Corporacion Durango, S.A.B. de C.V.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
|
|
|
o |
|
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
|
|
|
þ |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
OR
|
|
|
o |
|
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.B. de C.V.
(formerly known as 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:
110,641,111 Common 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 þ No o
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.B. 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 legal currency of
Mexico. All references to dollars, and US$ are to United States dollars, the legal currency of
the United States.
On
June 29, 2007, the exchange rate for pesos into dollars was Ps
10.7946 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 10.8116 to US$1.00 as of December 31, 2006, Ps 10.6344 to US$1.00 as of
December 31, 2005 and Ps 11.1495 to US$1.00 as of December 31, 2004. The peso/dollar exchange rate
fluctuates widely, and the peso/dollar exchange rate at June 29, 2007 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, 2002, 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 constant
pesos in accordance with Mexican Financial Reporting Standards (Normas de Información Financiera
aplicables en México, or NIF), or Mexican FRS, which differ in certain 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 FRS and U.S. GAAP applicable to our company and a reconciliation to U.S. GAAP of our
consolidated net income (loss) for each of the three years in the period ended December 31, 2006
and total stockholders equity as of December 31, 2006 and 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
FRS, 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
the revenues and expenses of our U.S. based subsidiaries may be impacted by foreign exchange rate
fluctuations and inflation rates in the United States.
Our audited consolidated balance sheets as of December 31, 2006 and 2005 and the consolidated
statements of income and changes in financial position for the years ended December 31, 2006, 2005
and 2004 included in this annual report are presented in constant pesos in purchasing power as of
December 31, 2006. Except as otherwise indicated, financial data at all dates and for all periods
presented in this annual report have been restated in constant pesos in purchasing power as of
December 31, 2006.
1
Rounding
Certain figures included in this annual report and in our financial statements have been
rounded for ease of presentation. Percentage figures included in this annual report have not in all
cases been calculated on the basis of such rounded figures but on the basis of such amounts prior
to rounding. For this reason, percentage amounts in this annual report may vary from those obtained
by performing the same calculations using the figures in our financial statements. Certain
numerical figures shown as totals in some tables may not be an arithmetic aggregation of the
figures that preceded them due to rounding.
Market Data
This annual report includes information from third-party sources that we believe are reliable,
such as the Mexican National Chamber for the Pulp and Paper Industry (Cámara Nacional de la
Industria de la Celulosa y el Papel) and the Mexican Central Bank, among others. Although we have
no reason to believe that any of this information is inaccurate in any material respect, we have
not independently verified this information provided by third parties and take no responsibility
for the accuracy of such 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, and certain assumptions made by us based on our knowledge of the market and experience in
the Mexican paper industry. 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 includes forward-looking statements that involve substantial risks and
uncertainties, including, in particular statements about our plans, objectives, expectations,
estimates and intentions in the Item 3: Key InformationRisk Factors, Item 5. Operating and
Financial Review and Prospects and Item 4. Information on the Company. These statements are
based on current expectations and projections about future events and financial trends that affect
or may affect our business. Several factors may adversely affect our plans, objectives,
expectations, estimates and intentions, including, but not limited to:
|
|
|
our substantial debt and significant debt service obligations; |
|
|
|
|
cost and availability of raw materials, water, steam, transportation and other supplies and services; |
|
|
|
|
labor relations; |
|
|
|
|
customer relations; |
|
|
|
|
the cyclicality of the paper and packaging industries; |
|
|
|
|
the competitive nature of the industries in which we are operating; |
|
|
|
|
our ability to keep key personnel required to operate our business; |
|
|
|
|
developments in, or changes to, the laws, regulations and governmental
policies governing our business, including environmental liabilities; |
|
|
|
|
changes in general economic and political conditions, particularly in
Mexico, including changes in the dollar-peso exchange rate, interest rates and other
domestic and international market and industry conditions; |
|
|
|
|
limitations on our access to sources of financing on competitive terms; |
2
|
|
|
our need for substantial capital; and |
|
|
|
|
interest rate levels. |
Words such as believe, anticipate, plan, expect, intend, estimate, project,
predict, should, may, seek, continue, and other similar words are used in this annual
report to identify forward-looking statements, but are not the exclusive means of identifying these
statements. You should read these forward-looking statements carefully because they include
information concerning results and projections, strategy, funding plans, competitive position, the
paper and packaging sector environment, potential opportunities for growth, the effects of future
regulations and the effects of competition.
Forward-looking statements involve inherent risks and uncertainties. We caution you that a
number of important factors could cause actual results to differ materially from the plans,
objectives, expectations, estimates and intentions expressed in these forward-looking statements.
