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|
Allen del Norte, S.A. de C.V.
Grupo Apasco, S.A. de C.V.
Chiquita, S.A. de C.V. |
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United States:
|
|
United States: |
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South
Key
Mission
|
|
Harris Packaging
Bronco Packaging
Bana, Inc.
Victor Pkg Dallas |
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|
Sales and Marketing
In 2005, sales to our 10 largest customers accounted for approximately 28% of our net sales.
None of our customers accounted for a material amount of our revenues. We do not believe that the
loss of any single customer would have a material adverse effect on our business.
23
Our sales and marketing staff are responsible for identifying and developing markets as well
as notifying our research and development staff of customer product requirements. We sell our
products through our direct sales force at our Mexican offices located in Mexico City, Guadalajara
and Monterrey, Mexico, and our U.S. offices located in Albuquerque, New Mexico and Dallas, Texas.
As of December 31, 2005, we had approximately 208 employees involved in direct sales. We make
substantially all of our sales directly to our clients. We use brokers only in limited
circumstances.
Our sales strategy involves targeting niche markets, such as the maquiladora sector, growing
manufacturing regions in central and southern Mexico, Mexican export markets and lightweight
markets. A core element of our sales strategy is to establish long-term customer relationships by
ensuring that we satisfy our customers specific requirements. The customized service we provide
and the strategic relationships we have developed ensure we retain our existing customers while
attracting new ones. To enable us to maintain the advantages of strategically located facilities,
we continue to update our distribution network to accommodate the trends of our important
manufacturing customers.
To support our direct sales efforts and to actively promote our products, we engage in a
variety of marketing activities. These activities include regular meetings with our entire sales
force and educational seminars and social outings with customers.
Customer service is an important factor in maintaining and gaining market share and customers.
We deliver products to our customers in a manner that addresses individual technical
specifications, delivery methods, timing constraints and other customer specific requirements. Our
sales force has established customer complaint procedures and undergoes customer retention reviews
to ensure that the level of our service is maintained and constantly improved. Our advertising and
promotional campaigns are carried out in specialized industry publications and industry trade
shows.
With respect to corrugated containers, by engaging in sales on both sides of the Mexican-U.S.
border, we continuously evaluate the pricing levels for our products in both the U.S. and Mexican
markets. While pricing is generally negotiated on a yearly basis, our contracts normally include
price adjustment provisions to compensate for market movements as published in reputable trade
publications.
Raw Materials
We believe we have a flexible raw material mix. The principal raw materials used in our
production processes are recycled fiber and virgin pulp. Recycled fiber is obtained by processing
OCC material, ONP material, magazines and office waste paper material. We also use virgin pulp,
which is made by processing wood chips, which we mix with recycled fiber to produce a variety of
semi-recycled grades of other packaging and paper products. In the case of newsprint and printing
grades, we produce a high quality product with a high content of recycled fiber.
Recycled Fiber
Our business is affected by trends in international and domestic prices of OCC and ONP
material. In Mexico, the price differential between domestic and imported OCC and ONP material
fluctuates in peso terms, due to demand and currency fluctuations, and at any given time we may
supply ourselves from either market, depending on the then current price differential. In 2005,
approximately 73% of the fiber we used in our Mexican operations was recycled and approximately 49%
of this recycled fiber was imported from third party producers.
In the United States, our McKinley mill uses only recycled fiber. In 2005, our recycling
centers in Albuquerque, Phoenix and El Paso provided approximately 39% of our fiber requirements in
the United States and we obtained the balance of our recycled fiber requirements in the open
market.
Pulp
We are Mexicos sole producer of unbleached kraft pulp and we are currently able to produce
80,000 short tons of unbleached kraft pulp per year, which is more than sufficient to supply our
internal requirements for virgin kraft pulp. We are also able to produce 79,000 short tons per year
of chemical thermo-mechanical pulp, 52,000 short tons
24
per year of thermo-mechanical pulp, 79,000
short tons per year of sugar cane bagasse pulp, and 197,000 short tons per year of deinked pulp.
In Mexico, we buy our wood, the raw material from which we produce virgin kraft pulp, from
small property owners and ejidos, which are small plots of land granted by the Mexican government
to small groups of land workers. The wood is purchased from sellers located in the states of
Durango, Jalisco, Oaxaca and Michoacán. In total we have access to approximately 600,000 hectares
of forestry land. We have traditionally managed our supply of resources through direct negotiations
with landowners. In general, we believe that our existing wood supply arrangements are sufficient
to provide for our currently anticipated rates of consumption for the foreseeable future. We also
have a strong presence in the Mexican forestry sector that allows us to effectively source our wood
supply.
Water
Other than at our Atenquique and Mexpape pulp and paper mills, which use treated river water,
we obtain our water requirements for both our Mexican and U.S. operations from wells located at our
production facilities. We believe that our water supply is sufficient for all existing and
contemplated activities.
We believe that our McKinley mill is one of only three zero-effluent paper mills in the
world. Water is initially obtained from wells, and after using it in the papermaking process, it is
then treated and recycled through the plant. Accordingly, the ongoing water supply requirements at
our McKinley mill are significantly less than for conventional paper mills.
Electric Power
Our Mexpape and Tuxtepec mills generate approximately 50% of their electric power, and our
Centauro and Atenquique paper mills generate approximately 20% of their electric power. The balance
of our electricity requirements in Mexico is purchased from the Comisión Federal de Electricidad,
the Mexican state-owned electric company. The contracts for electric power supply signed with the
Mexican state-owned electric company are the standard contracts used for all Mexican companies and
there is no specific termination date for the contracts.
In the United States, a rural electric cooperative supplies 100% of the electric power used by
our McKinley mill at formula prices under a long-term contract. Our U.S. converting facilities
purchase electric power from local utilities.
Distribution and Supply of Our Products
Our distribution network is an extensive and efficient delivery system within the Mexican
paper and packaging industry. Our production facilities are strategically located in close
proximity to our suppliers and customers. In creating our vertically integrated manufacturing
process, we have generally located our raw material supply, processing and production assets near
major industrial centers around Mexico to reduce transportation costs and delivery time for our
products. We distribute and deliver our products from our plants as well as from several warehouses
strategically located throughout Mexico. In the United States, we deliver our products from our
plants located in Prewitt, New Mexico and Dallas and Houston, Texas. We are able to deliver our
products to our customers within one to five days from the date of the purchase order. We are able
to adjust deliveries of our products through the use of a just-in-time system, offering same day
deliveries, at the request of our customers.
At December 31, 2005, we owned approximately 90 trailer trucks and had access to approximately
1,500 additional trailer trucks owned by independent operators who provide services principally to
us. We use our trucks to transport wood from forests to our production facilities, and we also use
our trucks, and trucks operated by independent operators, to ship finished products to our
customers in Mexico and in the United States. The independent operators benefit from their
relationship with us because they can frequently haul our finished goods to industrial centers and
raw material in the form of recycled fiber to our plants on a single round trip. This also reduces
our shipping costs.
Among our products, containerboard, newsprint and printing grades, which are transported in
large rolls, can be economically shipped over long distances. Corrugated containers and multi-wall
sacks have a much smaller
25
economic shipping radius because their low density results in a
relatively high transport cost per ton compared to paper. Consequently, our broad network of
container and bag plants, located near major industrial centers around Mexico, is an important
factor in the timely and economic delivery of our packaging products to both local and national
customers.
We rely heavily on our distribution and supply system to obtain raw materials for our
strategically located network of production facilities and to deliver our products to customers. We
believe that the reach and efficiency of our distribution and supply system are important to our
customers, and we believe customer loyalty depends as much on service and quality as on price.
We also use railroads for the transportation of raw materials to our production facilities and
finished products to our customers.
Our Competition
In 2005, approximately 68% of our net sales of paper to third parties were to customers in
Mexico and the remainder was to customers in the United States. In 2005, approximately 88% of our
net sales of packaging products to third parties were to customers in Mexico and the remainder was
to customers in the United States.
In Mexico, we compete with a number of Mexican paper producers and packaging producers and
with major international integrated paper and packaging producers, who are primarily importers from
the United States. In addition, as an integrated paper and packaging producer, we compete not only
with other integrated paper and packaging producers, but also with companies that produce only
paper, converted products, or packaging. Many of our competitors have greater financial resources
than we do. We compete primarily on customer service, product quality differentiation and price.
In the United States, we compete with a number of paper producers and packaging producers,
including Smurfit Corp., Stone Container Corp., International Paper, Abitibi Consolidated, Inc.,
Packaging Corporation of America, Bowater Incorporated, and Weyerhaeuser Company, many of which
have greater financial resources than we do.
Constant review and benchmarking of competitive factors is necessary to remain competitive in
our industry. We monitor the paper industry through market publications, and through our
participation in many industry-related events. While pricing is normally negotiated on an annual
basis for the majority of our products, our contracts
normally include price adjustment provisions to compensate for market movements as published
in reputable trade publications.
We produce, distribute and sell different paper grades and paper products, which we believe
gives us, unlike our Mexican competitors, the flexibility to reduce the impact of cyclically
occurring in the market. We can increase paper production for export opportunities, as conditions
warrant, such as changes in raw material prices, without interrupting a steady supply of paper to
our internal converting operations and our existing customers. While the elimination of Mexican
tariffs under NAFTA has increased our competition from U.S. producers of all of our paper products,
we are not aware of any plans by domestic or foreign producers to construct additional production
capacity in Mexico.
Environmental Matters
Our Mexican operations are subject to federal, state and local laws and regulations, including
the Mexican General Law of Ecological Stabilization and Environment Protection (Ley General del
Equilibrio Ecológico y de Protección al Ambiente) and the rules and regulations published under
this law. Under this law, companies engaged in industrial activities are subject to the regulatory
jurisdiction of the Mexican Ministry of the Environment and Natural Resources.
In 1988, we agreed with Mexican environmental regulatory authorities on a compliance plan that
we proceeded to implement. Today, our paper mills are in compliance with general standards
established by law and with specific standards promulgated by the Mexican regulatory authorities.
In 1995, we purchased approximately 26% of Planta Ecológica Industrial, S.A. de C.V., a joint
venture of industrial water users in Monterrey, Nuevo León. The venture
26
processes and recycles
water used by plants in the industrial park where our Monterrey paper mill is located. Our paper
mills in Mexico are subject to periodic environmental audits by the Mexican Ministry of the
Environment and Natural Resources. We have frequently been recognized for our environmental record
and our role in implementing modern forest management techniques. However, there can be no
assurance that relevant Mexican authorities will continue to find our environmental procedures
adequate, or that more stringent environmental laws will not be enacted by Mexico in the future.
Were enforcement of existing laws to increase, or new environmental laws to be enacted, we could
incur material compliance costs.
Our U.S. operations are subject to federal, state, and local provisions regulating the
discharge of materials into the environment and otherwise related to the protection of the
environment. Compliance with these provisions, primarily the Federal Clean Air Act, Clean Water
Act, Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986, or CERCLA, and Resource Conservation and
Recovery Act, or RCRA, has required us to invest substantial funds to modify facilities to assure
compliance with applicable environmental regulations.
We are committed to protecting the health and welfare of our employees, the public, and the
environment and we strive to maintain compliance with all state and federal environmental
regulations in a manner that is also cost effective. See Item 5. Operating and Financial Review
and ProspectsContractual Commitments and Capital ExpendituresCapital Expenditures. In any
construction of new facilities and the modernization of existing facilities, we intend to use
modern technology for our air and water emissions. These forward-looking programs will minimize the
impact that changing regulations have on capital expenditures for environmental compliance.
Insurance
We carry all risk insurance policies for each of our facilities. These policies cover our
property, plant, equipment, raw materials, finished products and inventory at levels customary with
market practice.
Property, Plant and Equipment
The table below sets forth information regarding the identity, location, products and capacity
of our production facilities as of December 31, 2005:
|
|
|
|
|
|
|
Short tons |
|
|
|
per year |
|
|
|
|
|
|
Paper: |
|
|
|
|
Containerboard |
|
|
|
|
Centauro Mill (Durango) |
|
|
275,000 |
|
Atenquique Mill (Jalisco) |
|
|
145,000 |
|
McKinley Mill (New Mexico, U.S.) |
|
|
210,000 |
|
Monterrey Mill (Nuevo León) |
|
|
138,000 |
|
Guadalajara Mill (Jalisco) |
|
|
55,000 |
|
Texcoco Mill (Edo. de México) |
|
|
27,000 |
|
Tuxtepec Mill (Oaxaca) (2) |
|
|
50,000 |
|
|
|
|
|
Total |
|
|
900,000 |
|
Newsprint |
|
|
|
|
Tuxtepec Mill (Oaxaca) (2) |
|
|
160,000 |
|
|
|
|
|
Uncoated Free Sheet |
|
|
|
|
Mexpape Mill (Veracruz) |
|
|
155,000 |
|
|
|
|
|
|
|
|
1,215,000 |
|
|
|
|
|
Pulp: |
|
|
|
|
Unbleached Softwood Pulp |
|
|
|
|
Atenquique Mill (Jalisco) |
|
|
80,000 |
|
|
|
|
|
Bleached Chemical Thermomecanical Pulp |
|
|
|
|
Pipsamex Pulp Mill (Durango) (3) |
|
|
79,000 |
|
|
|
|
|
Thermomecanical Pulp (TMP) |
|
|
|
|
Tuxtepec Pulp Mill (Oaxaca) |
|
|
52,000 |
|
|
|
|
|
27
|
|
|
|
|
|
|
Short tons |
|
|
|
per year |
|
Bleached Bagasse Pulp |
|
|
|
|
Mexpape Pulp Mill (Veracruz) (3) |
|
|
79,000 |
|
|
|
|
|
Bleached Deinking Pulp |
|
|
|
|
Tuxtepec DIP Mill (Oaxaca) |
|
|
92,000 |
|
Mexpape DIPHB Mill (Veracruz) |
|
|
105,000 |
|
|
|
|
|
Total |
|
|
197,000 |
|
|
|
|
|
|
|
|
487,000 |
|
|
|
|
|
Packaging: |
|
|
|
|
Corrugated containers |
|
|
|
|
Mexicali Plant (Baja California Norte) (1) |
|
|
39,000 |
|
Chihuahua Plant (Chihuahua) |
|
|
37,000 |
|
Monterrey Centro Plant (Nuevo León) |
|
|
52,000 |
|
Cartonpack (Nuevo León) (1) |
|
|
59,000 |
|
Monterrey Plant (Nuevo León) |
|
|
56,000 |
|
Culiacán Plant (Sinaloa) (1) |
|
|
39,000 |
|
Guadalajara Plant (Jalisco) (1) |
|
|
52,000 |
|
Guadalajara Ceosa Plant (Jalisco) |
|
|
39,000 |
|
Guadalajara San Sebastián Plant (Jalisco) |
|
|
16,000 |
|
Querétaro Plant (Querétaro) |
|
|
47,000 |
|
Atenpack Juárez Plant (DF) |
|
|
51,000 |
|
Atenpack Tultitlan Plant (Edo. De México) |
|
|
52,000 |
|
Titán Tlalnepantla Plant (Edo. De México) (1)(3)(4) |
|
|
58,000 |
|
Eyemsa Izcalli Plant (Edo. de México) |
|
|
47,000 |
|
Eyemsa Tlalnepantla Plant (Edo. de México) |
|
|
46,000 |
|
Eyemsa Tapachula Plant (Chiapas) |
|
|
52,000 |
|
Eyemsa Tepatitlán Plant (Jalisco) |
|
|
50,000 |
|
Empaques del Norte Plant (Monterrey) |
|
|
25,000 |
|
Durango McKinley Paper Dallas Plant (Texas, U.S.) |
|
|
100,000 |
|
|
|
|
|
Total |
|
|
917,000 |
|
Multi-wall Sacks
|
|
|
|
|
Cd. Guzmán Plant (Jalisco) |
|
|
22,000 |
|
Tula Plant (Hidalgo) (1) |
|
|
22,000 |
|
Apasco Plant (Edo. de México) |
|
|
22,000 |
|
|
|
|
|
Total |
|
|
66,000 |
|
|
|
|
|
|
|
|
983,000 |
|
|
|
|
|
Other: |
|
|
|
|
Plywood Anahuac Mill (Chihuahua) (3) |
|
|
26,000 |
|
Particleboard Durango Mill (Durango) (3) |
|
|
17,000 |
|
Plywood Durango Mill (Durango) |
|
|
15,000 |
|
|
|
|
|
Total |
|
|
58,000 |
|
|
|
|
|
|
|
|
(1) |
|
Leased facility. |
|
(2) |
|
This mill has a total capacity of 210,000 short tons of newsprint; however, as this mill has
the ability to produce 50,000 short tons of containerboard per year on one of its newsprint
machines and we used this machine principally to produce containerboard during the year ended
December 31, 2005, we have reflected this amount as containerboard capacity as of December 31,
2005. |
|
(3) |
|
These facilities are not currently in operation. |
|
(4) |
|
On December 30, 2005, we suffered a casualty loss at this plant as a result of a fire. This
plant has been out of service since that date. The delivery commitments and customers of this
plant are currently being served by our other corrugated container plants. We expect to
reopen this plant by the end of 2006. |
Effective March 31, 2006, we entered into an operating lease agreement under which we lease
machinery and equipment with installed capacity of 200,000 short tons of linerboard and 100,000
short tons of corrugated boxes located at the Tizayuca industrial facility. The capacity of this
industrial facility is not included in the table above. The raw materials used by the Tizayuca
paper mill consist entirely of OCC purchased in Mexico, a substantial portion of which is supplied
by a nearby recycling facility. The Tizayuca industrial facility includes a generator
28
fueled by
natural gas which generates all of the electricity used by this facility, and obtains all of its
water from wells located at this facility.
In addition to our facilities described above, our headquarters are located in Durango,
Mexico, approximately 900 kilometers (560 miles) north of Mexico City. We maintain sales offices in
Mexico City, Guadalajara, Jalisco and Monterrey, Nuevo León and representative offices in Dallas,
Texas. Our various production facilities in Mexico are located in the states of Durango, Nuevo
León, Jalisco, Baja California, Sonora, Estado de México, Hidalgo, Querétaro, Sinaloa, Chihuahua
and Chiapas, as well as in Mexico City. In the United States, we operate facilities in the states
of New Mexico, Texas and Arizona. We own our headquarters and all of our operating facilities,
except as noted in the table above.
|
|
|
Item 5. |
|
Operating and Financial Review and Prospects. |
The following discussion of our financial condition and results of operations should be read
in conjunction with our audited consolidated financial statements at December 31, 2005 and 2004 and
for the years ended December 31, 2005, 2004 and 2003 included in this annual report, as well as
with the information presented under IntroductionPresentation of Financial and Other
Information and Item 3: Key InformationSelected Consolidated Financial Data.
The following discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those discussed in the forward-looking
statements as a result of various factors, including those set forth in IntroductionSpecial Note
Regarding Forward-Looking Statements and Item 3: Key InformationRisk Factors.
General
The discussion and analysis of our financial condition and results of operations have been
organized to present the following:
|
|
|
a brief overview of our company and the principal factors that influence our results of
operations, financial condition and liquidity; |
|
|
|
|
a review of our financial presentation and accounting policies, including our critical
accounting estimates; |
|
|
|
|
a discussion of the principal factors that influence our results of operations and
liquidity; |
|
|
|
|
a discussion of developments since the end of 2005 that may materially affect our
results of operations, financial condition and liquidity; |
|
|
|
|
a discussion of our results of operations for the years ended December 31, 2005, 2004
and 2003; |
|
|
|
|
a discussion of our liquidity and capital resources, including our changes in financial
position for the years ended December 31, 2005, 2004 and 2003, and our long-term
indebtedness; |
|
|
|
|
a discussion of our capital expenditures and our contractual commitments; and |
|
|
|
|
a discussion of the principal differences between Mexican GAAP and U.S. GAAP as they
relate to our financial statements. |
Overview
We are a vertically integrated producer of paper and packaging products with an extensive
distribution network that links our strategically located facilities with our customers. We believe
that these factors, as well as our investment in modern manufacturing technology and our access to
raw materials as Mexicos only producer of unbleached virgin kraft pulp and one of Mexicos largest
users of recycled paper, based on information published by
29
the Mexican National Chamber for the
Pulp and Paper Industry, allow us to be one of the industrys lowest cost producers.
Our results of operations have been influenced and will continue to be influenced by a variety
of factors, including:
|
|
|
the substantial reduction in our production capacity and product offerings as a result
of the disposition of Pronal and the molded pulp division of Empaques de Cartón Titán, or
Titán, and our disposition of our Chihuahua particleboard plant; |
|
|
|
|
the level of our outstanding indebtedness and the interest we are obligated to pay on
this indebtedness, which affects our net financial expenses; |
|
|
|
|
the Mexican and U.S. market prices of corrugated containers, containerboard and
newsprint, which significantly affect our net revenue; |
|
|
|
|
the level of production capacity in the United States and Mexico for the products that
we sell and our capacity utilization rate, which significantly affects the cost of
producing our products and may lead to the impairment of our assets; |
|
|
|
|
the Mexican and U.S. market prices of OCC and ONP, the principal raw materials in our
paper manufacturing operations, which significantly affect the cost of producing our
products; |
|
|
|
|
the growth rates of Mexican GDP and U.S. GDP, which affect the demand for our products,
and consequently our sales volume; |
|
|
|
|
the exchange rate of the peso against the dollar, which affects our net sales in pesos
and our financing costs; |
|
|
|
|
inflation rates in Mexico; and |
|
|
|
|
our ability to use our net operating loss carryforwards. |
|
|
Our financial condition and liquidity are and will be influenced by a variety of factors, including: |
|
|
|
our financial restructuring following our defaults on our unsecured debt in November 2002; |
|
|
|
|
our ability to generate cash flows from our operations; |
|
|
|
|
prevailing domestic and international interest rates and movements in exchange rates,
which affect our debt service requirements; |
|
|
|
|
our limited ability to borrow funds from Mexican and international financial
institutions or to sell our debt securities in the Mexican and international securities
markets, primarily as a result of covenants included in our restructured indebtedness; and |
|
|
|
|
our capital expenditure requirements, which consist primarily of maintenance of our
operating facilities. |
Financial Presentation and Accounting Policies
Consolidated Financial Statements
We have prepared our audited consolidated financial statements at December 31, 2005 and 2004
and for the three years ended December 31, 2005 in accordance with Mexican GAAP, which differs in
significant respects from U.S. GAAP. Note 23 to our audited consolidated financial statements
provides a description of the principal
30
differences between Mexican GAAP and U.S. GAAP applicable
to our company and a reconciliation to U.S. GAAP of our consolidated net income (loss) and total
stockholders equity as of December 31, 2005 and 2004 and for the three years ended December 31,
2005.
Business Segments
We manage our business and report our results on a product basis in three segments. Our
reportable segments are:
|
|
|
Paper This segment includes our production and sale of containerboard (linerboard and
corrugating medium), newsprint and uncoated free sheet. This segment includes the operating
results of the Grupo Durango division and the Grupo Pipsamex division in Mexico and Durango
McKinley Paper Companys paper operations in the United States. |
|
|
|
|
Packaging This segment includes the production and sale of corrugated containers,
multi-wall sacks and paper tubes. This segment includes the operating results of the
packaging division in Mexico and the U.S. |
|
|
|
|
Other This segment includes the production and sale of plywood. |
In 2005, paper products accounted for 42.9% of our net sales to third parties, packaging
products accounted for 55.9% of our net sales to third parties and other products accounted for the
remaining 1.2% of our net sales to third parties.
Discontinued Operations
In connection with our financial and operating restructuring, during 2003 we authorized the
discontinuation and/or sale of some subsidiaries or significant assets. The related assets,
liabilities and operating results are presented in our audited consolidated financial statements as
discontinued operations. In 2003, our discontinued operations consisted of (1) the molded pulp
division of Titán, which we sold on February 27, 2003, (2) Pronal, which we sold on November 14,
2003, and (3) the Chihuahua particleboard plant of Ponderosa. In 2004, our discontinued operations
consisted of the Chihuahua particleboard plant of Ponderosa. In 2005, our discontinued operations
consisted of the Chihuahua particleboard plant of Ponderosa, which we sold on July 15, 2005.
Critical Accounting Estimates
We have identified the most critical accounting estimates that involve a higher degree of
judgment and complexity and that management believes are important to a more complete understanding
of our financial position and results of operations. The preparation of our consolidated financial
statements requires us to make estimates and assumptions that affect the reported amount of assets
and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated
financial statements, and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates. In order to provide an understanding about how we
form our judgments and estimates about certain future events, including the variables and
assumptions underlying the estimates, and the sensitivity of those judgments to different variables
and conditions, we have included comments related to the following critical accounting estimates
under Mexican GAAP.
Allowance for doubtful accounts
We have attempted to reserve for expected credit losses based on our past experience with
similar accounts receivable and believe our reserves to be adequate. It is possible, however, that
the accuracy of our estimation process could be materially impacted as the composition of this pool
of accounts receivable changes over time. We continually review and refine the estimation process
to make it as reactive to these changes as possible; however, we cannot guarantee that we will be
able to accurately estimate credit losses on these accounts receivable.
31
Deferred taxes
As part of the process of preparing our consolidated financial statements, we are required to
estimate our income taxes. This process involves our estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment of items, such as
allowance for doubtful accounts, deferred assets, inventories, property, machinery and equipment,
accrued expenses and tax loss carryforwards, for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included within our consolidated balance
sheet. We must then assess the likelihood that our deferred tax assets will be recovered and to the
extent we believe that recovery is not likely, we must establish a valuation allowance. To the
extent we establish a valuation allowance or increase this allowance in a period, we must include
an expense within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision for income taxes, and
any valuation allowance recorded against our deferred tax assets. In evaluating the need for a
valuation allowance for deferred income tax assets related to tax loss carryforwards, we first
consider the reversal of existing taxable temporary differences that are expected to generate
taxable income during the tax loss carryforward periods. Subsequently, we consider any tax planning
strategies if prudent and feasible.
Property, plant and equipment
Fixed assets and intangible assets are assigned useful lives, which impact the annual
depreciation and amortization expense. The assignment of useful lives involves significant
judgments and the use of estimates. Changes in technology or changes in intended use of these
assets may cause the estimated useful life to change. We also evaluate the carrying value of
property, plant and equipment to be held and used and any assets to be disposed of when events or
circumstances suggest that the carrying value may not be recoverable, such as temporary shut downs
of plants or permanent closures. Such reviews have been necessary in recent years.
Prior to December 31, 2003, Mexican GAAP required the calculation of impairment of long-lived
assets by comparing the unamortized carrying amount of the asset to the undiscounted future
expected cash flows to be generated by the assets, without interest charges. Under these rules, if
the sum of the expected future undiscounted cash flow is less than the carrying amount of the
asset, a loss was recognized for the difference between the fair value and carrying value of the
assets. We recorded impairment losses for our long-lived assets of Ps 656.1 million during 2003 in
other income (expenses) net in our statement of operations and reserved these amounts against
the value of our property, plant and equipment on our balance sheet. The deferred income tax effect
for this reserve resulted in a benefit of Ps 210.0 million during 2003, which was recorded in
income tax benefit (expenses) in our statement of operations.
On January 1, 2004, we adopted Bulletin C-15, Impairment of the Value of Long-Lived Assets
and Their Disposal, issued by MIPA, or Bulletin C-15. Bulletin C-15 establishes general criteria
for the identification and, if applicable, recording of losses from impairment or the decrease in
value of long-lived tangible and intangible assets, including goodwill. Bulletin C-15 requires the
calculation of impairment of long-lived assets by comparing the unamortized carrying amount of the
asset to the net present value of future expected net cash flows. Under Bulletin C-15, if the net
present value of future expected net cash flows is less than the carrying amount of the asset, a
loss was recognized for the difference between the net present value of future expected net cash
flows and carrying value of the assets. We recorded a favorable adjustment of Ps 113.8 million and
a charge of Ps 479.1 million during 2005 and 2004, respectively, in other income (expenses).
For U.S. GAAP purposes, beginning on January 1, 2002, we follow SFAS No. 144, Accounting for
the Impairment of Disposal of Long-Lived Assets (SFAS 144). SFAS 144 provides criteria for when
and in what circumstances an impairment loss (write-down) should be recorded and the manner in
which the write-down should be measured. An evaluation of impairment is undertaken whenever events
or circumstances indicate that the carrying amount of an asset may not be recoverable. Under SFAS
144, the impairment criteria is met when the carrying value of assets exceeds the sum of expected
future cash flows (undiscounted and without interest charges) of the related assets. If it is
determined that an asset is impaired, it is written down to its fair value, if available or the
present value of expected future cash flows.
32
The estimates of undiscounted cash flows and the net present value of future expected net cash
flows takes into consideration expectations of future macroeconomic conditions as well as our
companys internal strategic plans. Therefore, inherent in the estimated future cash flows is a
certain level of risk that we have considered in our valuation; nevertheless, actual future results
may differ.
For assets to be disposed of, our company assesses whether machinery or equipment can be used
at other facilities and if not, estimates the proceeds to be realized upon sale of the assets. Our
company has recorded impairment losses related to certain unused assets and such losses may
potentially occur in the future. We reviewed the fair value less disposal cost of the long-lived
assets for which management has committed to a plan of disposal, principally Ponderosas Chihuahua
particleboard plant in 2003, and recorded impairment losses for these assets of Ps 381.8 million
during 2003 in income (loss) from discontinued operations net in our statement of operations.
The deferred income tax effect for this reserve resulted in a benefit of Ps 122.1 during 2003,
which was recorded in income (loss) from discontinued operations net in our statement of
operations.
Pension plans, seniority premiums and indemnities
The determination of our obligations for pension plans, seniority premiums and indemnities are
dependent on our selection of certain assumptions used by actuaries in calculating such amounts.
Those assumptions are described in note 11 to our audited consolidated financial statements and
include, among others, the discount rate, expected long-term rate of return on plan assets and
rates of increase in compensation and healthcare costs. In accordance with generally accepted
accounting principles, actual results that differ from our assumptions are accumulated and
amortized over future periods and, therefore, generally affect our recognized expense and recorded
obligation in such future periods. While we believe that our assumptions are appropriate,
significant differences in our actual experience or significant changes in our assumptions may
materially affect our pension and other post-retirement obligations and our future expense.
Negative goodwill
Until December 31, 2004, negative goodwill is amortized under the straight-line method over a
period not to exceed two years, which in our opinion, approximates the period in which the acquired
subsidiaries are integrated into our company. Determination of the period that it takes an acquired
subsidiary to be integrated into our company involves significant judgments and the use of
estimates.
Effective January 1, 2005, Statement B-7, Business Acquisitions, establishes, among other
things, that the purchase method should be used to account for business acquisition. In addition,
it modifies the accounting treatment of goodwill, ceasing its amortization, but subjecting it to
annual impairment test. Statement B-7 also provides specific guidance for the accounting for
acquisition of minority interest and transfer of assets of stock among entities under common
control.
Leasing operations are registered under Statement D-5, Leasing. We capitalize leased asset
related to industrial machinery and equipment. These assets are depreciated under the depreciation
rates of the common acquired assets.
Principal Factors Affecting Our Results of Operations and Liquidity
Our Financial Restructuring
In November 2002, we defaulted on payments of principal and interest under our unsecured
indebtedness. As a result of the factors described below, we did not generate sufficient cash flows
from our operations to make a total of US$52.2 million of principal or a total of US$34.7 million
of interest payments that were due on our unsecured indebtedness during 2002. In 2003, we did not
pay a total of US$77.3 million of principal or a total of US$78.3 million of interest that was due
on our unsecured indebtedness. In 2004, we did not pay a total of US$66.4 million of principal or a
total of US$72.9 million of interest that was due on our unsecured indebtedness.
Our liquidity crisis was caused by, among other things:
33
|
|
|
the substantial capital expenditures required to expand our production capacity, which
resulted in a substantial debt service burden and led to our default on our unsecured
indebtedness, which has restricted our access to the capital markets; |
|
|
|
|
the economic slow-down in the U.S. and Mexico, which resulted in a reduction in the
demand for manufactured products requiring the goods supplied by our company; |
|
|
|
|
a significant drop in international market prices for paper and packaging products; |
|
|
|
|
the significant increase in raw material costs and other production costs; |
|
|
|
|
the devaluation of the peso against the dollar from 2002 to 2004; and |
|
|
|
|
a significant delay in the implementation of our planned divestiture of certain non-strategic assets. |
In December 2002, we retained financial advisors to advise us in evaluating debt-restructuring
alternatives to implement a long-term solution to our capital structure and debt service
requirements. We also began discussions with our bank creditors and certain holders of our debt
securities.
On May 18, 2004, we filed a voluntary petition for concurso mercantil (commercial
reorganization) under the LCM with the Mexican court. None of our subsidiaries filed for concurso
mercantil or other bankruptcy protection in Mexico. On August 25, 2004, the Mexican court declared
that we had satisfied all of the requirements to be a debtor under the LCM.
We continued to negotiate with our creditors, and on August 13, 2004, we reached an agreement
in principle with creditors collectively holding approximately 68% of our unsecured debt regarding
the terms of a proposed plan of reorganization and a proposed plan support agreement. On November
17, 2004, the Mexican court certified the list of recognized claims in our commercial
reorganization proceeding. On December 23, 2004, the conciliator (conciliadora) appointed by the
Mexican Federal Institute of Commercial Reorganization Specialists (Instituto Federal de
Especialistas de Concursos Mercantiles) in our commercial reorganization proceeding submitted our
plan of reorganization to the holders of recognized claims that were party to our plan support
agreement. The plan of reorganization provided that, in exchange for their debt, our unsecured
financial creditors would receive new debt equal to approximately 85% of the outstanding principal
amount of our unsecured debt. In addition to the new debt, the plan of reorganization provided that
our unsecured financial creditors would receive a number of our Series B Shares representing an
aggregate of approximately 17% of our capital stock on a fully diluted basis. The plan was executed
by our company and the holders of a majority of the recognized claims on December 23, 2004.
The conciliator submitted our executed plan of reorganization to the Mexican court on January
11, 2005, and it was approved by the Mexican court on February 7, 2005. On February 23, 2005, our
plan of reorganization was consummated. As a result:
|
|
|
Bank creditors of our company with claims against our company in the amount of US$136.3
million (Ps 1,611.3 million) received 2,392,957 of our Series B Shares, representing 2.16%
of our issued and outstanding capital stock, and the principal amount of the debt
outstanding with respect to these claims was amended and restated under the Restructured
Credit Agreement. Under the Restructured Credit Agreement, notes in an aggregate principal
amount of US$116.1 million (Ps 1,294.6 million) were issued to the holders of these claims.
These notes bear interest at a rate of LIBOR plus 2.75% per annum, payable quarterly in
arrears, and the principal amount of these notes will be amortized quarterly until the
maturity of these notes on December 30, 2012. |
|
|
|
Unsecured creditors of our company with claims against our company in the amount of
US$510.3 million (Ps 5,689.9 million) related to our 2003 notes, 2006 notes, 2008 notes,
2009 notes and ECP note received 16,412,961 of our Series B Shares, representing 14.84% of
our issued and outstanding capital stock, and an aggregate principal amount of US$433.8
million (Ps 4,836.5 million) of our 2012 notes in respect to these claims. The 2012 notes
bear interest at a rate of 7.50% per annum until December 31, 2005, 8.50% per |
34
|
|
|
annum from January 1, 2006 through December 31, 2006, and 9.50% per annum thereafter,
payable quarterly in arrears, and mature on December 30, 2012. |
Our obligations under the Restructured Credit Agreement and the 2012 notes are guaranteed by
the following subsidiaries: (1) Administración Corporativa de Durango, S. A. de C. V., or ACD, (2)
Empaques de Cartón Titán, S.A. de C.V. or Titán (3) Envases y Empaques de México, S. A. de C. V.,
or Eyemex, (4) Cartonpack, S.A. de C.V., or Cartonpack, (5) Industrias Centauro, S.A. de C.V., or
Centauro, (6) Compañía Papelera de Atenquique, S. A. de C. V., or Atenquique, (7) Ponderosa
Industrial de México, S.A. de C. V. or Ponderosa, (8) Porteadores de Durango, S. A. de C. V., (9)
Compañía Norteamericana de Inversiones en Celulosa y Papel, S. A. de C. V., (10) Reciclajes
Centauro, S. A. de C. V., (11) Durango Internacional, S.A. de C. V. and (12) Durango International,
Inc.
In addition, our obligations under the Restructured Credit Agreement and the 2012 notes are
secured by (1) the shares of Grupo Pipsamex and Durango McKinley Paper Company, (2) the real
property of ACD, Titán, Eyemex, Cartonpack, Centauro, Atenquique and Ponderosa, and (3) certain
assets of Titán and Eyemex.
Disposition of Certain of Our Operations
Our results of operations have been affected during the last three years by our disposition of
some of our operations. As a result of these dispositions, our net sales, gross profit and
operating income have decreased significantly and we have recorded significant other expenses and
losses from discontinued operations.
Disposition of Molded Pulp Division
On February 27, 2003, our subsidiary, Titán, sold the assets of its molded pulp division for
approximately US$53.7 million (Ps 650.8 million), resulting in a gain of Ps 364.1 million, which is
included in income (loss) from discontinued operations net in the statement of operations for
2003. Pursuant to the asset purchase agreement, Titán transferred to the buyer some accounts
receivable and trade accounts payable, in order to enable the buyer to continue with the production
and selling of molded products. As a result of this sale, the capacity of our packaging segment was
reduced by 40 thousand short tons and we ceased producing molded pulp products.
Disposition of Pronal
On November 14, 2003, our subsidiary, Grupo Pipsamex, sold its subsidiary, Pronal, for US$28.0
million (Ps 354.2 million), resulting in a loss of Ps 486.4 million, which is included in income
(loss) from discontinued operations net in the statement of operations for 2003. As a result of
this sale, the capacity of our paper segment was reduced by 160 thousand short tons and we ceased
being the sole Mexican producer of newsprint.
A portion of the proceeds of this sale was pledged to Bancomext under the terms of our loan
agreements with Bancomext, and was included in our balance sheet as restricted cash as of December
31, 2003. On September 29, 2004, we used this restricted cash to prepay a portion of our loans to
Bancomext.
Disposition of Mexico City Warehouse
On November 25, 2003, our subsidiary, Grupo Pipsamex, sold a warehouse located in Mexico City
for US$11.5 million (Ps 140.4 million). As part of the sale, Grupo Pipsamex reserved the right to
use a portion of the warehouse representing approximately one third of the entire property for a
period of five years at no cost. This sale generated a loss of Ps 210.7 million, which is recorded
in other expenses net in our statement of operations for 2003.
A portion of the proceeds of this sale is pledged to Bancomext under the terms of our loan
agreements with Bancomext, and was included in our balance sheet as restricted cash as of December
31, 2003. On September 29, 2004, we used this restricted cash to prepay a portion of our loans to
Bancomext.
Disposition of Chihuahua Particleboard Operations
During 2003, our management authorized a plan to sell a plant located in Chihuahua, which is
primarily engaged in the manufacturing of particleboard. Based on negotiations with a potential
buyer, we reduced the book value of
35
the net assets to be sold by Ps 381.8 million, which reduction is included in the net loss of
discontinued operations in the statement of operations for 2003.
On July 15, 2005, our subsidiaries, Ponderosa and Compañía Forestal de Durango S.A. de C.V.,
sold the assets of our Chihuahua particleboard plant for US$30 million. As a result of this sale,
the capacity of our other segment was reduced by 200 thousand short tons, we ceased producing
particleboard and, as of the date of this annual report, we no longer have any discontinued
operations.
Effect of Level of Indebtedness and Interest Rates
At December 31, 2005, our total outstanding indebtedness on a consolidated basis was Ps
6,762.7 million. As a result of our substantial indebtedness, our company incurred interest
expenses of Ps 592.4 million in 2005, Ps 1,158.3 million in 2004 and Ps 1,228.1 million in 2003. In
addition, because substantially all of our indebtedness is denominated in dollars and the peso
depreciated significantly against the dollar during 2003, our company incurred foreign exchange
losses of Ps 892.8 million in 2003. These interest expenses and foreign exchange losses were
substantial factors in our losses from continuing operations in 2004 and 2003.
Our debt obligations with variable interest rates expose our company to market risks from
changes in the London interbank offered rate, or LIBOR.
As a result of our defaults on our unsecured debt, Standard & Poors Ratings Services, a
division of The McGraw-Hill Companies, Inc., or Standard & Poors, and Moodys Investors Service,
or Moodys, have ceased rating our company and our debt instruments. As a result of the cessation
of these ratings agencies coverage of our company and debt instruments, our access to sources of
short-term and long-term financing has been severely restricted.
Pricing of Our Products
In 2005, paper products accounted for 42.9% of our net sales to third parties and packaging
products accounted for 55.9% of our net sales to third parties. The pricing of our products is
influenced by a number of factors, including:
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industry capacity utilization and significant increases in capacity in the industry; |
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recycled fiber prices; |
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|
demand for packaging products as a result of the level of growth of the Mexican and U.S. economies; |
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|
fluctuations in the exchange rate between the peso and the dollar; and |
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prevailing inflation rates. |
Containerboard. Our prices for containerboard primarily reflect international paper prices.
During 2003, our average price per short ton for containerboard declined by 5.7%, principally due
to the slow economic recovery in the United States and Mexico. During 2004, our average price per
short ton for containerboard increased by 15.2%, principally as a result of increased economic
activity in Mexico and the United States. During 2005, our average price per short ton for
containerboard declined by 12.7%, principally as a result of the contraction of the manufacturing
industry in Mexico during 2005.
Uncoated Free Sheet. Our prices for uncoated free sheet primarily reflect international paper
prices. During 2003, our average price per short ton for uncoated free sheet decreased by 2.2%,
principally due to the slow economic recovery in the United States and Mexico. During 2004, our
average price per short ton for uncoated free sheet increased by 5.1%, principally as a result of
increased economic activity in the United States and Mexico. During 2005, our average price per
short ton for uncoated free sheet increased by 4.3%, principally reflecting the recovery of
international prices of uncoated free sheet.
36
Newsprint. Our prices for newsprint primarily reflect international paper prices. We were the
only producer of newsprint in Mexico from the end of 1998, when we acquired Grupo Pipsamex, until
November 2003, when we sold Pronal. During 2003, our average price per short ton for newsprint
decreased by 5.3%, principally due to the slow economic recovery in the United States and Mexico.
During 2004, our average price per short ton for newsprint increased by 7.7%, principally as a
result of the recovery of the international price of newsprint. During 2005, our average price per
short ton for newsprint increased by 8.9%, principally reflecting the recovery of international
prices of newsprint.
Packaging products. In general, the prices of our packaging products fluctuate in accordance
with international prices. As a result of generally low prices for packaging products in the United
States, competition in Mexico from imports has increased. During 2003, our average price per short
ton for corrugated containers decreased by 2.5%, principally due to the slow economic recovery in
the United States and Mexico. During 2004, our average price per short ton for corrugated
containers decreased by 0.2%. During 2005, our average price per short ton for corrugated
containers decreased by 2.0%, principally due to the contraction of the manufacturing industry in
Mexico during 2005.
Cyclicality Affecting the Paper and Packaging Industry, Capacity Utilization and Pricing
Global consumption of containerboard and newsprint has increased significantly over the past
30 years. Due to this growth in consumption, producers have experienced periods of insufficient
capacity for these products. Periods of insufficient capacity, including some due to raw material
shortages, have usually resulted in increased capacity utilization rates and international market
prices for our paper products, leading to increased operating margins. These periods have often
been followed by periods of capacity additions, which have resulted in declining capacity
utilization rates and international selling prices, leading to declining operating margins.
We expect that these cyclical trends in international selling prices and operating margins
relating to global capacity shortfalls and additions will likely persist in the future, principally
due to the continuing impact of four general factors:
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cyclical trends in general business and economic activity produce swings in demand for
paper and packaging products; |
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|
during periods of reduced demand, the high fixed cost structure of the capital intensive
paper industry generally leads producers to compete aggressively on price in order to
maximize capacity utilization; |
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|
|
significant capacity additions, whether through plant expansion or construction, can
take two to three years to implement and are therefore necessarily based upon estimates of
future demand; and |
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|
|
as competition in paper and packaging products is generally focused on price, being a
low-cost producer is critical to improved profitability. This favors producers with larger
plants that maximize economies of scale but construction of high capacity plants may result
in significant increases in capacity that can outstrip demand growth. |
Since mid-1995, the North American paper and packaging industry has experienced a prolonged
down cycle characterized by continued price pressures, excess capacity and the inability of many
industry participants to earn satisfactory returns on capital. To maintain reasonable capacity
utilization, U.S. paper producers have generally maintained high export levels over the past three
years, including in the exports to Mexico.
Capacity expansion plans in the North American paper and packaging industry have been reduced
to their lowest levels in over 20 years. In addition, large amounts of capacity have been
permanently closed since the beginning of 2001.
Capacity Utilization
Our operations have high fixed costs. Accordingly, to obtain low unit production costs and
maintain adequate operating margins, we seek to maintain a high capacity utilization rate at all of
our production facilities.
37
The table below sets forth capacity utilization rates with respect to the production
facilities for some of our principal products for the years ended December 31, 2005, 2004 and 2003.
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|
|
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|
Year Ended December 31, |
|
|
2005 |
|
2004 |
|
2003 |
Containerboard |
|
|
100 |
% |
|
|
99 |
% |
|
|
99 |
% |
Newsprint and uncoated free sheet |
|
|
96 |
% |
|
|
93 |
% |
|
|
94 |
% |
Corrugated containers |
|
|
72 |
% |
|
|
71 |
% |
|
|
70 |
% |
Multi-wall sacks |
|
|
66 |
% |
|
|
59 |
% |
|
|
56 |
% |
Effects of Fluctuations in Raw Materials Prices
Fluctuations in the market price of OCC and ONP, which are the primary raw materials used in
our paper making activities have significant effects on our costs of goods sold and the prices that
we are able to charge our customers for our paper and packaging products. In addition, our cost of
goods sold is significantly affected by energy costs.
Recycled Fiber Costs
OCC and ONP are the primary raw materials used in the production of our paper products. In
2005, OCC and ONP represented approximately 40% of the total cost of goods sold of our paper
segment and approximately 30% of our consolidated cost of goods sold. The cost of OCC and ONP
varies in accordance with international market prices, which fluctuate depending upon the supply of
OCC and ONP and the demand for finished paper. Mexican OCC or ONP prices tend to follow price
movements in the United States, but are generally lower because Mexican OCC or ONP is lower in
quality.
We believe that we are one of Mexicos largest users of recycled paper and operate recycling
centers in the United States in Albuquerque and Phoenix. In 2005, approximately 39% of the OCC and
ONP used in our United States paper production were collected by our recycling centers. We purchase
the remainder of our OCC and ONP requirements in the open market.
Because the primary raw material of our packaging segment is containerboard produced by our
paper segment or other paper producers with cost structures similar to ours, fluctuations in the
international market price of OCC and ONP result in similar fluctuations in the cost of the primary
raw materials of the packaging segment.
We attempt to revise the prices for our products, which are generally denominated in dollars
or are dollar-linked, to reflect changes in the international market prices of these products,
which in turn reflect fluctuations in the international market prices of OCC and ONP. However, as a
result of the imbalance between supply of and demand for paper and packaging products, during 2003
we were not able to successfully pass through the increased prices of OCC and ONP to our customers.
The international market price of OCC and ONP has fluctuated significantly in the past, and we
expect that it will continue to do so in the future. The international market price of OCC and ONP
has been subject to significant upward pressures during the past several years as a result of
significantly increased demand for OCC and ONP in Asia, particularly China. Significant increases
in the price of OCC and ONP and, consequently, the cost of producing our products, reduces our
gross margins and negatively affects our results of operations to the extent that we are unable to
pass all of these increased costs on to our customers and could result in reduced sales volumes of
our products. Conversely, significant decreases in the price of OCC and ONP and, consequently, the
cost of producing our products, would likely increase our gross margins and our results of
operations and could result in increased sales volumes if this lower cost leads us to lower our
prices. We do not currently hedge our exposure to changes in the prices of OCC and ONP.