The factors set forth 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. We caution you that the foregoing factors are not exclusive and that
other risks and uncertainties may cause actual results to differ materially from those in
forward-looking statements. Given such limitations, investors should not make any decision to
invest in the notes on the basis of the forward-looking statements contained herein.
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 assumptions underlying the forward-looking
statements are shown to be in error, except as may be required under applicable securities laws.
3
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 presents our selected consolidated financial information as of and for
each of the periods indicated. The data does not represent all of our financial information. This
data is qualified in its entirety by reference to, and should be read together with, our audited
consolidated financial statements at December 31, 2005 and 2006 and for the years ended December
31, 2004, 2005 and 2006, including the notes thereto. The data should also be read together with
IntroductionPresentation of Financial and Certain Other Information and Item 5. Operating and
Financial Review and Prospects.
The selected financial data at December 31, 2006 and 2005 and for the three years ended
December 31, 2006 have been derived from our audited consolidated financial statements included in
this annual report. The selected financial data at December 31, 2004, 2003 and 2002 and for the
years ended December 31, 2003 and 2002, has been derived from audited consolidated financial
statements that are not included in this annual report. Unless otherwise indicated, all peso
information is stated in constant pesos in purchasing power as of December 31, 2006.
Our audited financial statements have been prepared in accordance with Mexican FRS, which
differ 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 FRS and
U.S. GAAP applicable to our company and a reconciliation to U.S. GAAP of our consolidated net
income (loss) and related items for each of the three years in the period ended December 31, 2006
and total stockholders equity as of December 31, 2006 and 2005.
Mexican FRS 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, 2006, unless otherwise indicated.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(in millions of constant pesos, except per share data) |
|
Statement of Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican FRS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
Ps |
9,698.2 |
|
|
Ps |
8,475.9 |
|
|
Ps |
8,368.4 |
|
|
Ps |
7,627.0 |
|
|
Ps |
8,987.8 |
|
Cost of sales |
|
|
8,142.8 |
|
|
|
7,386.2 |
|
|
|
7,171.7 |
|
|
|
6,557.8 |
|
|
|
7,707.5 |
|
Gross profit |
|
|
1,555.3 |
|
|
|
1,089.6 |
|
|
|
1,196.7 |
|
|
|
1,069.2 |
|
|
|
1,280.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses |
|
|
721.9 |
|
|
|
705.4 |
|
|
|
722.5 |
|
|
|
726.6 |
|
|
|
702.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
833.4 |
|
|
|
384.3 |
|
|
|
474.2 |
|
|
|
342.6 |
|
|
|
577.6 |
|
Other income (expense) net |
|
|
65.5 |
|
|
|
5.5 |
|
|
|
(434.8 |
) |
|
|
(1,705.3 |
) |
|
|
(3,459.4 |
) |
Net comprehensive financing
cost (result): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(591.8 |
) |
|
|
(616.5 |
) |
|
|
(1,205.3 |
) |
|
|
(1,340.4 |
) |
|
|
(1,268.7 |
) |
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(in millions of constant pesos, except per share data) |
|
Interest income |
|
|
31.2 |
|
|
|
44.3 |
|
|
|
43.2 |
|
|
|
46.6 |
|
|
|
44.2 |
|
Exchange gain (loss) net |
|
|
(87.2 |
) |
|
|
348.2 |
|
|
|
65.1 |
|
|
|
(929.0 |
) |
|
|
(1,129.0 |
) |
Gain on monetary position |
|
|
252.0 |
|
|
|
206.7 |
|
|
|
488.3 |
|
|
|
415.7 |
|
|
|