Energy Costs
38
In 2005, energy cost represented approximately 19% of our cost of production. In particular,
our paper mills consume significant amounts of electric power. We purchase approximately 70% of the
electric power needs of our Mexican operations from the Federal Electricity Commission (Comisión
Federal de Electricidad), the Mexican state-owned electric company, under long-term contracts and
we produce the remainder at our own power plants. These long-term contracts guarantee the supply of
electric power at prices that have historically increased by the Mexican inflation rate. In the
United States, our McKinley mill is supplied 100% by a rural electric cooperative at formula prices
under a long-term contract. Our U.S. converting facilities purchase electric power from local
utilities.
Mexican and United States Demand for Our Products
We sell paper and packaging products in Mexico and the United States. The following is our
geographic segment sales information for the periods indicated.
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|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(in million of constant pesos) |
|
Mexico |
|
Ps |
10,555.4 |
|
|
Ps |
10,016.5 |
|
|
Ps |
8,072.0 |
|
United States |
|
|
2,291.4 |
|
|
|
2,358.6 |
|
|
|
2,072.7 |
|
Eliminations |
|
|
(4,703.5 |
) |
|
|
(4,335.8 |
) |
|
|
(2,817.4 |
) |
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|
|
|
|
|
|
|
|
Total |
|
Ps |
8,143.3 |
|
|
Ps |
8,039.3 |
|
|
Ps |
7,327.3 |
|
|
|
|
|
|
|
|
|
|
|
In 2005:
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|
approximately 68% of our net sales of paper to third parties was to customers in Mexico,
and the remainder was to customers in the United States; and |
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|
approximately 88% of our net sales of packaging products to third parties was to
customers in Mexico, and the remainder was to customers in the United States. |
As a Mexican company with most of our operations in Mexico, we are significantly affected by
economic conditions in Mexico. Our results of operations and financial condition have been, and
will continue to be, affected by the growth rate of Mexicos GDP because our products are used in
the packaging of a wide range of consumer, agricultural, manufacturing and industrial products.
In addition, because a significant portion of our operations are in the United States and a
large portion of our packaging products are used in Mexico to package consumer, agricultural,
manufacturing and industrial products destined for the United States, our results of operations and
financial condition have been, and will continue to be, affected by the growth rate of the United
States GDP.
Mexican GDP growth has fluctuated significantly, and we anticipate that it will likely
continue to do so. Mexican GDP grew by 1.4% in 2003, 4.2% in 2004 and 3.0% in 2005 . Our management
believes that economic growth in Mexico would positively affect our future net sales and results of
operations. However, a recession in Mexico would likely reduce our future net sales and negatively
impact our results of operations.
Effects of Fluctuations in Exchange Rates between the Peso and the Dollar
Our results of operations and financial condition have been, and will continue to be, affected
by the rate of depreciation or appreciation of the peso against the dollar because:
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|
a substantial portion of our net sales are denominated in dollars or linked to dollars; |
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|
we have significant amounts of dollar-denominated liabilities that require us to make
principal and interest payments in dollars; |
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|
|
the operations of our subsidiary, Durango McKinley Paper Company, are conducted in the
United States; |
39
|
|
|
our costs for some of our raw materials, principally imports of OCC and OPP to Mexico
and certain chemicals required in our production processes, are incurred in dollars or are
dollar-linked; and |
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|
we are permitted to deduct our foreign exchange losses in calculating our taxable income
and, conversely, are required to treat foreign exchange gains as taxable income. |
Approximately 25% of our sales were made in dollars during 2005 with the balance primarily
dollar-linked. Historically, costs of production in Mexico have been incurred in pesos, although
substantially all of the costs and expenses of Durango McKinley Paper Company are incurred in
dollars. During 2005, approximately 18% of our consolidated cost of goods sold was incurred in
dollars or was dollar-linked. The primary dollar costs of our Mexican operations are incurred for
imports of OCC and ONP. Fluctuations in the peso affect the cost of imported OCC and ONP and other
dollar-linked or imported raw materials. The peso depreciated by 7.6% in 2003, appreciated by 0.8%
against the dollar in 2004 and appreciated by 4.6% in 2005.
Depreciation of the peso against the dollar generally results in our receiving more pesos for
our dollar sales but our dollar-based costs increase. The net effect on our operating income is
generally positive because the percentage of our net sales denominated in dollars or dollar-linked
is significantly higher than the percentage of our costs and expenses that are denominated in
dollars or dollar-linked. In addition, depreciation of the pesos against the dollar generally
benefits Mexican traditional exporters and maquiladora exporters that consume our packaging
products.
Conversely, appreciation of the peso against the dollar generally results in our receiving
fewer pesos for our dollar sales but our dollar-based costs decrease. The net effect on our
operating income is generally negative because the percentage of our net sales denominated in
dollars or dollar-linked is significantly higher than the percentage of our costs and expenses that
are denominated in dollars or dollar-linked. In addition, appreciation of the peso against the
dollar generally reduces the sales of Mexican traditional exporters and maquiladora exporters that
consume our packaging products.
At December 31, 2005, substantially all of our indebtedness was denominated in dollars. As a
result, when the peso depreciates against the dollar:
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the interest costs on our dollar-denominated indebtedness in pesos increases, which
negatively affects our results of operations; |
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|
the amount of our dollar-denominated indebtedness in pesos increases, and our total
liabilities in pesos increase; and |
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our financial expenses increase as a result of foreign exchange losses that we must
record. |
For example, the 7.6% devaluation of the peso in 2003 substantially increased our financial
expenses and were substantial factors in our net losses for those years.
Conversely, when the peso appreciates against the dollar:
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|
the interest costs on our dollar-denominated indebtedness in pesos decreases, which
positively affects our results of operations; |
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|
the amount of our dollar-denominated indebtedness in pesos decreases, and our total
liabilities in pesos decrease; and |
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our financial expenses tend to decrease as a result of foreign exchange gains that we
must record. |
We do not have in place hedging arrangements with respect to devaluation risk because we do
not believe them to be cost effective for our company.
40
Effects of Inflation
Our results of operations and financial condition have been, and will continue to be, affected
by the rate of inflation in Mexico because:
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|
most of our costs and expenses are incurred in pesos in Mexico and are subject to
inflationary pressures while most of our sales are denominated in dollars or are
dollar-linked and are made at prices set by reference to international market prices; and |
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|
our monetary assets and liabilities are restated to give effect to the rate of Mexican
inflation, as expressed by the NCPI, and as a result we record monetary position gains and
losses that depend on our net monetary asset (liability) position and the rate of Mexican
inflation. |
A component of our net comprehensive financing cost includes our gain or loss from monetary
position, which refers to the gains or losses, due to the effects of inflation, from holding net
monetary liabilities or assets. A gain from monetary position results from holding net monetary
liabilities during periods of inflation as the purchasing power represented by nominal peso
liabilities declines over time. Accordingly, since our monetary liabilities, including debt and
other payables, exceeded our monetary assets, including cash, cash equivalents and accounts
receivable, in 2003, 2004 and 2005 we recorded a gain from monetary position for those periods.
The table below shows Mexican inflation according to the NCPI and our gain on monetary
position for the periods indicated:
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|
|
|
|
|
|
|
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|
|
Year Ended December 31, |
|
|
2005 |
|
2004 |
|
2003 |
|
|
(in millions of constant pesos, |
|
|
except percentages) |
Inflation |
|
|
3.3 |
% |
|
|
5.2 |
% |
|
|
4.0 |
% |
Gain from monetary position |
|
Ps |
198.7 |
|
|
Ps |
469.4 |
|
|
Ps |
399.5 |
|
Effect of Taxes on Our Income
In accordance with Mexican tax law, we are subject to federal income tax, tax on assets and
employee statutory profit sharing.
Income Taxes and Employee Statutory Profit Sharing
The income tax rate was 34% in 2003, 33% in 2004 and 30% in 2005. Mexican income taxes take
into consideration the taxable and deductible effects of inflation. As a result of an amendment to
the Income Tax Law that became effective on November 13, 2004, the income tax rate will be 29% and
28% in 2006 and 2007, respectively. These reductions in the income tax rate resulted in a decrease
in the value of our deferred income tax liability of Ps 23.3 million in 2004 and Ps 17.2 million in
2005, which increases were charged to income tax benefit (expenses) in our statement of operations.
Like other Mexican companies, we are required by law to pay our employees, in addition to
their agreed compensation and benefits, profit sharing in an aggregate amount equal to 10% of our
taxable income (calculated without reference to inflation adjustments). Prior to 2002, the payment
of employee statutory profit sharing was deductible in certain instances. This deduction was
completely eliminated in 2002, but is scheduled to be reinstated in 2006. Deferred income tax
assets and liabilities are recognized for temporary differences resulting from comparing the book
and tax values of assets and liabilities plus any future benefits from tax loss carryforwards.
Deferred income tax assets are reduced by any benefits about which there is uncertainty as to their
realizability.
Asset Taxes
Taxes on assets are calculated by applying a rate of 1.8% on the net average of the majority
of our restated assets less certain liabilities and is payable only to the extent that it exceeds
income tax payable for the applicable period.
41
If in any year the asset tax exceeds the income tax payable, the asset tax payment for such
excess may be reduced by the amount by which income taxes exceeded asset taxes in the three
preceding years and any required payment of asset taxes may be credited against the excess of
income taxes over asset taxes of the following ten years. The asset taxes paid that are expected to
be recoverable are recorded as an advance payment of income taxes and decrease the deferred income
tax liability on our balance sheet.
Tax Loss Carryforwards and Recoverable Asset Taxes
Tax loss carryforwards and recoverable asset taxes for which the deferred income tax asset and
prepaid income tax, respectively, have been partially recognized may be recovered subject to
certain conditions. Due to a deterioration in the circumstances used to assess the realization of
the benefit of tax loss carryforwards and recovery of tax on assets paid, the valuation allowance
for benefit of tax loss carryforwards and recoverable tax on assets was increased by Ps 183.2
million in 2005 and Ps 181.4 million in 2004 and charged to results of operations.
Restated amounts as of December 31, 2005 and expiration dates are:
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|
|
|
|
Tax Loss |
|
|
Recoverable |
|
Year of expiration |
|
Carryforwards |
|
|
Asset Taxes |
|
|
|
(millions of constant pesos) |
|
2006 |
|
Ps |
158.3 |
|
|
Ps |
28.6 |
|
2007 |
|
|
107.6 |
|
|
|
28.4 |
|
2008 |
|
|
149.2 |
|
|
|
27.5 |
|
2009 |
|
|
70.6 |
|
|
|
21.5 |
|
2010 |
|
|
63.6 |
|
|
|
25.9 |
|
2011 |
|
|
87.2 |
|
|
|
24.1 |
|
2012 |
|
|
361.2 |
|
|
|
64.1 |
|
2013 |
|
|
1,128.2 |
|
|
|
59.7 |
|
2014 |
|
|
384.3 |
|
|
|
6.4 |
|
2015 |
|
|
1,038.0 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
Total |
|
Ps |
3,548.2 |
|
|
Ps |
287.2 |
|
|
|
|
|
|
|
|
Recent Developments
Recapitalization of Series A Shares and Series B Shares
On January 25, 2006 and February 20, 2006, respectively, our board of directors and
shareholders approved a recapitalization of our company under which we created a new sole series of
common stock, no par value, and each of our outstanding Series A Shares and Series B Shares will be
converted into one newly issued share of common stock. Following this recapitalization:
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|
each of our outstanding CPOs will represent a financial interest in one share of our common stock; |
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|
each of our outstanding ADSs will continue to represent two CPOs; and |
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|
we expect that our common stock will be listed on the Mexican Stock Exchange. |
We expect that the new common stock will be publicly traded over the Mexican Stock Exchange,
subject to the approval of the CNBV and to the registration of the new common stock with the
National Stock Registry of the CNBV. If approved and registered by the CNBV, we expect that the
recapitalization and public trading of the new common stock will become effective within 15 days
following the date on which the CNBV grants its approval.
Debt Reduction Program
On February 27, 2006, we announced a debt reduction program to be undertaken during 2006. As
of June 27, 2006, we have prepaid US$66.4 million of our outstanding debt and made amortization and
payments at maturity of
42
an additional US$4 million. The following are the most significant pre-payments made under
this debt redection program:
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we have prepaid US$47.0 million to Bancomext under certain outstanding loan agreements; |
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|
we have prepaid US$10.0 million to Bank of Albuquerque, representing the full amount
outstanding under our loan agreement with Bank of Albuquerque; |
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|
we have prepaid US$4.8 million to GE Capital Leasing under our capital leases,
representing the full amount outstanding under these leases; and |
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|
we have prepaid US$4.6 million to GE Capital Corporation under an outstanding capital
lease. |
We have financed these prepayments through the issuance and sale of capital stock of Pipsamex to
our majority stockholders, the proceeds from the divestiture of some minor non-strategic assets and
operating cash flow.
Pipsamex Capital Increase
On March 6, 2006, Pipsamex issued and sold 2,177,042,255 shares of its series B capital stock,
representing 13.3% of Pipsamex outstanding capital stock to NKM Corporativo, S.A. de C.V., a
company owned and controlled by the Rincón family, for Ps 314.6 million. The proceeds of this sale
were used to fund our debt reduction program.
Tizayuca Mill Lease Agreement
On March 31, 2006, we purchased land and an industrial facility in Tizayuca, Hidalgo at which
a paper mill and converter are located for US$10.0 million. Effective March 31, 2006, we entered
into an operating lease agreement under which we lease machinery and equipment with installed
capacity of 200,000 short tons of linerboard and 100,000 short tons of corrugated boxes located at
the Tizayuca industrial facility. The lease agreement has a term of 7.5 years and requires
payments over its term of US$66.0 million. We have an option to purchase the machinery and
equipment for fair market value on the seventh anniversary of the commencement of this lease.
Results of Operations
The following discussion of our results of operations is based on our audited consolidated
financial statements prepared in accordance with Mexican GAAP. The discussion of the results of our
business segments is based upon financial information reported for each of the three segments of
our business, as detailed in note 21 to our audited consolidated financial statements.
In the following discussion, references to increases or decreases in any year are made by
comparison with the corresponding prior year, except as the context otherwise indicates.
The following table sets forth consolidated financial information for each of the three years
ended December 31, 2005.
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|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(in millions of constant pesos) |
|
Net sales |
|
Ps |
8,143.3 |
|
|
Ps |
8,039.3 |
|
|
Ps |
7,327.3 |
|
Cost of sales |
|
|
7,096.3 |
|
|
|
6,889.5 |
|
|
|
6,300.0 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,047.0 |
|
|
|
1,149.8 |
|
|
|
1,027.3 |
|
Selling, general and administrative expenses |
|
|
677.7 |
|
|
|
694.1 |
|
|
|
698.2 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
369.3 |
|
|
|
455.7 |
|
|
|
329.1 |
|
Other income (expense), net |
|
|
5.2 |
|
|
|
(417.9 |
) |
|
|
(1,638.8 |
) |
Net comprehensive financing cost: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(592.4 |
) |
|
|
(1,158.3 |
) |
|
|
(1,288.1 |
) |
Interest income |
|
|
42.6 |
|
|
|
41.5 |
|
|
|
44.7 |
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(in millions of constant pesos) |
|
Foreign exchange gain (loss) |
|
|
334.6 |
|
|
|
62.6 |
|
|
|
(892.8 |
) |
Monetary position gain |
|
|
198.7 |
|
|
|
469.4 |
|
|
|
399.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16.5 |
) |
|
|
(584.8 |
) |
|
|
(1,736.7 |
) |
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before
income taxes and employee statutory profit
sharing |
|
|
357.9 |
|
|
|
(547.1 |
) |
|
|
(3,046.3 |
) |
Income tax benefit |
|
|
(304.0 |
) |
|
|
502.7 |
|
|
|
2.3 |
|
Employee statutory profit sharing expense |
|
|
(0.7 |
) |
|
|
|
|
|
|
(1.9 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before equity in income of associated
companies |
|
|
53.2 |
|
|
|
(44.4 |
) |
|
|
(3,045.9 |
) |
Equity in income of associated companies |
|
|
1.9 |
|
|
|
2.7 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
55.1 |
|
|
|
(41.7 |
) |
|
|
(3,043.8 |
) |
Discontinued operations |
|
|
108.8 |
|
|
|
105.5 |
|
|
|
(597.0 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss) |
|
Ps |
163.9 |
|
|
Ps |
63.9 |
|
|
Ps |
(3,640.8 |
) |
|
|
|
|
|
|
|
|
|
|
The following table sets forth consolidated financial information for our business segments
for each of the three years ended December 31, 2005.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2005 |
|
2004 |
|
2003 |
|
|
(in millions of constant pesos, except percentages) |
Paper |
|
|
|
|
|
|
|
|
|
|
|
|
Sales to third parties |
|
Ps |
3,490.1 |
|
|
Ps |
3,554.5 |
|
|
Ps |
2,987.6 |
|
Intersegment sales |
|
|
4,199.8 |
|
|
|
4,029.7 |
|
|
|
2,655.0 |
|
Total sales |
|
|
7,689.8 |
|
|
|
7,584.2 |
|
|
|
5,642.6 |
|
Operating income (loss) |
|
|
122.5 |
|
|
|
55.5 |
|
|
|
(122.6 |
) |
Operating margin (%) |
|
|
3.5 |
% |
|
|
1.6 |
% |
|
|
(4.1 |
)% |
Depreciation and amortization |
|
|
276.6 |
|
|
|
293.1 |
|
|
|
285.7 |
|
Packaging |
|
|
|
|
|
|
|
|
|
|
|
|
Sales to third parties |
|
Ps |
4,552.8 |
|
|
Ps |
4,374.2 |
|
|
Ps |
4,251.0 |
|
Intersegment sales |
|
|
413.3 |
|
|
|
306.0 |
|
|
|
144.9 |
|
Total sales |
|
|
4,966.2 |
|
|
|
4,680.2 |
|
|
|
4,395.9 |
|
Operating income |
|
|
236.7 |
|
|
|
398.9 |
|
|
|
467.5 |
|
Operating margin (%) |
|
|
5.2 |
% |
|
|
9.1 |
% |
|
|
11.0 |
% |
Depreciation and amortization |
|
|
133.4 |
|
|
|
137.4 |
|
|
|
128.8 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
Sales to third parties |
|
Ps |
100.4 |
|
|
Ps |
110.5 |
|
|
Ps |
88.7 |
|
Intersegment sales |
|
|
90.4 |
|
|
|
0.1 |
|
|
|
17.5 |
|
Total sales |
|
|
190.8 |
|
|
|
110.6 |
|
|
|
106.2 |
|
Operating income (loss) |
|
|
10.1 |
|
|
|
1.2 |
|
|
|
(15.8 |
) |
Operating margin (%) |
|
|
10.0 |
% |
|
|
1.1 |
% |
|
|
(17.8 |
)% |
Depreciation and amortization |
|
|
11.6 |
|
|
|
7.7 |
|
|
|
12.0 |
|
Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
Net Sales
Net sales increased by 1.3% in 2005, primarily due to the 4.1% increase of net sales to third
parties of our packaging segment. The effect of this increase was partially offset by the 1.8%
decrease of net sales to third parties of our paper segment and the 9.2% decrease of net sales to
third parties of our other segment.
Net sales to third parties of our packaging segment increased by 4.1% in 2005, primarily as a
result of:
44
|
|
|
a 3.1% increase in net sales to third parties of corrugated containers, principally
due to a 5.2% increase in our sales volume of corrugated containers, the effects of which
were partially offset by a 2.0% decline in our average sales price for corrugated
containers; and |
|
|
|
|
a 12.0% increase in net sales to third parties of multi-wall sacks, principally due to a
5.4% increase in our sales volume of multi-wall sacks and a 6.2% increase in our average
sales price for multi-wall sacks. |
|
|
Net sales to third parties of our paper segment decreased by 1.8% in 2005, due to: |
|
|
|
a 12.3% decrease in net sales to third parties of containerboard, principally due to a
12.7% decrease in our average sales price for containerboard, the effects of which were
partially offset by a 0.4% increase in our sales volume of containerboard; and |
|
|
|
|
to a lesser extent, a 2.0% decrease in net sales to third parties of newsprint,
principally due to a 9.9% decrease in our sales volume of newsprint, the effects of which
were partially offset by an 8.9% increase in our average sales price for newsprint. |
The effects of these decreases was partially offset by a 14.6% increase in net sales to third
parties of uncoated free sheet, principally due to a 4.3% increase in our average sales price for
uncoated free sheet and a 9.8% increase in our sales volume of uncoated free sheet.
Net sales to third parties of our other segment decreased by 9.2% in 2005, primarily due to
16.9% decrease in our sales volume of our other products. The effects of this decrease were
partially offset by a 9.3% increase in our average sales price for our other products.
Cost of Sales
Cost of sales increased by 3.0% in 2005, primarily due to increased sales volumes of packaging
products. Average prices for recycled fiber, consisting of OCC and ONP, which accounted for
approximately 30% of our cost of goods sold in 2005, increased by 15.9% in nominal dollar terms to
US$169 per short ton in 2005 from US$146 per short ton in 2004. Our energy cost, which represented
approximately 19% of our cost of production in 2005, increased by 11.9%, primarily as a result of
increased production volumes and increased prices for energy. On a unit cost basis, energy cost
increased by 9% in 2005. Our labor cost, which represented approximately 11% of our cost of
production in 2005, decreased by 1%, primarily as a result of a reduction in the number of our
employees at the higher end of our wage scale. On a unit cost basis, labor costs decreased by 3% in
2005.
Gross Profit and Gross Margin
Gross profit decreased by 8.9% in 2005, primarily as a result of the decrease in net sales of
our paper and other segments. Gross margin decreased to 12.9% in 2005 compared to 14.3% in 2004.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by 2.4% in 2005, and selling, general
and administrative expenses as a percentage of our net sales decreased to 8.3% in 2005 compared to
8.6% in 2004, primarily as a result of our greater control of our selling, general and
administrative expenses which decreased despite our increased net sales.
Operating Income
Operating income decreased by 19.0% in 2005, primarily as a result of the 8.9% decrease in our
gross profit that principally resulted from our increased cost of sales. Operating margin declined
to 4.5% in 2005 compared to 5.7% in 2004.
45
Operating income in our paper segment increased to Ps 122.5 million in 2005 from Ps 55.5
million in 2004. Operating margin of this segment increased to 3.5% in 2005 compared to 1.6% in
2004, principally due to price increases for newsprint and uncoated free sheet that exceeded the
increases in the unit costs of these products.
Operating income in our packaging segment decreased by 40.7%, primarily as a result of the
decline in the average prices of our packaging products in 2005. Operating margin of this segment
declined to 5.2% in 2005 compared to 9.1% in 2004, principally due to the decline in the average
price of corrugated cartons.
Operating income in our other segment was Ps 10.1 million in 2005 compared to Ps 1.2 million
in 2004, primarily as a result of higher average prices for our other products. Operating margin
of this segment increased to 10.0% in 2005 compared to 1.1% in 2004.
Other Income (Expense), Net
Other income, net was Ps 5.2 million in 2005 compared to other expense, net of Ps 417.9
million in 2004. In 2005, other income, net arose primarily as a result of a Ps 113.8 million gain
recorded as a result of the revaluation of long-lived assets in use at five of our mills and
plants. The effect of this gain, was partially offset by a Ps 65.7 million restructuring expense
recorded in 2005 in connection with our financial restructuring.
In 2004, other expenses net arose primarily as a result of:
|
|
|
a Ps 479.1 million expense recorded as a result of the impairment of long-lived assets
in use at five of our mills and plants; |
|
|
|
|
a Ps 333.5 million expense recorded as a result of the amortization in full of the debt
issuance expenses relating to our 2003 notes, 2006 notes, 2008 notes and 2009 notes; and |
|
|
|
|
a Ps 149.4 million restructuring expense recorded in 2004 in connection with our
financial restructuring. |
These expenses were partially offset by other income of Ps 641.5 million we recorded as a result of
our purchase of notes issued by our company in the aggregate principal amount of US$48.1 million
(Ps 554.2 million) for US$7.5 million (Ps 88.9 million).
Net Comprehensive Financing Cost
Net comprehensive financing cost decreased by 97.2% in 2005, primarily due to (1) a 48.9%
decrease in interest expense in 2005, principally as a result of the restructuring of a portion of
our outstanding debt in February 2005, which reduced the aggregate outstanding principal amount of
our debt and the average applicable interest rate, and (2) an increase in our foreign exchange gain
to Ps 334.6 million in 2005 compared to Ps 62.6 million in 2004 as a result of a 4.6% appreciation
of the peso in 2005 compared to the 0.8% appreciation of the peso in 2004. These effects were
partially offset by a 57.7% decrease in monetary position gain in 2005, principally due to the
reduction of Mexican inflation to 3.3% in 2005 compared to 5.2% in 2004, and the reduction of the
aggregate outstanding principal amount of our debt.
Income Tax and Employee Statutory Profit Sharing Benefit (Expenses)
Income tax and employee statutory profit sharing expense was Ps 304.7 million in 2005 as
compared to a benefit of Ps 502.7 million in 2004, principally due to tax benefits accrued in 2004
as a result of the impairment of certain of our long-lived assets. Our effective tax rate
decreased to 84.9% in 2005 compared to 94.4% in 2004.
Income (Loss) from Discontinued Operations
Income from discontinued operations increased by 3.1% in 2005. In 2004 and 2005, our
discontinued operations were the operations of our Chihuahua particleboard mill, which we sold on
July 15, 2005.
In 2005, income from discontinued operations was composed of:
46
|
|
|
income of Ps 59.3 million generated by our discontinued operations; |
|
|
|
|
a Ps 65.2 million income tax and employee statutory profit sharing benefit recorded with
respect to our discontinued operations; and |
|
|
|
|
a Ps 15.8 million loss recorded on the sale of our Chihuahua particleboard plant. |
In 2004, income from discontinued operations was composed of:
|
|
|
income of Ps 70.4 million generated by our discontinued operations; and |
|
|
|
|
a Ps 35.2 million income tax and employee statutory profit sharing benefit recorded with
respect to our discontinued operations. |
Consolidated Net Income
Net income was Ps 163.9 million in 2005 compared to Ps 63.9 million in 2004. Net income as a
percentage of net sales increased to 2.0% in 2005 compared to 0.8% in 2004.
Year Ended December 31, 2004 Compared with Year Ended December 31, 2003
Net Sales
Net sales increased by 9.7% in 2004 due to:
|
|
|
the 19.0% increase of net sales to third parties of our paper segment; |
|
|
|
|
the 2.9% increase of net sales to third parties of our packaging segment; and |
|
|
|
|
the 24.7% increase of net sales to third parties of our other segment. |
|
|
Net sales to third parties of our paper segment increased by 19.0% in 2004 due to: |
|
|
|
a 25.8% increase in net sales to third parties of containerboard, principally due to a
15.2% increase in our average sales price for containerboard and a 9.3% increase in our
sales volume of containerboard; |
|
|
|
|
a 30.1% increase in net sales to third parties of newsprint, principally due to a 20.9%
increase in our sales volume of newsprint and a 7.7% increase in our average sales price
for newsprint; and |
|
|
|
|
a 2.2% increase in net sales to third parties of uncoated free sheet, principally due to
a 5.1% increase in our average sales price for uncoated free sheet, which was partially
offset by a 2.7% decrease in our sales volume of uncoated free sheet. |
Net sales to third parties of our packaging segment increased by 2.9% in 2004, primarily as a
result of:
|
|
|
a 2.5% increase in net sales to third parties of corrugated containers, principally due
to a 2.7% increase in our sales volume of corrugated containers, the effects of which were
partially offset by a 0.2% decline in our average sales price for corrugated containers;
and |
|
|
|
|
an 8.7% increase in net sales to third parties of multi-wall sacks, principally due to a
11.0% increase in our sales volume of multi-wall sacks, the effects of which were partially
offset by a 2.1% decline in our average sales price for multi-wall sacks. |
47
Net sales to third parties of our other segment increased by 24.7% in 2004, primarily due to a
15.2% increase in our average sales price for our other products and an 8.2% increase in our sales
volume of our other products.
Cost of Sales
Cost of sales increased by 9.4% in 2004, primarily due to increased sales volumes of paper
products. Average prices for recycled fiber, consisting of OCC and ONP, which accounted for
approximately 30% of our cost of sales in 2004, increased by 17.7% in nominal dollar terms to
US$146 per short ton in 2004 from US$124 per short ton in 2003. Our energy cost, which represented
approximately 17% of our cost of production in 2004, increased by 10.1%, primarily as a result of
increased production volumes and increased prices for energy. On a unit cost basis, energy cost
increased by 4% in 2004. Our labor cost, which represented approximately 12% of our cost of
production in 2004, increased by 4%, primarily as a result of increases in wages paid to our
employees. On a unit cost basis, labor costs decreased by 2% in 2004.
Gross Profit and Gross Margin
Gross profit increased by 11.9% in 2004, primarily as a result of the increase in net sales of
our paper and packaging segments. Gross margin increased to 14.3% in 2004 compared to 14.0% in
2003.
Selling, General and Administrative Expenses
Selling, general and administrative expenses remained stable at Ps 694.1 million in 2004
compared to Ps 698.2 million in 2003. Selling, general and administrative expenses as a percentage
of our net sales decreased to 8.6% in 2004 compared to 9.5% in 2003 as a result of our greater
control of our selling, general and administrative expenses which remained stable despite our
increased net sales.
Operating Income
Operating income increased by 38.4% in 2004, primarily as a result of the 11.9% increase in
our gross profit that principally resulted from our increased net sales. Operating margin increased
to 5.7% in 2004 compared to 4.5% in 2003.
Operating income in our paper segment was Ps 55.5 million compared to operating loss of Ps
122.6 million in 2003, primarily as a result of the increase in average sales prices of our paper
products and this segments increased net sales in 2004. Operating margin of this segment increased
to 1.6% in 2004 compared to (4.1)% in 2003, principally due to price increases for containerboard
and newsprint and uncoated free sheet that exceeded the increases in the unit costs of these
products.
Operating income in our packaging segment decreased by 14.7%, primarily as a result of the
decline in the average prices of our packaging products, partially offset by the increased sales of
this segment. Operating margin of this segment declined to 9.1% in 2004 compared to 11.0% in 2003,
principally due to increases in the unit costs of corrugated containers.
Operating income in our other segment was Ps 1.2 million compared to operating loss of Ps 15.8
million in 2003, primarily as a result of higher average prices for our other products and this
segments increased net sales in 2004. Operating margin of this segment increased to 1.1% in 2004
compared to (17.8)% in 2003.
Other Expenses Net
Other expenses net decreased by 74.5% in 2004. In 2004, other expenses net arose
primarily as a result of:
|
|
|
a Ps 479.1 million expense recorded as a result of the impairment of long-lived assets
in use at five of our mills and plants; |
|
|
|
|
a Ps 333.5 million expense recorded as a result of the amortization in full of the debt
issuance expenses relating to our 2003 notes, 2006 notes, 2008 notes and 2009 notes; and |
48
|
|
|
a Ps 149.4 million restructuring expense recorded in 2004 in connection with our
financial restructuring. |
These expenses were partially offset by other income of Ps 641.5 million we recorded as a result of
our purchase of notes issued by our company in the aggregate principal amount of US$48.1 million
(Ps 554.2 million) for US$7.5 million (Ps 88.9 million).
In 2003, other expenses net arose primarily as a result of:
|
|
|
a Ps 656.1 million expense recorded as a result of the impairment of long-lived assets
in use at five of our mills and plants; |
|
|
|
|
a Ps 342.5 million expense recorded as a result of our assumption of the Bank of
America, N.A. loan agreement and the JPMorgan letters of credit relating to the call of our
guarantees of these instruments following the defaults on these instruments by Durango
Georgia Receivables Company and Durango Paper Company, respectively; |
|
|
|
|
a Ps 296.6 million restructuring expense recorded in 2003 in connection with our
financial restructuring, including our payment of US$12.0 million in fees related to
certain forbearance agreements; and |
|
|
|
|
a Ps 217.0 million expense reflecting our loss on the sale of property, plant and
equipment, principally the sale of Grupo Pipsamexs warehouse in Mexico City. |
Net Comprehensive Financing Cost
Net comprehensive financing cost decreased by 66.3% in 2003, primarily due to (1) the Ps 62.6
million foreign exchange gain we recorded in 2004 compared to the Ps 892.8 million foreign exchange
loss we recorded in 2003 as a result of a 0.8% appreciation of the peso in 2004 as compared to a
7.6% depreciation of the peso in 2003, and (2) a 10.1% decrease in interest expense in 2004,
primarily as a result of our ceasing to accrue interest on our outstanding unsecured debt after the
Mexican court declared us to be in commercial reorganization under the LCM on August 25, 2004, the
effect of which was partially offset by our accrual of interest on this debt at default rates in
2004 prior to August 25, 2004.
Income Tax and Employee Statutory Profit Sharing Benefit
Income tax and employee statutory profit sharing benefit was Ps 502.7 million in 2004 as
compared to Ps 0.4 million in 2003, principally due to the change in the valuation allowance for
recoverable deferred income tax assets and recoverable tax on assets. Our effective tax rate
increased to 94.5% in 2004 compared to 0.02% in 2003.
Income (Loss) from Discontinued Operations
Income from discontinued operations was Ps 105.5 million in 2004 compared to loss from
discontinued operations of Ps 597.0 million in 2003. In 2004, our discontinued operations were the
operations of our Chihuahua particleboard mill, which were held for sale at December 31, 2004. In
2003, our discontinued operations were:
|
|
|
the operations of our molded pulp division, which we sold for US$53.7 million on February 27, 2003; |
|
|
|
|
the operations of Pronal, which we sold for US$28.0 million on November 14, 2003; and |
|
|
|
|
the operations of our Chihuahua particleboard mill, which were held for sale at December 31, 2003. |
In 2004, income from discontinued operations was composed of:
|
|
|
income of Ps 70.4 million generated by our discontinued operations; and |
49
|
|
|
a Ps 35.2 million income tax and employee statutory profit sharing benefit recorded with
respect to our discontinued operations. |
In 2003, loss from discontinued operations was composed of:
|
|
|
a Ps 612.9 million loss incurred by our discontinued operations, including a Ps 381.8
million impairment charge assessed against the Chihuahua particleboard mill; |
|
|
|
|
a Ps 486.4 million loss recorded on the sale of Pronal; |
|
|
|
|
a Ps 364.1 million gain recorded on the sale of our molded pulp division; and |
|
|
|
|
a Ps 138.2 million income tax and employee statutory profit sharing benefit recorded
with respect to our discontinued operations. |
Consolidated Net Income (Loss)
Net income was Ps 63.9 million in 2004 compared to net loss of Ps 3,640.8 million in 2003. Net
income as a percentage of net sales was to 0.8% in 2004 compared to a net loss as a percentage of
net sales of 49.7% in 2003.
Liquidity and Capital Resources
Our principal cash requirements consist of the following:
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working capital requirements; |
|
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|
|
servicing our indebtedness; and |
|
|
|
|
capital expenditures related to investments in operations, major maintenance and
expansion of plant facilities. |
Our principal sources of liquidity have historically consisted of:
|
|
|
cash flows from operating activities; |
|
|
|
|
short-term and long-term borrowings; and |
|
|
|
|
sales of debt securities in domestic and international capital markets. |
At December 31, 2005 and December 31, 2004, we had cash and cash equivalents of Ps 700.4
million and Ps 859.9 million, respectively. At December 31, 2005 and December 31, 2004, we had
working capital of Ps 2,018.0 million and Ps 2,104.5 million, respectively.
We believe that cash generated by our operating activities will be adequate to meet our debt
service requirements, capital expenditures and working capital needs for the foreseeable future.
Our future operating performance and our ability to service our debt are subject to future economic
conditions and to financial, business and other factors, many of which are beyond our control.
Changes in Financial Position
Net Resources Provided by (Used in) Operating Activities
Operating activities provided net resources of Ps 143.1 million in 2005, Ps 849.0 million in
2004 and used net resources of Ps 482.6 million in 2003. The significant factors that led to the
provision of net resources by operating
50
activities in 2005 were our consolidated net income from continuing operations of Ps 55.1
million, net of items not requiring or providing resources, principally:
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|
|
depreciation and amortization of Ps 421.6 million; |
|
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|
|
deferred income tax expense of Ps 241.1 million, primarily as a result of the
revaluation of long-lived assets in use at five of our mills and plants; and |
|
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|
|
a Ps 113.8 million gain as a result of the revaluation of long-lived assets in use at
five of our mills and plants. |
These effects were supplemented by (1) a Ps 92.2 million decrease in other current assets, and
(2) a Ps 90.4 million increase in trade accounts payable. The effects of these items were partially
offset by:
|
|
|
a Ps 307.7 million loss from discontinued operations, net of items that did not require resources; |
|
|
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|
a Ps 135.6 million decrease in accrued expenses and taxes, other than income taxes; |
|
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|
|
a Ps 100.2 million decrease in other liabilities, net; and |
|
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|
|
a Ps 90.0 million increase in inventories. |
The significant factors that led to the provision of net resources by operating activities in
2004 were our consolidated loss from continuing operations of Ps 41.6 million, net of items not
requiring or providing resources, principally:
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|
|
impairment of long-lived assets of Ps 479.1 million related to five of our mills and plants; |
|
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|
|
depreciation and amortization of Ps 438.2 million, |
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|
|
amortization of debt-issuance cost of Ps 338.1 million related to our 2003 notes, 2006
notes, 2008 notes and 2009 notes as a result of our financial restructuring, and |
|
|
|
|
deferred income tax benefit of Ps 531.3 million, primarily as a result of the impairment
of our long-lived assets. |
These effects were supplemented by (1) a Ps 135.6 million decrease in trade accounts receivables,
net, primarily as a result of greater efficiency in our collection process, (2) net income of
discontinued operations, net of items not requiring the use of resources, of Ps 105.5 million, and
(3) a Ps 73.2 million decrease in inventories. The effects of these items were partially offset by
a Ps 222.7 million decrease in trade accounts payable.
The significant factors that led to the use of net resources from operating activities in 2003
were our consolidated net loss of Ps 3,043.8 million, net of items not requiring or providing
resources, principally:
|
|
|
impairment of long-lived assets of Ps 656.1 million related to five of our mills and plants; |
|
|
|
|
depreciation and amortization of Ps 426.4 million; |
|
|
|
|
loss related to Durango Paper Company of Ps 342.5 million; and |
|
|
|
|
loss on sale of property, plant and equipment of Ps 217.0 million principally related to
the sale of Grupo Pipsamexs warehouse in Mexico City. |
The effects of our net loss were supplemented by (1) net loss of discontinued operations, net of
items not requiring the use of resources, of Ps 194.3 million, (2) a Ps 98.3 million increase in
trade accounts receivable, net principally
51
as a result of the increase in recoverable taxes; and (3) a Ps 88.3 million decrease in other
liabilities, net resulting from an increase in deferred income of Grupo Pipsamex.
The effects of these items were partially offset by:
|
|
|
a Ps 998.3 million increase in interest payable as a result of our failure to pay
interest payments due on our unsecured indebtedness during 2003; |
|
|
|
|
a Ps 93.6 million increase in trade accounts payable resulting from our decision to
delay payments to certain of our trade creditors in order to conserve our cash resources; |
|
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|
a Ps 81.9 million increase in liabilities of discontinued operations; and |
|
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|
|
a Ps 52.5 million decrease in inventories, principally resulting from a decrease in
spare parts and finished products. |
Net Resources Used in Financing Activities
Financing activities used net resources of Ps 555.1 million in 2005, Ps 625.7 million in 2004
and Ps 60.7 million in 2003. In 2005, net resources used in financing activities on a consolidated
basis primarily consisted of (1) a Ps 3,989.0 million decrease in short-term and long-term debt,
partially offset by (2) a Ps 290.7 million increase in capital stock and a Ps 2,973.7 million
increase in additional paid-in capital, reflecting the effects of our issuance of Series B Shares
in connection with our financial restructuring. These effects were supplemented by payments of
long-term debt of Ps 170.5 million, primarily payments on our capital leases and secured debt.
In 2004, net resources used in financing activities on a consolidated basis primarily
consisted of payments of Ps 798.9 million of long-term debt, primarily payments on our capital
leases and secured debt. The effects of these payments were partially offset by the incurrence of
Ps 101.1 million of short-term and long-term debt, primarily as a result of the effects of the
application of inflation accounting.
In 2003, net resources used in financing activities on a consolidated basis primarily
consisted of payments of Ps 441.3 million on our long-term debt, primarily payments on our capital
leases and secured debt. The effects of these payments were partially offset by the incurrence of
Ps 282.0 million of short-term and long-term debt, primarily as a result of the effects of the
application of inflation accounting.
Net Resources Generated by (Used in) Investing Activities
Investing activities generated net resources of Ps 248.5 million in 2005, used net resources
of Ps 61.4 million in 2004, and generated net resources of Ps 990.4 million in 2003. In 2005, net
resources generated by investing activities on a consolidated basis primarily consisted of (1) Ps
334.4 million received as proceeds from the sale of our Chihuahua particleboard plant, and (2) Ps
74.8 million received as proceeds from the sale of property, plant and equipment. The effects of
these transactions were partially offset by (1) Ps 134.8 million of acquisitions of machinery and
equipment, and (2) Ps 54.0 million of investment in subsidiaries.
In 2004, net resources used in investing activities on a consolidated basis primarily
consisted of our acquisition of machinery and equipment for Ps 214.2 million. The effects of these
transactions were partially offset by the termination of restrictions placed on Ps 171.2 million of
the proceeds of the sales of Pronal and Grupo Pipsamexs Mexico City warehouse as a result of the
prepayment of a portion of our indebtedness to Bancomext in connection with the restructuring of
our debt to Bancomext on September 30, 2004.
In 2003, net resources generated by investing activities on a consolidated basis primarily
consisted of (1) Ps 1,005.0 million received as proceeds from the sale of our molded products
division and Pronal, and (2) Ps 251.2 million received as proceeds from the sale of property, plant
and equipment, primarily Grupo Pipsamexs Mexico City warehouse. The effects of these transactions
were partially offset by the restrictions placed on Ps 171.2 million of the proceeds of the sales
of Pronal and Grupo Pipsamexs Mexico City warehouse and our acquisition of machinery and equipment
for Ps 114.7 million.
52
Indebtedness
At December 31, 2005, our total outstanding indebtedness on a consolidated basis was Ps
6,762.7 million, consisting of Ps 257.6 million of short-term indebtedness, including current
portion of long-term indebtedness (or 3.8% of our total indebtedness), and Ps 6,505.1 million of
long-term indebtedness (or 96.2% of our total indebtedness). All of our indebtedness at December
31, 2005 was denominated in foreign currencies. The weighted average interest rate on our
indebtedness was 7.6% at December 31, 2005, 7.3% at December 31, 2004 without giving effect to our
financial restructuring, and 10.8% at December 31, 2003.
Short-Term Indebtedness
At December 31, 2005, we have no outstanding short-term indebtedness, other than the current
porion of our long-term indebtedness.
Long-Term Indebtedness
The following table sets forth selected information with respect to certain of our principal
outstanding long-term debt instruments at December 31, 2005.
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|
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|
|
|
|
Outstanding |
|
|
|
|
Principal Amount at |
|
|
Instrument |
|
December 31, 2005 |
|
Final Maturity |
2012 notes
|
|
US$433.8 million
|
|
December 2012 |
Restructured Credit Agreement
|
|
US$110.3 million
|
|
December 2012 |
Bancomext Loan
|
|
US$55.6 million
|
|
September 2014 |
Bancomext Fabrica Mexicana Loan
|
|
US$8.5 million
|
|
September 2014 (repaid) |
Bank of Albuquerque Loan
|
|
US$10.0 million
|
|
May 2008 (repaid) |
Commerzbank Loan
|
|
6.4 million
|
|
January 2010 |
GE Capital Leasing Leases
|
|
US$5.3 million
|
|
April 2009 |
GE Capital Corporation Lease
|
|
US$4.9 million
|
|
October 2007 |
2012 Notes
On February 23, 2005, we issued an aggregate principal amount of US$433.8 million (Ps 4,836.5
million) of our 2012 notes in connection with our restructuring. The 2012 notes bear interest at a
rate of 7.50% per annum until December 31, 2005, 8.50% per annum from January 1, 2006 through
December 31, 2006, and 9.50% per annum thereafter, payable quarterly in arrears, and mature on
December 30, 2012.
Restructured Credit Agreement
On February 23, 2005, we entered into the Restructured Credit Agreement. Under the
Restructured Credit Agreement, notes in an aggregate principal amount of US$116.1 million (Ps
1,294.6 million) were issued in connection with our restructuring. These notes bear interest at a
rate of LIBOR plus 2.75% per annum, payable quarterly in arrears, and the principal amount of these
notes will be amortized quarterly until the maturity of these notes on December 30, 2012. As of
December 31, 2005, the aggregate principal amount outstanding under the Restrucured Credit
Agreement was US$110.3 million (Ps 1,173.0 million).
Other Secured Bank Debt
Bancomext Loans. Our subsidiary, Grupo Pipsamex, borrowed an aggregate principal amount of
US$80.0 million (Ps 921.7 million) from Bancomext under a loan agreement. In 2004, we defaulted
under this loan agreement and negotiated the restructuring of this loan agreement with Bancomext.
This loan agreement was restructured on September 29, 2004. In connection with the restructuring,
we applied US$28.0 million of the proceeds of our sale of our subsidiary, Pronal, and Grupo
Pipsamex warehouse in Mexico City to the principal amount and accrued interest under this loan
agreement. The restructured loan is payable in 40 quarterly installments beginning in December 2004
and bears interest at a rate of LIBOR + 5.1535%, payable quarterly. This loan is
53
secured by a first priority security interest in substantially all of the assets of Grupo
Pipsamex and certain of its subsidiaries and is guaranteed by CODUSA. As of December 31, 2005, the
aggregate principal amount outstanding under this loan agreement was US$55.6 million (Ps 591.5
million). On February 26, 2006, we prepaid US$26.5 million under this loan agreement, and on June
8, 2006, we prepaid an additional US$12.0 million under this loan agreement.
Our subsidiary, Fábrica Mexicana de Papel, S.A. de C.V., borrowed an aggregate principal
amount of US$15.4 million (Ps 177.4 million) from Bancomext under a loan agreement. In 2004, we
defaulted under this loan agreement and negotiated the restructuring of this loan agreement with
Bancomext. This loan agreement was restructured on September 29, 2004. In connection with the
restructuring, we applied US$12.0 million of the proceeds of our sale of our subsidiary, Pronal,
and Grupo Pipsamex warehouse in Mexico City to the principal amount and accrued interest under
this loan agreement. The restructured loan is payable in 40 quarterly installments beginning in
December 2004 and bears interest at a rate of LIBOR + 5.153%, payable quarterly. This loan is
secured by a second priority security interest in substantially all of the assets of Fábrica
Mexicana de Papel, S.A. de C.V. and certain other subsidiaries of Grupo Pipsamex and is guaranteed
by CODUSA. As of December 31, 2005, the aggregate principal amount outstanding under this loan
agreement was US$8.5 million (Ps 90.1 million). On February 26, 2006, we prepaid all outstanding
amounts under this loan agreement.
Bank of Albuquerque Loan. Our subsidiary, Durango McKinley Paper Company, borrowed an
aggregate principal amount of US$22.0 million (Ps 255.2 million) from the Bank of Albuquerque under
a loan agreement. In addition, the Bank of Albuquerque has issued letters of credit in an aggregate
amount of US$10.5 million (Ps 111.7 million) under this loan agreement. This loan agreement was
used to refinance a credit facility between our former subsidiary, Durango Paper Company, and the
Bank of America, N.A. The principal on the term loan is payable in 24 quarterly installments
beginning August 2002 and bears interest at a rate of LIBOR + 2.75%. The obligations of Durango
McKinley Paper Company under the Bank of Albuquerque loan agreement are secured by the accounts,
inventory and equipment of Durango McKinley Paper Company and its real property located in Houston,
Texas, Mesquite, Texas and Prewitt, New Mexico. In addition, the obligations are guaranteed by
Durango International, Inc. As of December 31, 2005, the aggregate principal amount outstanding
under this loan agreement was US$10.0 million (Ps 106.3 million). On March 24, 2006, we prepaid
US$8.0 million under this loan agreement, and on April 7, 2006, we prepaid the remaining
outstanding balance under this loan agreement.
Commerzbank Loan. Our subsidiary, Ponderosa, borrowed an aggregate principal amount of 10.7
million (Ps 166.9 million) from Commerzbank under a loan agreement. This loan is payable in 15
semi-annual installments beginning in January 2003 and bears interest at a rate of EUROLIBOR +
1.15%. The obligations of Ponderosa under this loan agreement are secured by the certain equipment
of Ponderosa acquired with the proceeds of this loan. In addition, the obligations are guaranteed
by CODUSA. As of December 31, 2005, the aggregate principal amount outstanding under this loan was
6.4 million (Ps 80.3 million).
Our Capital Leases
GE Capital Leasing Leases. Our subsidiary, Titán, has entered into financial lease agreements
with GE Capital Leasing for the acquisition of machinery. Titán issued two promissory notes in
respect of the future minimum lease payments under these financial lease agreements in an aggregate
principal amount of US$10.0 million (Ps 115.0 million) which are payable in 28 quarterly
installments with the final payments due in October 2008 and April 2009, respectively. The
promissory notes bear interest at a rate of LIBOR + 3.25%. The promissory notes are secured by a
pledge of the leased machinery and are guaranteed by CODUSA. As of December 31, 2005, the aggregate
principal amount outstanding under these promissory notes was US$5.3 million (Ps 56.1 million). On
February 26, 2006, we prepaid US$4.8 million under these promissory notes.
GE Capital Corporation Lease. In connection with our acquisition of Líneas Aéreas, we assumed
a financial lease agreement with GE Capital Corporation with respect to a business jet. The
original amount outstanding under this lease was US$8.0 million (Ps 85.1 million), payable in 60
monthly installments through October 2007. At the time of our acquisition of Líneas Aéreas, the
amount outstanding under this lease was US$5.3 million (Ps 56.4 million). The interest rate under
this lease was the prime rate + 1.50% per annum with the prime rate not to be less than 4.75% per
annum. As of December 31, 2005, the aggregate principal amount outstanding under this lease
agreement was US$4.9 million ($52.3 million). On February 24, 2006, we prepaid US$4.6 million under
this lease
54
agreement. We expect to prepay the remaining outstanding amounts under this lease agreement
in connection with our pending sale of the business jet.
Restrictive Covenants and Available Credit
The instruments governing our indebtedness contain financial and other covenants that
restrict, among other things, the ability of our company and most of our subsidiaries to:
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|
|
incur additional indebtedness; |
|
|
|
|
incur liens; |
|
|
|
|
issue guarantees; |
|
|
|
|
issue or sell capital stock of subsidiaries; |
|
|
|
|
pay dividends or make certain other restricted payments; |
|
|
|
|
consummate certain asset sales; |
|
|
|
|
enter into certain transactions with affiliates; or |
|
|
|
|
merge or consolidate with any other person or sell or otherwise dispose of all or
substantially all of our assets. |
The Common Agreement for the benefit of the holders of our 2012 notes and creditors under the
Restructured Credit Agreement also requires prepayments of the indebtedness from the proceeds from
certain asset sales, insurance, and incurrence of certain indebtedness. Our failure to comply with
the restrictions contained in the Common Agreement constitutes an event of default, which could
result in an acceleration of such indebtedness.
We must maintain minimum debt service, minimum net worth and maximum leverage ratios under the
Restructured Credit Agreement, and the Bank of Albuquerque loan agreement. Our failure to comply
with these restrictions constitutes an event of default, which could result in an acceleration of
such indebtedness.
The above covenants, together with our highly leveraged position, have restricted, and will
continue to restrict, our corporate activities, including our ability to respond to market
conditions, to provide for unanticipated capital expenditures or to take advantage of business
opportunities.
Off-Balance Sheet Arrangements
We do not currently have any transactions involving off-balance sheet arrangements.
55
Contractual Commitments and Capital Expenditures
Contractual Commitments
The following table summarizes significant contractual obligations and commitments at December
31, 2005 that have an impact on our liquidity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
Less than One Year |
|
One to Three Years |
|
Three to Five Years |
|
More than Five Years |
|
Total |
|
|
(millions of constant pesos) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indebtedness |
|
Ps |
235.4 |
|
|
Ps |
533.6 |
|
|
Ps |
477.1 |
|
|
Ps |
5,408.2 |
|
|
Ps |
6,654.3 |
|
Interest on indebtedness (1) |
|
|
524.7 |
|
|
|
1,604.9 |
|
|
|
973.7 |
|
|
|
454.2 |
|
|
|
3,557.5 |
|
Capital leases |
|
|
22.2 |
|
|
|
80.7 |
|
|
|
5.5 |
|
|
|
|
|
|
|
108.4 |
|
Operating leases (2) |
|
|
107.0 |
|
|
|
162.1 |
|
|
|
99.7 |
|
|
|
24.9 |
|
|
|
393.7 |
|
Notes payable |
|
|
48.3 |
|
|
|
49.4 |
|
|
|
14.4 |
|
|
|
|
|
|
|
112.0 |
|
|
|
|
Total contractual obligations |
|
Ps |
937.6 |
|
|
Ps |
2,430.7 |
|
|
Ps |
1,570.4 |
|
|
Ps |
5,887.3 |
|
|
Ps |
10,825.9 |
|
|
|
|
|
|
|
(1) |
|
Consists of estimated future payments of interest on our indebtedness, calculated based on
interest rates and foreign exchange rates applicable at December 31, 2005 and assuming that
all amortization payments and payments at maturity on our indebtedness will be made on their
scheduled payment dates. |
|
(2) |
|
Consists of estimated future minimum lease payments as of December 31, 2005 under
noncancelable operating leases of equipment to our subsidiaries. |
Capital Expenditures
Our capital expenditures on property, plant and equipment were Ps 134.8 million in 2005, Ps
214.2 million in 2004 and Ps 114.7 million in 2003. Our principal capital expenditures projects
during 2003 through 2005 included:
|
|
|
Ps 152.0 million for the installation of Durango McKinley Paper Companys BHS
corrugating plant in Dallas, Texas, which was completed in 2003; |
|
|
|
|
Ps 159.3 million in 2004 for the purchase of printers for the packaging division and
machinery and equipment for our paper mills, which increased our annual containerboard
capacity by 57,000 short tons; and |
|
|
|
|
Ps 110.9 million in 2005 for the purchase of printers for the packaging division and
machinery and equipment for our paper mills. |
We have instituted a capital investment program to help our overall operations and have
implemented a series of measures to improve efficiency and to increase capacity at our paper mills.
In addition, we have made capital expenditures to bring our plants into proper compliance with
environmental regulations with the latest technology.
56
The following table sets forth our capital expenditures for the periods indicated and
sets forth our capital expenditures and capital commitments for environmental matters:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2007 |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
Estimated |
|
|
Estimated |
|
|
|
(in millions of constant pesos) |
|
Capital expenditures (other than
environmental) |
|
Ps |
109.1 |
|
|
Ps |
200.0 |
|
|
Ps |
122.8 |
|
|
Ps |
183.5 |
|
|
Ps |
200.0 |
|
Environmental capital expenditures |
|
|
5.6 |
|
|
|
14.2 |
|
|
|
12.0 |
|
|
|
16.5 |
|
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Ps |
114.7 |
|
|
Ps |
214.2 |
|
|
Ps |
134.8 |
|
|
Ps |
200.0 |
|
|
Ps |
210.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our loan agreements and the Common Agreement governing the Restructured Credit Agreement and
the 2012 notes contain significant restrictions on our ability to make capital expenditures. We
currently are budgeting total capital expenditures of approximately Ps 200.0 million for 2006 and
Ps 210.0 million for 2007. Our principal capital expenditures for 2006 consist of efficiency
enhancement projects and cost reduction projects.
We expect to finance our capital expenditure plan with internally generated cash and supplier
financing. No assurance can be given that we will be able to meet our capital expenditure budget.
Differences between Mexican GAAP and U.S. GAAP
Our audited consolidated financial statements are prepared in accordance with Mexican GAAP.
Mexican GAAP differs in significant respects from U.S. GAAP. For more information about the
differences between Mexican GAAP and U.S. GAAP and a reconciliation to U.S. GAAP of our
consolidated net income (loss) and total stockholders equity as of December 31, 2005 and 2004 and
for each of the three years in the period ended December 31, 2005, see note 23 to our audited
consolidated financial statements. It should be noted that our reconciliation to U.S. GAAP does not
include the reversal of the restatement of the financial statements as required by Bulletin B-10,
Recognition of the Effects of Inflation in the Financial Information, since the application of
this bulletin represents a comprehensive measure of the effects of price-level changes in the
Mexican economy and, as such, is considered a more meaningful presentation than historical
cost-based financial reporting in Mexican pesos for both Mexican and U.S. accounting purposes.
New Accounting Pronouncements
In June 2004, the FASB issued Emerging Issues Task Force Issue No. 02-14, Whether an Investor
Should Apply the Equity Method of Accounting to Investments Other Than Common Stock (EITF 02-14).
EITF 02-14 addresses whether the equity method of accounting applies when an investor does not have
an investment in voting common stock of an investee but exercises significant influence through
other means. EITF 02-14 states that an investor should only apply the equity method of accounting
when it has investments in either common stock or in-substance common stock of a corporation,
provided that the investor has the ability to exercise significant influence over the operating and
financial policies of the investee. The accounting provisions of EITF 02-14 are effective for
reporting periods beginning after September 15, 2004. The adoption of EITF 02-14 is not expected to
have any impact on the Company s consolidated financial position, results of operations or cash
flows.
57
In June 2005, the FASB published SFAS No. 154, Accounting changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS No. 154), which changes the
requirements for the accounting for and reporting of a change in accounting principle and redefines
restatement as the revising of previously issued financial statements to reflect the correction of
an error. SFAS No. 154 requires retrospective application to prior periods financial statements of
changes in accounting principle, unless it is impracticable to determine the period-specific
effects of the cumulative effect of the change. This Statement also carries forward without change
the guidance contained in Opinion 20 for reporting the correction of an error in previously issued
financial statements and a change in accounting estimate. This Statement does not change the
transition provisions of any existing accounting pronouncement. SFAS No. 154 will be effective for
accounting changes and corrections of errors made in fiscal years beginning after December 15,
2005. The Company is currently considering the impact that adoption will have on its consolidated
results and financial position.
SFAS No.155 Accounting for certain hybrid financial instruments-and amendment of FASB Statements
No. 133 and 140 issued on February 2006. This Statement amends FASB Statements No. 133,
Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement
resolves issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement
133 to Beneficial Interests in Securitized Financial Assets. This Statement permits fair value
remeasurement for any hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips
are not subject to the requirements of Statement 133, establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are freestanding derivatives
or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation,
clarifies that concentrations of credit risk in the form of subordination are not embedded
derivatives and amends Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a beneficial interest other
than another derivative financial instrument. This Statement is effective for all financial
instruments acquired or issued after the beginning of an entitys first fiscal year that begins
after September 15, 2006. The Companys management is in the process of determining the potential
impact of adopting this Standard on its consolidated financial position and results of operations.
SFAS No. 156 Accounting for servicing of financial assets-an amendment of FASB Statement No.140
issued on March 2006. This Statement amends FASB Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting
for separately recognized servicing assets and servicing liabilities. This Statement requires that
all separately recognized servicing assets and servicing liabilities be initially measured at fair
value, if practicable. This Statement permits, but does not require, the subsequent measurement of
servicing assets and servicing liabilities at fair value. This Statement permits an entity to
reclassify certain available-for-sale securities to trading securities, regardless of the
restriction in paragraph 15 of Statement 115, provided that those available-for-sale securities are identified in some
manner as offsetting the entitys exposure to changes in fair
value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair
value. This option is available only once, as of the beginning of the fiscal year in which the
entity adopts this Statement. An entity should adopt this Statement as of the beginning of its
first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the
beginning of an entitys fiscal year, provided the entity has not yet issued financial statements,
including interim financial statements, for any period of that fiscal year. The effective date of
this Statement is the date an entity adopts the requirements of this Statement. An entity should
apply the requirements for recognition and initial measurement of servicing assets and servicing
liabilities prospectively to all transactions after the effective date of this Statement. The
Companys management is in the process of determining the potential impact of adopting this
Standard on its consolidated financial position and results of operations.
58
Item 6. Directors, Senior Management and Employees.
Directors
Our board of directors is responsible for the management of our business. Our bylaws
(estatutos sociales) provide that the board of directors will consist of the number of directors
and alternate directors elected by our stockholders at the annual ordinary stockholders meeting,
each of whom is elected for a term of one year.
Pursuant to our bylaws, alternate directors may be appointed by our stockholders to serve on
the board of directors in place of directors who are unable to attend meetings. If a member of our
board is absent from a meeting, a specific alternate director is called to serve as a director for
such meeting. Even when alternate directors are not substituting for a director, they are invited
to attend all board meetings.
Our board of directors includes 15 directors. No alternate directors were elected by our
stockholders at the most recent ordinary stockholders meeting.
The table below sets forth the members of our board of directors:
|
|
|
|
|
|
|
Name |
|
Current Title |
|
Since |
Miguel Rincón(1)
|
|
Chairman of the Board of Directors and Chief Executive Officer
|
|
|
1982 |
|
José Antonio Rincón(1)
|
|
Vice-Chairman of the Board of Directors and Chief Operating Officer
|
|
|
1982 |
|
Mayela Rincón de Velasco(1)
|
|
Director, Vice President and Chief Financial Officer
|
|
|
1982 |
|
Jesús Rincón(1)
|
|
Director
|
|
|
1987 |
|
Wilfrido Rincón(1)
|
|
Director
|
|
|
1987 |
|
Ignacio Rincón(1)
|
|
Director
|
|
|
1987 |
|
Ángel Del Palacio
|
|
Director
|
|
|
2001 |
|
Alfonso Fernández De Castro
|
|
Director
|
|
|
2001 |
|
Buenaventura G. Saravia
|
|
Director
|
|
|
2001 |
|
Roberto Isaac Hernández
|
|
Director
|
|
|
2001 |
|
Martín Rincón(1)
|
|
Director
|
|
|
2003 |
|
Juan Francisco Ealy Ortiz
|
|
Director
|
|
|
2005 |
|
Jose Luis Michel Nava
|
|
Director
|
|
|
2005 |
|
Javier Pérez Rocha
|
|
Director
|
|
|
2005 |
|
Rebeca Castaños Castaños
|
|
Director
|
|
|
2005 |
|
|
|
|
(1) |
|
Miguel Rincón, José A. Rincón, Jesús Rincón, Wilfrido Rincón, Ignacio Rincón, Martín Rincón
and Mayela Rincón de Velasco are siblings. |
The following is a summary of the business experience, areas of expertise and principal
outside business interests of our current directors.
Miguel Rincón has been Chairman of the Board of Directors and Chief Executive Officer of our
company since 1982. He has been an active member of a number of organizations in Mexico related to
our industry, such as the Mexican National Chamber for the Pulp and Paper Industry, the Por México
Group, an association of business leaders from all sectors, and the National Commission on
Commercial Agriculture (Comisión Nacional Agropecuaría Comercial). He currently serves on a number
of corporate boards in Mexico, including Banamex and El Universal Compañía Periodística Nacional,
S.A. de C.V.
Jose Antonio Rincón has been Vice-Chairman of the Board of Directors and Chief Operating
Officer of our company since 1982. Since 1988, he has been a member of the Mexican National Chamber
for the Pulp and Paper Industry and he was its President from 2002 to 2003. He is currently the
president of Sector Privado Empresarial de Durango, A.C. He is currently the president of the
philanthropic board of the General Hospital of Durango (Hospital General de Durango).
Mayela Rincón de Velasco has been a Director, Vice-President and Chief Financial Officer of
our company since 1982. From 1987 to 1994, she worked as a professor of international finance in
the Durango State University (Universidad Juárez del Estado de Durango). She is an active member of
MIPA and the Durango Association of
59
Public Accountants (Colegio de Contadores Públicos de Durango, A.C.). She is currently a
member of the Board of Directors of BBVA Bancomer.
Jesús Rincón has been a Director of our company since 1987. Since 1997, he has been the
general manager of Porteadores de Durango as well as the general manager of Ponderosa. From 1995 to
1997, he served as the development manager of our company. He is an active member of the Mexican
National Association of Particleboard Manufacturers (Asociación Nacional de Productores de Tableros
y Aglomerados) and the Mexican Forest Industry Association (Asociación Mexicana de la Industria
Forestal).
Wilfrido Rincón has been a Director of our company since 1987. Since 2004, he has been the
general manager of Planning and Development of our company. From 2002 to 2004 he was the Logistics
Managing Director for domestic and imported raw materials for our company. From 1998 to 2002, he
was the general manager of the Paper Division of Grupo Durango. From 1997 to 1998, he served as
general manager of Ponderosa S.A., and from 1994 to 1996 he worked as development manager of our
company. He served as president of the Mexican National Chamber of the Forestry Industry (Consejo
Consultivo Forestal Nacional) from 1997 to 1999 and is vice-president of the Mexican National
Chamber for the Pulp and Paper Industry. He is an active member of the Mexican National Association
for Forestry (Asociación Nacional de Forestales).
Ignacio Rincón has been a Director of our company since 1987. Since 1999, he has been the
general manager of Titán. From 1998 to 1999, he worked as the marketing manager of Titán. From 1994
to 1997, he worked as the planning manager of our company. He is currently an active member of the
Association of Technicians in Pulp and Paper (Asociación de Técnicos de la Celulosa y del Papel).
Ángel Del Palacio has been a Director of our company since 2001. He is an entrepreneur in the
services sector and the general manager of several automobile dealerships in the north of Mexico.
He has a bachelors degree in business and an MBA from the Monterrey Institute of Technology
(ITESM).
Alfonso Fernández de Castro has been a Director of our company since 2001. He is an
entrepreneur in the Mexican forest industry. He is the founder and general manager of Grupo
Forestal Alfa, one of the principal companies in the Mexican forest industry.
Buenaventura G. Saravia has been a Director of our company since 2001. He is an entrepreneur
in the cattle breeding industry and the general manager of Empresas la Punta one of the principal
exporters of cattle from Mexico to the United States. He has a bachelors degree in business from
the Monterrey Institute of Technology (ITESM).
Roberto Isaac Hernández has been a Director of our company since 2001. He is an entrepreneur
in the services sector and the general manager of a chain of gas stations and supermarkets in the
north of Mexico. He has a bachelors degree in economics from the Monterrey Institute of Technology
(ITESM) and an MBA from the Notre Dame University in France.
Martín Rincón has been a Director of our company since 2003. Since 2002, he has been the
general manager of Grupo Pipsamex. From 1998 to 2002, he was the commercial director of Grupo
Pipsamex. From 1997 to 1998, he was the finance manager of McKinley Paper Company and was the
supply manager of the Grupo Durango division from 1995 to 1997. In 1999, he was the vice-president
of the Mexican National Chamber for the Pulp and Paper Industry. He is currently president of the
Mexican National Chamber for the Pulp and Paper Industry, a member of the council of directors of
the Mexican National Association of Paper Distributors (Asociación Nacional de Distribuidores de
Papel) and a member of the Mexican National Book Association (Asociación Nacional del Libro).
Juan Francisco Ealy Ortiz has been a Director of our company since April 2005. Since 1969, he
has been the Chairman, Chief Executive Officer and General Manager of El Universal S.A. de C.V.,
one of the largest media companies in Mexico. He has a bachelors degree in economics from
Universidad Nacional Autónoma de México (UNAM).
Jose Luis Michel Nava has been a Director of our company since April 2005. He has been the
head of Institutional Remedial Management for the Latin-America Region for Citibank, N.A. since
August 2002. From
60
February 2000 to August 2002, he was a private investor. He was the head of the Mexico office
for Institutional Remedial Management Citibank N.A. Sucursal en Mexico between September 1996 and
February 2000. He was a Private Bank Director for Mexico with Citibank N.A. Sucursal en Mexico
between June 1991 and August 1996. Between March 1985 and June 1991 he held various other positions
with Citibank N.A. Sucursal en Mexico. He is a member of the board of directors of Compañía
Industrial de Parras. He has a Bachelor in Science in Industrial Engineering from Universidad La
Salle in México City and a Master in Science in economics from the University of Wisconsin.
Javier Pérez Rocha has been a Director of our company since April 2005. He has served as
counsel in the Mexico City office of White & Case LLP since 2005. Prior to that time, he practiced
law as a sole practicioner since 1978. From 1965 through 1978, he was an associate or partner with
the Mexican law firm of Santamarina y Steta S.C.. He is a member of the board of directors of G.
Collado, S.A. de C.V. and Sanluis Corporación, S.A. de C.V. He has a degree in law from Universidad
Nacional Autónoma de México (UNAM).
Rebeca Castaños Castaños has been a Director of our company since April 2005. She has
practiced as a certified accountant with Despacho Castaños, S.C. since 1990. From 1998 through
2000, she was controller of Durango Apparel, S.A. de C.V. She has a bachelors degree in accounting
from Durango State University.
Executive Officers
Our executive officers are appointed by the board of directors and serve until their
successors have been appointed and take office.
The table below sets forth our executive officers:
|
|
|
|
|
Name |
|
Current Title |
|
Since |
Miguel Rincón(1) |
|
Chief Executive Officer |
|
1982 |
José Antonio Rincón(1) |
|
Chief Operating Officer |
|
1982 |
Mayela Rincón de Velasco(1) |
|
Chief Financial Officer |
|
1982 |
Gustavo Peyro Medina |
|
Audit Managing Director |
|
1996 |
Arturo Díaz Medina |
|
Administrative Managing Director |
|
1998 |
Jesús Romo Carrasco |
|
Controller |
|
1988 |
Gabriel Villegas Salazar |
|
Secretary of the Board and General Counsel |
|
1987 |
|
|
|
(1) |
|
Miguel Rincón, José Antonio Rincón and Mayela Rincón de Velasco are siblings. |
The following is a summary of the business experience and areas of expertise of our current
officers. Information regarding current officers who are also directors is provided above.
Gustavo Peyro Medina has been Audit Managing Director of our company since 1996. He also was
Manager of the Controller and Audit Department of our company from 1992 to 1999. Since 1983, he has
been an active member of MIPA and the Durango Association of Public Accountants. He has been a
member of the Institute of Internal Auditors since 2001. He is an active member of the Institute of
Internal Auditors, Inc.
Arturo Díaz Medina has been the Administrative Managing Director of our company since 1998. He
held other finance and operations positions from 1994 to 1998 in two of our paper mills. Prior to
joining our company, he was head of the finance and commercial areas of an auto parts company based
in Durango, Mexico. Since 1990 he has been an active member of the Durango Association of Public
Accountants.
Jesús Romo has been the Controller of our company since 1998. He is a professor of accounting
and statistics at Durango State University. Since 1978, he has been an active member of the Durango
Association of Public Accountants. He has a bachelors degree in accounting from Durango State
University and an MBA from the Monterrey Institute of Technology (ITESM).
61
Gabriel Villegas Salazar has been Secretary of the Board and Legal Counsel of our company
since 1987. In 1993, he was appointed General Counsel. He has studied American law at the
Iberoamericana University coordinated by the Georgetown University Law Center.
Compensation of Directors and Officers
Directors
receive no compensation in their capacity as directors or as members
of any committee of our board of directors and there are no service
contracts providing for benefits upon termination of employment of any of our directors. The
aggregate amount of compensation paid by us to our executive officers during 2005 was Ps 23.4
million, including employee benefits. In 2006, we expect that the aggregate amount of compensation
paid to our executive officers will total approximately Ps 25.0 million, including benefits. Our
executive officers participate in benefit programs that provide them with health and life insurance
as well as other employee benefits mandated by Mexican law.
Each subsidiary pays performance-based cash bonuses to its management. The amount of the bonus
is determined by a formula that weighs various factors, including the performance of the operating
subsidiary measured in terms of earnings, market share and sales volume targets and the individual
performance of the manager. The bonus varies for each manager depending on the above factors.
Statutory Auditor
Under our bylaws in accordance with Mexican law, our annual stockholders meeting must elect
at least one statutory auditor (comisario) and a corresponding alternate statutory auditor. The
primary role of a statutory auditor is to report to our stockholders at the annual ordinary
stockholders meeting regarding the accuracy of the financial information presented to our
stockholders by our board of directors. Subject to terms and conditions, a statutory auditor is
also authorized:
|
|
|
to call ordinary or extraordinary stockholders meetings; |
|
|
|
|
to place items on the agenda for meetings of stockholders or our board of directors; |
|
|
|
|
to attend meetings of stockholders and of our board of directors; and |
|
|
|
|
generally to inspect the affairs of our company. |
On April 28, 2006, our ordinary stockholders meeting reappointed Héctor Ortiz Rosales as our
statutory auditor and Carlos Orozco Rentería as our alternate statutory auditor. Prior to his
appointment as statutory auditor in 2005, Mr. Ortiz had been our alternate statutory auditor since
2003.
Audit Committee
Our audit committee recommends the external auditors of our company to our board of directors,
suggests the terms and conditions of the auditors service, supervises the auditors work, acts as
an intermediary between our board of directors and the auditors, guarantees the independence of the
auditors, reviews the auditors working plan, communications and audit reports. Our audit committee
informs our board of directors of audit results, recommends to our board of directors guidelines
for financial reporting, assists our board of directors in the review of financial information,
contributes in the determination of the general outline of the internal control system and
evaluates its effectiveness, supports our board of directors in the evaluation and coordination of
the annual internal audit programs, coordinates the internal, external and statutory auditing work,
and verifies the compliance with such statutes and regulations as are applicable to our company.
Our audit committee acts and adopts any resolution by majority vote. In case of conflict of
interest, the members with conflicts do not participate. The committee has such powers specifically
granted by our bylaws and participates in such studies, advisory work and additional matters
submitted to it by our board of directors.
Our audit committee informs the board of directors of its activities at least twice a year or
at any other time that the audit committee deems appropriate or becomes aware of any acts or facts
material to our company.
62
Our audit committee may not delegate any of its powers to anyone, but may request advice from
experts to adequately resolve such matters submitted to it.
The members of our audit committee are Rebeca Castaños Castaños, Buenaventura G. Saravia and
Mayela Rincón de Velasco. Rebeca Castaños Castaños is the president of our Audit Committee.
Remuneration Committee
Our remuneration committee recommends designations of our principal officers, suggests
evaluation criteria in accordance with the general guidelines issued by our board of directors and
analyzes and submits to our board of directors the structures and remuneration of our principal
officers.
Our remuneration committee acts and adopts any resolution by majority vote. In case of
conflict of interest, the members with conflicts do not participate. The committee has such powers
specifically granted by our bylaws and participates in such studies, advisory work and additional
matters submitted to it by our board of directors.
Our remuneration committee informs the board of directors of its activities at least twice a
year or at any other time that the remuneration committee deems appropriate or becomes aware of any
acts or facts material to our company.
Our remuneration committee may not delegate any of its powers, but may request advice from
experts to resolve adequately such matters submitted to the remuneration committee.
The members of our remuneration committee are Ángel del Palacio E., Roberto Isaac Hernández
and Wilfrido Rincón. Ángel del Palacio E. is the president of our remuneration committee.
Financing and Planning Committee
Our financing and planning committee evaluates and makes suggestions on our investment
policies and our guidelines for strategic planning. It opines on matters related to our annual
report, follows up on compliance of approved budgets and identifies risks affecting us.
Our financing and planning committee acts and adopts any resolution by majority vote. In case
of conflict of interest, the members with conflicts do not participate. The committee has such
powers specifically granted by our bylaws and participates in such studies, advisory work and
additional matters submitted to it by our board of directors.
Our financing and planning committee informs the board of directors of its activities at least
twice a year or at any other time that the financing and planning committee deems appropriate or
becomes aware of any acts or facts material to our company.
Our financing and planning committee may not delegate any of its powers to anyone, but may
request advice from experts to resolve adequately such matters submitted to the remuneration
committee.
The members of our financing and planning committee are Alfonso Fernández de Castro, José A.
Rincón and Mayela Rincón de Velasco. Alfonso Fernández de Castro is the president of our financing
and planning committee.
Employees
At December 31, 2005, we had 8,006 employees (7,721 in Mexico and 285 in the United States)
and approximately 65% our work force was unionized. We have not experienced any work stoppages in
our facilities or those of our subsidiaries, other than a strike at our Atenquique mill which
lasted nine days in July 1998 and which was resolved by contract renegotiations. We currently have
good relations with our employees at all our facilities.
63
The table below shows the number of our employees in Mexico and the United States at the end
of each of the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31 |
|
|
2005 |
|
2004 |
|
2003 |
Mexico (1) |
|
|
7,721 |
|
|
|
7,301 |
|
|
|
7,283 |
|
United States |
|
|
285 |
|
|
|
282 |
|
|
|
304 |
|
Total |
|
|
8,006 |
|
|
|
7,583 |
|
|
|
7,587 |
|
|
|
|
(1) |
|
Includes 1,453, 1,457 and 1,453 temporary employees as of December 31, 2003, 2004 and 2005,
respectively. Includes 211 and 192 employees of our discontinued operations as of December 31,
2003 and 2004, respectively. |
Share Ownership of Directors and Officers
The total number of shares owned by members of our board of directors and executive officers
as of June 27, 2006 represents 78.9% of our capital stock. See Item 7. Major Stockholders and
Related Party TransactionsMajor Stockholders.
Item 7. Major Stockholders and Related Party Transactions.
Major Stockholders
We have two classes of common stock, represented by the Series A Shares and the Series B
Shares. As of June 27, 2006, our issued and outstanding capital stock consisted of 91,835,193
Series A Shares, with no par value, and 18,805,918 Series B Shares, with no par value. Each Series
A Share and Series B Shares is entitled to one vote at each meeting of our stockholders.
On January 25, 2006 and February 20, 2006, respectively, our board of directors and
shareholders approved a recapitalization of our company under which we created a new sole series of
common stock, no par value, and each of our outstanding Series A Shares and Series B Shares will be
converted into one newly issued share of common stock. Following this recapitalization:
|
|
|
each of our outstanding CPOs will represent a financial interest in one share of our common stock; |
|
|
|
|
each of our outstanding ADSs will continue to represent two CPOs; and |
|
|
|
|
we expect that our common stock will be listed on the Mexican Stock Exchange. |
We expect that the new common stock will be publicly traded over the Mexican Stock Exchange
subject to the approval of the CNBV and to the registration of the new common stock with the
National Stock Registry of the CNBV. If approved and registered by the CNBV, we expect that the
recapitalization and public trading of the new common stock will become effective within 15 days
following the date on which the CNBV grants its approval.
As
of March 31, 2006, there were 1,952,789 of our ADSs outstanding, each ADS representing two CPOs,
each of which represents one Series A Share. As of
March 31, 2006, approximately 4.3% of our
outstanding Series A Shares were represented by ADSs and were
held by approximately 277 beneficial
owners.
The stockholders who are presently part of our management currently own, directly and
indirectly through their ownership in ACM and their beneficial ownership of the Banamex Trust and
the Rincón Family Trust, approximately 78.9% of the issued and outstanding Series A Shares and
Series B Shares and have the power to elect the majority of the directors and control our company.
On April 28, 2006, our stockholders voted to elect 15 directors.
The following table sets forth current information with respect to the beneficial ownership of
our common stock as of June 27, 2006 by:
64
|
|
|
each person known by us to beneficially own more than 5%, in the aggregate, of each
class of outstanding shares of our common stock; and |
|
|
|
|
all of our directors and executive officers as a group. |
Our principal shareholders have the same voting rights with respect to each class of our shares
that they own as other holders of shares of that class.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Shares |
|
Series B Shares |
|
Total |
|
|
Number of Shares |
|
% |
|
Number of shares |
|
% |
|
Number of shares |
|
% |
Rincón Family Trust
(1) |
|
|
56,350,367 |
|
|
|
61.4 |
|
|
|
|
|
|
|
|
|
|
|
56,350,367 |
|
|
|
50.9 |
|
Administradora
Corporativa y
Mercantil, S.A. de
C.V. (ACM) (2) |
|
|
15,068,000 |
|
|
|
16.4 |
|
|
|
|
|
|
|
|
|
|
|
15,068,000 |
|
|
|
13.6 |
|
Banamex Trust (3) |
|
|
15,911,511 |
|
|
|
17.3 |
|
|
|
|
|
|
|
|
|
|
|
15,911,511 |
|
|
|
14.4 |
|
Miguel Rincón (4) |
|
|
87,329,878 |
|
|
|
95.1 |
|
|
|
40,455 |
|
|
|
0.2 |
|
|
|
87,370,333 |
|
|
|
79.0 |
|
José Antonio Rincón
(5) |
|
|
87,329,878 |
|
|
|
95.1 |
|
|
|
14,699 |
|
|
|
0.1 |
|
|
|
87,344,577 |
|
|
|
78.9 |
|
Jesús Rincón (6) |
|
|
87,329,878 |
|
|
|
95.1 |
|
|
|
|
|
|
|
|
|
|
|
87,329,878 |
|
|
|
78.9 |
|
Wilfrido Rincón (7) |
|
|
87,329,878 |
|
|
|
95.1 |
|
|
|
14,256 |
|
|
|
0.1 |
|
|
|
87,344,134 |
|
|
|
78.9 |
|
Ignacio Rincón (8) |
|
|
87,329,878 |
|
|
|
95.1 |
|
|
|
9,472 |
|
|
|
0.1 |
|
|
|
87,339,350 |
|
|
|
78.9 |
|
Martin Rincón (9) |
|
|
87,329,878 |
|
|
|
95.1 |
|
|
|
3,168 |
|
|
|
* |
|
|
|
87,333,046 |
|
|
|
78.9 |
|
Mayela Rincón (10) |
|
|
71,418,367 |
|
|
|
77.8 |
|
|
|
8,807 |
|
|
|
* |
|
|
|
71,427,174 |
|
|
|
64.6 |
|
All directors and
executive officers as
a group (19 persons)
(11) |
|
|
87,329,878 |
|
|
|
95.1 |
|
|
|
90,857 |
|
|
|
0.5 |
|
|
|
87,420,735 |
|
|
|
78.9 |
|
|
|
|
* |
|
Less than 0.1%. |
|
(1) |
|
The beneficiaries of the Rincón Family Trust are Miguel Rincón, José Antonio Rincón, Jesús
Rincón, Wilfrido Rincón, Ignacio Rincón, Martín Rincón and Mayela Rincón. |
|
(2) |
|
ACM is owned by Miguel Rincón, José Antonio Rincón, Jesús Rincón, Wilfrido Rincón, Ignacio
Rincón and Martín Rincón. Mayela Rincón is a member of the board of directors of ACM. |
|
(3) |
|
The beneficiaries of the Banamex Trust are Miguel Rincón, José Antonio Rincón, Jesús Rincón,
Wilfrido Rincón, Ignacio Rincón and Martín Rincón. |
|
(4) |
|
Includes 40,455 Series B Shares owned by Miguel Rincón, 56,350,367 Series A Shares owned by
the Rincón Family Trust, 15,068,000 Series A Shares owned by ACM, and 15,911,511 Series A
Shares owned by the Banamex Trust. Miguel Rincón disclaims beneficial ownership of the Series
A Shares owned by ACM, except to the extent of his ownership of ACM. Miguel Rincón disclaims
beneficial ownership of the Series A Shares owned by the Rincón Family Trust and the Banamex
Trust, except to the extent of his beneficial ownership in the Rincón Family Trust and the
Banamex Trust. |
|
(5) |
|
Includes 14,699 Series B Shares owned by José Antonio Rincón, 56,350,367 Series A Shares
owned by the Rincón Family Trust, 15,068,000 Series A Shares owned by ACM, and 15,911,511
Series A Shares owned by the Banamex Trust. José Antonio Rincón disclaims beneficial ownership
of the Series A Shares owned by ACM, except to the extent of his ownership of ACM. José
Antonio Rincón disclaims beneficial ownership of the Series A Shares owned by the Rincón
Family Trust and the Banamex Trust, except to the extent of his beneficial ownership in the
Rincón Family Trust and the Banamex Trust. |
|
(6) |
|
Includes 56,350,367 Series A Shares owned by the Rincón Family Trust, 15,068,000 Series A
Shares owned by ACM, and 15,911,511 Series A Shares owned by the Banamex Trust. Jesús Rincón
disclaims beneficial ownership of the Series A Shares owned by ACM, except to the extent of
his ownership of ACM. Jesús Rincón disclaims beneficial ownership of the Series A Shares owned
by the Rincón Family Trust and the Banamex Trust, except to the extent of his beneficial
ownership in the Rincón Family Trust and the Banamex Trust. |
65
|
|
|
(7) |
|
Includes 14,256 Series B Shares owned by Wilfrido Rincón, 56,350,367 Series A Shares owned by
the Rincón Family Trust, 15,068,000 Series A Shares owned by ACM, and 15,911,511 Series A
Shares owned by the Banamex Trust. Wilfrido Rincón disclaims beneficial ownership of the
Series A Shares owned by ACM, except to the extent of his ownership of ACM. Wilfrido Rincón
disclaims beneficial ownership of the Series A Shares owned by the Rincón Family Trust and the
Banamex Trust, except to the extent of his beneficial ownership in the Rincón Family Trust and
the Banamex Trust. |
|
(8) |
|
Includes 9,472 Series B Shares owned by Ignacio Rincón, 56,350,367 Series A Shares owned by
the Rincón Family Trust, 15,068,000 Series A Shares owned by ACM, and 15,911,511 Series A
Shares owned by the Banamex Trust. Ignacio Rincón disclaims beneficial ownership of the Series
A Shares owned by ACM, except to the extent of his ownership of ACM. Ignacio Rincón disclaims
beneficial ownership of the Series A Shares owned by the Rincón Family Trust and the Banamex
Trust, except to the extent of his beneficial ownership in the Rincón Family Trust and the
Banamex Trust. |
|
(9) |
|
Includes 3,168 Series B Shares owned by Martín Rincón, 56,350,367 Series A Shares owned by
the Rincón Family Trust, 15,068,000 Series A Shares owned by ACM, and 15,911,511 Series A
Shares owned by the Banamex Trust. Martin Rincón disclaims beneficial ownership of the Series
A Shares owned by ACM, except to the extent of his ownership of ACM. Martín Rincón disclaims
beneficial ownership of the Series A Shares owned by the Rincón Family Trust and the Banamex
Trust, except to the extent of his beneficial ownership in the Rincón Family Trust and the
Banamex Trust. |
|
(10) |
|
Includes 8,807 Series B Shares owned by Mayela Rincón, 56,350,367 Series A Shares owned by
the Rincón Family Trust and 15,068,000 Series A Shares owned by ACM. Mayela Rincón disclaims
beneficial ownership of the Series A Shares owned by ACM. Mayela Rincón disclaims beneficial
ownership of the Series A Shares owned by the Rincón Family Trust, except to the extent of her
beneficial ownership in the Rincón Family Trust. |
|
(11) |
|
Includes 90,857 Series B Shares owned by directors and officers of our company, 56,350,367
Series A Shares owned by the Rincón Family Trust, 15,068,000 Series A Shares owned by ACM, and
15,911,511 Series A Shares owned by the Banamex Trust. |
Rincon Family Trust
On June 22, 2005, the Rincón Family Trust was established by Miguel Rincón, José Antonio
Rincón, Jesús Rincón, Wilfrido Rincón, Ignacio Rincón, Martín Rincón and Mayela Rincón de Velasco,
as settlors and beneficiaries. The settlors contributed an aggregate of 56,350,367 Series A Shares
to the Rincón Family Trust, representing 50.9% of the aggregate outstanding capital stock of
Corporación Durango.
Under the agreement governing the Rincón Family Trust, resolutions of the technical committee
must be adopted by the vote of at least 60% of the beneficial interests in the Rincón Family Trust.
The technical committee of the Rincón Family Trust has the power to instruct the trustee with
respect to the voting and disposition of the shares owned by the Rincón Family Trust, in the
understanding that the main purpose of the Rincón Family Trust is to hold, at least, 50.9% of the
outstanding capital stock of Corporación Durango throughout the term of the Rincón Family Trust. In
addition, the agreement prohibits the members of the Rincón family from transferring any interest
in the Rincón Family Trust to any person other than another member of the Rincón family or a direct
descendant thereof. The Rincón Family Trust has a term of nine years. The Rincon Family Trust may
be amended through resolutions of the technical committee adopted by the vote of at least 75% of
the beneficial interests in the Rincón Family Trust, and approved in writing by the trustee. Upon
the termination of the Rincón Family Trust, the shares contributed by the settlors will be
transferred to them according to the number of shares originally contributed to the Rincón Family
Trust by each settlor.
Banamex Trust
On February 24, 2005, the Banamex Trust was established by Miguel Rincón, José Antonio Rincón,
Jesús Rincón, Wilfrido Rincón, Ignacio Rincón and Martín Rincón, as settlors and beneficiaries. The
settlors contributed an aggregate of 15,911,511 Series A Shares to the Banamex Trust. The Series A
Shares held by the Banamex Trust
66
are pledged to secure ACMs obligations under a loan made by Banamex to ACM, or the ACM Loan.
Under the agreement governing the Banamex Trust, each settlor is entitled to instruct the trustee
of the Banamex Trust with respect to the voting of the Series A Shares contributed to the Banamex
Trust by that settlor unless an event of default has occurred and is continuing under the pledge
agreement between the Banamex Trust and Banamex. The pledge agreement permits Banamex to cause the
Banamex Trust to sell all or part of the Series A Shares held by the Banamex Trust if the price of
the Series A Shares on the Mexican Stock Exchange meets or exceeds the peso equivalent of US$1.50.
Banamex may exercise this right at any time whether or not an event of default under the pledge
agreement has occurred. All proceeds from any such sale are to be paid to Banamex and applied
against ACMs obligations under the ACM Loan.
ACM Pledge
ACM granted a pledge in favor of Banamex over the all of the Series A Shares that ACM owns to
secure ACMs obligations under the ACM Loan. The pledge agreement permits Banamex to cause the sale
of all or part of the Series A Shares owned by ACM if the price of the Series A Shares on the
Mexican Stock Exchange meets or exceeds the peso equivalent of US$1.50. Banamex may exercise this
right at any time whether or not an event of default under the pledge agreement has occurred. All
proceeds from any such sale are to be paid to Banamex and applied against ACMs obligations under
the ACM Loan.
CPO Trust
Certain Series A Shares are held in trust by Nacional Financiera S.N.C., or NAFIN, as the
trustee of a trust, which we refer to as the CPO Trust, established under a trust agreement dated
November 24, 1989 between NAFIN as the grantor and as trustee for the benefit of the holders of
certain Ordinary Participation Certificates, or CPOs issued by the trustee. Each CPO represents an
interest in one share of Series A Common Stock held in the CPO Trust. The CPO Trust and the CPOs
issued under the trust agreement will expire on November 24, 2019.
Holders of CPOs are not entitled to exercise any voting rights with respect to the Series A
Shares held in the CPO Trust. Such voting rights are exercisable only by the trustee, which is
required by the terms of the trust agreement to vote such Series A Shares in the same manner as the
majority of the Series A Shares that are not held in the CPO Trust that are voted at any
shareholders meeting. Currently, the Rincón Family Trust owns a majority of the shares of Series A
Shares that are not held in the CPO Trust. As of March 31, 2005, the latest date for which
information is available, 3,930,078 Series A Shares were held in the CPO Trust.
Issuance of Series B Shares
On February 23, 2005, in connection with our financial restructuring, we issued 18,805,918 of
our Series B Shares, representing 17.0% of our issued and outstanding capital stock following this
issuance. The issuance of our Series B Shares had a substantial dilutive effect on the holders of
our Series A Shares, including our principal shareholders.
Related Party Transactions
Administradora Corporativa y Mercantil, S.A. de C.V.
From time to time, ACM, a company owned and controlled by the Rincón family, borrows funds
from our company to fund principal and interest payments on its indebtedness. The outstanding
balance on these loans was Ps 202.4 million at December 31, 2005. We recorded an allowance for
doubtful accounts in the full amount of these loans during 2003. These loans bear interest at a
rate of 5% per annum and mature on December 31, 2012.
Durango Paper Company
On October 7, 2002, the Company sold its subsidiary, Durango Paper Company, and certain
promissory notes to Operadora Omega Internacional, S.A. de C.V. The sale was made for an aggregate
amount of US$100 thousand. Prior to this sale, the Company had guaranteed certain obligations of
Durango Paper Companys subsidiaries, specifically the Bank of America, N.A. loan agreement and
the J.P. Morgan letters of credit, which in the aggregate,
67
totaled a principal amount of US$25.2 million ($290.4 million). In 2003, these creditors
called these guarantees. As a result, the Company recorded $285.0 million as due from related
parties in 2003 and recorded an allowance for doubtful accounts in the full amount of this
obligation.
Líneas Aéreas Ejecutivas de Durango, S.A. de C.V.
On April 18, 2005, our company purchased substantially all of the capital stock of Líneas
Aéreas for Ps 15.0 thousand from certain members of the Rincón family and some of their children.
Líneas Aéreas owns two business jets and provides transportation services to our subsidiaries and
third parties. In connection with this transaction, we assumed a financial lease agreement with GE
Capital Leasing with respect to one of the business jets.
Under this financial lease agreement, we are required to make monthly lease payments with a
final payment due in October 2007. The outstanding amount under this financial lease bears interest
at a rate of prime + 1.50% per annum. Our obligations under this financial lease are secured by a
pledge of the business jet. As of December 31, 2005, the aggregate principal amount outstanding
under this financial lease was US$4.9 million (Ps 52.3 million). On February 24, 2006, we prepaid
US$4.6 million under this financial lease. We expect to prepay the remaining outstanding amounts
under this financial lease in connection with our pending sale of the business jet.
In 2003, Líneas Aéreas borrowed Ps 15.2 million from our company. This loan bears interest at
a rate of 15% per annum and matures on December 31, 2006. As a result of our acquisition of Líneas
Aéreas, the amount of this loan is eliminated in the consolidation of our financial statements.
During the year ended December 31, 2005 prior to our acquisition of Líneas Aéreas, we
purchased services from Líneas Aéreas for an aggregate purchase price of Ps 1.1 million.
Transactions with Directors and their Affiliates
We sell newsprint to El Universal at prices that are not materially more favorable than sales
to other third parties. Juan Francisco Ealy Ortiz, one of our directors, is the Chairman, Chief
Executive Officer and Managing Director of El Universal. During the year ended December 31, 2005,
we recorded net sales to El Universal of approximately US$15.0 million (Ps 159.7 million).
On June 28, 2005, our company acquired 99.99% of the capital stock of Inmobiliaria Industrial
de Durango, S.A. de C.V. for Ps 735.0 thousand. This company was owned by some of the members of
the Rincón family.
On March 6, 2006, Pipsamex issued and sold 2,177,042,255 shares of its series B capital stock,
representing 13.3% of Pipsamex outstanding capital stock to NKM Corporativo, S.A. de C.V., a
company owned and controlled by the Rincón family, for Ps 314.6 million. The proceeds of this sale
were used to fund a portion of our debt redection program.
Item 8. Financial Information.
See Item 18. Financial Statements.
Legal Proceedings
We are, or since January 1, 2005, have been a party to the following significant lawsuits:
Voluntary Concurso Mercantil Petition (Solicitud de Concurso Mercantil Presentada por el Propio
Comerciante), Case No. 3/2004
On May 18, 2004, we filed a voluntary petition for concurso mercantil under the LCM with the
Mexican court. On August 25, 2004, the Mexican court declared that we had satisfied all of the
requirements to be a debtor under the LCM. On November 17, 2004, the Mexican court certified the
list of recognized claims in our concurso mercantil proceeding. On December 23, 2004, the
conciliator submitted our plan of reorganization to the holders of recognized claims and the plan
was executed by us and the holders of recognized claims representing approximately
68
65% of the total number of recognized claims. On January 11, 2005, the conciliator submitted
the executed plan of reorganization to the Mexican court, and on February 7, 2005, the Mexican
court approved the plan of reorganization and the termination of the concurso mercantil. On
February 23, 2005, our plan of reorganization was consummated. For a description of our plan of
reorganization, see Item 4: Information on Our CompanySignificant Developments During 2004 and
Recent Developments Financial Restructuring.
In re: Petition of Gabriel Villegas Salazar, as Foreign Representative of Corporación Durango, S.A.
de C.V., Debtor in Foreign Proceeding, Case No.: 04-13487(RDD).
On May 20, 2004, our foreign representative, Gabriel Villegas Salazar, filed the 304
Proceeding with the United States Bankruptcy Court for the Southern District of New York,
commencing a case in the United States ancillary to the concurso mercantil proceeding in Durango,
Mexico. The 304 Proceeding was administered under the case caption In re: Petition of Gabriel
Villegas Salazar, as foreign representative of Corporación Durango, S.A. de C.V., Debtor in Foreign
Proceeding.
Pursuant to sections 105(a) and 304(b) of the United States Bankruptcy Code and in furtherance
of the concurso mercantil proceeding, on June 4, 2004 and August 16, 2004, the United States
Bankruptcy Court for the Southern District of New York entered a preliminary injunction enjoining
the commencement or continuation of any action against our company, its officers and directors, and
four of our operating subsidiaries, Titán, Centauro, Atenquique, and Ponderosa. The preliminary
injunction entered on August 16, 2004 provided that it would expire by its own terms on February
28, 2005.
On December 28, 2004, our foreign representative filed a motion with the United States
Bankruptcy Court for the Southern District of New York for entry of an order extending comity to
our concurso mercantil proceeding and our plan of reorganization, as well as permanently enjoining
our creditors from taking any action in respect of their claims that were restructured in the
concurso mercantil proceeding. On January 19, 2005, the United States Bankruptcy Court for the
Southern District of New York entered an order permanently enjoining our creditors from taking
action against our company in respect of their claims that were restructured in the concurso
mercantil proceeding, as well as recognizing and giving effect to our plan of reorganization and
the order from the Mexican court confirming the same.
Compass Income Master Fund, Inc. et al. v. Corporación Durango, S.A. de C.V., Index No.: 600621/03,
Supreme Court of the State of New York, County of New York.
On February 25, 2003, Compass Income Master Fund, Inc., Compass Renta Fija America Latina
F.I.I. and Interbank Overseas, Ltd. filed a suit against our company in New York state court for
breach of contract seeking payment of US$3.5 million, plus interest at 9% per annum from February
13, 2003. The plaintiffs breach of contract action was based upon commercial paper we issued on or
about August 13, 2002. On June 4, 2004, the action was stayed pursuant to an order of the United
States Bankruptcy Court for the Southern District of New York. The plaintiffs subsequently informed
us that they had sold the commercial paper that was the subject of their lawsuit. We signed a
stipulation of discontinuance without prejudice at the request of the plaintiffs, and on March 1,
2005, the court ordered that the lawsuit be discontinued.
Comisión Nacional del Agua v. Productora Nacional de Papel, S.A. de C.V.
On December 16, 2003, the Mexican government through the Mexican National Water
Commission made demand upon Pronal, a former subsidiary of Grupo Pipsamex, for payment of Ps 159
million (US$14.5 million) for water consumed during the calendar years 2000 and 2001. On March 4,
2004, Pronal filed a declaratory action with the Administrative and Fiscal Mexican Federal Tribunal
(Tribunal Federal de Justicia Fiscal y Administrativa) asking that the court find that Pronal is
not liable for any amounts to the National Water Commission and that, as a result, the demand be
nullified. The action is still in discovery. In the event Pronal is unsuccessful in having the
demand nullified and required to pay the National Water Commission, Pronal could seek to assert
indemnification rights against Grupo Pipsamex under the terms of the Stock
Purchase Agreement executed on November 14, 2003, pursuant to which Grupo Pipsamex, as seller,
agreed to indemnify Pronal and the buyer for certain debts. In addition, in the event Pronal is
unable to recover in full from Grupo Pipsamex, Pronal could also demand payment from Corporacion
Durango under the guaranty dated November 14, 2003.
69
Other Litigation
We are party to various legal proceedings in the ordinary course of our business. We do not
expect any of these proceedings, if determined adversely to us, individually or in the aggregate,
to have a material adverse effect on the results of our operations or on our financial condition.
Dividend Policy
We have not paid any dividends in the past five years. The declaration, amount and payment of
dividends are determined by a majority vote of the stockholders, including holders of the Series A
Shares, at our annual ordinary stockholders meeting, generally on the recommendation of the board
of directors, and will depend on our results of operations, financial condition, cash requirements,
the ability of our subsidiaries to pay cash dividends to us, future prospects and other factors
deemed relevant by our stockholders. Our ability to declare and pay dividends is currently
restricted under the terms of the Common Agreement.
Significant Changes
Other than as otherwise disclosed in this annual report, no significant change has occurred
since the date of the audited consolidated financial statements included in the annual report.
Item 9. The Offer and Listing.
General
The Series A Shares are listed on the Mexican Stock Exchange.
Our ADSs are issued by The Bank of New York, as depositary. Each ADS represents two CPOs
issued by NAFIN, as trustee of the CPO Trust. Each CPO represents a financial interest in one
Series A Share held in the CPO Trust. Our ADSs are presently being quoted, and have been quoted
since May 27, 2004, on the Pink Sheets Electronic Quotation Service, or the Pink Sheets, maintained
by Pink Sheets LLC for the National Quotation Bureau, Inc. The ticker symbol CDURQ has been
assigned to our ADSs for over-the-counter quotations.
Prior to July 15, 2005, our ADSs were listed and traded on the NYSE. As a result of our filing
on May 18, 2004 of our concurso mercantil proceeding, on May 25, 2004, our ADSs were suspended from
trading by the NYSE and, thereafter, delisted by the NYSE.
Trading on the Mexican Stock Exchange, the New York Stock Exchange and the Pink Sheets
The Mexican Stock Exchange, located in Mexico City, is the only stock exchange in Mexico.
Founded in 1894, it ceased operation in the early 1900s and was reestablished in 1907. The Mexican
Stock Exchange is organized as a corporation, the shares of which are held by 31 brokerage firms.
The firms are exclusively authorized to trade on the floor of the Mexican Stock Exchange. Trading
on the Mexican Stock Exchange takes place principally through an automated system known as the
Electronic Exchange System for Registered or Assigned Transactions (Sistema Electrónico de
Negociación de Transacciones, Registro y Asignación), or SENTRA, between the hours of 8:30 a.m. and
3:00 p.m., Mexico City time. Trades in securities listed on the Mexican Stock Exchange may, subject
to certain requirements, also be effected off the Mexican Stock Exchange. Due primarily to tax
considerations, however, most transactions in listed Mexican securities are effected through the
Mexican Stock Exchange. The Mexican Stock Exchange operates a system of automatic suspension of
trading in shares of a particular issuer as a means of controlling excessive price volatility.
Settlement takes place two business days after a transaction involving the purchase or sale of
shares is completed on the Mexican Stock Exchange. Deferred settlement, even if by mutual
agreement, is not permitted without the approval of the CNBV. Most securities traded on the Mexican
Stock Exchange are on deposit with S.D. Indeval, S.A. de C.V. (Institución para el Depósito de
Valores), or Indeval, a privately-owned central securities depositary
70
that acts as a clearinghouse,
depositary, custodian, settlement, transfer and registration institution for Mexican Stock Exchange
transactions, thereby eliminating the need for physical transfer of securities.
The Mexican Stock Exchange is one of Latin Americas two largest exchanges by market
capitalization, but it remains relatively small and illiquid compared to major world markets. In
December 2005, the five largest traded equity issues (measured by market capitalization)
represented approximately 43% of the total value of equity issues traded on the Mexican Stock
Exchange. Although there is substantial participation by the public in the trading of securities, a
major part of the activity of the Mexican Stock Exchange reflects transactions by approximately 50
institutional investors. There is no formal over-the-counter market for securities in Mexico.
Holders of ADSs have no voting rights with respect to the underlying CPOs or Series A Shares.
Voting rights with respect to the Series A Shares held in the CPO Trust will be exercised by the
CPO Trustee, which is required to vote the underlying Series A Shares in the same manner as the
majority of the Series A Shares that are not so held and that are voted at the relevant
stockholders meeting.
The tables below set forth (1) the high and low closing sales prices (in nominal pesos) for
our Series A Shares on the Mexican Stock Exchange, (2) the high and low closing sales prices for
the ADSs on the New York Stock Exchange, and (3) high and low quotations for our ADSs on the Pink
Sheets for the periods indicated. Quotations on the Pink Sheets reflect inter-dealer prices,
without retail markup, markdown or commissions, and may not necessarily represent actual
transactions.
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|
|
New York Stock Exchange/ |
|
|
Mexican Stock Exchange |
|
Pink Sheets (1) |
|
|
Pesos per Series A Share |
|
Dollars per ADS |
|
|
High |
|
Low |
|
High |
|
Low |
2001 |
|
Ps |
24.00 |
|
|
Ps |
24.00 |
|
|
US$ |
5.55 |
|
US$ |
5.15 |
2002 |
|
|
14.00 |
|
|
|
14.00 |
|
|
|
5.55 |
|
|
|
1.01 |
|
2003 |
|
|
16.30 |
|
|
|
3.00 |
|
|
|
1.70 |
|
|
|
0.40 |
|
2004 |
|
|
19.98 |
|
|
|
2.90 |
|
|
|
3.85 |
|
|
|
0.20 |
|
2005 |
|
|
13.00 |
|
|
|
4.11 |
|
|
|
1.30 |
|
|
|
0.15 |
|
|
|
|
(1) |
|
Prices through May 25, 2004 are prices quoted on the New York Stock Exchange. Prices after
May 25, 2004 are prices quoted on the Pink Sheets. |
|
(2) |
|
Through May 25, 2004. The high and low prices on the Pink Sheets between May 27, 2004 and
December 31, 2004 were US$0.95 and US$0.20, respectively. |
Source: Mexican Stock Exchange; New York Stock Exchange; Pink Sheets LLC.
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New York Stock Exchange/ |
|
|
Mexican Stock Exchange |
|
Pink Sheets (1) |
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|
Pesos per Series A Share |
|
Dollars per ADS |
|
|
High |
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Low |
|
High |
|
Low |
2004 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
Ps |
19.98 |
|
|
Ps |
11.80 |
|
|
US$ |
3.85 |
|
|
US$ |
1.55 |
|
Second Quarter |
|
|
14.50 |
|
|
|
10.98 |
|
|
|
2.40 |
|
|
|
0.95 |
|
Third Quarter |
|
|
10.98 |
|
|
|
6.50 |
|
|
|
0.50 |
|
|
|
0.20 |
|
Fourth Quarter |
|
|
7.00 |
|
|
|
2.90 |
|
|
|
0.65 |
|
|
|
0.25 |
|
|
|
|
|
|
|
|
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|
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2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
13.00 |
|
|
|
6.89 |
|
|
|
1.55 |
|
|
|
0.40 |
|
Second Quarter |
|
|
12.00 |
|
|
|
6.69 |
|
|
|
1.25 |
|
|
|
0.60 |
|
Third Quarter |
|
|
9.00 |
|
|
|
6.01 |
|
|
|
0.85 |
|
|
|
0.15 |
|
Fourth Quarter |
|
|
9.00 |
|
|
|
4.11 |
|
|
|
1.25 |
|
|
|
0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
12.97 |
|
|
|
4.10 |
|
|
|
1.25 |
|
|
|
0.25 |
|
Second Quarter
(through June 27) |
|
|
7.71 |
|
|
|
4.10 |
|
|
|
1.30 |
|
|
|
0.37 |
|
71
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(1) |
|
Prices through May 25, 2004 are prices quoted on the New York Stock Exchange. Prices after
May 25, 2004 are prices quoted on the Pink Sheets. |
Source: Mexican Stock Exchange; New York Stock Exchange; Pink Sheets LLC.
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|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican Stock Exchange |
|
Pink Sheets |
|
|
Pesos per Series A Share |
|
Dollars per ADS |
|
|
High |
|
Low |
|
High |
|
Low |
December 2005 |
|
Ps |
9.00 |
|
|
Ps |
4.11 |
|
|
US$ |
1.25 |
|
|
US$ |
0.25 |
|
January 2006 |
|
|
12.97 |
|
|
|
6.00 |
|
|
|
0.25 |
|
|
|
0.35 |
|
February 2006 |
|
|
11.23 |
|
|
|
9.99 |
|
|
|
0.35 |
|
|
|
0.35 |
|
March 2006 |
|
|
9.99 |
|
|
|
4.10 |
|
|
|
1.12 |
|
|
|
0.35 |
|
April 2006 |
|
|
7.20 |
|
|
|
4.10 |
|
|
|
0.37 |
|
|
|
0.37 |
|
May 2006 |
|
|
7.20 |
|
|
|
4.90 |
|
|
|
1.30 |
|
|
|
0.50 |
|
June 2006 (through June 27) |
|
|
7.15 |
|
|
|
7.71 |
|
|
|
0.65 |
|
|
|
0.50 |
|
|
|
|
Source: Mexican Stock Exchange; Pink Sheets LLC. |
On June 27, 2006, the closing sales price of our Series A Shares on the Mexican Stock Exchange
was Ps 7.71 per share.
Item 10. Additional Information.
Organizational Documents
Set forth below is a summary of the material provisions of our bylaws (estatutos sociales) and
applicable Mexican law. This description does not purport to be complete and is qualified by
reference to Mexican law and to the bylaws of our company, incorporated by reference herein.
On December 30, 2005, the new Mexican Securities Market Law (Ley del Mercado de Valores) was
published. This law became effective on June 28, 2006. The Mexican Securities Market Law includes
provisions that seek to improve the regulation of disclosure of information, minority shareholder
rights and corporate governance. In addition, the Mexican Securities Law imposes further duties and
liabilities on the members of the Board of Directors as well as on the relevant officers (such as a
duty of loyalty and a duty of care). Likewise, under the Mexican Securities Law we are required to
adopt specific amendments to our bylaws on or prior to December 24, 2006. We currently expect the
most significant of these amendments to relate to: (1) revising our corporate name to reflect that
we have adopted a new corporate form called a publicly held company (sociedad anónima bursátil),
(2) creating the corporate practices committee, a new committee of our Board of Directors, which
will consist exclusively of independent directors, and (3) eliminating the role and
responsibilities of the statutory auditor, whose responsibilities will be assumed by the Board of
Directors through the audit committee and the new corporate practices committee, as well as by our
external auditor. The following summary does not give effect to these amendments.
Registration and Transfer
The Series A Shares and Series B Shares are evidenced by share certificates in registered
form. Our stockholders may hold their Series A Shares or Series B Shares in the form of physical
certificates or indirectly through institutions that have an account with Indeval. Accounts may be
maintained at Indeval by brokers, banks or other entities approved by the CNBV.
Voting Rights
Each of our shares entitles the holder thereof to one vote at any general meeting of our
stockholders. Currently, Series A Shares and Series B Shares are the only shares of our capital
stock outstanding.
72
Stockholders meetings may be ordinary stockholders meeting or extraordinary stockholders
meetings. Extraordinary stockholders meetings are those called to consider certain matters
specified in Article 182 of the Mexican Companies Law (Ley General de Sociedades Mercantiles),
including:
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amendments to our bylaws; |
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anticipated dissolution of our company; |
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merger and transformation of our company from one type of company to another; and |
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increases or decreases affecting the fixed portion of our capital stock. |
General meetings called to consider matters not required to be considered at an extraordinary
stockholders meeting, including increases and decreases affecting the variable portion of our
capital stock, are ordinary stockholders meetings. An annual ordinary stockholders meeting must be
held at least once a year, within four months after the end of the preceding fiscal year.
The annual ordinary stockholders meeting is held to consider the approval of the annual report
of our board of directors and for our subsidiaries in which we have an investment that exceeds 20%
of our net worth, including the approval of the financial statements for the preceding fiscal year,
the election of directors and our statutory auditor and the allocation of our profits, if any, from
the preceding year.
The quorum for an ordinary stockholders meeting convened on the first call is at least 50% of
all outstanding shares and action may be taken by holders of a majority of the shares represented
at such meeting. If a quorum is not present, a subsequent ordinary stockholders meeting may be
called at which a quorum shall exist regardless of the number of shares present, and action may be
taken by a majority of the shares represented at such meeting. The quorum for an extraordinary
stockholders meeting convened on the first call is 75% of all outstanding shares. If a quorum is
not present, a subsequent extraordinary stockholders meeting may be called at which 50% of all
outstanding shares constitute a quorum. Whether on first or subsequent call, actions at an
extraordinary stockholders meeting may be taken only by holders of a majority of the outstanding
shares.
Stockholders meetings may be called by:
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our board of directors; |
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our statutory auditor; |
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|
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stockholders representing at least 10% of our outstanding shares by requesting our board
of directors or our statutory auditor to issue such a call; |
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|
a Mexican court in the event our board of directors or our statutory auditor do not
comply with a valid request of our stockholders; and |
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|
any stockholder when no meeting has been held for two consecutive years or when any of
the following matters has not been dealt with at such a meeting: |
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|
the annual report of our board of directors regarding our financial statements; |
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the appointment of directors and our statutory auditor; or |
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the compensation of our directors and statutory auditor. |
Notices of meetings must be published in a newspaper of major circulation in the city of
Durango, Mexico at least 15 days prior to a meeting. Only stockholders who have either (1)
deposited their shares at our offices, or (2) deposited their shares with a Mexican or non-Mexican
credit institution or an institution for the deposit of securities
73
and present a certificate of deposit from such institution prior to the meeting indicating
ownership by such person will be admitted as such to stockholders meetings. A stockholder may be
represented by an attorney-in-fact who holds a duly granted power-of-attorney on the form provided
by the Company for such purposes.
Dividends
At the annual ordinary stockholders meeting, our board of directors submits our financial
statements for the previous fiscal year, together with a report thereon from our board of
directors, to the stockholders for approval. The stockholders, after they have approved the
financial statements, determine the allocation of our distributable earnings for the preceding
year. Five percent of our net income must be allocated to a legal reserve fund until such fund
reaches an amount equal to at least 20% of our then current capital stock. As of June 30, 2006, our
legal reserve was Ps 267.8 million. Allocation to the legal reserve is determined without reference
to inflation adjustment under Mexican GAAP. Thereafter, the remainder of our net income is
allocated as determined by the stockholders meeting and may be distributed as dividends. All
shares which are fully paid and outstanding at the time a dividend or other distribution is
declared are entitled to share equally in such dividend or other distribution. Shares which are
only partially paid participate in a dividend or distribution in the same proportion that such
shares have been paid at the time of the dividend or distribution.
We have not paid any dividends in the past five years. The declaration, amount and payment of
dividends will depend on our results of operations, financial condition, cash requirements, the
ability of our subsidiaries to pay cash dividends to us, future prospects and other factors deemed
relevant by our stockholders. Our ability to declare and pay dividends is currently restricted
under the terms of the Common Agreement.
Liquidation Rights
Upon our dissolution, one or more liquidators must be appointed by an ordinary stockholders
meeting or an extraordinary stockholders meeting to wind up our affairs. All fully paid and
outstanding shares of capital stock will be entitled to participate equally in any distribution
upon liquidation. Partially paid shares participate in a liquidation distribution in the same
manner as they would in a dividend distribution.
Changes in Capital Stock
The fixed portion of our capital stock may be increased or decreased by a resolution of an
extraordinary stockholders meeting. The variable portion of our capital stock may be increased or
decreased by resolution of an ordinary stockholders meeting, unless such increase or decrease is
derived from our repurchase of our shares, in which case a resolution of our board of directors
authorizing such action would be sufficient. Capital increases and decreases must be recorded in
our book of capital variations.
Pre-Emptive Rights
In the event of a capital increase, a holder of issued and outstanding shares of our capital
stock has a preemptive right to subscribe for a sufficient number of shares to maintain such
holders existing proportional holdings of shares. However, our stockholders may waive these
preemptive rights with respect to any specific capital increase at a stockholders meeting and such
waiver would be binding on all stockholders, whether or not present or represented at the
stockholder meeting. Preemptive rights, if not waived, must be exercised within 15 days following
the publication of notice of the capital increase in the Official Gazette of the State of Durango
(Periódico Oficial del Estado de Durango) and in a newspaper of major circulation in the city of
Durango, Mexico. Under Mexican law, preemptive rights cannot be represented by an instrument that
is negotiable separately from the corresponding share.
Repurchase Obligation
In accordance with our bylaws, and as prescribed by the CNBV, our majority stockholders are
obligated to make a public offer for the purchase of stock held by our minority stockholders in the
event that the listing of our stock with the Mexican Stock Exchange is cancelled either by
resolution of our company or by an order of the CNBV. The price at which the stock must be
purchased by our majority stockholders is the greater of:
74
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the average quotation price for the 30 days prior to the date of the offer; or |
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the book value, as reflected in the last report filed with the CNBV and the Mexican Stock Exchange. |
The majority stockholders are not bound to make such public offer if the cancellation of the
listing is adopted by resolution of 95% of our stockholders and the amount offered to be paid for
the shares owned by the public is less than 300,000 UDIS. This provision, contained in our bylaws,
may not be amended without the consent of holders of at least 95% of our capital stock and the
prior approval of the CNBV.
Other Provisions
Variable Capital and Withdrawal Rights. The outstanding variable portion of our capital stock
may be fully or partially withdrawn by our stockholders. The minimum fixed portion of our capital
stock specified in our bylaws cannot be withdrawn. A stockholder who wishes to effect a total or
partial withdrawal of its shares must notify us in an authenticated written notice to that effect.
If notice of withdrawal is received prior to the last quarter of any fiscal year, the withdrawal
becomes effective at the end of the fiscal year in which the notice is given. Otherwise, the
withdrawal becomes effective at the end of the following fiscal year. Because our fixed capital
cannot be withdrawn, requests for withdrawals are satisfied only to the extent of our available
variable capital and in the order in which they are received. Requests which are received
simultaneously would be satisfied pro rata to the extent of our available variable capital.
Reimbursement of withdrawn shares is made at the lesser of:
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|
95% of the average share price quoted on the Mexican Stock Exchange during the 30
business days prior to the date on which the withdrawal becomes effective; and |
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the book value per share as calculated from our financial statements (as approved at the
annual ordinary stockholders meeting) for the fiscal year at the end of which the
withdrawal becomes effective. |
Any such amount to be paid by us becomes due on the day following the annual ordinary stockholders
meeting referred to above.
Right of Dissenting Stockholders to Tender Their Shares. The Mexican Companies Law provides
that upon the adoption at an extraordinary stockholders meeting of resolutions approving changes in
our companys business purpose, nationality or its form of corporate organization, dissenting
stockholders acquire the right to withdraw from a Mexican company and to compel such company to
reimburse their shares, subject to the fulfillment of certain terms and conditions. The amount of
the reimbursement is determined by the proportion of the tendered shares to the net worth of such
company as set forth in the financial statements approved at the then most recent stockholders
meeting. Dissenting stockholders must perfect their withdrawal rights by making a request to this
effect within 15 days following the date on which the meeting adopting the relevant resolution
adjourns. Holders of CPOs, who cannot vote, are not entitled to this right.
Restrictions on Foreign Investment. The bylaws provide that Series A Shares may only be
acquired by Mexican investors and that Series A Shares shall at all times represent at least 51% of
our companys capital stock. The bylaws also provide that Series B Shares may be acquired either by
Mexican or non-Mexican investors and that Series B Shares shall in no event represent more than 49%
of the capital stock of our company.
Forfeiture of Shares. As required by Mexican law, our bylaws provide, Any foreigner who at
the time of incorporation, or at any time thereafter, acquires a corporate interest or
participation in the corporation shall be considered by that fact alone as Mexican with respect to
such interest or participation and it shall be understood that he agrees not to invoke the
protection of his Government under penalty, in case of failure to comply with such agreement, of
forfeiture of such interest or participation in favor of the Mexican Nation. Under this provision,
a non-Mexican stockholder of our company is deemed to have agreed not to ask such stockholders
government to impose a diplomatic claim against the Mexican government with respect to such
stockholders rights as a stockholder. If the stockholder should invoke such governmental
protection in violation of this agreement, its shares
75
could be forfeited to the Mexican government. Mexican law requires that such a provision be
included in the bylaws of any Mexican corporation admitting non-Mexican stockholders.
Duration. Our existence under our bylaws continues until 99 years from the date of our
incorporation and can be extended by resolution of an extraordinary stockholders meeting.
Conflict of Interest. A stockholder of our company that votes on a business transaction in
which its interest conflicts with that of our company may be liable for losses and damages only if
the transaction would not have been approved without its vote. Additionally, a member of our board
of directors or of any committee thereof whose interests conflict with those of our company must
disclose the conflict to the other members of our board or directors or the respective committee
and abstain from any deliberation or vote in connection therewith. Failure by a director or member
of the respective committee to comply with such obligations may result in such director or member
being liable for damages and losses.
Purchase by our company of its Shares. In accordance with the provisions of Article 14 Bis 3
of the Mexican Securities Market Law (Ley del Mercado de Valores), we may purchase our shares. An
ordinary general meeting of stockholders may authorize, for any fiscal year, the repurchase of our
shares, specifying the maximum amount of funds available, provided that the total amount of funds
authorized for such purpose cannot exceed the retained earnings of our company. Upon any repurchase
of our shares, our capital stock would be reduced accordingly.
Shares Without Voting Rights. With the prior consent of the CNBV, we may issue shares without
voting rights or restricted voting rights, and with restrictions to other corporate rights in
addition to those restrictions set forth in Article 113 of the Mexican Companies Law. Any issuance
of shares, other than common shares, may not exceed 25% of our issued and outstanding capital
stock, unless issued with the prior approval of the CNBV. For calculation of the percentage, shares
(or the corresponding CPOs) with voting restrictions based on the nationality of the related
holders, will not be considered. We do not currently have shares without voting rights, but the
voting rights of our shares deposited in the CPO Trust are limited.
Prohibition on Purchase of Shares by Subsidiaries of our Company. Companies or other entities
controlled by us may not purchase, directly or indirectly, shares of our capital stock or shares of
companies or entities that are our stockholders.
Material Contracts
Our company has not entered into any other material contracts other than those entered into in
the ordinary course of business or those disclosed elsewhere within this Form 20-F.
For a brief discussion of certain terms of our significant debt agreements, see Item 5.
Operating and Financial Review and Prospects Indebtedness and for a discussion of other
transactions and agreements with our affiliates and associated companies, see Item 7. Major
Stockholders and Related Party Transactions Related Party Transactions.
Exchange Controls
The Mexican government does not currently restrict the ability of Mexican or foreign persons
or entities to convert pesos into dollars or other currencies, and vice versa. However, in the
past, the Mexican economy has experienced balance of payment deficits and shortages in foreign
exchange reserves, and the Mexican government has responded by restricting the ability of Mexican
or foreign persons or entities to convert pesos to foreign currencies generally, and dollars in
particular. The Mexican government may institute a restrictive currency exchange control policy in
the future. Any restrictive currency exchange control policy could prevent or restrict our access
to dollars to meet our dollar-denominated obligations, including our debt obligations, when and if
issued, and could also have a material adverse effect on our business, financial condition and
results of operations.
76
Mexican Income Taxation
The following is a description of the material Mexican income tax consequences of the
purchasing, owning and disposing of Series A Shares, ADSs and CPOs. The tax treatment of a holder
of the Series A Shares, the Series A Shares represented by ADSs and CPOs may vary depending upon
the particular situation of the holder.
The following summary of the principal consequences under Mexican law, as currently in effect,
and of the Treaty (defined below) is limited to an investment in Series A Shares, CPOs and ADSs by
a holder who is not a resident of Mexico and who will not hold Series A Shares, CPOs and ADSs or a
beneficial interest therein in connection with a permanent establishment (establecimiento
permanente) in Mexico, or Foreign Holder. For purposes of Mexican taxation, an individual or
corporation that does not satisfy the necessary requirements to be considered a Mexican resident
for tax purposes as described below is deemed to be a Foreign Holder. For purposes of Mexican
taxation, an individual is a resident of Mexico if such person has established his or her home in
Mexico, unless such person has resided in another country for more than 183 days, whether
consecutive or not, during a calendar year and can demonstrate that such person has become a
resident of that country for tax purposes. A legal entity is a resident of Mexico if (i) it was
incorporated under Mexican law, or (ii) it has its main management or its principal administrative
office located in Mexico. A Mexican citizen is presumed to be a resident of Mexico unless such
person can demonstrate the contrary. A permanent establishment of a non-resident will be required
to pay taxes in Mexico with respect to income attributable to such permanent establishment in
accordance with applicable law.
This summary is based upon the federal tax laws, regulations and treaty obligations of Mexico
as in effect on June 27, 2006, which are subject to change. Such tax laws, their regulations and
treaty obligations of Mexico are also subject to various interpretations, and the Ministry of
Finance and Public Credit (Secretaría de Hacienda y Crédito Público) or the Mexican competent
courts could later disagree with the explanations or conclusions set out below. The discussion
below does not address all Mexican tax considerations that may be relevant to particular investors,
nor does it address the special tax rules applicable to certain categories of investors or any tax
consequences under the tax laws of any state or municipality of Mexico. Prospective purchasers of
Series A Shares, CPOs and ADSs are urged to consult their own tax advisors as to the Mexican or
other tax consequences of the purchase, ownership and disposition of Series A Shares, Series A
Shares represented by ADSs and CPOs, including, in particular, the effect of any foreign, state or
local tax laws.
The United States and Mexico have entered into a Convention for the Avoidance of Double
Taxation and Prevention of Fiscal Evasion with respect to Income Taxes and accompanying protocol,
or the Treaty, that generally became effective on January 1, 1994. In general, the Treaty does not
have adverse effects on holders of ADSs, Series A Shares and CPOs.
The United States and Mexico have also entered into an agreement that regulates the exchange
of information regarding tax matters.
Series A Shares, ADSs, CPOs
Taxation of Dividends
Under the Mexican Income Tax Law (Ley del Impuesto Sobre la Renta), dividends, either in cash
or in kind, paid with respect to Series A Shares underlying the CPOs and ADSs to a Foreign Holder
will not be subject to any withholding tax.
On the other hand, during 2004 Mexican companies paying dividends with profits that have not
yet been subject to the corporate income tax, are obligated to pay a tax of 33% of the amount
resulting from the increase to the amount of the dividend multiplied by a factor of 1.4925, as if
the distributed profits would have been a profit after the payment of the tax. There are tax rate
modifications for 2005 and will be subsequent changes in the following years. Tax rate applicable
in 2005 is 30%. Such tax rate will decrease 1% in both 2006 and 2007, to a minimum rate of 28%,
while the applicable factor will be 1.4286 during 2005, 1.4085 during 2006 and 1.3889 as of 2007.
77
However, Mexican companies will not be subject to any income tax in addition to the corporate
tax as long as the amount maintained in its after tax profits account (cuenta de utilidad fiscal
neta, or CUFIN) exceeds or equals the dividend payment to be made.
In addition, up to December 31, 2001, Mexican companies were authorized to defer a portion of
their taxes, case in which a company was obligated to maintain a reinvested after tax profits
account (cuenta de utilidad fiscal neta reinvertida, or CUFINRE). In this regard, companies that
had elected to defer their income taxes are required to pay such deferred taxes when distributing
their profits that were partially taxed; therefore, any dividend coming from their CUFINRE balances
will be taxed by applying a rate of 3% (in case those profits were obtained during 1999) or of 5%
(in case those profits were obtained during 2000 and 2001) to the amount of distributed dividends
already grossed-up by the 1.5385 factor.
Mexican companies that maintain a CUFINRE account set up under the provisions in full force
and effect during the tax years prior to 2002, must first exhaust the balance in their CUFINRE
account before they can utilize CUFIN balances.
Disposition of Series A Shares, ADSs and CPOs
The sale or other disposition of shares or securities that represent the ownership of assets
by nonresidents are subject to income taxation in Mexico as long as (i) they are issued by a
Mexican resident, or (ii) the accounting value of said shares or securities comes, in more than
50%, from immovable property located in Mexico.
However, deposits of CPOs in exchange for ADSs and withdrawals of CPOs in exchange for ADSs
will not give rise to Mexican taxation. The sale or other disposition of ADSs by a Foreign Holder
will not be subject to Mexican tax.
The sale or other disposition of Series A Shares or CPOs by a Foreign Holder will be:
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Subject to Mexican income tax assessed at the rate of 25% on the total amount of the
transaction, without any deduction. The purchaser of Series A Shares is obligated to
withhold the tax only if he is a Mexican resident or has a permanent establishment in
Mexico; in any other cases, the Foreign Holder will be obligated to pay the tax directly to
the Mexican tax authorities; or |
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Subject to Mexican income tax assessed at the optional rate of 33% on the gains obtained
(if any) as long as the Foreign Holder (i) has a representative in Mexico that meets
certain requirements, and is appointed before the actual sale or disposition takes place,
(ii) is not a resident of a country considered as a tax haven or of a country with
territorial taxation system in terms of the provisions of the Income Tax Law, and (iii)
files an audited opinion of the transaction prepared by a public accountant authorized
for such purposes with the Mexican Ministry of Finance and Public Credit. In this case, the
Foreign Holder will be obligated to pay the tax through the appointed representative to the
Mexican tax authorities. There are tax rate modifications for 2005 and there will be
subsequent changes in the following years. Tax rate applicable in 2005 is 30%. Such tax
rate will decrease 1% in each of the subsequent years of 2006 and 2007, to a minimum rate
of 28%; or |
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Exempt from Mexican income tax as long as (i) the transaction is carried out through the
Mexican Stock Exchange, (ii) the Foreign Holder is an individual, and (iii) the income from
the sale or other disposition would have been exempt if obtained by a Mexican resident
individual. |
However, under the Treaty, a Foreign Holder that is eligible to claim the benefits of the
Treaty will be exempt from Mexican tax on gains realized on a sale or other disposition of Series A
Shares or CPOs, so long as such Foreign Holder did not own, directly or indirectly, 25% or more of
the outstanding shares of our company (including those represented by ADSs) within the 12-month
period preceding such sale or other disposition.
Estate and Gift Taxes
78
A Foreign Holder will not be liable in Mexico for estate, gift, inheritance or similar taxes
with respect to its holdings of Series A Shares, CPOs or ADSs; provided, however, that gifts or any
gratuitous transfers of Series A Shares or CPOs may in certain circumstances result in the
imposition of a Mexican federal income tax upon the recipient. There are no Mexican stamp, issue,
registration or similar taxes payable by a Foreign Holder with respect to the Series A Shares, CPOs
or ADSs.
United States Federal Income Taxation
The following is a description of the material U.S. federal income tax consequences of owning
and disposing of Series A Shares, CPOs or ADSs. This description addresses only the U.S. federal
income tax considerations of holders that will hold Series A Shares, CPOs or ADSs as capital
assets. This description is based on the Internal Revenue Code of 1986, as amended, or the Code,
United States Treasury Regulations (temporary, proposed and final) issued under the Code, and
administrative and judicial interpretations of the Code and regulations, each as in effect and
available as of the date of this annual report.
These income tax laws, regulations, and interpretations, however, may change at any time, and
any change could be retroactive to the issuance date of the Series A Shares, CPOs or ADSs, as the
case may be. These income tax laws and regulations are also subject to various interpretations, and
the U.S. Internal Revenue Service, or the IRS, or the U.S. courts could later disagree with the
explanations or conclusions set out below.
This description does not address all of the tax consequences that may be relevant to a
holder. This description does not address, except as stated below, any of the tax consequences to:
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holders that may be subject to special tax treatment, such as financial institutions,
insurance companies, real estate investment trusts, regulated investment companies,
tax-exempt organizations, grantor trusts or dealers or traders in securities or currencies; |
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certain former citizens or long-term residents of the United States; |
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persons whose functional currency for U.S. federal income tax purposes is not the dollar; and |
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persons that will hold Series A Shares, CPOs or ADSs as part of a position in a straddle
or as part of a hedging, conversion or other integrated investment transaction for U.S.
federal income tax purposes. |
This description does not address, except as stated below, any of the tax consequences to
persons that received Series A Shares CPOs or ADSs as compensation for the performance of services,
persons that will hold Series A Shares CPOs or ADSs or holders that own (or are deemed to own) 10%
or more (by voting power or value) of the stock of our company. Moreover, this summary does not
address the U.S. federal estate and gift or alternative minimum tax consequences of the
acquisition, ownership and disposition of Series A Shares, CPOs or ADSs.
For purposes of this description, a U.S. Holder is a beneficial owner of Series A Shares, CPOs
or ADSs who for U.S. federal income tax purposes is:
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a citizen or resident of the United States; |
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a corporation or partnership created or organized in or under the laws of the United
States or any state thereof, including the District of Columbia; |
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an estate the income of which is subject to U.S. federal income taxation regardless of
its source; or |
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a trust (1) that validly elects to be treated as a United States person for U.S. federal
income tax purposes or (2)(a) the administration over which a U.S. court can exercise
primary supervision and (b) all of the substantial decisions of which one or more United
States persons have the authority to control. |
79
In general, this discussion does not address the tax consequences applicable to holders that
are treated as partnerships or other pass-through entities for U.S. federal income tax purposes.
Such an entity, a partner of a partnership, a member in a limited liability company that is treated
as a partnership for U.S. federal income tax purposes, and other owners of a pass-through entity
that holds Series A Shares, CPOs or ADSs should consult its own tax advisor as to such
consequences.
A non-U.S. Holder is a beneficial owner of the Series A Shares, CPOs or ADSs, other than a
U.S. Holder.
ADSs
This description is based in part on the representations of the Depositary and the assumption
that each obligation in the Deposit Agreement and any related agreement will be performed in
accordance with its terms. The U.S. Treasury Department has expressed concern that depositaries for
American depositary receipts, or other intermediaries between the holders of shares of an issuer
and the issuer, may be taking actions that are inconsistent with the claiming of U.S. foreign tax
credits by U.S. Holders of such receipts or shares. Accordingly, the analysis regarding the
sourcing rules described below for U.S. foreign tax credit purposes could be affected by future
actions that may be taken by the U.S. Treasury Department.
Ownership of CPOs or ADSs in General
For U.S. federal income tax purposes, a holder of CPOs or ADSs generally will be treated as
the owner of the Series A Shares represented by such CPOs or ADSs.
Distributions
Subject to the discussion below under Passive Foreign Investment Company Considerations, the
gross amount of any distribution by our company of cash or property (other than certain
distributions, if any, of Series A Shares, CPOs or ADSs distributed pro rata to all stockholders of
our company, including holders of CPOs or ADSs) with respect to Series A Shares, CPOs or ADSs,
before reduction for any Mexican taxes withheld therefrom, will be includible in income by a U.S.
Holder as dividend income to the extent such distributions are paid out of the current or
accumulated earnings and profits of our company as determined under U.S. federal income tax
principles. Such dividends will not be eligible for the dividends received deduction generally
allowed to corporate U.S. Holders. Subject to the discussion below under Passive Foreign
Investment Company Considerations, non-corporate U.S. Holders generally may be taxed on such
distributions at the lower rates applicable to long-term capital gains for taxable years beginning
on or before December 31, 2010, (i.e., gains from the sale of capital assets held for more
than one year). Non-corporate U.S. Holders that do not meet a minimum holdings period requirement
during which they are not protected from the risk of loss will not be eligible for the reduced
rates of taxation. Subject to the discussion below under Passive Foreign Investment Company
Considerations, to the extent, if any, that the amount of any distribution by our company exceeds
our companys current and accumulated earnings and profits as determined under U.S. federal income
tax principles, it will be treated first as a tax-free return of the U.S. Holders adjusted tax
basis in the Series A Shares, CPOs or ADSs and thereafter as capital gain. Our company does not
maintain calculations of our companys earnings and profits under U.S. federal income tax
principles.
Any such dividend paid in pesos will be included in the gross income of a U.S. Holder in an
amount equal to the dollar value of the pesos on the date of receipt. The amount of any
distribution of property other than cash will be the fair market value of such property on the date
of distribution.
Dividends received by a U.S. Holder with respect to Series A Shares, CPOs or ADSs will be
treated as foreign source income, which may be relevant in calculating such holders foreign tax
credit limitation. The limitation on foreign taxes eligible for credit is calculated separately
with respect to specific classes of income. For this purpose, dividends distributed by our company
generally will constitute passive income, or, in the case of certain U.S. Holders, financial
services income. U.S. Holders should note that the financial services income category will be
eliminated with respect to taxable years beginning after December 31, 2006, and the foreign tax
credit limitation categories after such time will be limited to passive category income and
general category income.
80
Subject to the discussion below under Backup Withholding Tax and Information Reporting
Requirements, a Non-U.S. Holder of Series A Shares, CPOs or ADSs generally will not be subject to
United States federal income or withholding tax on dividends received on Series A Shares, CPOs or
ADSs, unless such income is effectively connected with the conduct by such Non-U.S. Holder of a
trade or business in the United States.
Sale or Exchange of Series A Shares or ADSs
Subject to the discussion below under Passive Foreign Investment Company Considerations, a
U.S. Holder generally will recognize gain or loss on the sale or exchange of Series A Shares, CPOs
or ADSs equal to the difference between the amount realized on such sale or exchange and the U.S.
Holders adjusted tax basis in the Series A Shares, CPOs or ADSs. Such gain or loss generally will
be capital gain or loss. Currently, in the case of a noncorporate U.S. Holder, the maximum marginal
U.S. federal income tax rate applicable to such gain will be lower than the maximum marginal U.S.
federal income tax rate applicable to ordinary income (other than certain dividends) if such U.S.
Holders holding period for such Series A Shares, CPOs or ADSs exceeds one year (i.e., long-term
capital gains). Gain or loss, if any, recognized by a U.S. Holder generally will be treated as U.S.
source income or loss for U.S. foreign tax credit purposes. The deductibility of capital losses is
subject to limitations.
The initial tax basis of Series A Shares to a U.S. Holder will be the dollar value of any
peso-denominated purchase price determined on the date of purchase. If the Series A Shares are
treated as traded on an established securities market, a cash basis U.S. Holder (or, if it
elects, an accrual basis U.S. Holder) will determine the dollar value of the cost of such Series A
Shares by translating the amount paid at the spot rate of exchange on the settlement date of the
purchase. The conversion of dollars to pesos and the immediate use of that currency to purchase
Series A Shares generally will not result in taxable gain or loss for a U.S. Holder.
With respect to the sale or exchange of Series A Shares, the amount realized generally will be
the dollar value of the payment received determined on (i) the date of receipt of payment in the
case of a cash basis U.S. Holder and (ii) the date of disposition in the case of an accrual basis
U.S. Holder. If the Series A Shares are treated as traded on an established securities market, a
cash basis taxpayer (or, if it elects, an accrual basis taxpayer) will determine the dollar value
of the amount realized by translating the amount received at the spot rate of exchange on the
settlement date of the sale.
Subject to the discussion below under Backup Withholding Tax and Information Reporting
Requirements, a Non-U.S. Holder of Series A Shares, CPOs or ADSs generally will not be subject to
U.S. federal income or withholding tax on any gain realized on the sale or exchange of such Series
A Shares, CPOs or ADSs unless (i) such gain is effectively connected with the conduct by such
Non-U.S. Holder of a trade or business in the United States or (ii) in the case of any gain
realized by an individual Non-U.S. Holder, such holder is present in the United States for 183 days
or more in the taxable year of such sale or exchange and certain other conditions are met.
Passive Foreign Investment Company Considerations
A Non-U.S. corporation will be classified as a passive foreign investment company, or a
PFIC, for U.S. federal income tax purposes in any taxable year in which, after applying certain
look-through rules, either (i) at least 75% of its gross income is passive income or (ii) at
least 50% of the gross value of its assets is attributable to assets that produce passive income
or are held for the production of passive income. Passive income for this purpose generally
includes dividends, interest, royalties, rents and gains from commodities and securities
transactions.
Based on certain estimates of our companys gross income and gross assets and the nature of
our companys business, our company believes that it will not be classified as a PFIC for the
taxable year ended December 31, 2005. Our companys status in future years will depend on our
companys assets and activities in those years. Our company has no reason to believe that its
assets or activities will change in a manner that would cause our company to be classified as a
PFIC, but there can be no assurance that our company will not be considered a PFIC for any taxable
year. If our company were a PFIC, a U.S. Holder of Series A Shares, CPOs or ADSs generally would be
subject to imputed interest charges and other disadvantageous tax treatment (including the denial
of the taxation of certain dividends at the lower rates applicable to long-term capital gains, as
discussed above under Distributions) with respect to any gain from the sale or exchange of, and
certain distributions with respect to, the Series A Shares, CPOs or ADSs.
81
If our company were a PFIC, a U.S. Holder of Series A Shares, CPOs or ADSs could make a
variety of elections that may alleviate certain of the tax consequences referred to above, and one
of these elections may be made retroactively. However, it is expected that the conditions necessary
for making certain of such elections will not apply in the case of the Series A Shares, CPOs or
ADSs. U.S. Holders should consult their own tax advisors regarding the tax consequences that would
arise if our company were treated as a PFIC.
U.S. Backup Withholding Tax and Information Reporting
U.S. backup withholding tax and information reporting requirements generally will apply to
certain payments to certain noncorporate holders of stock. Information reporting generally will
apply to payments of dividends on, and to proceeds from the sale or redemption of, Series A Shares,
CPOs or ADSs, in each case, made within the United States, or by a U.S. payor or U.S. middleman, to
a holder of Series A Shares, CPOs or ADSs (other than an exempt recipient, including a corporation,
a payee that is not a United States person who provides appropriate certification and certain other
persons). A payor will be required to withhold backup withholding tax from any such payments within
the United States, or by a U.S. payor or U.S. middleman, to a holder (other than an exempt
recipient) if such holder fails to furnish its correct taxpayer identification number or otherwise
fails to comply with, or establish an exemption from, such backup withholding tax requirements. The
backup withholding tax rate is 28% for taxable years through 2010. In the case of such payments
made within the United States to a foreign simple trust, a foreign grantor trust or a foreign
partnership (other than payments to a foreign simple trust, a foreign grantor trust or foreign
partnership that qualifies as a withholding foreign trust or a withholding foreign partnership
within the meaning of the applicable U.S. Treasury Regulations and payments to a foreign simple
trust, a foreign grantor trust or a foreign partnership that are effectively connected with the
conduct of a trade or business in the United States), the beneficiaries of the foreign simple
trust, the persons treated as the owners of the foreign grantor trust or the partners of the
foreign partnership, as the case may be, will be required to provide the certification discussed
above in order to establish an exemption from backup withholding tax and information reporting
requirements. Moreover, a payor may rely on a certification provided by a payee that is not a
United States person only if such payor does not have actual knowledge or a reason to know that any
information or certification stated in such certificate is incorrect.
THE ABOVE DESCRIPTION OF MEXICAN INCOME TAXATION AND U.S. FEDERAL INCOME TAXATION IS NOT INTENDED
TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSEQUENCES RELATING TO ACQUISITION, OWNERSHIP AND
DISPOSITION OF THE SERIES A SHARES, CPOs OR ADSs. PROSPECTIVE PURCHASERS OF SERIES A SHARES, CPOs
OR ADSs SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE TAX CONSEQUENCES OF THEIR PARTICULAR
SITUATIONS.
Documents on Display
The documents concerning our company that are referred to in this annual report may be
inspected at our offices at Torre Corporativa Durango, Potasio 150, Ciudad Industrial, Durango,
Durango, United Mexican States 34208.
Item 11. Quantitative and Qualitative Disclosure about Market Risk.
We are exposed to a number of market risks arising from our normal business activities. Such
market risks principally involve the possibility that changes in interest rates, exchange rates or
commodity prices will adversely affect the value of our financial assets and liabilities or future
cash flows and earnings. Market risk is the potential loss arising from adverse changes in market
rates and prices. We periodically review our exposure to risks arising from fluctuations in
interest rates and foreign exchange and determine at the senior management level how to manage
these risks. We do not have a derivatives trading portfolio. We have not entered into market risk
sensitive instruments for speculative purposes. See note 3j to our financial statements.
Interest Rate Risk
We face primary market risk exposure due to interest rate risk. Approximately 29.1% of our
long-term interest-bearing debt at December 31, 2005 was variable rate. Substantially all of our
long-term debt is denominated in dollars. As a result, depreciation of the peso will result in
increases in our interest expense in peso terms. Variable
82
rate long-term debt denominated in dollars bears interest at rates tied to LIBOR, the rate
that banks in the London interbank market offer for dollar deposits of varying maturities.
The table below summarizes our debt obligations, which include notes, bank loans and leases,
at December 31, 2005. The table presents payment obligations in millions of pesos by maturity date
and the related weighted-average interest rates. Dollar-denominated liabilities and notional
amounts have been converted to pesos based on the exchange rate at December 31, 2005, which was Ps
10.6344 = US1.00.
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Liabilities |
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2006 |
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2007 |
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2008 |
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2009 |
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2010 |
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Thereafter |
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(in millions of constant pesos) |
Fixed Rate Debt |
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Millions of Pesos |
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|
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|
|
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|
4,613.0 |
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Weighted Average rate |
|
|
8.94 |
% |
|
|
9.99 |
% |
|
|
9.99 |
% |
|
|
9.99 |
% |
|
|
9.99 |
% |
|
|
9.99 |
% |
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Variable Rate Debt |
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|
|
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Millions of Pesos |
|
|
257.6 |
|
|
|
335.7 |
|
|
|
278.6 |
|
|
|
248.5 |
|
|
|
256.5 |
|
|
|
772.8 |
|
Weighted Average rate |
|
|
8.37 |
% |
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|
8.42 |
% |
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|
8.51 |
% |
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|
8.54 |
% |
|
|
8.61 |
% |
|
|
8.69 |
% |
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Total Debt |
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Millions of Pesos |
|
|
257.6 |
|
|
|
335.7 |
|
|
|
278.6 |
|
|
|
248.5 |
|
|
|
256.5 |
|
|
|
5,385.8 |
|
Weighted Average rate |
|
|
8.76 |
% |
|
|
9.54 |
% |
|
|
9.61 |
% |
|
|
9.68 |
% |
|
|
9.74 |
% |
|
|
9.80 |
% |
In the event that the average interest rate applicable to our financial liabilities in 2006 is
1% higher than the average interest rate in 2005, our financial expenses would increase by
approximately Ps 53.0 million.
Foreign Currency Exchange Rate Risk
Since substantially all of our long-term interest-bearing debt is denominated in dollars, the
interest expense varies with exchange rate movements between the peso and the dollar. We have not
entered into any derivative contracts to limit our exposure to exchange rate fluctuations. Although
prices for our products in Mexico are quoted in pesos, prices are linked to dollars. We believe
that this link mitigates in part the effect of exchange rate fluctuations between the dollar and
the peso. However, because the majority of our costs of production are paid in pesos, in periods in
which the peso appreciates against the dollar, our operating margins are reduced.
The table set forth above summarizes our debt obligations that are sensitive to foreign
currency exchange rates at December 31, 2005. The table presents principal payment obligations in
millions of pesos by maturity date for dollar-denominated debt.
In the event that the peso depreciates by 10% against the dollar during 2006 as compared to
the peso/dollar exchange rate at December 31, 2005, our financial expenses indexed to the dollar in
2006 would increase by approximately Ps 59.0 million.
Item 12. Description of Securities Other than Equity Securities.
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
Not applicable.
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Item 14. |
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Material Modifications to the Rights of Security Holders and Use of Proceeds. |
Not applicable.
83
Item 15. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of December 31, 2005, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures. There
are inherent limitations to the effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or overriding of the controls and
procedures. Accordingly, even effective disclosure controls and procedures can only provide
reasonable assurance of achieving their control objectives, and management necessarily applies its
judgment in assessing the costs and benefits of such controls and procedures.
Based
upon and as of the date of our evaluation, for the reasons described
below, our Chief
Executive Officer and Chief Financial Officer concluded that, as of December 31, 2005, our
disclosure controls and procedures were ineffective in providing reasonable assurance that
information relating to us that is required to be included in our periodic filings with the SEC is
recorded, processed, summarized and reported as and when required.
During 2004, we restated our financial statements to correct certain amounts previously
reported in our Mexican GAAP financial statements for the year ended December 31, 2004.
Additionally, we also restated our U.S. GAAP financial information for the years ended December 31,
2003, 2002, 2001 and 2000. These corrections made for our Mexican and U.S. GAAP financial
information were related to the determination of our deferred tax provision.
We recognized that such corrections described above represented a material weakness in our
internal control over financial reporting, as defined under the Public Company Accounting Oversight
Boards Auditing Standard No.2 , An audit of Internal Control Over Financial Reporting Performed in
Conjunction with an Audit of Financial Statements. We have not fully remediated this material
weakness during 2005 since we are still in the process to upgrading our information technologies
through the automation of our consolidated system that will improve our ability to prepare our
financial information under both Mexican GAAP and U.S. GAAP specifically in our deferred income tax
calculations.
Item 16. [Reserved].
Not applicable.
Item 16A. Audit Committee Financial Expert.
The audit committee members are Rebeca Castaños Castaños, Buenaventura G. Saravia and Mayela
Rincón de Velasco. Our Board of Directors has determined that Mayela Rincón de Velasco is our
audit committee financial expert within the meaning of applicable law. Mayela Rincón de Velasco
is our Chief Financial Officer and, therefore, is not independent with respect to our company. Our
Board of Directors is reviewing the qualifications of the other members of the audit committee to
determine whether any is an audit committee financial expert within the meaning of applicable law
and independent under the listing standards of a national securities exchange registered pursuant
to section 6(a) of the Exchange Act or a national securities association registered pursuant to
section 15A(a) of the Exchange Act that have been approved by the SEC.
84
Item 16B. Code of Ethics.
We have adopted a Code of Conduct and Business Ethics Policy that applies to our principal
executive officer, principal financial officer and principal accounting officer as well as all our
directors, other officers and employees. This Code of Conduct and Business Ethics Policy can be
found at our website, www.corpdgo.com.
Item 16C. Principal Accountant Fees and Services.
Audit Fees
The following table summarizes the aggregate fees billed to us by our principal accounting
firm, PricewaterhouseCoopers, for the fiscal years ended December 31, 2005 and 2004:
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For the year ended December 31, |
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2005 |
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2004 |
|
|
|
(in thousands of constant pesos) |
|
Audit Fees |
|
Ps |
13,270 |
|
|
Ps |
10,178 |
|
Tax Fees |
|
|
130 |
|
|
|
884 |
|
Other Fees |
|
|
597 |
|
|
|
5,423 |
|
|
|
|
|
|
|
|
Total Fees |
|
Ps |
13,997 |
|
|
Ps |
16,485 |
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|
Audit fees and audit-related fees. Audit fees in the above table, which include all
audit-related fees, for the years ended December 31, 2005 and 2004, are the aggregate fees billed
or expected to be billed by PricewaterhouseCoopers in connection with the audit of our annual
financial statements and regulatory audits. Additionally, the audit fees include review of our
companys annual financial statements and our companys annual reports to be filed with the SEC and
the CNBV. We did not incur any audit related fees during the years ended December 31, 2005 and
2004.
Tax Fees. Tax fees in the above table for the years ended December 31, 2005 and 2004 are fees
billed or expected to be billed by PricewaterhouseCoopers for tax consultations.
Other Fees. Other fees in the above table for the year ended December 31, 2004 are fees billed
by PricewaterhouseCoopers for non-audit services related to the financial restructuring of our
company. Other fees in the above table for the year ended December 31, 2005 are fees billed by
Pricewaterhouse Coopers for non-audit services related to our compliance with the Sarbanes-Oxley
Act of 2002. As a percentage of total fees billed to our company, other fees represent 4.3% for
2005 and 32.9% for 2004.
Audit Committees Pre-Approval Policy and Procedures
Our audit committee is charged with the responsibility of pre-approving all audit and
non-audit services provided to us and our subsidiaries by our independent auditor and any other
auditing firm. In performing this duty, the audit committee is guided by the following pre-approval
policies and procedures:
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the audit committee must pre-approve services performed by our independent auditor for
us or our subsidiaries, which may include audit, review, attest and non-audit services
permitted under applicable law, such as the rules and regulations of the SEC, the Public
Company Accounting Oversight Board and any other regulatory or self-regulatory body,
collectively, the covered services; |
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the audit committee must pre-approve all covered services provided by other firms
besides our independent auditor to the extent our independent auditor expressly relies on
the audit report of these other firms in preparing its own audit report; and |
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the audit committee may delegate its authority to pre-approve the covered services to
one or more members of the audit committee. |
85
In considering whether to grant approval, the audit committee considers the nature and scope
of the service as proposed in light of applicable law, as well as the principles and other guidance
of the SEC and the Public Company Accounting Oversight Board with respect to auditor independence.
The audit committee also considers whether the overall level of non-audit services is compatible
with the independence of the independent auditor. In general, predictable and recurring services
are approved by the audit committee on an annual basis at or about the start of each fiscal year.
While our policies and procedures acknowledge the de minimus exception granted by SEC
regulations, which allows certain services to be exempt from pre-approval, we do not normally rely
on this exception. Our chief financial officer is responsible for bringing to the audit committees
attention any instance in which services may have been provided without prior approval.
Substantially all of the above fees paid to PricewaterhouseCoopers were subject to our pre-approval
policies and procedures.
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Item 16D. |
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Exemptions from the Listing Standards for Audit Committees. |
Not applicable.
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Item 16E. |
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers. |
During the year ended December 31, 2005, there were no purchases made by or on behalf of
Corporación Durango, S.A. de C.V. or any affiliated purchaser, as defined in Rule 10b-18(a)(3)
under the Exchange Act, of shares or other units of any class of Corporación Durango, S.A. de
C.V.s equity securities that are registered by Corporación Durango, S.A. de C.V. pursuant to
Section 12 of the Exchange Act.
86
PART III
Item 17. Financial Statements.
Not applicable.
Item 18. Financial Statements.
See
pages F-1 to F-77, incorporated herein by reference.
Item 19. Exhibits.
Documents filed as exhibits to this annual report:
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1.1 |
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Bylaws of our company, as amended (English translation) |
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2.1 |
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Indenture, dated as of February 23, 2005, between Corporación Durango S.A. de C.V. and Law
Debenture Trust Company of New York, as Trustee (incorporated by reference to Exhibit 2.1 to our
annual report on Form 20-F filed on October 28, 2005) |
|
|
|
|
|
|
2.2 |
|
|
Restructured Credit Agreement, dated as of February 23, 2005, among Corporación Durango, S.A. de
C.V., the Guarantors named therein, the Tranche A Holders named therein, and The Bank of New
York, as Administrative Agent (incorporated by reference to Exhibit 2.2 to our annual report on
Form 20-F filed on October 28, 2005) |
|
|
|
|
|
|
2.3 |
|
|
Common Agreement, dated as of February 23, 2005, among Corporación Durango, S.A. de C.V., the
Guarantors and Additional Guarantors named therein, the A Lenders named therein, The Bank of New
York, as Administrative Agent, Law Debenture Trust Company of New York, as Trustee, Deutsche Bank
Trust Company Americas, as Collateral Agent, Deutsche Bank Mexico, S.A., Institución De Banca
Multiple, Trust Division, as Collateral Agent, Deutsche Bank Trust Company Americas, as
Guarantor Paying Agent, and the Subordinating Creditors named therein (incorporated by reference
to Exhibit 2.3 to our annual report on Form 20-F filed on October 28, 2005) |
|
|
|
|
|
|
2.4 |
|
|
The total amount of long-term debt securities of our company and its subsidiaries under any one
instrument, other than the Indenture and the Restructured Credit Agreement, does not exceed 10%
of the total assets of our company and its subsidiaries on a consolidated basis. We agree to
furnish copies of any or all such instruments to the United States Securities and Exchange
Commission upon request. |
|
|
|
|
|
|
2.5 |
|
|
Form of Deposit Agreement among our company, The Bank of New York and owners and beneficial
owners of American Depositary Receipts issued thereunder, including the form of American
Depositary Receipts (incorporated by reference to Exhibit 4.3 to our companys registration
statement No. 33-80148 on Form F-1 filed on June 10, 1994) |
|
|
|
|
|
|
2.6 |
|
|
Trust Agreement, dated November 24, 1989, between NAFIN, as grantor, and NAFIN, Trust
Department, as CPO trustee, together with an English translation (incorporated by reference to
Exhibit 4.4 to our companys registration statement No. 33-80148 on Form F-1 filed on June 10,
1994) |
|
|
|
|
|
|
2.7 |
|
|
Public Deed with respect to the CPOs, together with an English translation (incorporated by
reference to Exhibit 4.5 to our companys registration statement No. 33-80148 on Form F-1 filed
on June 10, 1994) |
|
|
|
|
|
|
3.1 |
|
|
Convenience translation of Irrevocable Trust Administration Agreement, dated June 22, 2005,
between Miguel Rincón Arredondo, José A. Rincón Arredondo, Jesús Rincón Arredondo, Wilfrido
Rincón Arredondo, Ignacio Rincón Arredondo, Martín Rincón Arredondo and Mayela Rincón Arredondo
de Velasco, as Settlors and Beneficiaries, and Banco Invex, S.A., Institución de Banca Múltiple,
Invex Grupo Financiero, Fiduciario, as Trustee (incorporated by reference to Exhibit 99.5 filed
as an exhibit to Amendment No. 3 to Schedule 13D filed with the United States Securities and
Exchange Commission on July 18, 2005) |
|
|
|
|
|
|
8 |
|
|
List of Subsidiaries |
87
|
|
|
|
|
|
|
|
|
|
|
12.1 |
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
12.2 |
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
13.1 |
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
13.2 |
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
88
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf.
|
|
|
|
|
|
CORPORACIÓN DURANGO, S.A. DE C.V.
|
|
|
By: |
/s/ Mayela Rincón Arredondo de Velasco
|
|
|
|
Name: |
Mayela Rincón Arredondo de Velasco |
|
|
|
Title: |
Chief Financial Officer |
|
|
Date: June
30, 2006
89
INDEX TO FINANCIAL STATEMENTS
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
F-2 |
Report
of Independent Certified Public Accountants
|
|
F-3 |
Report
of Independent Registered Public Accounting Firm
|
|
F-4 |
Consolidated Balance Sheets as of December 31, 2005 and 2004
|
|
F-5 |
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003
|
|
F-6 |
Statements of Changes in Shareholders Equity for the years ended December 31, 2005, 2004 and 2003
|
|
F-7 |
Consolidated Statement of Changes in Financial Position for the years ended December 31, 2005,
2004 and 2003
|
|
F-8 |
Notes to the Consolidated Financial Statements
|
|
F-9 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Corporación Durango, S. A. de C. V.:
We have audited the consolidated balance sheets of Corporación Durango, S.A. de C. V. and
subsidiaries (collectively the Company) as of December 31, 2005 and 2004, and the related
consolidated statements of operations, changes in stockholders equity and changes in financial
position for the years then ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits. We did not audit the financial statements of
Durango International, Inc. and Subsidiaries which statements
reflect 7.5% of consolidated total assets as of December 31,
2005, and 17% net sales and 0.2% of consolidated net income for the
year ended December 31, 2005. Those statements, prepared in
accordance with generally accepted accounting principles in the United
States, were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the
amounts included for those subsidiaries on such basis of accounting
is based solely on the report of such other auditor.
We conducted our audits in accordance with auditing standards generally accepted in Mexico and with
the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures contained in
the financial statements, including the Companys conversion of
the amounts in the financial statements of Durango International, Inc.
and Subsidiaries prepared in accordance with generally accepted
accounting principles in the United States presented in U.S. dollars,
to amounts in accordance with generally accepted accounting
principles in Mexico presented in Mexican pesos of equivalent
purchasing power at December 31, 2005. 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 and the report of the other auditor provide a reasonable basis for our opinion.
In our
opinion, based in our audits and the report of the other auditor, the
aforementioned financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Corporación Durango, S. A. de C. V. and subsidiaries as of
December 31, 2005 and 2004, and the consolidated results of their operations, the changes in their
stockholders equity and the changes in their financial position for the years ended December 31,
2005 and 2004, in conformity with accounting principles generally accepted in Mexico.
Accounting principles generally accepted in Mexico vary in certain significant respects from
accounting principles generally accepted in the United States. Information relating to
the nature and effect of such differences is presented in Note 23, to the consolidated financial
statements.
PricewaterhouseCoopers, S.C.
Mexico City, April 24, 2006, except for Note 23 as to which the date is June 30, 2006.
Javier Monroy C.P.
Audit Partner
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders Durango International, Inc.
We have audited the accompanying consolidated balance sheet of Durango International, Inc.
(DII) (a wholly owned subsidiary of Corporacion Durango S.A. de C.V.) and subsidiaries referred
to herein as (the Company) as of December 31, 2005, and the
related consolidated statements of income, shareholders equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audit. The
combined financial statements of Durango McKinley Paper Company and Durango International Inc. as
of and for the year ended December 31, 2004 were audited by other auditors whose report
dated April 22, 2005 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly, we express
no such opinion. 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 audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Durango International, Inc. and subsidiaries as of December 31, 2005
and the results of their operations and cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
KBA GROUP LLP
Dallas, Texas
February 21, 2006, except as to Note K for which the date is as of April 10, 2006
|
|
|
|
|
14241 Dallas Parkway, Suite 200 |
|
|
Dallas,Texas 75254 |
|
|
Phone 972.702.8262 |
|
|
Fax 972.702.0673 |
|
|
www.kbagroupllp.com |
F-3
Report of Independent Registered Public
Accounting Firm to the Board of Directors
and Stockholders of
Corporación Durango, S. A. de C. V.
We have audited the accompanying consolidated balance sheet of Corporación Durango, S. A. de
C. V. and subsidiaries (the Company) as of December 31, 2003, and the related consolidated
statements of operations, changes in stockholders equity and changes in financial position for the
year then ended, all expressed in thousands of Mexican pesos of purchasing power of December 31,
2005. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in Mexico and
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Corporación Durango, S. A. de C. V. and subsidiaries as of December 31,
2003, and the results of their operations, changes in their stockholders equity and changes in
their financial position for the year then ended in conformity with accounting principles generally
accepted in Mexico.
Accounting principles generally accepted in Mexico vary in certain significant respects from
accounting principles generally accepted in the United States (U. S. GAAP). The application of the
latter would have affected the determination of stockholders equity as of December 31, 2003, and
the determination of net loss for the year then ended to the extent summarized in Note 23.
As discussed in Note 23 to the consolidated financial statements, the reconciliation to U. S. GAAP
as of December 31, 2003 and for the year then ended has been restated for adjustments to deferred
income taxes for U. S. GAAP purposes only.
The consolidated financial statements as of December 31, 2003 and for the year then ended issued on
June 28, 2004 were prepared assuming that the Company will continue as a going concern. Since
November 2002 the Company had failed to pay principal and interest of certain obligations, and
therefore the Company reclassified most of its debt as short-term. In addition, during 2003 and
2002 the Company had incurred significant consolidated net losses, and since 2001 its operating
margin has declined substantially. As of December 31, 2003, the Company had negative working
capital and was experiencing severe liquidity problems. Furthermore, the Company estimated that
upon the adoption of Bulletin C-15, Impairment of the Value of Long-Lived Assets and Their
Disposal, whose application was mandatory for fiscal years beginning on or after January 1, 2004,
a charge to results of operations for the year 2004 of Ps.675,655,000, net of deferred income
taxes, would be required, which would additionally reduce its stockholders equity. These factors,
among others, raise substantial doubt about its ability to continue as a going concern. The
Companys ability to continue as a going concern is dependent upon its ability to generate profits
and to restructure its debt. The originally issued 2003 financial statements do not include any
additional adjustments related to the valuation and presentation of assets or the presentation and
amount of liabilities that might result if the Company is unable to continue as a going concern.
The accompanying financial statements have been translated into English for the convenience of
readers in the United States of America.
Galaz, Yamazaki, Ruiz Urquiza, S. C.
Member of Deloitte Touche Tohmatsu
C.P.C. Claudia Leticia Rizo Navarro
April 30, 2004
(June 28, 2004 as to Notes 1.e, 24, 25, 26 and 27 to the originally issued 2003 financial
statements,
July 4, 2005 as to the adjustment to deferred income taxes discussed in Note 23, and June 29, 2006
as to the restatement to constant Mexican pesos as of December 31, 2005)
F-4
CORPORACIÓN DURANGO, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2005 AND 2004
(Notes 1, 2 and 3)
(In thousands of constant Mexican pesos as of December 31, 2005)
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents (Note 4) |
|
$ |
700,408 |
|
|
$ |
859,886 |
|
Accounts receivable Net (Note 5) |
|
|
1,733,285 |
|
|
|
1,852,745 |
|
Short-term related parties (Note 14) |
|
|
11,803 |
|
|
|
13,505 |
|
Inventories Net (Note 6) |
|
|
1,195,809 |
|
|
|
1,105,815 |
|
Prepaid expenses |
|
|
15,655 |
|
|
|
6,711 |
|
Current assets of discontinued operations (Note 17) |
|
|
|
|
|
|
107,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
3,656,960 |
|
|
|
3,946,635 |
|
|
|
|
|
|
|
|
|
|
PROPERTY, MACHINERY PLANT AND
EQUIPMENT NET (Note 7) |
|
|
10,913,101 |
|
|
|
11,433,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS NET (Note 8) |
|
|
260,386 |
|
|
|
350,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS OF DISCONTINUED
OPERATIONS (Note 17) |
|
|
|
|
|
|
257,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
14,830,447 |
|
|
$ |
15,988,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Short-term debt (Note 9) |
|
$ |
|
|
|
$ |
43,554 |
|
Current portion of long-term debt (Note 9) |
|
|
257,572 |
|
|
|
138,429 |
|
Notes payable |
|
|
48,274 |
|
|
|
49,887 |
|
Accrued interest |
|
|
13,564 |
|
|
|
15,920 |
|
Trade accounts payable |
|
|
843,891 |
|
|
|
753,464 |
|
Accrued expenses and taxes |
|
|
474,599 |
|
|
|
708,875 |
|
Employee statutory profit sharing |
|
|
1,000 |
|
|
|
876 |
|
Current liabilities of discontinued operations (Note 17) |
|
|
|
|
|
|
131,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,638,900 |
|
|
|
1,842,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES: |
|
|
|
|
|
|
|
|
Long-term debt (Note 9) |
|
|
6,505,139 |
|
|
|
7,178,232 |
|
Long-term notes payable |
|
|
63,773 |
|
|
|
89,927 |
|
Deferred income taxes (Note 16) |
|
|
1,601,824 |
|
|
|
1,483,957 |
|
Pension plans and seniority premiums (Note 11) |
|
|
307,899 |
|
|
|
315,706 |
|
Long-term liabilities of discontinued operations (Note 17) |
|
|
|
|
|
|
150,181 |
|
Liabilities to be capitalized to equity (Note 9) |
|
|
|
|
|
|
3,264,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
8,478,635 |
|
|
|
12,482,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
10,117,535 |
|
|
|
14,324,310 |
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
Common stock (Note 12) |
|
|
5,445,303 |
|
|
|
5,154,576 |
|
Additional paid-in capital |
|
|
4,481,354 |
|
|
|
1,507,630 |
|
Retained earnings |
|
|
2,750,209 |
|
|
|
2,686,117 |
|
Net gain for the year |
|
|
179,176 |
|
|
|
64,092 |
|
Loss from holding non monetary assets |
|
|
(5,462,129 |
) |
|
|
(4,745,267 |
) |
Cumulative initial effect of deferred income taxes |
|
|
(3,348,713 |
) |
|
|
(3,348,713 |
) |
Cumulative translation adjustment of foreign subsidiaries |
|
|
609,425 |
|
|
|
265,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Majority stockholders equity |
|
|
4,654,625 |
|
|
|
1,583,884 |
|
|
|
|
|
|
|
|
|
|
Minority stockholders equity in consolidated subsidiaries |
|
|
58,287 |
|
|
|
80,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
4,712,912 |
|
|
|
1,663,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 18 and 19) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
14,830,447 |
|
|
$ |
15,988,246 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CORPORACIÓN DURANGO, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Notes 1, 2 and 3)
(In thousands of constant Mexican pesos as of December 31, 2005, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net sales |
|
$ |
8,143,300 |
|
|
$ |
8,039,294 |
|
|
$ |
7,327,253 |
|
Cost of sales |
|
|
7,096,308 |
|
|
|
6,889,515 |
|
|
|
6,299,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,046,992 |
|
|
|
1,149,779 |
|
|
|
1,027,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
677,735 |
|
|
|
694,128 |
|
|
|
698,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
369,257 |
|
|
|
455,651 |
|
|
|
329,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses) net (Note 15) |
|
|
5,235 |
|
|
|
(417,906 |
) |
|
|
(1,638,756 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net comprehensive financing cost: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(592,425 |
) |
|
|
(1,158,265 |
) |
|
|
(1,288,087 |
) |
Interest income |
|
|
42,555 |
|
|
|
41,503 |
|
|
|
44,727 |
|
Exchange gain (loss) |
|
|
334,613 |
|
|
|
62,561 |
|
|
|
(892,766 |
) |
Gain on monetary position |
|
|
198,708 |
|
|
|
469,359 |
|
|
|
399,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,549 |
) |
|
|
(584,842 |
) |
|
|
(1,736,669 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income
taxes, employee statutory profit sharing and
equity in income of associated companies |
|
|
357,943 |
|
|
|
(547,097 |
) |
|
|
(3,046,302 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (Note 16) |
|
|
(304,016 |
) |
|
|
502,740 |
|
|
|
2,297 |
|
Employee statutory profit sharing |
|
|
(719 |
) |
|
|
|
|
|
|
(1,884 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(304,735 |
) |
|
|
502,740 |
|
|
|
413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before equity
in income of associated companies |
|
|
53,208 |
|
|
|
(44,357 |
) |
|
|
(3,045,889 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in the income of associated companies |
|
|
1,901 |
|
|
|
2,736 |
|
|
|
2,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
55,109 |
|
|
|
(41,621 |
) |
|
|
(3,043,828 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations Net (Note 17) |
|
|
108,802 |
|
|
|
105,536 |
|
|
|
(596,964 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss) |
|
$ |
163,911 |
|
|
$ |
63,915 |
|
|
($ |
3,640,792 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Majority interest |
|
$ |
179,176 |
|
|
$ |
64,092 |
|
|
($ |
3,634,451 |
) |
Minority interest |
|
|
(15,265 |
) |
|
|
(177 |
) |
|
|
(6,341 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss) |
|
$ |
163,911 |
|
|
$ |
63,915 |
|
|
($ |
3,640,792 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share of
Continuing operations |
|
|
0.51 |
|
|
|
(0.45 |
) |
|
|
(32.75 |
) |
Discontinued operations |
|
|
1.00 |
|
|
|
1.15 |
|
|
|
(6.42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share |
|
|
1.51 |
|
|
|
0.70 |
|
|
|
(39.17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding |
|
|
108,528,665 |
|
|
|
91,834,192 |
|
|
|
92,942,916 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CORPORACIÓN DURANGO, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Notes 1, 2 and 3)
(In thousands of constant Mexican pesos as of December 31, 2005)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
|
Cumulative |
|
|
Minority |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss fron |
|
|
Additional |
|
|
initial effect |
|
|
translation |
|
|
stockholders |
|
|
|
|
|
|
Common |
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
holding non |
|
|
liability |
|
|
of deferred |
|
|
adjustment |
|
|
equity |
|
|
Total |
|
|
|
stock |
|
|
Treasury |
|
|
paid-in |
|
|
Retained |
|
|
monetary |
|
|
for seniority |
|
|
income |
|
|
of foreign |
|
|
in consolidated |
|
|
stockholders |
|
|
|
(Note 12) |
|
|
stock |
|
|
capital |
|
|
earnings |
|
|
assets |
|
|
premiums |
|
|
taxes |
|
|
subsidiaries |
|
|
subsidiaries |
|
|
equity |
|
Balances as of January 1, 2003 |
|
$ |
5,280,258 |
|
|
($ |
125,731 |
) |
|
$ |
1,507,630 |
|
|
$ |
6,670,306 |
|
|
($ |
5,002,821 |
) |
|
($ |
159,181 |
) |
|
($ |
3,348,713 |
) |
|
$ |
94,870 |
|
|
$ |
77,319 |
|
|
$ |
4,993,937 |
|
Reduction of common stock
(Note 12.b) |
|
|
(125,731 |
) |
|
|
125,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of the additional liability
for seniority premium (Note 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(159,181 |
) |
|
|
|
|
|
|
159,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts for
receivable due from shareholders
(Note 14.b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(190,557 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(190,557 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,634,451 |
) |
|
|
422,477 |
|
|
|
|
|
|
|
|
|
|
|
98,625 |
|
|
|
(3,653 |
) |
|
|
(3,117,002 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2003 |
|
|
5,154,527 |
|
|
|
|
|
|
|
1,507,630 |
|
|
|
2,686,117 |
|
|
|
(4,580,344 |
) |
|
|
|
|
|
|
(3,348,713 |
) |
|
|
193,495 |
|
|
|
73,666 |
|
|
|
1,686,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in common stock (Note 12.c) |
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,092 |
|
|
|
(164,923 |
) |
|
|
|
|
|
|
|
|
|
|
71,954 |
|
|
|
6,386 |
|
|
|
(22,491 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2004 |
|
|
5,154,576 |
|
|
|
|
|
|
|
1,507,630 |
|
|
|
2,750,209 |
|
|
|
(4,745,267 |
) |
|
|
|
|
|
|
(3,348,713 |
) |
|
|
265,449 |
|
|
|
80,052 |
|
|
|
1,663,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in common stock |
|
|
290,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium in Issuance of Shares |
|
|
|
|
|
|
|
|
|
|
2,973,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,973,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179,176 |
|
|
|
(716,862 |
) |
|
|
|
|
|
|
|
|
|
|
343,976 |
|
|
|
(21,765 |
) |
|
|
(215,475 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2005 |
|
$ |
5,445,303 |
|
|
$ |
|
|
|
$ |
4,481,354 |
|
|
$ |
2,929,385 |
|
|
($ |
5,462,129 |
) |
|
$ |
|
|
|
($ |
3,348,713 |
) |
|
$ |
609,425 |
|
|
$ |
58,287 |
|
|
$ |
4,712,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
CORPORACIÓN DURANGO, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Notes 1, 2 and 3)
(In thousands of constant Mexican pesos as of December 31, 2005)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income (loss) from continuing operations |
|
$ |
55,109 |
|
|
($ |
41,621 |
) |
|
($ |
3,043,828 |
) |
Items applied to income that did not require (provide) resources: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
421,617 |
|
|
|
438,236 |
|
|
|
426,407 |
|
(Income) expense from deferred income tax |
|
|
241,143 |
|
|
|
(531,254 |
) |
|
|
(79,473 |
) |
(Revaluation) impairment of long-lived assets |
|
|
(113,803 |
) |
|
|
479,130 |
|
|
|
656,144 |
|
(Loss) income on sale of property, plant and equipment |
|
|
(1,696 |
) |
|
|
22,844 |
|
|
|
217,015 |
|
Other (expenses) income |
|
|
(26,107 |
) |
|
|
17,020 |
|
|
|
24,813 |
|
Amortization of debt issuance costs and other financing costs |
|
|
|
|
|
|
338,148 |
|
|
|
99,999 |
|
Loss on operations of Durango Paper Company |
|
|
|
|
|
|
|
|
|
|
342,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
576,263 |
|
|
|
722,503 |
|
|
|
(1,356,451 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable Net |
|
|
20,036 |
|
|
|
135,582 |
|
|
|
(98,261 |
) |
Inventories |
|
|
(89,994 |
) |
|
|
73,190 |
|
|
|
52,466 |
|
Other current assets |
|
|
92,182 |
|
|
|
(29,316 |
) |
|
|
7,922 |
|
Trade accounts payable |
|
|
90,427 |
|
|
|
(222,726 |
) |
|
|
93,638 |
|
Accrued interest |
|
|
(2,356 |
) |
|
|
|
|
|
|
998,272 |
|
Accrued expenses and taxes other than income taxes |
|
|
(135,602 |
) |
|
|
44,958 |
|
|
|
14,085 |
|
Other Net |
|
|
(100,163 |
) |
|
|
(3,324 |
) |
|
|
(88,319 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net resources (used in) provided by operating activities before
discontinued operations |
|
|
450,793 |
|
|
|
720,867 |
|
|
|
(376,648 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations |
|
|
107,973 |
|
|
|
(16,465 |
) |
|
|
6,452 |
|
Liabilities of discontinued operations |
|
|
(131,138 |
) |
|
|
39,102 |
|
|
|
81,852 |
|
Discontinued operations net of items that did not require resources |
|
|
(284,509 |
) |
|
|
105,536 |
|
|
|
(194,264 |
) |
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations |
|
|
(307,674 |
) |
|
|
128,173 |
|
|
|
(105,960 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net resources provided by (used in) operating activities |
|
|
143,119 |
|
|
|
849,040 |
|
|
|
(482,608 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase of short-term and long-term debt |
|
|
(3,988,996 |
) |
|
|
101,148 |
|
|
|
281,951 |
|
Payments of long-term debt |
|
|
(170,546 |
) |
|
|
(798,869 |
) |
|
|
(441,257 |
) |
Common stock increase |
|
|
290,727 |
|
|
|
49 |
|
|
|
|
|
Additional paid-in capital |
|
|
2,973,724 |
|
|
|
|
|
|
|
|
|
Translation adjustment of foreign subsidiaries |
|
|
343,976 |
|
|
|
71,954 |
|
|
|
98,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net resources used in financing activities |
|
|
(551,115 |
) |
|
|
(625,718 |
) |
|
|
(60,684 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from the sale of discontinued operations |
|
|
334,393 |
|
|
|
|
|
|
|
1,004,969 |
|
Acquisition of machinery and equipment |
|
|
(134,849 |
) |
|
|
(214,181 |
) |
|
|
(114,733 |
) |
Restricted cash |
|
|
|
|
|
|
171,195 |
|
|
|
(171,195 |
) |
Divestment of subsidiaries |
|
|
(54,002 |
) |
|
|
|
|
|
|
|
|
Investment in (divestment of) other assets |
|
|
28,205 |
|
|
|
(34,856 |
) |
|
|
20,222 |
|
Sale of property, plant and equipment |
|
|
74,771 |
|
|
|
16,483 |
|
|
|
251,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net resources (used in) generated by investing activities |
|
|
248,518 |
|
|
|
(61,359 |
) |
|
|
990,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
|
(159,478 |
) |
|
|
161,963 |
|
|
|
447,121 |
|
Balance of cash and cash equivalents at beginning of year |
|
|
859,886 |
|
|
|
697,923 |
|
|
|
250,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of cash and cash equivalents at end of year |
|
$ |
700,408 |
|
|
$ |
859,886 |
|
|
$ |
697,923 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-8
CORPORACIÓN DURANGO, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(In thousands of constant Mexican pesos as of December 31, 2005)
NOTE 1 THE ENTITY:
a. |
|
Entity Corporación Durango, S. A. de C. V. (CODUSA) and subsidiaries (collectively, the
Company) are primarily engaged in the manufacturing and selling of packaging (corrugated
boxes and multi-wall sacks ), paper (containerboard, newsprint and bond) and other wood
products (plywood) in Mexico and in the United States of America. |
|
b. |
|
In October 2002, the Company sold its investment in Durango Paper Company (DPC) to Operadora
Omega Internacional, S.A. de C.V. Prior to this sale, the Company provided certain guarantees
for a bank loan and certain letters of credit issued by DPC, amounting to $290,323 (US$25.2
million). DPCs creditors called these guarantees and consequently, the 2003 statement of
operations reflects a charge of $284,976 (US$23.6 million) which was recorded in other
expenses. These liabilities were included in the restructured debt. |
NOTE 2 BASIS OF PRESENTATION:
a. |
|
Going concern The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern, with realization of its assets and
liability payments in the ordinary course of business. As a consequence of the inability of
the Company to pay principal and interest of certain obligations, the Company reclassified
most of its debt as a short-term during 2002 and 2003, as mentioned in Note 9.b. As a result
of the financial restructuring agreement executed by the Company and its creditors in February
2005, the balances of the restructured debt have been reclassified, as of December 31, 2004
and 2005, to short-term and long-term debt in accordance with the maturity of those balances.
(See Note 9). |
|
b. |
|
Basis of presentation The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in Mexico (Mexican GAAP) issued by
the Mexican Institute of Public Accountants (MIPA). |
|
c. |
|
Consolidation of financial statements The consolidated financial statements include the
assets, liabilities and income or loss of the subsidiaries in which the Company holds more
than 50% ownership and operating and financial control. The ownership percentage in the
capital stock of the Companys significant consolidated subsidiaries is shown below. All
significant intercompany balances and transactions have been eliminated in these consolidated
financial statements. |
F-9
|
|
|
|
|
|
|
Group |
|
Ownership |
|
|
(or Company) |
|
percentage |
|
Activity |
Administración Corporativa de Durango, S. A. de C.
V. and subsidiaries
|
|
|
100 |
% |
|
Administrative services |
|
|
|
|
|
|
|
Compañía Forestal de Durango, S. A. de C. V.
|
|
|
100 |
% |
|
Administrative services |
|
|
|
|
|
|
|
Compañía Papelera de Atenquique, S. A. de C. V.
|
|
|
98 |
% |
|
Manufacturing of paper
for corrugated boxes |
|
|
|
|
|
|
|
Durango International, Inc. and subsidiaries
|
|
|
100 |
% |
|
Manufacturing of paper
for corrugated boxes
and corrugated boxes. |
|
|
|
|
|
|
|
Durango Internacional, S. A. de C. V. and subsidiary
|
|
|
100 |
% |
|
Advisory,
administrative and
organization services |
|
|
|
|
|
|
|
Empaques de Cartón Titán, S. A. de C. V. and
subsidiaries
|
|
|
100 |
% |
|
Manufacturing of
corrugated boxes and
multi-wall sacks |
|
|
|
|
|
|
|
Grupo Pipsamex, S. A. de C. V. and subsidiaries
|
|
|
100 |
% |
|
Manufacturing of
newsprint and bond
paper |
|
|
|
|
|
|
|
Industrias Centauro, S. A. de C. V.
|
|
|
99 |
% |
|
Manufacturing of paper
for corrugated boxes |
|
|
|
|
|
|
|
Ponderosa Industrial de México, S. A. de C. V.
|
|
|
100 |
% |
|
Manufacturing of plywood |
|
|
|
|
|
|
|
Porteadores de Durango S.A. de C.V. and subsidiaries
|
|
|
100 |
% |
|
Hauling freight |
d. |
|
Translation of financial statements of foreign subsidiaries The accounting policies of
foreign subsidiaries are the same as those of CODUSA. The local currency financial statements
are restated to reflect constant purchasing power of the currency of the country in which the
subsidiaries operate by using the change in the consumer price index of the country.
Subsequently, all assets and liabilities are translated at the exchange rate in effect at year
end closing. The capital stock is translated at the historical exchange rates, and retained
earnings at the exchange rate in effect at the balance sheet date on which they arise. Income,
costs and expenses are translated at the exchange rate in effect on the date they are
recognized. The resulting translation effects are presented in stockholders equity. |
|
|
|
The financial statements of foreign subsidiaries included in the 2005, 2004 and 2003 consolidated
financial statements are restated in the constant currency of the country in which they operate
and translated into Mexican pesos using the exchange rate as of the latest balance sheet date
presented. |
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements have been prepared in accordance with Mexican GAAP and
reflect the purchasing power of the Mexican peso as of the most recent reporting date. For
comparison purposes, consolidated financial statements of prior years have also been restated to
reflect identical purchasing power, using factors derived from changes in the National Consumer
Products Index (NCPI) issued by Banco de México.
F-10
The significant accounting policies followed by the Company including concepts, methodology and
criteria used for the recognition of the effects of inflation in financial information are as
follows:
a. |
|
All significant intercompany balances and transactions have been eliminated for consolidation
purposes. The consolidation process was done based on subsidiaries audited financial
statements. See Note 14. |
|
b. |
|
Investments in cash equivalents include debt and stock investments and are classified based
on managements anticipated use of the investments at the time of sale either as debt to be
held to maturity, financial investments or available-for sale instruments. They are recorded
at acquisition cost and are subsequently valued as discussed in the following paragraphs. |
|
i. |
|
Debt investments to be held to maturity are valued at acquisition cost less prime
amortizations, plus discount amortizations, based on the outstanding balance during the life
of the investment. If necessary, a reduction in value is registered. |
|
|
ii. |
|
Financial instruments held for trading or available for sale are valued at fair value
(which is similar to market value) with gains or losses recognized in the statements of
operations. Fair value is the amount for which a financial asset can be exchanged or a
financial liability can be paid in an arms-length transaction between interested and
willing parties. |
c. |
|
Accumulated preferred dividends of the limited voting rights shares, declared only if
earnings are obtained, are not recognized as liability until they are declared. |
|
d. |
|
Investments in affiliated and associated companies stocks are valued by the participation
method. The acquisition cost of the stocks is modified by the proportional part of the changes
in the capital stock of affiliated and associated companies after the acquisition date.
Participation of the Company in the affiliated and associated companies income is presented
separately in the statements of operations. |
|
e. |
|
Inventories and cost of sales are stated at average cost and
are later restated using factors derived from changes in the NCPI at its reposition costbased
on the most recent purchase price or production cost. The value should not exceed its market
value. See Note 6. |
|
f. |
|
Property, machinery and equipment of Mexican origin are recorded at acquisition cost and are
restated to reflect Mexican pesos of constant purchasing power using factors derived from
changes in the NCPI. |
|
|
|
Machinery and equipment of non-Mexican origin are recorded at acquisition cost and the
acquisition cost is restated to constant currency using the inflation of the country of origin,
then converted into Mexican pesos at the exchange rate in effect at the balance sheet date. |
F-11
|
|
Depreciation is calculated based on units produced in the period in relation to the total
estimated production of the assets over their useful lives, as follows: |
|
|
|
|
|
Years |
Buildings |
|
25-50 |
Machinery and industrial equipment |
|
23-40 |
Transportation equipment |
|
1-5 |
Computer equipment |
|
1-3 |
Office furniture and equipment |
|
5-10 |
|
|
These assets are evaluated annually for potential impairment. |
|
|
|
Recurring maintenance and repair expenditures are charged to operating expense as incurred. Major
overhauls to fixed assets are capitalized and amortized over the period in which benefits are
expected to be received. |
|
|
|
Net comprehensive financing cost incurred during the period of construction and installation of
property, machinery and equipment is capitalized and restated applying factors derived from
changes in the NCPI. |
|
g. |
|
Intangible assets are recognized in the balance sheet provided they are identifiable, provide
future economic benefits and there is control over those benefits. Intangible assets with
indefinite useful lives are not amortized. Intangible assets with definite useful lives are
amortized systematically based on the best estimate of their useful lives determined on the
basis of expectations for future economic benefits. The carrying value of intangible assets is
subject to an annual impairment evaluation. |
|
h. |
|
Effective January 1, 2004, the Company adopted Statement C-15, Impairment in the Value of
Long-Lived Assets and their Disposal, issued by MIPA, which establishes general criteria for
the identification and, if applicable, recording of impairment losses or the decrease in value
of long-lived tangible and intangible assets, including goodwill. The Company performed its
annual impairment evaluation of long-lived assets at December 31, 2005 and 2004, and, as a
result, recorded a favorable adjustment of $113,803 and a charge of $479,130, respectively, in
other income (expenses). |
|
i. |
|
Financial instruments held for trading or available for sale are valued at fair value (which
is similar to market value) with gains or losses recognized in the statement of operations.
Fair value is the amount for which a financial asset can be exchanged or a financial liability
can be paid in an arms-length transaction between interested and willing parties. |
F-12
j. |
|
Investments in derivative financial instruments for trading or hedging purposes are recorded
as assets or liabilities at fair value. Realized and unrealized gains or losses on those
investments are recorded in the statement of operations. As of January 1, 2005, the Company
adopted amendments to Statement C-2, Financial Instruments. Statement C-2, as amended,
requires effects for valuation of derivative financial instruments for trading to be recorded
in capital stock and impairment effects losses to be calculated. The adoption of the
amendments to this Statement by the Company did not have any impact on the accompanying
financial statements because the Company did not have derivative financial instruments. |
|
k. |
|
Long-lived tangible and intangible assets (including goodwill) are subject to an annual
impairment evaluation to calculate their useful value and determine if impairment is
applicable. |
|
l. |
|
Liabilities and provisions for liabilities represent present obligations of the Company with
a probable requirement to pay those obligations in cash. The provisions have been recorded
based on the best reasonable estimation by management of the present payment obligation;
however, actual results could differ from recorded provisions. |
|
m. |
|
Income tax (IT) is recorded by the comprehensive method of assets and liabilities, which
consists of recording deferred tax for all temporary differences between the book and tax
values of assets and liabilities. Asset tax (AT) paid is charged in
the statement of operations due to uncertainty of its recoverability. See Note 16. |
|
|
|
Deferred employee statutory profit sharing (EPS) is recorded only when there are temporary
differences in accounting and tax net income that could cause a future benefit or liability and
the amount can be reasonably estimated. |
|
n. |
|
Pension plans and seniority premiums to which employees are entitled upon termination of
employment after 15 years of service are non- contributory and are recorded as costs of the
year in which the respective services are rendered, based on actuarial calculations using the
projected unit credit method. |
|
|
|
As of January 1, 2005, the Company adopted amendments to Statement D-3, Labor Obligations,
issued by MIPA. Statement D-3, as amended, establishes rules for estimating and recording the
liabilities related to severance payments due to employees upon dismissal for causes other than
financial restructuring. These effects are recognized through actuarial calculations using the
projected credit unit method. The net cost for the year ended December 31, 2005 for this item was
$5,139, which was recorded in the results for the year. The initial adoption of the amendments to
this Statement did not have a material impact on the financial statements. |
|
|
|
Other compensation based on seniority to which employees are entitled in the event of dismissal
or death, in accordance with the Mexican Federal Labor Law, are charged to income in the year in
which they become payable. |
F-13
o. |
|
Debt issuance costs Debt issuance costs, which are included in other assets, are
capitalized and restated by applying changes in the NCPI. Amortization is calculated based on
the proportion of the initial tenor of the debt during which the debt has been outstanding. In
2004, the unamortized balance was charged to income for the period, as a result of the
exchange of outstanding debt for restructured debt. |
|
p. |
|
Common stock, legal reserve and retained earnings represent the value of those items in
terms of purchasing power of the Mexican peso as of the most recent balance sheet date, and
are determined by applying factors derived from the NCPI to the historical values. |
|
q. |
|
Additional paid-in capital represents the excess of payments for shares subscribed over their
par value, and is restated applying NCPI factors. |
|
r. |
|
Insufficiency in capital stock restatement represents the initial accrued result on monetary
position and the result of holding non-monetary assets (inventories and/or fixed assets)
stated in Mexican pesos of purchasing power as of the most recent balance sheet date. |
|
s. |
|
Comprehensive income (loss) represents the net income (loss) for the period presented in the
consolidated statements of operations, plus the effects of holding non-monetary assets, the
profit from translation of foreign currency, and other items required by specific accounting
standards to be reflected in stockholders equity, but which do not represent capital
contributions, reductions or distributions, and is restated by applying NCPI factors. |
|
t. |
|
The result on monetary position represents income due to inflation changes, measured by NCPI
factors, on the years net monthly monetary assets and liabilities, stated in Mexican pesos of
purchasing power as of the most recent balance sheet date. Inflation rates were 3.33% in 2005,
5.19% in 2004 and 3.97% in 2003. |
|
u. |
|
Net income (loss) per common share is calculated by dividing the net income (loss) of
majority stockholders for the period by the weighted average number of shares outstanding
during the period. There are no effects from potential dilutive shares. |
|
v. |
|
Liabilities for contingencies are recognized when it is probable that a liability has been
incurred before the date of the balance sheet and that the amount can be reasonably
estimated. |
|
w. |
|
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. Differences due to exchange rate fluctuations from transactions and payment dates or
valuations as of the most recent balance sheet date are recognized in income. See Note 13. |
F-14
|
|
Financial statements of foreign subsidiaries included in the consolidation process are restated
to reflect constant purchasing power of the currency of the country in which the subsidiaries
operate by using the change in the consumer price index of the country. Subsequently, all assets
and liabilities are translated at the exchange rate in effect at year-end closing. The effect of
exchange rate fluctuations is presented in stockholders equity in Cumulative translation
adjustment of foreign subsidiaries. |
|
|
|
Financial statements of foreign subsidiaries are translated as follows: a) cash and cash
equivalents at the exchange rate in effect at the closing date; b) non-cash items at historical
exchange rates; c) statements of operations items at monthly average exchange rates for the
period; and d) the translated effect is recorded in net comprehensive financing cost. Financial
statements in Mexican pesos are restated at year-end closing as specified by Statement B-10 . |
|
x. |
|
Sales are recognized upon delivery of products and receipt of customer acceptance. Revenue is
recognized only when the Company has transferred to the buyer the significant risks and
rewards of ownership of the goods, which generally occurs when those goods are delivered in
compliance with the customers orders and when the amount of revenue and the cost incurred or
to be incurred in the transaction can be reliably measured. |
|
y. |
|
Information by Segment The provisions contained in Statement B-5, Financial Information by
Segment, issued by MIPA are mandatory for public entities listed on the Mexican Stock
Exchange. Statement B-5 requires that companies look to their internal organizational
structure and internal reporting system for purposes of identifying segments. For all years
presented the Company operates in three reporting segments. See Note 21. |
|
z. |
|
B-7 Business Acquisitions Effective 2005 Statement B-7, Business Acquisitions, establishes,
among other things, that the purchase method to account for business acquisition. In addition, it
modifies the accounting treatment of goodwill, ceasing its amortization but subject to annual
impairment test. Statement B-7 also provides specific guidance for the acquisition of minority
interest and transfer of assets of stock amongst entities common control.
|
|
aa. |
|
Leasing Leasing operations are registered under Statement D-5 Leasing. The Company
capitalizes leased asset related to industrial machinery and equipment. These assets are
depreciated under the depreciations rates of the common acquired assets.
|
NOTE 4 CASH AND CASH EQUIVALENTS:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Cash |
|
$ |
410,996 |
|
|
$ |
310,107 |
|
Cash equivalents |
|
|
289,412 |
|
|
|
549,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
700,408 |
|
|
$ |
859,886 |
|
|
|
|
|
|
|
|
F-15
NOTE 5 ACCOUNTS RECEIVABLE:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Trade accounts receivable |
|
$ |
1,731,075 |
|
|
$ |
1,800,888 |
|
Recoverable taxes |
|
|
44,862 |
|
|
|
145,988 |
|
Other |
|
|
112,053 |
|
|
|
81,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,887,990 |
|
|
|
2,028,443 |
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
|
(154,705 |
) |
|
|
(175,698 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,733,285 |
|
|
$ |
1,852,745 |
|
|
|
|
|
|
|
|
NOTE 6 INVENTORIES:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Finished goods |
|
$ |
278,389 |
|
|
$ |
189,472 |
|
Production-in-process |
|
|
7,281 |
|
|
|
8,911 |
|
Raw materials |
|
|
371,014 |
|
|
|
342,107 |
|
Spare parts and materials |
|
|
283,434 |
|
|
|
274,278 |
|
Molds and dies |
|
|
78,606 |
|
|
|
96,867 |
|
Other |
|
|
10,693 |
|
|
|
26,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,029,417 |
|
|
|
938,405 |
|
Allowance for obsolete inventories |
|
|
(32,778 |
) |
|
|
(30,842 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
996,639 |
|
|
|
907,563 |
|
Advances to suppliers |
|
|
38,458 |
|
|
|
76,137 |
|
Merchandise-in-transit |
|
|
160,712 |
|
|
|
122,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,195,809 |
|
|
$ |
1,105,815 |
|
|
|
|
|
|
|
|
NOTE 7 PROPERTY, MACHINERY AND EQUIPMENT:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Buildings |
|
$ |
3,692,976 |
|
|
$ |
3,641,466 |
|
Machinery and industrial equipment (*) |
|
|
17,949,942 |
|
|
|
18,486,387 |
|
Transportation equipment, computer equipment and
office furniture and equipment |
|
|
1,416,746 |
|
|
|
1,310,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,059,664 |
|
|
|
23,438,583 |
|
Accumulated depreciation |
|
|
(13,063,873 |
) |
|
|
(12,883,117 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,995,791 |
|
|
|
10,555,466 |
|
Land |
|
|
863,749 |
|
|
|
825,617 |
|
Construction-in-progress |
|
|
53,561 |
|
|
|
52,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,913,101 |
|
|
$ |
11,433,228 |
|
|
|
|
|
|
|
|
F-16
Depreciation expense for the years ended December 31, 2005, 2004 and 2003 was $390,006, $408,333
and $402,278, respectively.
For the years ended December 31, 2005 and 2004, under the provisions of Statement C-15, the Company
recognized an increase of $113,803 and a decrease of $479,130 in fixed assets value, respectively,
which were reflected in the consolidated statement of operations as other income and other
expenses, respectively. The related deferred income tax effect was a charge of $31,865 and a
credit of $134,156 in 2005 and 2004, respectively.
|
|
|
(*) |
|
The value impairment effect was recognized in accordance with Statement C-15 in the fixed
assets items that originated it with the following results: |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Machinery and industrial equipment |
|
$ |
17,836,139 |
|
|
$ |
18,965,517 |
|
Revaluation impairment |
|
|
113,803 |
|
|
|
(479,130 |
) |
Depreciation |
|
|
(10,117,787 |
) |
|
|
(10,633,716 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and industrial equipment |
|
$ |
7,832,155 |
|
|
$ |
7,852,671 |
|
|
|
|
|
|
|
|
During 2003, the Company reviewed the recoverable value of its long-lived assets in use, based on
future cash flows resulting from production and sale operations during the remaining useful life of
the fixed assets evaluated, which is from 20 to 35 years after 2003. The effect of that evaluation
resulted in an impairment provision of $656,144 in 2003, recorded in the consolidated statement of
operations within other expenses. The deferred income tax effect was a credit to income in the
amounts of $209,966.
On January 1, 2005, Statement B-7, Business Acquisitions, issued by MIPA became effective,
changing the accounting treatment of goodwill. Goodwill is not longer permitted to be amortized
and is subject to annual impairment tests. The effect of Statement B-7 was a charge of $119,296
for Empaques del Norte, S.A. de C.V., $11,069 for Líneas Aéreas Ejecutivas de Durango, S. A. de C.
V. and $25,307 for Inmobiliaria Industrial de Durango, S.A. de C.V., in each case recorded as an
adjustments to its fixed assets.
As of December 31, 2005, 2004 and 2003, the Company had temporarily idle assets with a net carrying
amount of $364, $11,337 and $101,071, respectively.
F-17
At December 31, the Companys capitalized lease assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Machinery and industrial equipment |
|
$ |
175,802 |
|
|
$ |
366,085 |
|
Accumulated depreciation |
|
|
(13,707 |
) |
|
|
(59,770 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
162,095 |
|
|
$ |
306,315 |
|
|
|
|
|
|
|
|
At March 14, 2006, we have pre-paid substantially all of the balance of our financial leases; the
remaining balance is $8,853.
As a result of its financial restructuring which was finalized in February 2005, the Company and
its subsidiaries granted security interests over their principal fixed assets. See Note 9.c. In
addition, various loans are collateralized with substantially all of the Companys machinery and
equipment.
The carrying value of capitalized comprehensive financing costs at December 31, 2005, 2004 and 2003
was $69,422, $55,084 and $75,377, respectively.
NOTE 8 OTHER ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset |
|
|
Debt |
|
|
|
|
|
|
|
|
|
related to seniority |
|
|
issuance |
|
|
|
|
|
|
|
2005 |
|
premiums |
|
|
costs |
|
|
Other |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2005 |
|
$ |
195,936 |
|
|
$ |
653,625 |
|
|
$ |
222,581 |
|
|
$ |
1,072,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net movement |
|
|
(30,583 |
) |
|
|
|
|
|
|
(28,205 |
) |
|
|
(58,788 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2005 |
|
|
165,353 |
|
|
|
653,625 |
|
|
|
194,376 |
|
|
|
1,013,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2005 |
|
|
|
|
|
|
653,625 |
|
|
|
67,732 |
|
|
|
721,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization for the period |
|
|
|
|
|
|
|
|
|
|
31,611 |
|
|
|
31,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2005 |
|
|
|
|
|
|
653,625 |
|
|
|
99,343 |
|
|
|
752,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balances as of December 31, 2005 |
|
$ |
165,353 |
|
|
$ |
|
|
|
$ |
95,033 |
|
|
$ |
260,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset |
|
|
Debt |
|
|
|
|
|
|
|
|
|
related to seniority |
|
|
issuance |
|
|
|
|
|
|
|
2004 |
|
premiums |
|
|
costs |
|
|
Other |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2004 |
|
$ |
109,839 |
|
|
$ |
655,119 |
|
|
$ |
179,191 |
|
|
$ |
944,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net movement |
|
|
86,097 |
|
|
|
(1,494 |
) |
|
|
43,390 |
|
|
|
127,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2004 |
|
|
195,936 |
|
|
|
653,625 |
|
|
|
222,581 |
|
|
|
1,072,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2004 |
|
|
|
|
|
|
320,115 |
|
|
|
37,829 |
|
|
|
357,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization for the period |
|
|
|
|
|
|
333,510 |
|
|
|
29,903 |
|
|
|
363,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2004 |
|
|
|
|
|
|
653,625 |
|
|
|
67,732 |
|
|
|
721,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balances as of December 31, 2004 |
|
$ |
195,936 |
|
|
$ |
|
|
|
$ |
154,849 |
|
|
$ |
350,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset |
|
|
Debt |
|
|
|
|
|
|
|
|
|
related to seniority |
|
|
issuance |
|
|
|
|
|
|
|
2003 |
|
premiums |
|
|
costs |
|
|
Other |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2003 |
|
$ |
73,282 |
|
|
$ |
670,265 |
|
|
$ |
184,267 |
|
|
$ |
927,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net movement |
|
|
36,557 |
|
|
|
(15,146 |
) |
|
|
(5,076 |
) |
|
|
16,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2003 |
|
|
109,839 |
|
|
|
655,119 |
|
|
|
179,191 |
|
|
|
944,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2003 |
|
|
|
|
|
|
227,292 |
|
|
|
6,524 |
|
|
|
233,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization for the period |
|
|
|
|
|
|
92,823 |
|
|
|
31,305 |
|
|
|
124,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2003 |
|
|
|
|
|
|
320,115 |
|
|
|
37,829 |
|
|
|
357,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balances as of December 31, 2003 |
|
$ |
109,839 |
|
|
$ |
335,004 |
|
|
$ |
140,462 |
|
|
$ |
586,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2004, the Company wrote-off debt issuance costs in the amount of $333,510, due to advanced
maturity of the related bonds, and to the financial restructuring.
F-19
NOTE 9 SHORT AND LONG-TERM DEBT:
a. |
|
Short-term and long-term debt not capitalized to equity as of December 31, is as follows: |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Short-term debt |
|
$ |
|
|
|
$ |
43,554 |
|
Current portion of long-term debt |
|
|
257,572 |
|
|
|
138,429 |
|
Long-term debt |
|
|
6,505,139 |
|
|
|
7,178,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,762,711 |
|
|
$ |
7,360,215 |
|
|
|
|
|
|
|
|
b. |
|
Financial restructuring |
In an effort to expand its production capacity and maintain its leadership in the Mexican and Latin
American paper industries, the Company obtained significant resources in U.S. Dollars from domestic
and foreign financial institutions (mainly in the United States ). In addition, the Company issued
Notes, some of which were listed on the New York Stock Exchange. However, during 2002, the Company
suffered from a combination of economic factors beyond the Companys control, including the
economic recession in the United States , a significant reduction in the paper price worldwide, a
dramatic reduction in the manufacturing output in industries supplied by our subsidiaries, an
increase in power, raw material, gas and labor costs and imports of our products into the Mexican
market.
These economic factors made the last quarter of the year 2002 a difficult one for the Company, and
resulted in a significant reduction in cash flow, making it impossible for the Company during
November 2002 to make principal and interest payments on some of its debt and causing the Company
to default on payments of principal and interest under its unsecured indebtedness. As a result, the
Company reclassified a portion of its long-term debt as short-term debt, resulting in negative
working capital and concern regarding the Companys ability to continue as a going concern.
During 2002, the Company started negotiations with credit institutions and bondholders, in an
effort to re-negotiate its debt. In addition, the Company decided to sell certain non-strategic
assets. In April 2003, the Company signed a Forbearance Agreement with certain of its creditors
postponing the rights of those creditors to enforce their remedies. The Forbearance Agreement
expired on June 30, 2003.
On
April 30, 2004, the Company entered into a plan support agreement with certain bank creditors and
holders of its notes holding an aggregate of 55% of the outstanding principal amount of its
unsecured debt. Under the terms of the plan support agreement, the parties were obligated to
pursue and implement a financial restructuring along the lines contained in the agreement in
principle with these creditors, including by means of a cash tender offer and certain
F-20
exchange offers and, under certain circumstances, a prepackaged plan of reorganization under
U.S. bankruptcy law. The participating creditors agreed that they would tender their unsecured debt
in the offers and vote their unsecured debt in favor of the prepackaged plan of reorganization
under U.S. bankruptcy law. The plan support agreement contained certain obligations of the Company
and the participating creditors. These obligations were not met by the agreed-upon dates and
certain participating creditors terminated the plan support agreement on May 17, 2004.
On May 18, 2004, the Company filed a voluntary petition under Mexicos Business Reorganization Act
with the First Federal District Court in Durango, Mexico. On May 20, 2004, the Companys foreign
representative commenced a proceeding under section 304 of the United States Bankruptcy Code with
the United States Bankruptcy Court for the Southern District of New York (the 304 Proceeding) on
the Companys behalf. None of the Companys subsidiaries filed for concurso mercantil or other
bankruptcy protection.
On May 25, 2004, following the Companys filing under Mexicos Business Reorganization Act, the New
York Stock Exchange announced that the trading of the Companys ADSs, 2006 notes and 2008 notes
would be suspended immediately. On July 15, 2004, the Companys ADSs, 2006 notes and 2008 notes
were delisted from the New York Stock Exchange.
On August 13, 2004, the Company reached an agreement to support its financial restructuring program
with most of its unsecured financial creditors and members of the Ad hoc Committee of bondholders.
On August 25, 2004, the Mexican court declared the Company to be in commercial reorganization under
the Mexicos Business Reorganization Act. On November 17, 2004, the Mexican court certified the
list of recognized claims in the Companys Concurso Proceeding.
On December 23, 2004, the conciliator appointed by the Mexican Federal Institute of Commercial
Reorganization Specialists in the Companys concurso proceeding submitted its plan of
reorganization to the holders of recognized claims and the plan was executed by the Company and the
holders of recognized claims representing 65% of the total number of recognized claims. The plan of
reorganization provided that, in exchange for their debt, the Companys unsecured financial
creditors would receive new debt equal to approximately 85% of the outstanding principal amount of
the Companys unsecured debt.
Uninsured bank creditors would modify their loans to Portion A loans of approximately $116.1
million dollars.
Holders of other unsecured loans, including 5/8% Notes maturing in 2003, 13 1/8% Notes maturing in
2006, 13 1/2% Notes maturing in 2008 and 13 3/4% Notes maturing in 2009, will receive Series B Notes
to be issued in the amount of approximately $433.8 million dollars in exchange for the their
current debt, in addition, all creditors will receive 17% of the Companys capital stock.
F-21
On January 11, 2005, the conciliator submitted the executed plan of reorganization to the Mexican
court, and on February 7, 2005, the Mexican court approved the plan of reorganization, ending the
concurso proceeding for the Company.
On January 19, 2005, the U.S. bankruptcy court overseeing our 304 Proceeding entered an order
permanently enjoining our creditors from taking action against our company in respect of their
claims that were restructured in the concurso mercantil proceeding, as well as recognizing and
giving effect to our plan of reorganization and the order from the Mexican court confirming the
same.
On February 23, 2005, the Companys plan of reorganization was consummated. As a result:
|
|
Bank creditors of the Company with claims against it in the
aggregate amount of $1,611,298 (US$136.3 million) received
2,392,957 Series B Shares, representing 2.16% of the Companys
issued and outstanding capital stock, and the principal amount of
the debt outstanding with respect to these claims was amended and
restated under the Restructured Credit Agreement. Under the
Restructured Credit Agreement, notes in an aggregate principal
amount of $1,294,579 (US$116.1 million) were issued to the holders
of these claims. These Senior Notes bear interest at a rate of
LIBOR plus 2.75% per annum, payable quarterly in arrears and the
principal amount of these notes will be amortized quarterly until
the maturity of these notes on December 30, 2012. |
|
|
Unsecured creditors of the Company with claims against it in the
aggregate amount of $5,689,892 (US$510.3 million) related to its
125/8 Senior Notes due 2003 (the 2003
Senior Notes), its 131/8 Senior Notes due
2006 (the 2006 Senior Notes), its 131/2 Senior Notes due 2008 (the
2008 Senior Notes), its 133/4 Senior Notes due 2009 (the 2009
Senior Notes) and the note issued under its Euro Commercial Paper
Program, (the ECP note) received 16,412,961 Series B Shares,
representing 14.84% of the Companys issued and outstanding
capital stock, and an aggregate principal amount of $4,836,492 (US$433.8 million) of its 2012
Senior Notes in respect to these claims. The 2012 Senior Notes bear interest at a rate of 7.5%
per annum until December 31, 2005, 8.5% per annum from January 1, 2006 through December 31, 2006,
and 9.5% per annum thereafter, payable quarterly in arrears, and mature on December 30, 2012. |
Our obligations under the Restructured Credit Agreement and the 2012 notes are guaranteed by the
following subsidiaries: (1) Administración Corporativa de Durango, S. A. de C. V., or ACD, (2)
Empaques de Cartón Titán, S.A. de C.V. or Titán (3) Envases y Empaques de México, S. A. de C. V.,
or Eyemex, (4) Cartonpack, S.A. de C.V., or Cartonpack, (5) Industrias Centauro, or Centauro, (6)
Compañía Papelera de Atenquique, S. A. de C. V., or Atenquique, (7) Ponderosa Industrial de México,
S.A. de C. V. or Ponderosa, (8) Porteadores de Durango, S. A. de C. V., (9) Compañía Norteamericana
de Inversiones en Celulosa y Papel, S. A. de C. V., (10) Reciclajes Centauro, S. A. de C. V., (11)
Durango Internacional, S.A. de C. V. and (12) Durango International, Inc.
F-22
|
|
The Company announced on February 27, 2006 a debt reduction program during the year. At
issue date of these financial statements, the Company has pre-paid US$60 million. This program
has been sourced by majority stockholders capital contribution, some non-strategic assets
divestments and cash flow. |
c. |
|
Total short-term and long-term debt by composition as of December 31 is as follows: |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Senior Notes |
|
$ |
4,613,050 |
|
|
$ |
4,948,584 |
|
Bank loans |
|
|
1,173,046 |
|
|
|
1,288,872 |
|
Financial lease agreements |
|
|
108,392 |
|
|
|
122,613 |
|
Letters of credit |
|
|
|
|
|
|
48,819 |
|
Euro Commercial Paper |
|
|
|
|
|
|
48,963 |
|
Other long-term debt |
|
|
868,223 |
|
|
|
902,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,762,711 |
|
|
$ |
7,360,215 |
|
|
|
|
|
|
|
|
RESTRUCTURED DEBT
(1) Senior Notes and Euro Commercial Paper
Senior Notes consisted of four issues, maturing in 2003, 2006, 2008 and 2009, as further described
below:
2003 Senior Notes. At December 31, 2004, before recognizing the effects of the Companys
financial restructuring, the Company had outstanding $210,023 (US$18.2 million) aggregate principal
amount of its 2003 Senior Notes. The 2003 notes matured on August 1, 2003 and were not paid. In
addition, the Company did not make interest payments on its 2003 Senior Notes following November
29, 2002. At December 31, 2004, before recognizing the effects of its financial restructuring, the
aggregate amount of accrued and unpaid interest of the 2003 Senior Notes was $269,230 (US$23.4
million). As part of the Companys financial restructuring, on February 23, 2005, principal of and
accrued and unpaid interest on its 2003 Senior Notes was converted into an aggregate principal
amount of US$15.5 million of the 2012 Senior Notes and 563,348 of the Series B Shares.
F-23
2006 Senior Notes. At December 31, 2004, before recognizing the effects of the financial
restructuring, the Company had outstanding $3,476,315 (US$301.7 million) aggregate principal amount
of its 2006 Senior Notes. The Company did not make interest payments on its 2006 Senior Notes
following November 29, 2002. At December 31, 2004, before recognizing the effects of its financial
restructuring, the aggregate amount of accrued and unpaid interest of the 2006 Senior Notes was
$4,517,076 (US$392.1 million). As part of the Companys financial restructuring, on February 23,
2005, the principal of and accrued and unpaid interest on its 2006 Senior Notes was converted into
an aggregate principal amount of US$256.5 million of its 2012 Senior Notes and 9,559,019 of its
Series B Shares.
2008 Senior Notes. At December 31, 2004, before recognizing the effects of its financial
restructuring, the Company had outstanding $119,390 (US$10.4 million) aggregate principal amount of
the 2008 Senior Notes. The Company did not make interest payments on its 2008 Senior Notes
following November 29, 2002. At December 31, 2004, before recognizing the effects of its financial
restructuring, the aggregate amount of accrued and unpaid interest of the 2008 Senior Notes was
$156,254 (US$13.6 million). As part of its financial restructuring, on February 23, 2005, the
principal of and accrued and unpaid interest on its 2008 Senior Notes was converted into an
aggregate principal amount of US$8.8 million of its 2012 Senior Notes and 343,333 of its Series B
Shares.
2009 Senior Notes. At December 31, 2004, before recognizing the effects of its financial
restructuring, the Company had outstanding $2,016,137 (US$175 million) aggregate principal amount
of its 2009 Senior Notes. The Company did not make interest payments on the 2009 Senior Notes
following November 29, 2002. At December 31, 2004, before recognizing the effects of its financial
restructuring, the aggregate amount of accrued and unpaid interest of the 2009 Senior Notes was
$2,719,411 (US$236 million). As part of its financial restructuring, on February 23, 2005, the
principal of and accrued and unpaid interest on its 2009 Senior Notes was converted into an
aggregate principal amount of US$148.8 million of its 2012 Senior Notes and 5,899,859 of its Series
B Shares.
Euro Commercial Paper. At December 31, 2004, before recognizing the effects of the financial
restructuring, the Company had one series of notes outstanding under the Euro Commercial Paper
Program in an aggregate amount of $57,604 (US$5.0 million). As part of the financial
restructuring, on February 23, 2005, the principal of and accrued and unpaid interest on these
Senior Notes was converted into an aggregate principal amount of US$4.3 million of the 2012 Senior
Notes and 56,402 of the Series B Shares.
The Senior Notes and the Euro Commercial Paper were restructured in connection with the Concurso
Mercantil process and the aggregate principal amounts of these instruments were exchanged for
Senior Notes due 2012 with an aggregate principal amount of $4,613,050 (US$433.8 million), which
bear quarterly interest payments in arrears at rates of 7.5% in 2005, 8.5% in 2006 and 2007 and
9.5% in subsequent years.
F-24
(2) Bank loans and letters of credit
Banamex Loan. The Company borrowed an aggregate principal amount of $1,082,953 (US$94
million) from Banamex under a loan agreement. This loan was payable in 10 quarterly installments
beginning in June 2002 and bore interest at a rate of LIBOR + 2.8% payable quarterly. This loan
matured in September 2004 and was not paid. At December 31, 2004, before recognizing the effects of
its financial restructuring, the outstanding principal amount under this loan was $867,926 (US$75.3
million). The Company did not make principal or interest payments under this loan following
November 29, 2002. At December 31, 2004, before recognizing the effects of its financial
restructuring, the aggregate amount of accrued and unpaid interest under this loan was $208,476
(US$18.1 million). As part of its financial restructuring, on February 23, 2005, the Company
issued 318,455 of the Series B Shares to Banamex, and a note in the aggregate principal amount of
US$64 million was issued under the Restructured Credit Agreement with respect to the remaining
principal of and accrued and unpaid interest on this loan.
Banamex Note. The Company borrowed an aggregate principal amount of $84,101 (US$7.3 million)
from Banamex under a promissory note. This promissory note bore interest at a rate of 5.2% per
annum payable semi-annually. This promissory note matured in December 2002 and was not paid.
Before recognizing the effects of its financial restructuring, the outstanding principal amount
under this promissory note was $58,756 (US$5.1 million). The Company did not make principal or
interest payments under this promissory note following November 29, 2002. At December 31, 2004,
before recognizing the effects of its financial restructuring, the aggregate amount of due and
unpaid interest under this promissory note was $17,085 (US$1.5 million). As part of its financial
restructuring, on February 23, 2005, the Company issued 99,856 of the Series B Shares to Banamex,
and a note in the aggregate principal amount of US$4.3 million was issued under the Restructured
Credit Agreement with respect to the remaining principal of and accrued and unpaid interest on this
note.
California Commerce Bank Loans. The Company borrowed an aggregate principal amount of
$307,375 (US$26.7 million) from California Commerce Bank under two loan agreements. The first
California Commerce Bank loan agreement in the principal amount of $134,563 (US$11.7 million) bore
interest at a rate of LIBOR + 2.75%. The first California Commerce Bank loan agreement matured in
January 2003 and was not paid. The second California Commerce Bank loan agreement in the amount of
$172,812 (US$15 million) bore interest at a rate of LIBOR + 3.25%. The second California Commerce
Bank loan agreement matured in May 2004 and was not paid. The Company did not make principal or
interest payments under the California Commerce Bank loan agreements following November 29, 2002.
At December 31, 2004, before recognizing the effects of its financial restructuring, the aggregate
amount of due and unpaid principal under the California Commerce Bank loan agreements was $278,573
(US$24.2 million) and the aggregate amount of due and unpaid interest under the California Commerce
Bank loan agreements was $37,530 (US$3.3 million). As part of its financial
F-25
restructuring, on February 23, 2005, the Company issued 199,872 of the Series B Shares to
California Commerce Bank, and a note in the aggregate principal amount of US$20.6 million was
issued under the Restructured Credit Agreement with respect to the remaining principal of and
accrued and unpaid interest on the California Commerce Bank loan agreements.
JPMorgan Chase Loan. The Company borrowed an aggregate principal amount of $576,039 (US$50
million) from JPMorgan Chase Bank (f/k/a Chase Manhattan Bank) under a loan agreement. The
JPMorgan Chase loan agreement was payable in five semiannual installments beginning in December
2000 and bore interest at a rate of LIBOR + 1.5% payable quarterly. This loan matured in December
2002 and was not paid. The Company did not make principal or interest payments under this loan
following November 29, 2002. At December 31, 2004, before recognizing the effects of its financial
restructuring, the aggregate amount of due and unpaid principal under this loan was $115,208 (US$10
million) and the aggregate amount of due and unpaid interest under this loan was $7,071 (US$0.6
million). As part of its financial restructuring, on February 23, 2005, the Company issued 163,890
of the Series B Shares to creditors under this loan agreement, and a note in the aggregate
principal amount of US$8.5 million was issued under the Restructured Credit Agreement with respect
to the remaining principal of and accrued and unpaid interest on this loan.
Bank of America, N.A. Loan. The Companys former subsidiary, Durango Georgia Receivables
Company, borrowed an aggregate principal amount of $253,457 (US$22 million) from Bank of America,
N.A. under a loan agreement. This loan was payable in five monthly installments beginning in
August 2002, and bore interest at a rate of LIBOR + 3.0%. The Company guaranteed this loan.
Durango Georgia Receivables Company filed for protection from its creditors under Chapter 11 of the
U.S. bankruptcy code in November 2002. Bank of America, N.A. called the Companys guarantee in
February 2003. As a result, the obligations under this loan were recorded as indebtedness of the
Company in these financial statements. The Company did not make principal or interest payments
under this guarantee. At December 31, 2004, before recognizing the effects of its financial
restructuring, the aggregate amount of due and unpaid principal under this loan was $195,853
(US$17.0 million) and the aggregate amount of due and unpaid interest under this loan was $21,542
(US$1.9 million). As part of its financial restructuring, on February 23, 2005, the Company issued
292,019 of its Series B Shares to the creditor under this loan agreement, and a note in the
aggregate principal amount of US$14.5 million was issued under the Restructured Credit Agreement
with respect to the remaining principal of and accrued and unpaid interest on its guarantee
obligations.
First JPMorgan Letter of Credit. JPMorgan Chase Bank (f/k/a Chase Manhattan Bank) issued a
letter of credit to SunTrust Leasing Corporation in the aggregate principal amount of $30,135
(US$2.6 million) for the benefit of the Companys former subsidiary, Durango Georgia Paper Company.
This letter of credit was drawn on April 19, 2000. The Company guaranteed Durango Georgia Paper
Companys reimbursement obligation under this letter of credit. Durango Georgia Paper Company
filed for protection from its creditors under Chapter 11 of the U.S. bankruptcy code in November
2002. JPMorgan Chase Bank called the Companys guarantee on January 15, 2003. As a result, the
reimbursement obligation under the letter of
F-26
credit was recorded as indebtedness of the Company in these financial statements. The Company did
not make principal or interest payments under this reimbursement obligation. Under the terms of the
reimbursement agreement, past due obligations under the reimbursement agreement bore interest at a
rate of 7.25% per annum. At December 31, 2004, before recognizing the effects of its financial
restructuring, the aggregate amount of due and unpaid principal under this reimbursement obligation
was $30,135 (US$2.6 million) and the aggregate amount of due and unpaid interest under this
reimbursement obligation was $3,900 (US$0.3 million). As part of its financial restructuring, on
February 23, 2005, the Company issued 53,910 of the Series B Shares to JPMorgan Chase Bank, and a
note in the aggregate principal amount of US$2.2 million was issued under the Restructured Credit
Agreement with respect to the remaining principal of and accrued and unpaid interest on the
Companys guarantee obligations.
Second JPMorgan Letter of Credit. JPMorgan Chase Bank (f/k/a Chase Manhattan Bank) issued a
letter of credit to Pitney Bowes Credit Corporation in the aggregate principal amount of $35,714
(US$3.1 million) for the benefit of the Companys former subsidiary, Durango Georgia Paper Company.
This letter of credit was drawn on April 19, 2000. The Company guaranteed Durango Georgia Paper
Companys reimbursement obligation under this letter of credit. Durango Georgia Paper Company
filed for protection from its creditors under chapter 11 of the U.S. bankruptcy code in November
2002. JPMorgan Chase Bank called the Companys guarantee on January 15, 2003. As a result, the
reimbursement obligation under this letter of credit was recorded as indebtedness of the Company in
these financial statements. Under the terms of the reimbursement agreement, past due obligations
under the reimbursement agreement bore interest at a rate of 7.25% per annum. At December 31,
2004, before recognizing the effects of its financial restructuring, the aggregate amount of due
and unpaid principal under this reimbursement obligation was $27,299 (US$2.4 million) and the
aggregate amount of due and unpaid interest under this reimbursement obligation was $3,370 (US$0.3
million). As part of its financial restructuring, on February 23, 2005, the Company issued 46,001
of the Series B Shares to JPMorgan Chase Bank, and a note in the aggregate principal amount of
US$2.0 million was issued under the Restructured Credit Agreement with respect to the remaining
principal of and accrued and unpaid interest on the Companys guarantee obligations.
(3) Financial lease agreements
Arrendadora Bank of America, N.A. Leases. The Company has entered into financial lease
agreements with Arrendadora Bank of America, N.A. for the acquisition of certain machinery. The
Company issued promissory notes in respect of the future minimum lease payments under these
financial lease agreements in an aggregate principal amount of $199,309 (US$17.3 million) with
maturities between February 2005 and August 2005. The promissory notes bear interest at rates
ranging from LIBOR + 3.0% to LIBOR + 3.5% payable quarterly and are secured by a pledge of the
leased machinery. The Company has sub-leased the machinery to certain of the Companys
subsidiaries. As of December 31, 2005, these promissory notes had been paid in full.
F-27
GE Capital Leasing Leases. The Companys subsidiary, Empaques de Cartón Titán, S. A. de C. V.
(Titán), has entered into financial lease agreements with GE Capital Leasing for the acquisition
of machinery. Titán issued two promissory notes in respect of the future minimum lease payments
under these financial lease agreements in an aggregate principal amount of $115,028 (US$10 million)
which are payable in 28 quarterly installments with the final payments due in October 2008 and
April 2009, respectively. The promissory notes bear interest at a rate of LIBOR + 3.25%. The
promissory notes are secured by a pledge of the leased machinery and are guaranteed by CODUSA. As
of December 31, 2005, the aggregate principal amount outstanding under these promissory notes was
$56,106 (US$5.2 million).
GE Capital Corporation Lease. In connection with our acquisition of Líneas Aéreas, we assumed
a financial lease agreement with GE Capital Corporation with respect to a business jet. The
original amount outstanding under this lease was US$8.0 million (Ps 85.1 million), payable in 60
monthly installments through October 2007. At the time of our acquisition of Líneas Aéreas, the
amount outstanding under this lease was US$5.3 million (Ps 56.4 million). The interest rate under
this lease was the prime rate + 1.50% per annum with the prime rate not to be less than 4.75% per
annum. As of December 31, 2005, the aggregate principal amount outstanding under these lease
agreement was US$4.9 million ($52.3 million).
(4) Other long-term debt
Bancomext Loans. The Companys subsidiary, Grupo Pipsamex, S. A. de C. V. (Grupo Pipsamex),
borrowed an aggregate principal amount of $921,662 (US$80 million) from Bancomext under a loan
agreement. In 2004, the Company defaulted under this loan agreement and negotiated the
restructuring of this loan agreement with Bancomext. This loan agreement was restructured on
September 29, 2004. In connection with the restructuring, the Company applied US$28.0 million of
the proceeds of the sale of its subsidiary, Productora Nacional de Papel, S. A. de C. V.
(Pronal), and Grupo Pipsamexs warehouse in Mexico City to the principal amount and accrued
interest under this loan agreement. The restructured loan is payable in 40 quarterly installments
beginning in December 2004 and bears interest at a rate of LIBOR + 5.1535%, payable quarterly.
This loan is secured by a first priority security interest in substantially all of the assets of
Grupo Pipsamex and certain of its subsidiaries and is guaranteed by CODUSA. As of December 31,
2005, the aggregate principal amount outstanding under this loan agreement was $591,498 (US$55.6
million). On February 26, 2006, the Company pre-paid US$26.5 million. As of March 31, 2006, the
aggregate principal amount outstanding under this loan agreement was US$29.1 million.
The Companys subsidiary, Fábrica Mexicana de Papel, S.A. de C.V., borrowed an aggregate principal
amount of $177,420 (US$15.4 million) from Bancomext under a loan agreement. In 2004, the Company
defaulted under this loan agreement and negotiated the restructuring of this loan agreement with
Bancomext. This loan agreement was restructured on September 29, 2004. In connection with the
restructuring, the Company applied US$12.0 million of the proceeds of the sale of its subsidiary,
Pronal, and Grupo Pipsamex warehouse in Mexico City to the principal amount and accrued interest
under this loan agreement. The restructured loan is payable
F-28
in 40 quarterly installments beginning in December 2004 and bears interest at a rate of LIBOR +
5.153%, payable quarterly. This loan is secured by a second priority security interest in
substantially all of the assets of Fábrica Mexicana de Papel, S.A. de C.V. and certain other
subsidiaries of Grupo Pipsamex and is guaranteed by CODUSA. As of December 31, 2005, the aggregate
principal amount outstanding under this loan agreement was $90,105 (US$8.5 million). On February
26, 2006, the Company pre-paid this loan and as of the date of issue of these financial statements,
Bancomext is in the process of releasing the secured assets.
Bank of Albuquerque Loan. The Companys subsidiary, Durango McKinley Paper Company, borrowed
an aggregate principal amount of $255,226 (US$22.0 million) from the Bank of Albuquerque under a
loan agreement. In addition, the Bank of Albuquerque has issued letter of credits in an aggregate
amount of $111,661 (US$10.5 million) under this loan agreement. This loan agreement was used to
refinance a credit facility that the Companys former subsidiary, Durango Paper Company, had with
the Bank of America, N.A. The principal on the term loan is payable in 24 quarterly installments
beginning August 2002 and bears interest at a rate of LIBOR + 2.75%. The obligations of Durango
McKinley Paper Company under the Bank of Albuquerque loan agreement are secured by the accounts,
inventory and equipment of Durango McKinley Paper Company and its real property located in Houston,
Texas, Mesquite, Texas and Prewitt, New Mexico. In addition, the obligations are guaranteed by
Durango International, Inc. As of December 31, 2005, the aggregate principal amount outstanding
under this loan agreement was $106,345 (US$10.0 million). On March 24, 2006, the Company prepaid
US$8.0 million and, as of that date, the aggregate principal amount outstanding under this loan
agreement was US$2.0 million. On April 7, 2006, the Company prepaid the remaining US$10.0 million .
As of the date of issue of these financial statements, Bank of Albuquerque is in the process of
releasing the property securing this loan.
Commerzbank Loan. The Companys subsidiary, Ponderosa Industrial de México, S. A. de C. V.
(Ponderosa), borrowed an aggregate principal amount of $166,909 (10.7 million) from AKA
Ausfuhrkredit-Gesellschaft m.b.H. or Commerzbank, under a loan agreement. This loan is payable in
15 semi-annual installments beginning in January 2003 and bears interest at a rate of EUROLIBOR +
1.15%. The obligations of Ponderosa under this loan agreement are secured by the certain equipment
of Ponderosa acquired with the proceeds of this loan. In addition, the obligations are guaranteed
by CODUSA. As of December 31, 2005, the aggregate principal amount outstanding under this loan was
$80,275 (6.4 million).
(5) Reduction in the 2005 carrying value debt.
Outstanding debt of $3,264,451, consisting of principal of $1,117,978 (15% of the principal of the
restructured debt) and accrued interest of $2,146,473, was exchanged for a 17% of the Company
capital stock during 2005.
F-29
(6) Restrictive Covenants and Available Credit
The instruments governing our indebtedness contain financial and other covenants that
restrict, among other things, the ability of our company and most of our subsidiaries to:
|
|
|
incur additional indebtedness; |
|
|
|
|
incur liens; |
|
|
|
|
issue guarantees; |
|
|
|
|
issue or sell capital stock of subsidiaries; |
|
|
|
|
pay dividends or make certain other restricted payments; |
|
|
|
|
consummate certain asset sales; |
|
|
|
|
enter into certain transactions with affiliates; or |
|
|
|
|
merge or consolidate with any other person or sell or otherwise dispose of all or
substantially all of our assets. |
DEBT AT DECEMBER 31, 2005
TRANCHE A.
On February 23, 2005, the Company issued Senior Notes with an aggregate principal amount of
$1,294,579 (US$116.1 million) as a result of the financial restructuring of the Company. These
Senior Notes bear interest payable quarterly in arrears at rates of LIBOR + 2.75% and the principal
of these Senior Notes amortize on a quarterly basis until their maturity on December 30, 2012. The
outstanding principal balance of these notes at December 31, 2005 was $1,173,046 (US$110.3 million).
TRANCHE B.
On February 23, 2005, the Company issued Senior Notes with an aggregate principal amount of
$4,836,492 (US$433.8 million) as a result of the financial restructuring of the Company. The 2012
Senior Notes bear interest payable quarterly in arrears at rate of 7.5% until December 31, 2005,
8.5% from January 1, 2006 to December 31, 2006, and 9.5% thereafter until its maturity on December
30, 2012. The outstanding principal balance of the 2012 Senior Notes at December 31, 2005 was
$4,613,050 (US$433.8 million).
F-30
d. Long-term debt maturities for year ended December 31, 2005 are:
|
|
|
|
|
2007 |
|
$ |
335,693 |
|
2008 |
|
|
278,619 |
|
2009 |
|
|
248,521 |
|
2010 |
|
|
234,107 |
|
2011 |
|
|
225,188 |
|
2012 and thereafter |
|
|
5,183,011 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,505,139 |
|
|
|
|
|
e. At December 31, 2005, the minimum rental commitments under financial leases are as follows:
|
|
|
|
|
Total minimum lease obligations |
|
$ |
112,496 |
|
Unearned interest |
|
|
(4,104 |
) |
|
|
|
|
|
|
|
|
|
Present value of lease obligations |
|
|
108,392 |
|
Current portion of lease obligations |
|
|
22,187 |
|
|
|
|
|
|
|
|
|
|
Long-term portion of lease obligations |
|
$ |
86,205 |
|
|
|
|
|
Financial leases obligations, which include a purchase option at the end of the lease term, are
payable as follows:
|
|
|
|
|
2006 |
|
$ |
22,187 |
|
2007 |
|
|
63,840 |
|
2008 |
|
|
16,871 |
|
2009 |
|
|
5,494 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
108,392 |
|
|
|
|
|
NOTE 10 FINANCIAL INSTRUMENTS:
a. |
|
Financial instruments The estimated fair value amounts of the Companys financial
instruments have been determined by the Company using available market information or other
appropriate valuation methodologies that require considerable judgment in developing and
interpreting the estimates of fair value. |
|
|
|
The carrying amount of the Companys cash equivalents, accounts receivable, accounts payable and
current notes payable approximate fair value because they have relatively short-term maturities
and bear interest at variable rates, as appropriate. |
|
|
|
The long-term debt consists of debt instruments that bear interest at fixed or variable rates. |
F-31
|
|
As of December 31, 2004, the fair value of the Companys long-term debt was determined on the
basis of CODUSAs agreement of Concurso Mercantil which was then being negotiated and
formalized with CODUSAs unsecured creditors. |
|
b. |
|
Concentration of credit risk The financial instruments that are subject to a concentration
of credit risk are principally cash and cash equivalents and trade accounts receivable. The
Company deposits and invests its excess cash in recognized financial institutions. The
concentration of the credit risk with respect to accounts receivable is limited due to the
large number of customers comprising the Companys customer base and their dispersion across
different locations in Mexico and the U.S. There were no customers to whom sales exceeded 10%
of consolidated net sales for any of the periods presented. |
NOTE 11 PENSION PLANS, SENIORITY PREMIUMS AND POST-RETIREMENT OBLIGATIONS:
Pension Plans and Seniority Premiums .
México The Company maintains a pension plan for certain employees. In addition, in accordance
with the Mexican Labor Law, the Company provides seniority premium benefits to employees under
certain circumstances. These benefits consist of a lump sum payment of 12 days wages for each
year worked, calculated using the most recent salary, not to exceed twice the legal minimum wage
established by law. The pension plans and seniority premiums are unfunded.
The present values of these obligations at December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Accumulated benefit obligation |
|
$ |
202,581 |
|
|
$ |
211,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation |
|
$ |
224,802 |
|
|
$ |
239,223 |
|
Unrecognized items: |
|
|
|
|
|
|
|
|
Variances for assumptions and adjustments based on
experience |
|
|
19,008 |
|
|
|
6,040 |
|
Transition amount |
|
|
(116,225 |
) |
|
|
(128,928 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net projected liability |
|
|
127,585 |
|
|
|
116,335 |
|
Additional minimum liability |
|
|
74,996 |
|
|
|
94,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
202,581 |
|
|
$ |
211,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset |
|
$ |
74,281 |
|
|
$ |
94,932 |
|
|
|
|
|
|
|
|
F-32
The real rates (net of inflation) used in the actuarial calculations for the years ended December
31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Discount rate |
|
|
5 |
% |
|
|
5 |
% |
Salary increases |
|
|
2 |
% |
|
|
2 |
% |
The amortization periods for the unamortized items are as follows:
|
|
|
|
|
|
|
|
|
|
|
Remaining Years |
|
|
2005 |
|
2004 |
Transition asset |
|
|
17 |
|
|
|
18 |
|
Variances in assumptions and adjustments based on experience |
|
|
17 |
|
|
|
18 |
|
In connection with the reorganization of the Companys operations, certain administrative and
operating personnel were terminated during 2003 and as a result, payments totaling $64,414 were
incurred and were recognized and included within other income (expenses).
United
States of America The subsidiaries in the United States of America have established the
following defined contribution plans: a 401(k) retirement savings plan, health insurance plan,
disability plan, and life insurance plan, among others. For the years ended December 31, 2005,
2004 and 2003, total expenses related to these plans were $21,125, $27,924 and $34,858
respectively.
As of December 31, 2005 and 2004 the Company did not have any defined benefits plans. During 2003
the additional liability related to seniority premiums in the amount of $159,181, which was
presented separately in the statement of changes in stockholders equity, was transferred to
retained earnings.
Post-retirement obligations
Beginning in 2004, the Company has granted post-retirement benefits to its employees. As a result,
the Company recognized labor liabilities for post-retirement obligations.
F-33
The present value of these obligations at December 31, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Accumulated post-retirement benefit obligation |
|
$ |
97,887 |
|
|
$ |
104,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement other benefit obligation |
|
$ |
101,260 |
|
|
$ |
104,024 |
|
Variances for assumptions and adjustments based on
experience |
|
|
(12,229 |
) |
|
|
|
|
Unrecognized prior service cost to be amortized over 17 years |
|
|
(89,509 |
) |
|
|
(106,256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net projected liability |
|
|
(478 |
) |
|
|
(2,232 |
) |
Additional minimum liability |
|
|
98,365 |
|
|
|
106,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
97,887 |
|
|
$ |
104,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset |
|
$ |
86,625 |
|
|
$ |
101,004 |
|
|
|
|
|
|
|
|
Retirement compensation
The present value of these obligations at December 31, 2005 is as follows:
|
|
|
|
|
Accumulated post-retirement benefit obligation |
|
$ |
7,431 |
|
|
|
|
|
|
|
|
|
|
Post-retirement other benefit obligation |
|
$ |
16,731 |
|
Unrecognized prior service cost to be amortized over 17 years |
|
|
(13,747 |
) |
|
|
|
|
|
|
|
|
|
Net projected liability |
|
|
2,984 |
|
Additional minimum liability |
|
|
4,447 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,431 |
|
|
|
|
|
|
|
|
|
|
Intangible asset |
|
$ |
4,447 |
|
|
|
|
|
F-34
Total labor obligations presented in the balance sheet are as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Seniority premiums and pensions |
|
$ |
202,581 |
|
|
$ |
211,267 |
|
Post-retirement obligations |
|
|
97,887 |
|
|
|
104,439 |
|
Retirement compensation |
|
|
7,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
307,899 |
|
|
$ |
315,706 |
|
|
|
|
|
|
|
|
Total intangible asset labor obligations are as follow:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Seniority premiums and pensions |
|
$ |
74,281 |
|
|
$ |
94,932 |
|
Post-retirement obligations |
|
|
86,625 |
|
|
|
101,004 |
|
Retirement compensation |
|
|
4,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
165,353 |
|
|
$ |
195,936 |
|
|
|
|
|
|
|
|
Net period cost for the years ended December 31, is as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Service cost |
|
$ |
10,380 |
|
|
$ |
7,411 |
|
Amortization of transition asset, variances for
assumptions and adjustments based on experience |
|
|
16,731 |
|
|
|
17,065 |
|
Financial cost |
|
|
14,548 |
|
|
|
14,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net period cost |
|
$ |
41,659 |
|
|
$ |
39,200 |
|
|
|
|
|
|
|
|
NOTE 12 STOCKHOLDERS EQUITY:
a. |
|
Shares of common stock at par value as of December 31 are comprised as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Inflation |
|
|
|
|
|
|
Number of |
|
|
Par |
|
|
restatement |
|
|
|
|
|
|
shares |
|
|
value |
|
|
effect |
|
|
Total |
|
Fixed capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A |
|
|
46,613,171 |
|
|
$ |
699,760 |
|
|
$ |
1,916,502 |
|
|
$ |
2,616,262 |
|
Series B |
|
|
18,805,918 |
|
|
|
282,314 |
|
|
|
8,413 |
|
|
|
290,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A |
|
|
45,222,022 |
|
|
|
678,873 |
|
|
|
1,859,441 |
|
|
|
2,538,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,641,111 |
|
|
$ |
1,660,947 |
|
|
$ |
3,784,356 |
|
|
$ |
5,445,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
Inflation |
|
|
|
|
|
|
Number of |
|
|
Par |
|
|
restatement |
|
|
|
|
|
|
shares |
|
|
value |
|
|
effect |
|
|
Total |
|
Fixed capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A |
|
|
46,613,171 |
|
|
$ |
699,760 |
|
|
$ |
1,916,502 |
|
|
$ |
2,616,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A |
|
|
45,222,022 |
|
|
|
678,873 |
|
|
|
1,859,441 |
|
|
|
2,538,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,835,193 |
|
|
$ |
1,378,633 |
|
|
$ |
3,775,943 |
|
|
$ |
5,154,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock consists of common nominative shares without par value. The variable portion of
capital stock cannot exceed ten times the aggregate amount of the fixed minimum portion without
right to withdraw. |
b. |
|
On June 30, 2003, Board of Directors approved the conversion of 2,240,000 treasury shares;
consequently, variable capital was reduced by $125,731 ($33,627 at par value). On April 30,
2004, Board of Directors cancelled the conversion of the 2,240,000 treasury shares and
increased the fixed minimum portion by $291,763 and authorized the issuance of 18,808,989
treasury shares. |
|
c. |
|
On May 17, 2004, Board of Directors approved the contribution of $49 to its fixed share
capital and the sale of 3,071 treasury shares. |
|
d. |
|
Retained earnings include the statutory legal reserve. The Mexican 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. 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. At December 31, 2005, 2004 and 2003 the legal
reserve, in historical nominal pesos, was $259,634. |
|
e. |
|
Stockholders equity, except restated paid-in capital and tax retained earnings, will be
subject to a tax at the rate in effect when a dividend is distributed. In 2005, the rate was
30% (33% in 2004 and 34% in 2003) and will be reduced by one percentage point each year until
reaching 28% in 2007. Any tax paid on such distribution may be credited against pre-paid
taxes and the income tax payable of the year in which the tax on the dividend is paid and the
two fiscal years following such payment. |
|
f. |
|
The balances of the tax account related to stockholders equity as of December are as
follows: |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Contributed capital account |
|
$ |
3,772,365 |
|
|
$ |
3,481,637 |
|
After tax profits account |
|
|
1,803,263 |
|
|
|
1,956,906 |
|
Reinvested after tax profits account |
|
|
947,551 |
|
|
|
947,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,523,179 |
|
|
$ |
6,386,094 |
|
|
|
|
|
|
|
|
F-36
NOTE 13 FOREIGN CURRENCY TRANSACTIONS AND BALANCES:
a. |
|
At December 31, the foreign currency monetary position is as follows: |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Thousands of U.S. dollars: |
|
|
|
|
|
|
|
|
Monetary assets |
|
US$ |
64,042 |
|
|
US$ |
55,092 |
|
Monetary liabilities |
|
|
(665,179 |
) |
|
|
(960,713 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monetary (liability) position, net |
|
(US$ |
601,137 |
) |
|
(US$ |
905,621 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent in Mexican pesos |
|
($ |
6,392,727 |
) |
|
($ |
10,097,221 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Euros: |
|
|
|
|
|
|
|
|
Monetary (liability) position, net |
|
|
(8,317 |
) |
|
|
(10,251 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent in Mexican pesos |
|
($ |
104,287 |
) |
|
($ |
155,439 |
) |
|
|
|
|
|
|
|
b. |
|
Non-monetary assets of foreign origin at December 31, 2005 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance in |
|
|
|
|
|
|
|
|
foreign |
|
Equivalent |
|
|
|
|
|
|
currency |
|
in Mexican |
|
|
Currency |
|
(thousands) |
|
pesos |
Inventories |
|
U.S. dollar |
|
|
19,796 |
|
|
$ |
210,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and industrial equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
United States of America |
|
U.S. dollar |
|
|
462,925 |
|
|
|
4,922,932 |
|
Brazil |
|
Real |
|
|
188,436 |
|
|
|
862,381 |
|
Japan |
|
Yen |
|
|
4,109,349 |
|
|
|
370,540 |
|
Germany |
|
Euro |
|
|
25,214 |
|
|
|
316,154 |
|
Canada |
|
Canadian dollar |
|
|
35,610 |
|
|
|
324,419 |
|
Other |
|
Several |
|
|
|
|
|
|
305,462 |
|
c. |
|
The condensed financial information of the principal foreign countries before inter-company
eliminations, is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands of |
|
|
|
U.S. dollars) |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
United States of America |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
213,216 |
|
|
|
212,347 |
|
|
|
146,646 |
|
Income from operations |
|
|
2,337 |
|
|
|
3,352 |
|
|
|
4,471 |
|
Net (loss) |
|
|
(15,488 |
) |
|
|
(1,867 |
) |
|
|
(54,559 |
) |
Current assets |
|
|
132,768 |
|
|
|
206,049 |
|
|
|
30,216 |
|
Total assets |
|
|
317,285 |
|
|
|
278,272 |
|
|
|
115,022 |
|
Current liabilities |
|
|
65,869 |
|
|
|
71,118 |
|
|
|
18,960 |
|
Total liabilities |
|
|
87,207 |
|
|
|
92,265 |
|
|
|
48,204 |
|
F-37
d. |
|
Transactions denominated in foreign currency were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands of |
|
|
|
U.S. dollars) |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Export sales |
|
|
189,563 |
|
|
|
205,617 |
|
|
|
166,230 |
|
Interest expense |
|
|
(50,544 |
) |
|
|
(90,306 |
) |
|
|
(96,455 |
) |
Interest income |
|
|
534 |
|
|
|
68 |
|
|
|
31 |
|
Import purchases |
|
|
(219,570 |
) |
|
|
(238,801 |
) |
|
|
(167,303 |
) |
Acquisition (sales) of machinery and equipment |
|
|
14,829 |
|
|
|
(555 |
) |
|
|
(35,486 |
) |
e. |
|
The exchange rates in effect at the dates of the consolidated balance sheets and issuance of
the consolidated financial statements were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
April 24, |
|
|
2005 |
|
2004 |
|
2006 |
U.S. dollar |
|
$ |
10.6344 |
|
|
$ |
11.1495 |
|
|
$ |
11.0656 |
|
Euros |
|
|
12.5390 |
|
|
|
15.1633 |
|
|
|
13.7545 |
|
NOTE 14 TRANSACTIONS AND BALANCES WITH RELATED PARTIES:
a. |
|
Transactions with related parties, for the years ended December 31, carried out in the
ordinary course of business, were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
Interest income |
|
$ |
|
|
|
$ |
13,959 |
|
|
$ |
27,256 |
|
Sale of paper |
|
|
|
|
|
|
5,058 |
|
|
|
13,186 |
|
Sale of machinery and industrial equipment
and other equipment |
|
|
|
|
|
|
|
|
|
|
17,601 |
|
Freight expenses |
|
|
|
|
|
|
|
|
|
|
45,999 |
|
Air transportation services |
|
|
|
|
|
|
36,220 |
|
|
|
|
|
Other (expenses) income |
|
|
|
|
|
|
(1,012 |
) |
|
|
3,471 |
|
b. |
|
Accounts receivable from related parties as of December 31, are as follows: |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Administradora Corporativa y Mercantil, S.A. de C.V. (1 and 4) |
|
$ |
11,803 |
|
|
$ |
202,931 |
|
Durango Georgia Receivables Company (DGC) (2 and 4) |
|
|
|
|
|
|
211,791 |
|
Durango Paper Company (DPC) (2 and 4) |
|
|
|
|
|
|
63,661 |
|
Líneas Aéreas Ejecutivas de Durango, S. A. de C. V.(3) |
|
|
|
|
|
|
1,131 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,803 |
|
|
|
479,514 |
|
Allowance for doubtful accounts |
|
|
|
|
|
|
(466,009 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,803 |
|
|
$ |
13,505 |
|
|
|
|
|
|
|
|
F-38
In 2005, accounts receivable were applied to the corresponding reserves.
|
(1) |
|
Administradora Corporativa y Mercantil, S.A. de C.V (ACM) From time to time, ACM, a
company owned and controlled by the Rincón family, borrows funds from our company to fund principal
and interest payments on its indebtedness. The outstanding balance on these loans was Ps 202.4
million at December 31, 2005. We recorded an allowance for doubtful accounts in the full amount of
these loans during 2003. These loans bear interest at a rate of 5% per annum and mature on December
31, 2012.
|
|
|
(2) |
|
Durango Paper Company On October 7, 2002, the Company sold its subsidiary, Durango
Paper Company, and certain promissory notes to Operadora Omega Internacional, S.A. de C.V.
The sale was made for an aggregate amount of US$100 thousand. Prior to this sale, the
Company had guaranteed certain obligations of Durango Paper Companys subsidiaries,
specifically the Bank of America, N.A. loan agreement and the J.P. Morgan letters of
credit, which in the aggregate, totaled a principal amount of US$25.2 million ($290.4
million). In 2003, these creditors called these guarantees. As a result, the Company
recorded $285.0 million as due from related parties in 2003 and recorded an allowance for
doubtful accounts in the full amount of this obligation. |
|
|
(3) |
|
Líneas Aéreas Ejecutivas de Durango, S.A. de C.V. The Company obtains service flights
from Líneas Aéreas, a company that was owned and controlled by the Rincón family until April
18, 2005. Líneas Aéreas owns two business jets and provides transportation services to the
Companys subsidiaries and third parties. For the year ended December 31, 2003, the Company
purchased services from Líneas Aéreas for an aggregate amount of $1,131. |
|
|
|
|
Under this financial lease agreement, we are required to make monthly lease payments
with a final payment due in October 2007. The outstanding amount under this financial lease
bears interest at a rate of prime + 1.50% per annum. Our obligations under this financial
lease are secured by a pledge of the business jet. As of December 31, 2005, the aggregate
principal amount outstanding under this financial lease was US$4.9 million (Ps 52.3 million). |
|
|
|
|
In 2003, Líneas Aéreas borrowed $15.2 million from the Company. This loan bears interest at a
rate of 15% per annum and matures on December 31, 2006. As of December 31, 2004, the
outstanding balance of this loan was $1.1 million. In 2004, Líneas Aéreas paid the Company
interest in an aggregate amount of $4.2 million. |
|
|
(4) |
|
During 2003, the Company recorded an allowance for doubtful accounts in connection with
the account receivable from ACM. Since the Companys controlling shareholders own ACM, the
$190,557 charge was recorded in retained earnings. |
F-39
|
|
Transactions with Directors and their Affiliates We sell newsprint to El Universal at prices
that are not materially more favorable than sales to other third parties. Juan Francisco Ealy
Ortiz, one of our directors, is the Chairman, Chief Executive Officer and Managing Director of El
Universal. During the year ended December 31, 2005, we recorded net sales to El Universal of
approximately US$15.0 million (Ps 159.7 million).
|
|
|
|
On June 28, 2005, our company acquired 99.99% of the capital stock of Inmobiliaria Industrial
de Durango, S.A. de C.V. for Ps 735.0 thousand. This company was owned by some of the members of
the Rincón family.
|
|
|
|
On March 6, 2006, Pipsamex issued and sold 2,177,042,255 shares of its series B capital stock,
representing 13.3% of Pipsamex outstanding capital stock to NKM Corporativo, S.A. de C.V., a
company owned and controlled by the Rincón family, for Ps 314.6 million. The proceeds of this sale
were used to fund our debt reduction program.
|
c. |
|
Acquisition of new subsidiaries: |
|
|
|
In April 11, 2005, the Company acquired 99.99% of the capital stock of Empaques del Norte, S.A.
de C.V. for $64,928 (US$5.8 million). The liability at December 31, 2005 was $8,517. See Note 7. |
|
|
|
On April 18, 2005 the Company acquired 99.99% of the capital stock of Líneas Aéreas Ejecutivas de
Durango, S. A. de C. V. (Líneas Aéreas) for $15. This company was owned by some of the Rincón
family members. Líneas Aéreas owns two business jets and provides transportation services to the
Companys subsidiaries and third parties. See Note 7. |
|
|
|
On June 28, 2005, the Company acquired 99.99% of the capital stock of Inmobiliaria Industrial de
Durango, S.A. de C.V. for $735. This company was owned by some of the Rincón family members (See
Note 7). |
|
d. |
|
Creation of new subsidiary: |
|
|
|
Corporación Durango, S.A. de C.V., Empaques de Cartón Titán, S.A. de C.V., Industrias Centauro,
S.A. de C.V. and Inmobiliaria Industrial Tizayuca, S.A. de C.V., entered into an operating lease
agreement with GE Capital CEF México, S. de R.L. de C.V., effective as of March 31, 2006. This
agreement has a term of 7.5 years by US$50 million. Under this lease agreement, the Companys
newly formed subsidiary, Papel y Empaques de Tizayuca, S.A. de C.V., leases machinery and
equipment with installed capacity of 200,000 short tons of |
F-40
|
|
linerboard and 100,000 short tons of corrugated boxes located at an industrial facility purchased
by the Company. |
NOTE 15 OTHER INCOME (EXPENSES), NET:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Loss on sale of property, plant and equipment (1) |
|
($ |
1,696 |
) |
|
($ |
22,844 |
) |
|
($ |
217,015 |
) |
Severance payments due to reorganization |
|
|
|
|
|
|
|
|
|
|
(64,414 |
) |
Restructuring expenses |
|
|
(65,717 |
) |
|
|
(149,440 |
) |
|
|
(296,607 |
) |
Write-off of debt issuance costs |
|
|
|
|
|
|
(333,510 |
) |
|
|
|
|
Reserve for fixed assets value |
|
|
|
|
|
|
|
|
|
|
(656,144 |
) |
Revaluation (impairment) of long-lived assets in use |
|
|
113,803 |
|
|
|
(479,130 |
) |
|
|
|
|
Loss on operations of DPC (2) |
|
|
|
|
|
|
|
|
|
|
(342,472 |
) |
Debt repurchase at market price (3) |
|
|
|
|
|
|
641,451 |
|
|
|
|
|
Other expenses, net |
|
|
(41,155 |
) |
|
|
(74,433 |
) |
|
|
(62,104 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,235 |
|
|
($ |
417,906 |
) |
|
($ |
1,638,756 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On November 25, 2003, the Company sold property for $140,425 (US$11.5 million). As part of
the sale, the Company reserved the right to use approximately a third of the property for a
period of five years at no cost. This sale resulted in a loss of $210,746. |
|
(2) |
|
In 2003, this amount included $284,976 of expenditures for certain guarantees granted by the
Company on a bank loan and some letters of credit issued by DPC, which were called by the
creditors (See Note 1.b.). |
|
(3) |
|
On August 5, 2004, HG Estate LLC and St. Marys Railroad Corporation sold certain notes in an
aggregate principal amount of US$48.1 million ($554.2 million) issued by Durango Paper Company
in favor of HG Estate LLC and St. Marys Railroad Corporation, to the indirect partially-owned
subsidiary Compañía Norteamericana de Inversiones en Celulosa y Papel, S.A. de C.V. for US$7.5
million ($88.9 million) which the parties agreed was the fair market value of these notes. The
Company recorded a debt reduction of $641,451 in other income (expenses), as a consequence of
the market value purchase of these notes. |
NOTE 16 INCOME TAX (IT), ASSET TAX (AT) AND EMPLOYEES STATUTORY PROFIT SHARING (EPS):
F-41
The Company is subject to IT and AT. IT is calculated considering as taxable or non-taxable some
inflation effects, like calculated depreciation based on constant values and cost of sales
deduction instead of purchases (until December 31, 2004 purchases instead of cost of sales),
allowing for actual costs deduction and the inflation effect of some liabilities and monetary
assets is accumulated or deducted through the annual inflation adjustment which is similar to the
result for monetary position.
As a result of the amendments to the Income Tax Law in effect as of November 13, 2004, the IT rate
will be 29% in 2006 and 28% in 2007. Therefore, the effect of those statutory income tax rate
reductions were considered in valuing deferred income taxes, creating for 2005 and 2004, a decrease
in income tax liability of $17,225 and $23,321, respectively, which reduced net income by the same
amount.
AT is calculated by applying a 1.8% rate to the net average of the majority of inflation restated
assets and certain liabilities, and is payable only to the extent that it exceeds IT payable for
the same period. If in any year AT exceeds IT payable, the AT payment for such excess may be
reduced by the amount by which IT exceeded AT in the three preceding years and any required payment
is carried forward and applied against the excess of IT over AT over the following ten years.
The Company incurs consolidated IT and AT payments with its Mexican subsidiaries in proportion to
the Companys voting stock in each of its subsidiaries at the balance sheet date. Beginning on
January 1, 2002, the proportion is calculated based on the average daily equity percentage that the
Company owns of its subsidiaries during the year. The tax results of the subsidiaries are
consolidated at 100% and 60% of such proportion for 2005 and 2004, respectively, and the tax
results of the holding company are also consolidated at 100% and 60% for 2005 and 2004,
respectively. Estimated IT and AT payments of CODUSA and its subsidiaries are made as if the
Company had not opted for tax consolidation.
a. |
|
IT (provision) benefit consists of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Current |
|
($ |
122,223 |
) |
|
($ |
37,448 |
) |
|
($ |
165,952 |
) |
Deferred |
|
|
(241,143 |
) |
|
|
531,254 |
|
|
|
79,473 |
|
Benefit from tax consolidation |
|
|
59,350 |
|
|
|
8,934 |
|
|
|
88,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ |
304,016 |
) |
|
$ |
502,740 |
|
|
$ |
2,297 |
|
|
|
|
|
|
|
|
|
|
|
b. |
|
The reconciliation of the statutory and effective IT rates expressed as a percentage of
income (loss) from continuing operations before IT and EPS for the years ended December 31,
2005, 2004 and 2003 is: |
F-42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Statutory income tax rate |
|
|
30 |
% |
|
|
33 |
% |
|
|
34 |
% |
Plus (less) the effect of permanent differences: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible expenses |
|
|
16.72 |
% |
|
|
(5.43 |
%) |
|
|
(1.30 |
%) |
Other |
|
|
13.17 |
% |
|
|
10.23 |
% |
|
|
(14.59 |
%) |
Effects of inflation |
|
|
(7.24 |
%) |
|
|
7.05 |
% |
|
|
0.93 |
% |
Effect of the rate reduction on deferred IT |
|
|
(18.89 |
%) |
|
|
16.59 |
% |
|
|
0.49 |
% |
Change in valuation allowance of recoverable
deferred IT asset and AT |
|
|
51.17 |
% |
|
|
33.01 |
% |
|
|
(19.51 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective IT rate |
|
|
84.93 |
% |
|
|
94.45 |
% |
|
|
0.02 |
% |
|
|
|
|
|
|
|
|
|
|
c. |
|
At December 31, 2005 and 2004 the main components of the net deferred IT liability balance
are: |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Deferred IT liability (asset): |
|
|
|
|
|
|
|
|
Property, machinery and equipment |
|
$ |
2,434,657 |
|
|
$ |
2,628,007 |
|
Inventories |
|
|
(121,026 |
) |
|
|
35,833 |
|
Allowance for doubtful accounts |
|
|
(49,767 |
) |
|
|
(65,600 |
) |
Accrued expenses |
|
|
(40,965 |
) |
|
|
(94,712 |
) |
Other assets |
|
|
(26,829 |
) |
|
|
44,521 |
|
Other, net |
|
|
(65,307 |
) |
|
|
(45,851 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred IT from temporary differences |
|
|
2,130,763 |
|
|
|
2,502,198 |
|
|
|
|
|
|
|
|
|
|
Tax loss carryforwards |
|
|
(1,005,278 |
) |
|
|
(1,300,654 |
) |
Recoverable AT carryforwards |
|
|
(329,849 |
) |
|
|
(340,624 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
795,636 |
|
|
|
860,920 |
|
Valuation allowance |
|
|
806,188 |
|
|
|
623,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net long-term deferred IT liability |
|
$ |
1,601,824 |
|
|
$ |
1,483,957 |
|
|
|
|
|
|
|
|
|
|
Certain reclassifications among line items have been made that did not impact the total net
deferred income tax liability. |
|
d. |
|
Due to the uncertainty of the recovery and use of recoverable AT and unamortized tax loss
carryforwards, the Company established a valuation allowance for the amounts that it does not
expect to recover. |
|
e. |
|
At December 31, 2005 and 2004, the Company has taxable temporary differences related to
deferred EPS, mainly inventories and property, machinery and equipment, for which the deferred
EPS liabilities were not recognized since the Company believes that they will not materialize
due to the continuity of its operations (i.e. will be replaced in the future with similar
temporary differences). |
F-43
f. |
|
Consolidated unamortized tax loss carryforwards and recoverable AT of the Mexican companies
for which the deferred IT assets and prepaid IT, respectively, have been recognized may be
recoverable subject to certain conditions. The restated amounts of tax loss carryforwards and
recoverable AT and their respective expiration dates at December 31, 2005 are as follows: |
|
|
|
|
|
|
|
|
|
Year of |
|
Tax loss |
|
|
Recoverable |
|
Expiration |
|
carryforwards |
|
|
AT |
|
2006 |
|
$ |
158,265 |
|
|
$ |
28,558 |
|
2007 |
|
|
107,569 |
|
|
|
28,361 |
|
2008 |
|
|
149,179 |
|
|
|
27,510 |
|
2009 |
|
|
70,629 |
|
|
|
21,487 |
|
2010 |
|
|
63,618 |
|
|
|
25,931 |
|
2011 |
|
|
87,156 |
|
|
|
24,142 |
|
2012 |
|
|
361,183 |
|
|
|
64,104 |
|
2013 |
|
|
1,128,248 |
|
|
|
59,711 |
|
2014 |
|
|
384,274 |
|
|
|
6,397 |
|
2015 |
|
|
1,038,042 |
|
|
|
961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,548,163 |
|
|
$ |
287,162 |
|
|
|
|
|
|
|
|
g. |
|
For the years ended December 31, 2005, 2004 and 2003, the change in gain (loss) from holding
non-monetary assets includes the effect of the deferred income tax of $148,636, $266,804 and
$220,789, respectively. |
NOTE 17 DISCONTINUED OPERATIONS:
As a result of the Companys financial and operating restructuring, in 2003, the Board of Directors
authorized the discontinuation and/or sale of certain subsidiaries or significant assets. The
related operating results have been presented as discontinued operations for the years ended
December 31, 2005, 2004 and 2003. Discontinued operations are as follows:
a. |
|
On February 27, 2003, the Company sold the assets of its molded pulp division for
approximately $650,772 (US$53.7 million), resulting in a gain of $364,087, which is included
in the net loss of discontinued operations in the accompanying statements of operations for
the year ended December 31, 2003. Additionally, according to the purchase agreement, the |
F-44
|
|
Company transferred to the buyer some accounts receivable and trade accounts payable, in order to
permit the buyer to continue with production and sale of molded products. |
|
b. |
|
On November 14, 2003, the Company sold its investment in Productora Nacional de Papel, S.A.
de C. V. for $354,224 (US$28.0 million), which gave rise to a $486,362 loss; this amount is
included in gain (loss) from discontinued operations-net in the accompanying consolidated
statements of operations for the year ended December 31, 2003. |
|
c. |
|
During 2003, the Companys management authorized a plan to sell a plant located in Chihuahua,
which is primarily engaged in the manufacturing of particleboard. On September 24, 2003, the
Company signed a letter of intent with a potential buyer. Based on the negotiations with the
potential buyer, the Company reduced the book value of the net assets to be sold by $381,828,
which is included in the net loss of discontinued operations in the accompanying consolidated
statement of operations for the year ended December 31, 2003. |
|
|
|
On July 15, 2005, our subsidiaries, Ponderosa Industrial de México, S.A. de C.V. and Compañía
Forestal de Durango, S.A. de C.V., sold the assets of our Chihuahua particleboard plant for
$334,393 (US$30 million). As a result of this sale, the capacity of the Companys other segment
was reduced by 200 thousands short tons, the Company ceased producing particleboard and the
Company no longer has any discontinued operations. |
|
|
|
The balance sheet of the Companys discontinued operations for the year ended December 31, 2004
is as follows: |
|
|
|
|
|
|
|
2004 |
|
Cash and cash equivalents |
|
$ |
7,573 |
|
Trade accounts receivable Net |
|
|
64,860 |
|
Inventories Net |
|
|
34,714 |
|
Prepaid expenses |
|
|
826 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
107,973 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment Net |
|
|
257,587 |
|
Other assets Net |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
Total long-term assets |
|
|
257,598 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
365,571 |
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
Current portion of long-term debt |
|
$ |
22,036 |
|
Trade accounts payable |
|
|
32,698 |
|
Accrued expenses and taxes |
|
|
76,404 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
131,138 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
99,164 |
|
Deferred income taxes |
|
|
49,856 |
|
Pension plans and seniority premiums |
|
|
1,161 |
|
|
|
|
|
F-45
|
|
|
|
|
|
|
2004 |
|
Total long-term liabilities |
|
|
150,181 |
|
|
|
|
|
Total liabilities |
|
$ |
281,319 |
|
|
|
|
|
Net assets of discontinued operations |
|
$ |
84,252 |
|
|
|
|
|
d. |
|
The statements of operations reflect the effects of discontinued operations, which are
comprised as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net sales |
|
$ |
166,046 |
|
|
$ |
346,247 |
|
|
$ |
752,938 |
|
Cost of sales |
|
|
141,112 |
|
|
|
289,986 |
|
|
|
764,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
24,934 |
|
|
|
56,261 |
|
|
|
(11,339 |
) |
Operating expenses Net |
|
|
21,953 |
|
|
|
31,806 |
|
|
|
45,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
2,981 |
|
|
|
24,455 |
|
|
|
(56,778 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net comprehensive financing income (cost) |
|
|
76,253 |
|
|
|
45,585 |
|
|
|
(147,042 |
) |
Other income (expenses) Net |
|
|
(19,886 |
) |
|
|
318 |
|
|
|
(27,285 |
) |
Impairment of long-lived assets |
|
|
|
|
|
|
|
|
|
|
(381,828 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
|
59,348 |
|
|
|
70,358 |
|
|
|
(612,933 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from sales of discontinued operations |
|
|
334,393 |
|
|
|
|
|
|
|
1,004,996 |
|
Cost of sales of assets of discontinued operations |
|
|
350,171 |
|
|
|
|
|
|
|
1,127,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sales of discontinued operations |
|
|
(15,778 |
) |
|
|
|
|
|
|
(122,275 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT and EPS |
|
|
65,232 |
|
|
|
35,178 |
|
|
|
138,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations |
|
$ |
108,802 |
|
|
$ |
105,536 |
|
|
($ |
596,964 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
6,947 |
|
|
$ |
15,734 |
|
|
$ |
40,950 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 18 COMMITMENTS:
a. |
|
Some of the Mexican subsidiaries lease certain equipment under non-cancelable operating
leases. Rental expenses totaled $51,214, $51,627 and $54,938 for the years ended December 31,
2005, 2004 and 2003, respectively. As of December 31, 2005, estimated future minimum lease
payments were as follows: |
F-46
|
|
|
|
|
Year |
|
Amount |
|
2006 |
|
$ |
25,022 |
|
2007 |
|
|
19,461 |
|
2008 |
|
|
17,399 |
|
2009 |
|
|
17,399 |
|
2010 and thereafter |
|
|
42,280 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
121,561 |
|
|
|
|
|
b. |
|
McKinley Paper Company leases certain equipment under non-cancelable operating leases. Rental
expenses under these leases were $9,248, $3,656 and $4,672 for the years ended December 31,
2005, 2004 and 2003 respectively. As of December 31, 2005, estimated future minimum lease
payments were as follows: |
|
|
|
|
|
Year |
|
Amount |
|
2006 |
|
$ |
7,710 |
|
2007 |
|
|
6,700 |
|
2008 |
|
|
5,073 |
|
2009 |
|
|
6,103 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,586 |
|
|
|
|
|
NOTE 19 CONTINGENCIES:
a. |
|
Subsequent to the sale of Productora Nacional de Papel, S.A. de C.V., as described in Note
17, the Mexican National Water Commission billed the Company $170,800 for alleged differences
in the payments of rights for extraction and use of national waters in 2001 and 2000. The
Company filed an appeal with the Federal Tax and Administrative Court and is currently
awaiting the courts ruling. The Companys management believes that there are insufficient
grounds for the legal suit and that the court will rule in its favor. |
b. |
|
Similarly, subsequent to the sale of Productora Nacional de Papel, S. A. de C. V., the
Mexican National Water Commission billed the Company $1,996 in taxes with respect to the
fiscal years ended 1998 and 1999 for alleged differences in the payment of rights by the use
or advantage of goods of the public domain of the Mexican Republic, such as receiving residual
water unloadings. The Company filed an appeal with the Federal Tax and Administrative Court
and is currently awaiting the acceptance of this appeal. |
c. |
|
The Company has filed a request for an injunction against the Mexican tax authorities
claiming the unconstitutionality of certain changes in the federal tax law as approved in the
tax amendments which went into effect on November 13, 2004, specifically, regarding the new
requirement to deduct cost of sales rather than purchases as had been allowed previously.
Although the Companys management and its legal advisors believe favorable rulings would be
issued to the Company, the related impact has not been quantified |
F-47
d. |
|
As a result of operations with related foreign entities, tax differences could arise if the
tax authorities, upon review, consider that the transfer prices and amounts used by the
Company are not similar to those which would have been used with or between independent
parties in comparable transactions. |
e. |
|
The Company would be obligated to pay severance payments to its employees in case of
dismissal under certain circumstances under the Federal Labor Law. As of December 31, 2005,
there are no obligations for such severance payments. Beginning in 2005, in accordance with
Statement D-3, as amended, this liability is recorded in the results for the year. |
f. |
|
The Companys Mexican operations are subject to federal, state and local laws and
regulations, including the Mexican General Law of Ecological Stabilization and Environment
Protection and the rules and regulations published under this law. Companies engaged in
industrial activities are subject to the regulatory jurisdiction of the Mexican Ministry of
the Environment and Natural Resources. |
|
|
|
In 1988, the Company agreed with Mexican environmental regulatory authorities on a compliance
plan that the Company proceeded to implement. The Companys paper mills are in compliance with
general standards promulgated by the Mexican regulatory authorities. In 1995, the Company
purchased approximately 26% of Planta Ecológica Industrial, S.A. de C.V., a joint venture of
industrial water users in Monterrey, Nuevo León. The venture paper mills in Mexico are subject
to periodic environmental audits by the Mexican Ministry of the Environmental and Natural
Resources. The Company has frequently been recognized for its environmental record and its role
in implementing modern forest management techniques. However, there can be no assurance that
relevant Mexican authorities will continue to find the Companys environmental procedures
adequate, or that more stringent environmental laws will not be enacted by Mexico in the future.
Were enforcements of existing laws to increase, or new environmental laws to be enacted, the
Company could incur material compliance costs. |
|
|
|
The Companys U.S. operations are subject to federal, state and local provisions regulating the
discharge of materials into the environment and otherwise related to the protection of the
environment. Compliance with these provisions, and primarily the Federal Clean Air Act, Clean
Water Act, Comprehensive Environment Response, Compensation and Liability Act of 1980, as amended
by the Superfund Amendments and Reauthorization Act of 1986, or CERCLA, and Resources
Conservation and Recovery Act, or RCRA, has required the Company to invest substantial funds to
modify facilities to assure compliance with applicable environmental regulations. |
|
|
|
The Company is committed to protecting the health and welfare of the Companys employees, the
public, and the environment and the Company strives to maintain compliance with all state and
federal environmental regulations in a manner that is also cost effective. In any construction
of new facilities and the modernization of existing facilities, the Company intends to use modern
technology for air and water emissions. These forward-looking |
F-48
|
|
programs will minimize the impact that changing regulations have on capital expenditures for
environmental compliance. |
|
g. |
|
Tax authority may have a different criteria from the
Companys as a result of tax
documentation review. |
|
h. |
|
On December 31, 2005 a facility from Empaques de Cartón Titán, S.A. de C.V., Silvamex, had
an accidental fire. Plant, equipment, finished product inventory and raw material inventory
were lost. During March of 2006 a pre-payment of $32,807 was recovered from the insurance
company. |
NOTE 20 SUBSEQUENT EVENTS:
a. |
|
CODUSA announced on February 27, 2006 a debt reduction program during the year. At April 24,
2006, the Company has pre-paid US$60 million. This program has been sourced by majority
stockholders capital contribution, proceeds from divestiture of some minor non-strategic
assets and operating cash flow. |
|
b. |
|
Corporación Durango, S.A. de C.V. and some subsidiaries, entered into an operating
lease agreement with GE Capital CEF México, S. de R.L. de C.V., effective as of April 1, 2006.
Under this lease agreement, the Companys newly formed subsidiary, Papel y Empaques de
Tizayuca, S.A. de C.V., leases machinery and equipment with installed
capacity of 200,000 short tons of linerboard and 100,000 short tons
of corrugated boxes located at an industrial facility purchased by
the Company. (See Note 14d.). |
NOTE 21 SEGMENT INFORMATION:
The Company has disclosed its operating segments based on its components about which separate
financial information is available and which is regularly reviewed by the chief operating decision
maker in deciding how to allocate resources and in assessing performance. Reportable segments
consist of one or more operating segments with similar economic characteristics, distribution
systems and regulatory environment. The information provided for segment reporting is based on
internal reports used by management.
The following summarizes the aggregation of the Companys operating segments into reportable
segments:
Paper This segment includes the production and sale of containerboard (linerboard and corrugating
medium), newsprint and uncoated free sheet. This segment includes the operating results of the
Grupo Durango division and the Grupo Pipsamex division in Mexico and Durango McKinley Paper
Companys paper operations in the United States.
Packaging This segment includes the production and sale of corrugated containers, multi-wall
sacks and paper tubes. This segment includes the operating results of the packaging division in
Mexico and the U.S. The company sold Durango Paper Company in October 2002, and no longer produces
brown or bleached.
F-49
Other This segment includes the production and sale of plywood.
a. Information by operating segments of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
Paper |
|
|
Packaging |
|
|
segments |
|
|
segments |
|
|
Eliminations |
|
|
consolidated |
|
Sales to external customers |
|
$ |
3,490,053 |
|
|
$ |
4,552,832 |
|
|
$ |
100,415 |
|
|
$ |
8,143,300 |
|
|
$ |
|
|
|
$ |
8,143,300 |
|
Intersegment sales |
|
|
4,199,757 |
|
|
|
413,345 |
|
|
|
90,379 |
|
|
|
4,703,481 |
|
|
|
(4,703,481 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
|
7,689,810 |
|
|
|
4,966,177 |
|
|
|
190,794 |
|
|
|
12,846,781 |
|
|
|
(4,703,481 |
) |
|
|
8,143,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
276,630 |
|
|
|
133,404 |
|
|
|
11,583 |
|
|
|
421,617 |
|
|
|
|
|
|
|
421,617 |
|
Income (loss) from operations |
|
|
122,481 |
|
|
|
236,691 |
|
|
|
10,085 |
|
|
|
369,257 |
|
|
|
|
|
|
|
369,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
18,950,232 |
|
|
|
27,704,559 |
|
|
|
1,247,590 |
|
|
|
47,902,381 |
|
|
|
(33,071,934 |
) |
|
|
14,830,447 |
|
Capital expenditures |
|
|
83,368 |
|
|
|
42,183 |
|
|
|
9,298 |
|
|
|
134,849 |
|
|
|
|
|
|
|
134,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment |
|
|
(113,803 |
) |
|
|
|
|
|
|
|
|
|
|
(113,803 |
) |
|
|
|
|
|
|
(113,803 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
663,036 |
|
|
|
3,063,836 |
|
|
|
10,630 |
|
|
|
3,737,502 |
|
|
|
(3,694,947 |
) |
|
|
42,555 |
|
Interest expense |
|
|
(1,109,666 |
) |
|
|
(2,873,822 |
) |
|
|
(39,061 |
) |
|
|
(4,022,549 |
) |
|
|
3,430,124 |
|
|
|
(592,425 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax |
|
$ |
437,451 |
|
|
($ |
631,932 |
) |
|
($ |
109,535 |
) |
|
($ |
304,016 |
) |
|
$ |
|
|
|
($ |
304,016 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
Paper |
|
|
Packaging |
|
|
segments |
|
|
segments |
|
|
Eliminations |
|
|
consolidated |
|
Sales to external customers |
|
$ |
3,554,513 |
|
|
$ |
4,374,244 |
|
|
$ |
110,537 |
|
|
$ |
8,039,294 |
|
|
$ |
|
|
|
$ |
8,039,294 |
|
Intersegment sales |
|
|
4,029,699 |
|
|
|
305,953 |
|
|
|
107 |
|
|
|
4,335,759 |
|
|
|
(4,335,759 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
|
7,584,212 |
|
|
|
4,680,197 |
|
|
|
110,644 |
|
|
|
12,375,053 |
|
|
|
(4,335,759 |
) |
|
|
8,039,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
293,051 |
|
|
|
137,441 |
|
|
|
7,744 |
|
|
|
438,236 |
|
|
|
|
|
|
|
438,236 |
|
Income (loss) from operations |
|
|
55,521 |
|
|
|
398,928 |
|
|
|
1,202 |
|
|
|
455,651 |
|
|
|
|
|
|
|
455,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
21,776,482 |
|
|
|
31,363,373 |
|
|
|
1,245,722 |
|
|
|
54,385,577 |
|
|
|
(38,762,902 |
) |
|
|
15,622,675 |
|
Capital expenditures |
|
|
121,203 |
|
|
|
66,835 |
|
|
|
26,143 |
|
|
|
214,181 |
|
|
|
|
|
|
|
214,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment |
|
|
479,130 |
|
|
|
|
|
|
|
|
|
|
|
479,130 |
|
|
|
|
|
|
|
479,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
640,604 |
|
|
|
1,931,947 |
|
|
|
1,240 |
|
|
|
2,573,791 |
|
|
|
(2,532,288 |
) |
|
|
41,503 |
|
Interest expense |
|
|
(923,258 |
) |
|
|
(2,695,201 |
) |
|
|
(4,316 |
) |
|
|
(3,652,775 |
) |
|
|
2,494,510 |
|
|
|
(1,158,265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax |
|
$ |
1,090,359 |
|
|
($ |
718,146 |
) |
|
$ |
130,527 |
|
|
$ |
502,740 |
|
|
|
|
|
|
$ |
502,740 |
|
F-50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
Paper |
|
|
Packaging |
|
|
segments |
|
|
segments |
|
|
Eliminations |
|
|
consolidated |
|
Sales to external customers |
|
$ |
2,987,613 |
|
|
$ |
4,250,984 |
|
|
$ |
88,656 |
|
|
$ |
7,327,253 |
|
|
$ |
|
|
|
$ |
7,327,253 |
|
Intersegment sales |
|
|
2,654,968 |
|
|
|
144,920 |
|
|
|
17,519 |
|
|
|
2,817,407 |
|
|
|
(2,817,407 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
|
5,642,581 |
|
|
|
4,395,904 |
|
|
|
106,175 |
|
|
|
10,144,660 |
|
|
|
(2,817,407 |
) |
|
|
7,327,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
285,676 |
|
|
|
128,751 |
|
|
|
11,980 |
|
|
|
426,407 |
|
|
|
|
|
|
|
426,407 |
|
Income (loss) from operations |
|
|
(122,562 |
) |
|
|
467,452 |
|
|
|
(15,767 |
) |
|
|
329,123 |
|
|
|
|
|
|
|
329,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
19,982,164 |
|
|
|
28,100,949 |
|
|
|
1,042,289 |
|
|
|
49,125,402 |
|
|
|
(32,247,600 |
) |
|
|
16,877,802 |
|
Capital expenditures |
|
|
80,548 |
|
|
|
33,604 |
|
|
|
581 |
|
|
|
114,733 |
|
|
|
|
|
|
|
114,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
440,946 |
|
|
|
1,501,096 |
|
|
|
8,773 |
|
|
|
1,950,815 |
|
|
|
(1,906,088 |
) |
|
|
44,727 |
|
Interest expense |
|
|
(724,671 |
) |
|
|
(2,434,418 |
) |
|
|
(580 |
) |
|
|
(3,159,669 |
) |
|
|
1,871,582 |
|
|
|
(1,288,087 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax |
|
$ |
(386,083 |
) |
|
$ |
334,735 |
|
|
$ |
53,645 |
|
|
|
2,297 |
|
|
|
|
|
|
$ |
2,297 |
|
b. General information of continuing operations by product:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Packaging |
|
|
|
|
|
|
|
|
|
|
|
|
- Corrugated container |
|
$ |
4,152,975 |
|
|
$ |
4,027,026 |
|
|
$ |
3,928,260 |
|
- Paper sacks |
|
|
388,909 |
|
|
|
347,218 |
|
|
|
319,574 |
|
- Tubes |
|
|
10,948 |
|
|
|
|
|
|
|
3,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper |
|
|
|
|
|
|
|
|
|
|
|
|
- Containerboard |
|
|
1,381,262 |
|
|
|
1,575,876 |
|
|
|
1,252,557 |
|
- Newsprint |
|
|
936,693 |
|
|
|
955,429 |
|
|
|
734,207 |
|
- Uncoated free sheet |
|
|
1,172,098 |
|
|
|
1,023,208 |
|
|
|
1,000,849 |
|
Other segments |
|
|
100,415 |
|
|
|
110,537 |
|
|
|
88,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
8,143,300 |
|
|
$ |
8,039,294 |
|
|
$ |
7,327,253 |
|
|
|
|
|
|
|
|
|
|
|
c. General segment information of continuing operations by geographical area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
Total |
|
|
Capital |
|
|
|
Net sales |
|
|
assets |
|
|
expenditures |
|
Mexico |
|
$ |
10,555,422 |
|
|
$ |
46,853,270 |
|
|
$ |
111,918 |
|
United States of America |
|
|
2,291,359 |
|
|
|
1,049,217 |
|
|
|
22,931 |
|
Intersegment eliminations |
|
|
(4,703,481 |
) |
|
|
(33,071,934 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
8,143,300 |
|
|
$ |
14,830,447 |
|
|
$ |
134,849 |
|
|
|
|
|
|
|
|
|
|
|
F-51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
Total |
|
|
Capital |
|
|
|
Net sales |
|
|
assets |
|
|
expenditures |
|
Mexico |
|
$ |
10,016,485 |
|
|
$ |
53,124,205 |
|
|
$ |
213,605 |
|
United States of America |
|
|
2,358,568 |
|
|
|
1,261,372 |
|
|
|
576 |
|
Intersegment eliminations |
|
|
(4,335,759 |
) |
|
|
(38,762,902 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
8,039,294 |
|
|
$ |
15,622,675 |
|
|
$ |
214,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
Total |
|
|
Capital |
|
|
|
Net sales |
|
|
assets |
|
|
expenditures |
|
Mexico |
|
$ |
8,071,959 |
|
|
$ |
45,978,850 |
|
|
$ |
98,076 |
|
United States of America |
|
|
2,072,701 |
|
|
|
3,146,552 |
|
|
|
16,657 |
|
Intersegment eliminations |
|
|
(2,817,407 |
) |
|
|
(32,247,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
7,327,253 |
|
|
$ |
16,877,802 |
|
|
$ |
114,733 |
|
|
|
|
|
|
|
|
|
|
|
d. Additional revenue analysis:
Annual revenues from the following client groups to which the Company sells are:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Packaging - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food and beverage |
|
$ |
3,180,846 |
|
|
$ |
3,080,003 |
|
|
$ |
2,937,822 |
|
Agribusiness |
|
|
440,215 |
|
|
|
474,053 |
|
|
|
538,913 |
|
Agriculture |
|
|
348,850 |
|
|
|
316,036 |
|
|
|
265,494 |
|
Maquila sector |
|
|
249,179 |
|
|
|
243,104 |
|
|
|
289,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper sacks - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cement |
|
|
234,901 |
|
|
|
215,622 |
|
|
|
164,929 |
|
Lime and plaster |
|
|
68,448 |
|
|
|
70,138 |
|
|
|
56,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Editorial |
|
|
1,886,063 |
|
|
|
1,649,225 |
|
|
|
1,663,000 |
|
Scholastic |
|
|
390,536 |
|
|
|
495,756 |
|
|
|
247,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forest - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture manufacturers |
|
|
100,415 |
|
|
|
110,537 |
|
|
|
88,656 |
|
Other |
|
|
1,243,847 |
|
|
|
1,384,820 |
|
|
|
1,074,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,143,300 |
|
|
$ |
8,039,294 |
|
|
$ |
7,327,253 |
|
|
|
|
|
|
|
|
|
|
|
F-52
NOTE 22 NEW ACCOUNTING PRINCIPLES:
As of June 1, 2004, the Mexican Board for Research and Development of Financial Reporting
Standards, or CINIF, assumed the responsibility of establishing Mexican accounting and reporting
standards. As part of its responsibility, and after due exposure in 2004 and 2005, the CINIF issued
several Financial Reporting Standards (Normas de Información Financiera, or NIFs) that became
effective on January 1, 2006.
The principal objective of the CINIF in issuing the NIFs is to achieve greater concurrence between
Mexican GAAP and International Financial Reporting Standards (IFRSs).
The structure of the NIFs is as follows:
|
|
|
New bulletins and interpretations to the bulletins issued by CINIF |
|
|
|
|
Existing bulletins issued by the Accounting Principles Board of the Mexican
Institute of Public Accountants that have not been amended, replaced or repealed by the
new NIFs |
|
|
|
|
IFRSs that are supplementary guidance to be used when Mexican GAAP does not provide
primary guidance |
The circulars issued by the Accounting Principles Board will continue to have the status of
recommendations and will be part of the NIFs until such time as they are replaced or repealed by
NIFs.
The NIFs issued to date are not expected to have a significant effect on financial reporting.
They are the following:
|
|
|
NIF A-1 Financial Information Standards Structure |
|
|
|
|
NIF A-2 Basic Principles |
|
|
|
|
NIF A-3 Users Requirements and Financial Statement Objectives |
|
|
|
|
NIF A-4 Financial Statements Qualitative Characteristics |
|
|
|
|
NIF A-5 Financial Statements Basic Elements |
|
|
|
|
NIF A-6 Recognition and Valuation |
|
|
|
|
NIF A-7 Presentation and Disclosure |
|
|
|
|
NIF A-8 Supplementary Standards to Mexican GAAP |
|
|
|
|
NIF B-1 Accounting Changes and Error Corrections |
In June 2004, the FASB issued Emerging Issues Task Force Issue No. 02-14, Whether an Investor
Should Apply the Equity Method of Accounting to Investments Other Than Common Stock (EITF 02-14).
EITF 02-14 addresses whether the equity method of accounting applies when an investor does not have
an investment in voting common stock of an investee but exercises significant influence through
other means. EITF 02-14 states that an investor should only apply the equity method of accounting
when it has investments in either common stock or in-substance common stock of a corporation,
provided that the investor has the ability to exercise significant influence over the operating and
financial policies of the investee. The accounting provisions of EITF 02-14 are effective for
reporting periods beginning after September 15, 2004. The adoption of EITF 02-14 is not expected to
have any impact on the Company s consolidated financial position, results of operations or cash
flows.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets An Amendment of APB
Opinion No. 29. APB Opinion No. 29, Accounting For Nonmonetary Transactions (SFAS 153). SFAS 153 is
based on the opinion that exchanges of nonmonetary assets should be measured based on the fair
value of the assets exchanged. SFAS 153 amends Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges
that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to change significantly as
a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after June 15,
2005. The adoption of SFAS No. 153 is not expected to have any impact on the Company s current
financial condition or results of operations.
F-53
NOTE 23 RECONCILIATION BETWEEN MEXICAN AND U.S. GAAP
The Companys consolidated financial statements are prepared in accordance with Mexican GAAP, which
differs in certain significant respects from U.S. GAAP. The Mexican GAAP consolidated financial
statements include the effects of inflation as provided for under Statement B-10. The application
of this Statement represents a comprehensive measure of the effects of price level changes in the
Mexican economy, and is considered to result in a more meaningful presentation than historical
cost-based financial reporting for both Mexican and U.S. accounting purposes. Therefore, the
following reconciliation to U.S. GAAP does not include the reversal of such inflationary effects.
Reconciliation of consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Majority interest net gain (loss) as reported under Mexican GAAP |
|
|
|
$ |
179,176 |
|
|
$ |
64,092 |
|
|
|
( $3,634,451 |
) |
Deferred income taxes |
|
i |
|
|
928,816 |
|
|
|
( 155,205 |
) |
|
|
( 278,818 |
) |
Deferred employee profit sharing |
|
i |
|
|
76,159 |
|
|
|
119,302 |
|
|
|
275,285 |
|
Purchase accounting adjustment depreciation |
|
ii |
|
|
132,660 |
|
|
|
111,571 |
|
|
|
170,567 |
|
Effect of fifth amendment to Statement B-10 |
|
iii |
|
|
(53,177 |
) |
|
|
( 56,554 |
) |
|
|
( 73,213 |
) |
Debt issuance costs and repurchase of bonds |
|
iv |
|
|
(247,117 |
) |
|
|
309,603 |
|
|
|
48,563 |
|
Capitalized financing costs |
|
v |
|
|
(29,610 |
) |
|
|
37,850 |
|
|
|
12,945 |
|
Effect of Statement B-15 on restatement to constant currency |
|
vi |
|
|
|
|
|
|
(1,278 |
) |
|
|
(2,795 |
) |
Adjustment to impairment of long-lived assets |
|
vii |
|
|
(150,948 |
) |
|
|
327,168 |
|
|
|
278,825 |
|
Adjustment to loss on sale of subsidiaries |
|
viii |
|
|
|
|
|
|
|
|
|
|
267,798 |
|
Deferred start-up, research and development costs |
|
ix |
|
|
4,261 |
|
|
|
3,824 |
|
|
|
101,148 |
|
Troubled debt restructuring effect, net of inflation and exchange
rate effects |
|
x |
|
|
524,465 |
|
|
|
|
|
|
|
|
|
Effect of U.S. GAAP adjustments on minority interest |
|
xi |
|
|
3,046 |
|
|
|
(3,491 |
) |
|
|
(3,514 |
) |
Reversal of (loss) income on sale of discontinued operations |
|
xii |
|
|
(11,195 |
) |
|
|
|
|
|
|
77,576 |
|
Severance payments |
|
xiii |
|
|
(11,592 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP net income (loss) |
|
|
|
$ |
1,344,944 |
|
|
$ |
756,882 |
|
|
|
( $2,760,084 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
F-54
Reconciliation of consolidated stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
|
|
2005 |
|
|
2004 |
|
Total stockholders equity corresponding to majority interest as
reported under Mexican GAAP |
|
|
|
$ |
4,654,625 |
|
|
$ |
1,583,884 |
|
Deferred income taxes |
|
i |
|
|
887,947 |
|
|
|
50,092 |
|
Deferred employee profit sharing |
|
i |
|
|
( 689,665 |
) |
|
|
( 765,824 |
) |
Purchase accounting adjustments: |
|
ii |
|
|
|
|
|
|
|
|
Accumulated negative goodwill |
|
|
|
|
( 4,083,970 |
) |
|
|
( 4,445,917 |
) |
Accumulated depreciation |
|
|
|
|
1,006,986 |
|
|
|
973,635 |
|
Effect of fifth amendment to Statement B-10: |
|
iii |
|
|
|
|
|
|
|
|
Fixed assets |
|
|
|
|
3,269,220 |
|
|
|
3,418,176 |
|
Accumulated depreciation |
|
|
|
|
( 1,859,098 |
) |
|
|
( 2,067,387 |
) |
Debt issuance costs and repurchase of bonds |
|
iv |
|
|
|
|
|
|
247,117 |
|
Capitalized financing costs |
|
v |
|
|
85,725 |
|
|
|
115,335 |
|
Effect of Statement B-15 on restatement to constant currency |
|
vi |
|
|
|
|
|
|
32,885 |
|
Adjustment to impairment on long-lived assets |
|
vii |
|
|
918,004 |
|
|
|
1,342,785 |
|
Deferred start-up, research and development costs: |
|
ix |
|
|
(4,514 |
) |
|
|
(8,775 |
) |
Reversal of premium on issuance of shares related to the troubled
debt restructuring effect |
|
x |
|
|
( 2,503,593 |
) |
|
|
|
|
Effect of U.S. GAAP adjustments on minority interest |
|
xi |
|
|
9,436 |
|
|
|
6,390 |
|
Severance payments |
|
xiii |
|
|
(9,300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S.
GAAP stockholders equity |
|
|
|
$ |
1,681,803 |
|
|
$ |
482,396 |
|
|
|
|
|
|
|
|
|
|
Provided below is an analysis of the changes in stockholders equity under U.S. GAAP:
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Balance at beginning of the year |
|
$ |
482,396 |
|
|
($ |
254,747 |
) |
Net income under U.S. GAAP |
|
|
1,344,944 |
|
|
|
756,882 |
|
Deficit from restatement |
|
|
( 693,021 |
) |
|
|
( 72,359 |
) |
Cumulative translation adjustment |
|
|
311,091 |
|
|
|
52,571 |
|
Increase in capital stock and additional paid in capital, net |
|
|
236,393 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the year |
|
$ |
1,681,803 |
|
|
$ |
482,396 |
|
|
|
|
|
|
|
|
F-55
Comprehensive loss
Comprehensive loss under Mexican GAAP is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Majority interest net income (loss) under Mexican GAAP |
|
$ |
179,176 |
|
|
$ |
64,092 |
|
|
|
($3,634,451 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income, net: |
|
|
(372,886 |
) |
|
|
(92,969 |
) |
|
|
680,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net majority comprehensive loss |
|
($ |
193,710 |
) |
|
($ |
28,877 |
) |
|
|
($2,954,168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative other comprehensive loss |
|
($ |
8,201,417 |
) |
|
($ |
7,828,531 |
) |
|
|
($7,735,562 |
) |
|
|
|
|
|
|
|
|
|
|
The components of other accumulated comprehensive loss as of December 31, 2005, 2004 and 2003
under Mexican GAAP, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
initial |
|
|
Additional |
|
|
Effects of |
|
|
(Loss) from |
|
|
Cumulative |
|
|
|
effect of |
|
|
liability |
|
|
translation |
|
|
holding |
|
|
other |
|
|
|
deferred |
|
|
for seniority |
|
|
of foreign |
|
|
non monetary |
|
|
comprehensive |
|
|
|
income tax |
|
|
premiums |
|
|
subsidiaries |
|
|
assets (1) |
|
|
loss |
|
Balances at January 1, 2003 |
|
($ |
3,348,713 |
) |
|
($ |
159,181 |
) |
|
$ |
94,870 |
|
|
($ |
5,002,821 |
) |
|
($ |
8,415,845 |
) |
Current period changes |
|
|
|
|
|
|
159,181 |
|
|
|
98,625 |
|
|
|
422,477 |
|
|
|
680,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2003 |
|
|
(3,348,713 |
) |
|
|
|
|
|
|
193,495 |
|
|
|
(4,580,344 |
) |
|
|
(7,735,562 |
) |
Current period changes |
|
|
|
|
|
|
|
|
|
|
71,954 |
|
|
|
(164,923 |
) |
|
|
(92,969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
(3,348,713 |
) |
|
|
|
|
|
|
265,449 |
|
|
|
(4,745,267 |
) |
|
|
(7,828,531 |
) |
Current period changes |
|
|
|
|
|
|
|
|
|
|
343,976 |
|
|
|
(716,862 |
) |
|
|
(372,886 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
($ |
3,348,713 |
) |
|
$ |
|
|
|
$ |
609,425 |
|
|
($ |
5,462,129 |
) |
|
($ |
8,201,417 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For 2005 and 2004, loss from holding non-monetary assets includes deferred tax effect of
($90,961) and ($82,064), respectively, as a result of the application of Statement D-4. |
F-56
Effects of the U.S. GAAP adjustments on discontinued operations
Reconciliation of consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Income (loss) as reported under Mexican GAAP |
|
|
|
$ |
108,802 |
|
|
$ |
105,536 |
|
|
($ |
596,964 |
) |
Deferred income taxes |
|
i |
|
|
(9,316 |
) |
|
|
206 |
|
|
|
158,048 |
|
Deferred employee profit sharing |
|
i |
|
|
21,380 |
|
|
|
13,811 |
|
|
|
|
|
Purchase accounting adjustments depreciation |
|
ii |
|
|
|
|
|
|
11,655 |
|
|
|
(14,494 |
) |
Effect of fifth amendment to Statement B-10 |
|
iii |
|
|
|
|
|
|
72 |
|
|
|
|
|
DPC liability |
|
|
|
|
|
|
|
|
|
|
|
|
274,291 |
|
Adjustment to impairment of long-lived assets |
|
vii |
|
|
|
|
|
|
(14,954 |
) |
|
|
|
|
Reversal of (loss) income on sale of discontinued operations
|
|
xii |
|
|
(11,195 |
) |
|
|
|
|
|
|
77,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP income (loss) |
|
|
|
$ |
109,671 |
|
|
$ |
116,326 |
|
|
($ |
101,543 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
i. Deferred income tax and employee profit sharing
Statement of Financial Accounting Standards No. 109, Accounting For Income Taxes (SFAS No.
109), requires an asset and liability approach for financial accounting and reporting for income
tax under the following basic principles: (a) a current tax liability or asset is recognized for
the estimated taxes payable or refundable on tax returns for the current year, (b) a deferred tax
liability or asset is recognized for the estimated future tax effects attributable to temporary
differences and tax loss and tax credit carryforwards, (c) the measurement of current and deferred
tax assets and liabilities is based on provisions of the enacted tax law; the effects of future
changes in tax laws or rates are not anticipated, and (d) the measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits for which available evidence indicates
that it is more likely than not that the tax benefit will not be realized. Under this method,
deferred tax and employee profit sharing are recognized with respect to all temporary differences,
and the benefit from utilizing tax loss carryforwards and asset tax credits is recognized in the
year in which the losses or credits arise (subject to a valuation allowance with respect to any tax
benefits which, in managements opinion, are more likely than not to be realized). The subsequent
realization of this benefit does not affect the income tax provision.
Temporary differences under SFAS No. 109 are determined based on the difference between the indexed
tax-basis amount of the asset or liability and the related restated amount reported in the
financial statements. The deferred income tax expense or benefit is calculated as the difference
between (a) the deferred tax assets and liabilities at the end of the current period, and (b) the
deferred tax assets and liabilities reported at the end of the prior period remeasured to units of
current general purchasing power at the end of the current period, whereas, under Mexican GAAP
Statement D-4, the change in the deferred tax asset or liability is first measured on a
F-57
historical cost basis and the components of the change including monetary gains or losses are allocated
between tax provision, deficit from restatement and monetary gain or loss.
The significant components of income and asset tax expense from continuing operations under U.S.
GAAP, by jurisdiction, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Income and asset tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
62,873 |
|
|
$ |
29,046 |
|
|
$ |
78,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
(706,361 |
) |
|
|
(283,104 |
) |
|
|
37,914 |
|
Foreign |
|
|
(4,636 |
) |
|
|
(72,792 |
) |
|
|
219,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(710,997 |
) |
|
|
(355,896 |
) |
|
|
257,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income and asset tax provision (benefit) continuing operations |
|
($ |
648,124 |
) |
|
($ |
326,850 |
) |
|
$ |
335,538 |
|
|
|
|
|
|
|
|
|
|
|
F-58
The income tax and profit sharing effects of significant items comprising the Companys net
deferred income tax and profit sharing assets and liabilities under U.S. GAAP are as follows:
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Deferred income tax liabilities (assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory |
|
$ |
81,759 |
|
|
$ |
265,158 |
|
Inventory Rule 106 |
|
|
(202,786 |
) |
|
|
(229,325 |
) |
Property, plant and equipment |
|
|
2,248,980 |
|
|
|
2,442,263 |
|
Other assets |
|
|
(29,114 |
) |
|
|
46,504 |
|
Allowance for doubtful accounts |
|
|
(49,767 |
) |
|
|
(65,599 |
) |
Accrued expenses |
|
|
(101,678 |
) |
|
|
(128,267 |
) |
Other reserves |
|
|
(3,573 |
) |
|
|
52,458 |
|
Troubled
debt restructuring |
|
|
(701,006 |
) |
|
|
|
|
Asset tax credits |
|
|
(329,849 |
) |
|
|
(340,627 |
) |
Tax loss carryforwards |
|
|
(1,005,278 |
) |
|
|
(1,300,652 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred income tax (asset) liability continuing
operations |
|
|
(92,312 |
) |
|
|
741,913 |
|
Valuation allowance |
|
|
806,189 |
|
|
|
691,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
713,877 |
|
|
|
1,433,866 |
|
Discontinued operations, net |
|
|
|
|
|
|
49,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred income tax liability |
|
$ |
713,877 |
|
|
$ |
1,483,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Deferred employee profit sharing liabilities (assets): |
|
|
|
|
|
|
|
|
Inventory |
|
$ |
29,200 |
|
|
$ |
87,957 |
|
Inventory Rule 106 |
|
|
(72,424 |
) |
|
|
(76,442 |
) |
Property, plant and equipment |
|
|
795,482 |
|
|
|
765,223 |
|
Other assets |
|
|
683 |
|
|
|
30,276 |
|
Allowance for doubtful accounts |
|
|
(15,471 |
) |
|
|
(17,235 |
) |
Other |
|
|
(47,805 |
) |
|
|
(43,969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred employee profit sharing liability from continuing
operations |
|
|
689,665 |
|
|
|
745,810 |
|
Discontinued operations, net |
|
|
|
|
|
|
20,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred employee profit sharing liability |
|
$ |
689,665 |
|
|
$ |
765,824 |
|
|
|
|
|
|
|
|
F-59
For the years ended December 31, 2005 and 2004, the difference in net deferred tax liabilities
between Mexican and U.S. GAAP (continuing and discontinued operations) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican |
|
|
U.S. |
|
|
|
|
|
|
GAAP |
|
|
GAAP |
|
|
Difference |
|
Deferred income tax liability: |
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2003 |
|
$ |
2,162,003 |
|
|
$ |
1,874,640 |
|
|
$ |
287,363 |
|
At December 31, 2004 |
|
|
1,533,813 |
|
|
|
1,483,721 |
|
|
|
50,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change |
|
($ |
628,190 |
) |
| ($ |
390,919 |
) |
| ($ |
237,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liability: |
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004 |
|
$ |
1,533,813 |
|
|
$ |
1,483,721 |
|
|
$ |
50,092 |
|
At December 31, 2005 |
|
|
1,601,824 |
|
|
|
713,877 |
|
|
|
887,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change |
|
$ |
68,011 |
|
| ($ |
769,844 |
) |
|
$ |
837,855 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability in 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican |
|
|
U.S. |
|
|
|
|
|
|
GAAP |
|
|
GAAP |
|
|
Difference |
|
Reflected in: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax expense line item |
|
$ |
175,278 |
|
| ($ |
769,844 |
) |
|
$ |
945,122 |
|
Gain on monetary position |
|
|
( 16,306 |
) |
|
|
|
|
|
|
( 16,306 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income statement effect |
|
|
158,972 |
|
|
|
(769,844 |
) |
|
|
928,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from holding non-monetary
assets(1) |
|
|
(90,961 |
) |
|
|
|
|
|
|
( 90,961 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in deferred tax liability |
|
$ |
68,011 |
|
| ($ |
769,844 |
) |
|
$ |
837,855 |
|
|
|
|
|
|
|
|
|
|
|
F-60
Deferred tax liability in 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican |
|
|
U.S. |
|
|
|
|
|
|
GAAP |
|
|
GAAP |
|
|
Difference |
|
Reflected in: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax gain line item |
| ($ |
566,432 |
) |
|
($ |
390,919 |
) |
| ($ |
175,513 |
) |
Loss on monetary position |
|
|
20,308 |
|
|
|
|
|
|
|
20,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income statement effect |
|
|
( 546,124 |
) |
|
|
(390,919 |
) |
|
|
( 155,205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from holding non-monetary
assets(1) |
|
|
( 82,066 |
) |
|
|
|
|
|
|
(82,066 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in deferred tax
liability |
| ($ |
628,190 |
) |
| ($ |
390,919 |
) |
| ($ |
237,271 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred tax liability in 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican |
|
|
U.S. |
|
|
|
|
|
|
GAAP |
|
|
GAAP |
|
|
Difference |
|
Reflected in: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax gain line item |
| ($ |
221,817 |
) |
| ($ |
44,562 |
) |
| ($ |
177,255 |
) |
Gain on monetary position |
|
|
( 101,563 |
) |
|
|
|
|
|
|
( 101,563 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income statement effect |
|
|
( 323,380 |
) |
|
|
( 44,562 |
) |
|
|
( 278,818 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from holding non-monetary
assets(1) |
|
|
216,639 |
|
|
|
|
|
|
|
216,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in deferred tax
liability |
| ($ |
106,741 |
) |
| ($ |
44,562 |
) |
| ($ |
62,179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the deferred income tax effect resulting from the differences in
restating the Companys non-monetary assets of foreign origin using the
Mexican peso against foreign currencies and by applying inflation rates of the countries
from which the non-monetary assets originate versus applying the Mexican NCPI. |
F-61
ii. Purchase accounting adjustments
For various acquisitions that took place in 1998 and 1999, under Mexican GAAP, the Company has
recorded negative goodwill, representing the excess of the book value of the net assets acquired
over the purchase price. Such negative goodwill was being amortized into income over the period in
which the Company expects to integrate these operations into the Company. Under Mexican GAAP,
negative goodwill was fully amortized into earnings by 2001.
Under U.S. GAAP, these acquisitions have been accounted for under the purchase method and,
consequently, the purchase price has been allocated to assets acquired and liabilities assumed
based on the relative fair values. As a result under U.S. GAAP, negative goodwill was recorded as
a reduction in the carrying value of the long-term assets (primarily fixed assets). As such, the
U.S. GAAP net income adjustment reflects the difference in depreciation of long-lived assets that
results from differences in the carrying value between U.S. GAAP and Mexican GAAP of these assets.
iii. Effect of fifth amendment to Statement B-10
As mentioned in Note 3f., the Company restates its non-monetary assets of foreign origin based on
the change of the Mexican Peso against foreign currencies and by applying inflation rates of the
countries from which the non-monetary assets originate. This methodology is not consistent with
Rule 3-20 of Regulation S-X regarding the use of the same reporting currency for all periods.
Under U.S. GAAP, these assets, which are used in Mexico, would be adjusted by the Mexican NCPI and
depreciation would be calculated on this basis.
iv. Debt issuance costs and repurchase of bonds
Under Mexican GAAP, consent fees, other fees and expenses incurred in connection with the issuance
of debt may be capitalized and amortized over the term of the debt using a straight-line method.
However, for U.S. GAAP purposes some of these costs should be expensed as incurred.
In addition, during 2004, for Mexican GAAP purposes, the Company wrote-off $333,510 representing
the unamortized debt issuance cost, as part of the restructuring process of its debt. For U.S.
GAAP, this was a 2005 transaction.
F-62
v. Capitalized financing costs
Under Mexican GAAP the capitalization of financing costs as part of the cost of assets under
construction include interest costs, gains or losses from monetary position and foreign exchange
losses.
U.S. GAAP requires the capitalization of interest during construction on qualifying assets. In an
inflationary economy, such as Mexico, it is acceptable practice to capitalize interest net of the
monetary gain on the related Mexican Peso debt, but not to capitalize the monetary gain on U.S.
Dollar or other stable currency debt. In addition, U.S. GAAP does not allow the capitalization of
foreign exchange losses.
vi. Effect of Statement B-15 on restatement to constant currency
Statement B-15 requires that the restatement of prior year amounts of foreign subsidiaries be
determined by first restating prior year foreign currency amounts by the inflation of the foreign
country and then retranslating such amounts at the exchange rate as of the date of the latest
balance sheet presented (December 31, 2005).
Under U.S. GAAP, the primary financial statements should be presented in the same constant
reporting currency for all periods. Prior to the adoption of Statement B-15, prior year
consolidated amounts were adjusted for the effects of inflation in Mexico and such adjustments were
considered to be an integral part of preparing price level adjusted financial statements. The
methodology established by Statement B-15 separates the adjustment process for the effects of
inflation on prior year amounts for foreign and domestic subsidiaries, which results in the
presentation of amounts, which are not in a constant unit of measure. The difference in the
methodologies used to restate a balance to December 31, 2005 purchasing power is included as a
one-line adjustment in the reconciliation to U.S. GAAP of net income (loss) and stockholders
equity.
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2004 |
|
|
2003 |
|
Consolidated statements of operations: |
|
|
|
|
|
|
|
|
As previously reported, indexed for effects of inflation in Mexico |
|
$ |
62,814 |
|
|
($ |
3,637,246 |
) |
As reported under Statement B-15 |
|
|
64,092 |
|
|
|
(3,634,451 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ |
1,278 |
) |
|
($ |
2,795 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated stockholders equity: |
|
|
|
|
|
|
|
|
As previously reported, indexed for effects of inflation in Mexico |
|
$ |
1,616,769 |
|
|
$ |
1,666,258 |
|
As reported under Statement B-15 |
|
|
1,583,884 |
|
|
|
1,612,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
32,885 |
|
|
$ |
53,546 |
|
|
|
|
|
|
|
|
F-63
vii. Adjustment to impairment on long-lived assets
The Company follows SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived
Assets. An evaluation of impairment is undertaken whenever events or circumstances indicate that
the carrying amount of an asset may not be recoverable. Under SFAS No. 144, the impairment criteria
is met when the carrying value of assets exceeds the sum of expected future cash flows
(undiscounted and without interest charges) of the related assets. If it is determined that an
asset is impaired, it is written down to its fair value, if available or the present value of
expected future cash flows.
Under both Mexican GAAP and U.S. GAAP, the Company tested certain longlived assets for
recoverability in response to significant adverse changes in business climate occurring during each
of the years presented. Under U.S. GAAP, certain assets being evaluated for recoverability had
lower book values than under Mexican GAAP due to other U.S. GAAP adjustments such as the allocation
of negative goodwill from acquisitions and the specific index inflation restatement. As such, the
impairment charges recorded under Mexican GAAP during 2005, 2004 and 2003 were greater than the
impairment charges calculated under U.S. GAAP. As a result, the Company recognized an adjustment to
U.S. GAAP net (loss) income of $150,948, $327,168, and $278,825 in 2005, 2004, and 2003,
respectively. These impairments relate primarily to machinery and equipment.
viii. Adjustment to loss on sale of subsidiaries
In October 2002, the Company sold the shares of Durango Paper Co. (DPC) to Operadora Omega, S.A. de
C.V. Additionally, during 2003 the Company sold its investments in Pronal and the assets of its
molded pulp division, and approved a plan to sell a particleboard plant located in Chihuahua.
Historically, under US GAAP the carrying value of such subsidiaries was different to the carrying
value recorded under Mexican GAAP due to deferred income taxes, negative goodwill and the reversal
of loss on sale of fixed assets. As such, the Company reversed the amount of the U.S. GAAP
cumulative adjustments relating to these businesses. In accordance with SFAS No. 144, Accounting
for the Impairment or disposal of Long Lived Assets, the sale of these components of the Company
have been presented as discontinued operations in the consolidated statement of operations as of
December 31, 2005, 2004 and 2003.
F-64
ix. Deferred start-up research and development costs
In 2002, under Mexican GAAP the Company deferred certain costs in relation to the reconstruction of
a manufacturing plant (Ponderosa Industrial de México, S.A. de C.V.) and the development of a new
paper manufacturing process. Under U.S. GAAP, SFAS No. 2 Accoun-ting for Research and Development
Costs and SOP 98 5, Reporting on the Costs of
Start Up Activities require that the Company expense the start up and research and develop-ment
costs as incurred. As such, the adjustment in 2002 for the start up and research and development
costs represents the reversal of the amounts capitalized under Mexican GAAP in such year.
The adjustment to U.S. GAAP in net income for 2005, 2004 and 2003 represents the reversal of the
amortization recorded under Mexican GAAP for those start up, research and development costs that
should not be capitalized for U.S. GAAP purposes.
x. Troubled Debt Restructuring
As described in Note 9, the Company restructured its financial debt with credit institutions and
bondholders. As of the date of the restructuring the carrying value of the old debt amounted to
Ps.9,599.6 million, and the face value of the new debt issued amounted to Ps.6,131.1 million. Such
difference was settled with shares issued by the Company.
Under Mexican GAAP, the Company recorded the new debt at face value plus accrued interest at year
end, based on the contractual interest rate specified in the new terms. The unsettled amount of
debt of Ps.3,468.5 million, was attributed to 17% of the Companys equity. The shares issued were
recorded at its par value, and the difference between the par value and the 17% of the equity was
recorded under Additional-paid-in capital in the statements of changes in shareholders equity.
No gain or loss was recorded on the restructured debt.
For U.S. GAAP purposes, under SFAS No. 15 Accounting by Debtors and Creditors for Trouble Debt
Restructurings, the restructuring was deemed to be a trouble debt restructuring. Therefore, the
carrying value of the old debt was reduced by the fair value of the shares granted. No gain was
recorded on the restructured debt as the remaining unsettled amount of the debt was less than the
total future cash payments specified by the new terms of the debt. Interest expense was computed
using an effective interest rate that equals the future cash payments specified by the new terms
with the carrying amount of the debt.
F-65
xi. Minority interest
This adjustment represents the minority interest in part of the U.S. GAAP adjustments described
above for non-wholly owned subsidiaries.
In addition, under Mexican GAAP, the minority interest in consolidated subsidiaries is presented as
a separate component with stockholders equity in the consolidated balance sheet. For U.S. GAAP
purposes, the minority interest is not included in stockholders equity.
xii. Reversal of loss on sale of discontinued operations
As described in Note 1 in October 2002, the Company sold its shares of DPC. Additionally, as
disclosed in Note 17, during 2003 the Company sold its investment in Pronal and the assets of its
molded pulp division, and approved a plan to sell a particleboard plant located in Chihuahua.
Historically, under U.S. GAAP the carrying value of such subsidiaries and discontinued operations
differed from the carrying value recorded under Mexican GAAP due to deferred income taxes, negative
goodwill, fixed asset impairment, and the reversal of loss on sale of fixed assets. As such, the
Company reversed the amount of the U.S. GAAP cumulative prior period adjustments relating to DPC,
Pronal, the molded pulp division and the particleboard plant. In accordance with SFAS No. 144, the
sale of theses components of the Company have been presented as discontinued operations in the
condensed statement of operations for all periods presented.
xiii. Severance payments
As more fully disclosed in Note 11 to these consolidated financial statements, effective Janurary
1, 2005, Durango adopted the provisions related to severance indemnity liabilities as established
by revised Bulletin D-3. Under Mexican GAAP, severance payments should be accounted in a manner
similar to other post-retirement benefits. Durango opted for the transitional method of
recognizing the actuarially determined severance liability of Ps.7,430 over the remaining expected
employee service period and consequently, as of December 31, 2005 has recognized a total liability
and charge to earnings of Ps.5,139. Prior to the adoption of revised Bulletin D-3, such severance
costs were recognized as incurred.
In November 2005, the AICPA International Practices Task Force concluded that conceptually, the
accounting for severance liabilities under revised Bulletin D-3 did not differ from that which is
required pursuant to U.S. GAAP under SFAS N° 112 Employers Accounting for Post-employment
Benefits. For the purposes of the December 31, 2005 reconciliation of earnings and equity,
Durango has recorded for U.S. GAAP purposes the remaining amount of the liability not yet
recognized under Mexican GAAP which totals Ps.16,731. Durango has determined that not recognizing
this liability for U.S. GAAP purposes in prior years was not significant.
F-66
SUPPLEMENTAL U.S. GAAP DISCLOSURES
a. Condensed information
The following tables present the Companys condensed balance sheets as of December 31, 2005 and
2004 and statements of operations for the three years ended December 31, reflecting U.S. GAAP
adjustments. All amounts have been indexed to December 31, 2005 constant Mexican Pesos, using the
Mexican NCPI factor:
F-67
CONDENSED CONSOLIDATED BALANCE SHEETS:
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
700,408 |
|
|
$ |
862,735 |
|
Accounts receivable, net |
|
|
1,733,285 |
|
|
|
1,863,799 |
|
Inventories, net |
|
|
1,195,809 |
|
|
|
1,114,160 |
|
Deferred income tax and employee profit sharing |
|
|
816,774 |
|
|
|
67,660 |
|
Short-term assets of discontinued operations |
|
|
|
|
|
|
107,973 |
|
Other |
|
|
27,458 |
|
|
|
20,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
4,473,734 |
|
|
|
4,036,543 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
10,249,968 |
|
|
|
10,807,220 |
|
Long-term assets of discontinued operations |
|
|
|
|
|
|
257,598 |
|
Other assets |
|
|
255,871 |
|
|
|
589,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
14,979,573 |
|
|
$ |
15,690,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity (deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Short-term debt, notes payable and current portion of long-term
debt |
|
$ |
257,572 |
|
|
$ |
234,522 |
|
Accrued liabilities and other payables |
|
|
1,380,328 |
|
|
|
1,490,611 |
|
Current liabilities of discontinued operations |
|
|
|
|
|
|
131,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,637,900 |
|
|
|
1,856,271 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
9,008,732 |
|
|
|
7,183,469 |
|
Seniority premiums |
|
|
317,199 |
|
|
|
315,706 |
|
Deferred income tax and employee profit sharing |
|
|
2,221,314 |
|
|
|
2,247,336 |
|
Other long-term debt |
|
|
63,774 |
|
|
|
3,361,914 |
|
Long-term liabilities of discontinued operations |
|
|
|
|
|
|
170,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
11,611,019 |
|
|
|
13,278,620 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
13,248,919 |
|
|
|
15,134,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
48,851 |
|
|
|
73,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity (deficit) |
|
|
1,681,803 |
|
|
|
482,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity (deficit) |
|
$ |
14,979,573 |
|
|
$ |
15,690,950 |
|
|
|
|
|
|
|
|
F-68
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net sales |
|
$ |
8,143,300 |
|
|
$ |
8,113,900 |
|
|
$ |
7,424,644 |
|
Cost of sales |
|
|
7,092,047 |
|
|
|
6,953,985 |
|
|
|
6,373,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,051,253 |
|
|
|
1,159,915 |
|
|
|
1,050,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
592,929 |
|
|
|
686,898 |
|
|
|
1,165,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
458,324 |
|
|
|
473,017 |
|
|
|
(114,823 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing cost: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
283,984 |
|
|
|
1,121,109 |
|
|
|
1,227,808 |
|
Interest income |
|
|
(42,555 |
) |
|
|
(41,540 |
) |
|
|
(46,115 |
) |
Foreign exchange (gain) loss, net |
|
|
(437,656 |
) |
|
|
(62,561 |
) |
|
|
892,766 |
|
Gain from monetary position, net |
|
|
(268,070 |
) |
|
|
(487,176 |
) |
|
|
(297,345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(464,297 |
) |
|
|
529,832 |
|
|
|
1,777,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expenses) income, net |
|
|
(355,685 |
) |
|
|
371,102 |
|
|
|
(435,957 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provisions, equity in income of
associated companies , minority interest and discontinued
operations |
|
|
566,936 |
|
|
|
314,287 |
|
|
|
(2,327,894 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for: |
|
|
|
|
|
|
|
|
|
|
|
|
Income and asset tax (benefit) expense |
|
|
(648,124 |
) |
|
|
(326,850 |
) |
|
|
335,538 |
|
Minority interest |
|
|
(18,311 |
) |
|
|
3,316 |
|
|
|
(2,829 |
) |
Equity in income of associated companies |
|
|
(1,902 |
) |
|
|
(2,735 |
) |
|
|
(2,062 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
|
1,235,273 |
|
|
|
640,556 |
|
|
|
(2,658,541 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net |
|
|
109,671 |
|
|
|
116,326 |
|
|
|
(101,543 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,344,944 |
|
|
$ |
756,882 |
|
|
($ |
2,760,084 |
) |
|
|
|
|
|
|
|
|
|
|
F-69
b. Cash flow information
Under U.S. GAAP, pursuant to SFAS 95, Statement of Cash Flows, a statement of cash flow is a
required component of a complete set of financial statements in lieu of a statement of changes in
financial position. SFAS 95 establishes specific presentation requirements and additional
disclosures, but does not provide guidance with respect to inflation adjusted financial statements.
Based on requirements of the Securities and Exchange Commission (the SEC), the effect of
inflation restatements and foreign exchange gains and losses on cash flow has been included in a
separate line after cash flows from financing activities.
The U.S. GAAP statements of cash flows for the years ended December 31, 2005, 2004 and 2003 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP net income (loss) from
continuing operations |
|
$ |
1,235,273 |
|
|
$ |
640,556 |
|
|
|
($2,658,541 |
) |
Adjustment to reconcile net income to net
cash flows provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
288,957 |
|
|
|
341,327 |
|
|
|
386,314 |
|
Minority interest |
|
|
(18,311 |
) |
|
|
3,316 |
|
|
|
|
|
Deferred income taxes |
|
|
(710,997 |
) |
|
|
(355,896 |
) |
|
|
251,573 |
|
Deferred employee profit sharing |
|
|
(56,145 |
) |
|
|
(105,491 |
) |
|
|
(275,285 |
) |
Allowance for doubtful accounts |
|
|
32,493 |
|
|
|
48,800 |
|
|
|
72,278 |
|
Inventory obsolescence allowance |
|
|
4,823 |
|
|
|
1,963 |
|
|
|
2,223 |
|
Gain from monetary position |
|
|
(268,070 |
) |
|
|
(487,176 |
) |
|
|
(384,230 |
) |
Loss (gain) on sale of non-strategic assets |
|
|
(10,662 |
) |
|
|
37,745 |
|
|
|
217,020 |
|
Impairment on long-lived assets |
|
|
37,145 |
|
|
|
137,008 |
|
|
|
638,294 |
|
Debt assumption |
|
|
|
|
|
|
|
|
|
|
74,684 |
|
Unrealized foreign exchange loss, net |
|
|
(160,752 |
) |
|
|
21,701 |
|
|
|
847,883 |
|
Amortization of debt issuance costs and
other financing costs |
|
|
|
|
|
|
24,941 |
|
|
|
|
|
Other |
|
|
(14,518 |
) |
|
|
17,021 |
|
|
|
24,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
359,236 |
|
|
|
325,815 |
|
|
|
(802,974 |
) |
F-70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
($ |
95,307 |
) |
|
($ |
93,669 |
) |
|
($ |
1,093,503 |
) |
Inventories, net |
|
|
(94,817 |
) |
|
|
71,226 |
|
|
|
84,665 |
|
Prepaid expenses |
|
|
(3,212 |
) |
|
|
(5,059 |
) |
|
|
|
|
Other liabilities |
|
|
88,167 |
|
|
|
380,705 |
|
|
|
1,698,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow (used in) provided by operating activities before
discontinued operations |
|
|
254,067 |
|
|
|
679,018 |
|
|
|
(113,314 |
) |
Discontinued operations |
|
|
(307,795 |
) |
|
|
117,384 |
|
|
|
(230,174 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by operating activities: |
|
|
(53,728 |
) |
|
|
796,402 |
|
|
|
(343,488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Bank loans |
|
|
132,558 |
|
|
|
517 |
|
|
|
|
|
Payments of long-term debt |
|
|
(170,546 |
) |
|
|
(482,721 |
) |
|
|
(441,269 |
) |
Increase in capital stock |
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by financing activities |
|
|
(37,988 |
) |
|
|
(482,155 |
) |
|
|
(441,269 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of fixed assets |
|
|
(105,238 |
) |
|
|
(208,753 |
) |
|
|
(115,996 |
) |
Proceeds from sale of non-strategic assets |
|
|
346,204 |
|
|
|
16,066 |
|
|
|
251,157 |
|
Investments in subsidiaries |
|
|
(54,002 |
) |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
|
|
|
|
171,195 |
|
|
|
(171,196 |
) |
Other assets |
|
|
271,061 |
|
|
|
(34,856 |
) |
|
|
20,222 |
|
Proceeds from sale of discontinued operations |
|
|
97,585 |
|
|
|
|
|
|
|
1,004,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities |
|
|
555,610 |
|
|
|
(56,348 |
) |
|
|
989,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of inflation and exchange rate changes on cash and cash
equivalents |
|
|
(626,221 |
) |
|
|
(93,087 |
) |
|
|
204,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(162,327 |
) |
|
|
164,812 |
|
|
|
408,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
862,735 |
|
|
|
697,923 |
|
|
|
288,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
700,408 |
|
|
$ |
862,735 |
|
|
$ |
697,923 |
|
|
|
|
|
|
|
|
|
|
|
F-71
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of capitalized interest |
|
$ |
579,102 |
|
|
$ |
36,466 |
|
|
$ |
156,268 |
|
Income and asset tax |
|
|
25,876 |
|
|
|
109,975 |
|
|
|
178,011 |
|
|
|
|
|
|
|
|
|
|
|
Non
cash transactions:
|
|
|
|
|
|
|
2005 |
|
Exchange debt |
|
($ |
3,542,539 |
) |
Exchange gain |
|
|
278,088 |
|
Common stock |
|
|
290,727 |
|
Premium in issuance of shares |
|
$ |
2,973,724 |
|
|
|
|
|
Supplemental balance sheet information
Liabilities and costs related to pension plans and seniority premiums are recorded under Mexican
GAAP according to Statement D-3, Labor Liabilities, as described in Note 3 n. Under U.S. GAAP,
the requirements of SFAS No. 87, Employers Accounting for Pensions, as amended by SFAS No.
132(R), Employers Disclosures about Pensions and Other Postretirement Benefits, for recording
liabilities and costs relating to pension plans and seniority premiums using actuarial computations
are similar to those of Statement D-3.
The following sets forth the changes in benefit obligations, and the funded status of such plans
for 2005 and 2004, reconciled with the amounts reported in the consolidated balance sheets under
U.S. GAAP.
F-72
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
Actual benefit obligation: |
|
$ |
202,581 |
|
|
$ |
211,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Projected benefit obligation, beginning of year |
|
$ |
239,223 |
|
|
$ |
241,296 |
|
Service cost |
|
|
10,380 |
|
|
|
7,381 |
|
Interest cost |
|
|
14,548 |
|
|
|
14,725 |
|
Actuarial loss |
|
|
16,731 |
|
|
|
17,064 |
|
Benefits paid and variations in assumptions |
|
|
( 56,080 |
) |
|
|
( 41,243 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations, end of year |
|
$ |
224,802 |
|
|
$ |
239,223 |
|
|
|
|
|
|
|
|
|
|
Post retirement benefits |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
Actual benefit obligation: |
|
$ |
97,887 |
|
|
$ |
104,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Projected benefit obligation, beginning of year |
|
$ |
104,024 |
|
|
$ |
114,141 |
|
Service cost |
|
|
400 |
|
|
|
436 |
|
Interest cost |
|
|
4,942 |
|
|
|
5,310 |
|
Benefits paid |
|
|
( 8,106 |
) |
|
|
( 15,863 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation, end of year |
|
$ |
101,260 |
|
|
$ |
104,024 |
|
|
|
|
|
|
|
|
There were no plan assets during 2005 or 2004.
F-73
|
|
Postretirement obligations |
Since 2004, the Company started granting postretirement benefits to its employees. Therefore, the
Company recognizes since 2004, labor liabilities for postretirement obligations.
The present value of these obligations at December 31, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
Actual benefit obligation: |
|
$ |
7,431 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Projected benefit obligation, beginning of year |
|
$ |
14,565 |
|
|
$ |
|
|
Service cost |
|
|
3,115 |
|
|
|
|
|
Interest cost |
|
|
1,206 |
|
|
|
|
|
Benefits paid |
|
|
(2,155 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation, end of year |
|
$ |
16,731 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Total labor obligations showed in Balance Sheet are as follows:
|
|
|
|
|
|
|
|
|
Seniority premiums and pensions |
|
$ |
202,581 |
|
|
$ |
211,266 |
|
Postretirement obligations |
|
|
97,887 |
|
|
|
104,440 |
|
Severance payments |
|
|
16,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
317,199 |
|
|
$ |
315,706 |
|
|
|
|
|
|
|
|
F-74
|
|
Valuation and qualifying accounts: |
The following table presents the roll forward of the allowance for doubtful accounts for the years
ended December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Balance at the beginning of the period |
|
|
($175,698 |
) |
|
|
($156,470 |
) |
|
|
($148,234 |
) |
Effects of inflation |
|
|
4,691 |
|
|
|
7,377 |
|
|
|
11,468 |
|
Increase in the allowance |
|
|
(32,493 |
) |
|
|
(48,800 |
) |
|
|
(72,278 |
) |
Write-offs |
|
|
48,795 |
|
|
|
22,195 |
|
|
|
52,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period |
|
|
($154,705 |
) |
|
|
($175,698 |
) |
|
|
($156,470 |
) |
|
|
|
|
|
|
|
|
|
|
The following table presents the roll forward of the inventory obsolescence allowance for the
years ended December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Balance at the beginning of the period |
|
|
($30,842 |
) |
|
|
($30,808 |
) |
|
|
($46,213 |
) |
Effects of inflation |
|
|
994 |
|
|
|
1,520 |
|
|
|
1,796 |
|
Increase in the allowance |
|
|
(4,823 |
) |
|
|
(1,963 |
) |
|
|
(2,310 |
) |
Write-offs |
|
|
1,893 |
|
|
|
409 |
|
|
|
15,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period |
|
|
($32,778 |
) |
|
|
($30,842 |
) |
|
|
($30,808 |
) |
|
|
|
|
|
|
|
|
|
|
U.S.
GAAP New Accounting pronouncements
In June 2004, the FASB issued Emerging Issues Task Force Issue No. 02-14, Whether an Investor
Should Apply the Equity Method of Accounting to Investments Other Than Common Stock (EITF 02-14).
EITF 02-14 addresses whether the equity method of accounting applies when an investor does not have
an investment in voting common stock of an investee but exercises significant influence through
other means. EITF 02-14 states that an investor should only apply the equity method of accounting
when it has investments in either common stock or in-substance common stock of a corporation,
provided that the investor has the ability to exercise significant influence over the operating and
financial policies of the investee. The accounting provisions of EITF 02-14 are effective for
reporting periods beginning after September 15, 2004. The adoption of EITF 02-14 is not expected to
have any impact on the Company s consolidated financial position, results of operations or cash
flows.
F-75
In June 2005, the FASB published SFAS No. 154, Accounting changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS No. 154), which changes the
requirements for the accounting for and reporting of a change in accounting principle and redefines
restatement as the revising of previously issued financial statements to reflect the correction of
an error. SFAS No. 154 requires retrospective application to prior periods financial statements of
changes in accounting principle, unless it is impracticable to determine the period-specific
effects of the cumulative effect of the change. This Statement also carries forward without change
the guidance contained in Opinion 20 for reporting the correction of an error in previously issued
financial statements and a change in accounting estimate. This Statement does not change the
transition provisions of any existing accounting pronouncement. SFAS No. 154 will be effective for
accounting changes and corrections of errors made in fiscal years beginning after December 15,
2005. The Company is currently considering the impact that adoption will have on its consolidated
results and financial position.
SFAS No.155 Accounting for certain hybrid financial instruments-and amendment of FASB Statements
No. 133 and 140 issued on February 2006. This Statement amends FASB Statements No. 133,
Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement
resolves issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement
133 to Beneficial Interests in Securitized Financial Assets. This Statement permits fair value
remeasurement for any hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips
are not subject to the requirements of Statement 133, establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are freestanding derivatives
or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation,
clarifies that concentrations of credit risk in the form of subordination are not embedded
derivatives and amends Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a beneficial interest other
than another derivative financial instrument. This Statement is effective for all financial
instruments acquired or issued after the beginning of an entitys first fiscal year that begins
after September 15, 2006. The Companys management is in the process of determining the potential
impact of adopting this Standard on its consolidated financial position and results of operations.
SFAS No. 156 Accounting for servicing of financial assets-an amendment of FASB Statement No.140
issued on March 2006. This Statement amends FASB Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting
for separately recognized servicing assets and servicing liabilities. This Statement requires that
all separately recognized servicing assets and servicing liabilities be initially measured at fair
value, if practicable. This Statement permits, but does not require, the subsequent measurement of
servicing assets and servicing liabilities at fair value. This Statement permits an entity to
reclassify certain available-for-sale securities to trading securities, regardless of the
restriction in paragraph 15 of Statement 115, provided that those available-for-sale securities are identified in some
manner as offsetting the entitys exposure to changes in fair value of
F-76
servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair
value. This option is available only once, as of the beginning of the fiscal year in which the
entity adopts this Statement. An entity should adopt this Statement as of the beginning of its
first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the
beginning of an entitys fiscal year, provided the entity has not yet issued financial statements,
including interim financial statements, for any period of that fiscal year. The effective date of
this Statement is the date an entity adopts the requirements of this Statement. An entity should
apply the requirements for recognition and initial measurement of servicing assets and servicing
liabilities prospectively to all transactions after the effective date of this Statement. The
Companys management is in the process of determining the potential impact of adopting this
Standard on its consolidated financial position and results of operations.
- - - - - - - - - - - - - - - -
F-77
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
Ex-1.1 Bylaws |
Ex-8 List of Subsidiaries |
Ex-12.1 Section 302 Certification of the CEO |
Ex-12.2 Section 302 Certification of the CFO |
Ex-13.1 Section 906 Certification of the CEO |
Ex-13.2 Section 906 Certification of the CFO |