458.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net comprehensive
financing cost (result) |
|
|
(395.8 |
) |
|
|
(17.3 |
) |
|
|
(608.7 |
) |
|
|
(1,807.1 |
) |
|
|
(1,895.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income
taxes, employee statutory
profit sharing, and equity in
income of associated
companies |
|
|
503.1 |
|
|
|
372.4 |
|
|
|
(569.3 |
) |
|
|
(3,169.9 |
) |
|
|
(4,777.2 |
) |
Income tax benefit (expense) |
|
|
(532.9 |
) |
|
|
(316.3 |
) |
|
|
523.1 |
|
|
|
2.3 |
|
|
|
751.1 |
|
Employee statutory
profit-sharing expense |
|
|
(3.5 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
(2.0 |
) |
|
|
(1.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before equity in
income of associated
companies |
|
|
(33.3 |
) |
|
|
55.4 |
|
|
|
(46.2 |
) |
|
|
(3,169.5 |
) |
|
|
(4,027.3 |
) |
Equity in income of
associated companies |
|
|
3.0 |
|
|
|
2.0 |
|
|
|
2.8 |
|
|
|
2.1 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations |
|
|
(30.3 |
) |
|
|
57.3 |
|
|
|
(43.4 |
) |
|
|
(3,167.4 |
) |
|
|
(4,025.0 |
) |
Income (loss) from
discontinued operations net |
|
|
|
|
|
|
113.2 |
|
|
|
109.8 |
|
|
|
(621.2 |
) |
|
|
(116.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss) |
|
Ps |
(30.3 |
) |
|
Ps |
170.5 |
|
|
Ps |
66.5 |
|
|
Ps |
(3,788.6 |
) |
|
Ps |
(4,141.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings
per share (1) |
|
Ps |
(0.27 |
) |
|
Ps |
1.57 |
|
|
Ps |
0.72 |
|
|
Ps |
(40.76 |
) |
|
Ps |
(44.02 |
) |
Basic and diluted earnings
per share from continuing
operations (1) |
|
Ps |
(0.30 |
) |
|
Ps |
0.51 |
|
|
Ps |
(0.50 |
) |
|
Ps |
(34.10 |
) |
|
Ps |
(42.81 |
) |
Weighted-average number of
shares outstanding |
|
|
110,641,111 |
|
|
|
108,528,665 |
|
|
|
91,834,192 |
|
|
|
92,942,916 |
|
|
|
94,072,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP: (2) (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
Ps |
9,698.2 |
|
|
Ps |
8,473.1 |
|
|
Ps |
8,442.9 |
|
|
Ps |
7,725.3 |
|
|
Ps |
7,363.9 |
|
Operating income (loss) |
|
|
995.8 |
|
|
|
476.9 |
|
|
|
492.2 |
|
|
|
(119.4 |
) |
|
|
(123.9 |
) |
Income (loss) before
provisions for income and
asset taxes, minority
interest, special items and
discontinued operations |
|
|
819.6 |
|
|
|
589.9 |
|
|
|
327.0 |
|
|
|
(2,422.2 |
) |
|
|
(1,798.5 |
) |
Net income (loss) |
|
|
173.6 |
|
|
|
1,399.4 |
|
|
|
787.5 |
|
|
|
(2,871.9 |
) |
|
|
(2,186.7 |
) |
Basic and diluted earnings
per share (4) |
|
|
1.57 |
|
|
|
12.89 |
|
|
|
8.58 |
|
|
|
(30.90 |
) |
|
|
(23.25 |
) |
Basic and diluted earnings
per share from continuing
operations (4) |
|
|
7.41 |
|
|
|
5.44 |
|
|
|
3.56 |
|
|
|
(26.06 |
) |
|
|
(19.12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican FRS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
Ps |
466.6 |
|
|
Ps |
729.0 |
|
|
Ps |
894.9 |
|
|
Ps |
726.5 |
|
|
Ps |
261.2 |
|
Total current assets |
|
|
3,638.3 |
|
|
|
3,805.9 |
|
|
|
4,107.6 |
|
|
|
4,113.0 |
|
|
|
4,151.9 |
|
Property, plant and
equipment, net |
|
|
11,254.5 |
|
|
|
11,356.5 |
|
|
|
11,898.4 |
|
|
|
12,759.2 |
|
|
|
13,531.3 |
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(in millions of constant pesos, except per share data) |
|
Total assets |
|
|
15,159.1 |
|
|
|
15,433.3 |
|
|
|
16,639.0 |
|
|
|
17,946.3 |
|
|
|
20,331.4 |
|
Short-term debt, including
current portion of long-term
debt |
|
|
169.5 |
|
|
|
268.1 |
|
|
|
189.4 |
|
|
|
6,817.0 |
|
|
|
8,886.0 |
|
Long-term debt |
|
|
5,624.5 |
|
|
|
6,768.7 |
|
|
|
7,469.5 |
|
|
|
439.5 |
|
|
|
1,155.2 |
|
Common stock |
|
|
5,665.8 |
|
|
|
5,665.8 |
|
|
|
5,363.3 |
|
|
|
4,363.3 |
|
|
|
5,494.1 |
|
Total majority stockholders
equity |
|
|
4,786.4 |
|
|
|
4,844.5 |
|
|
|
1,649.5 |
|
|
|
1,679.5 |
|
|
|
5,117.1 |
|
Total minority stockholders
equity |
|
|
419.1 |
|
|
|
60.6 |
|
|
|
83.3 |
|
|
|
76.6 |
|
|
|
80.5 |
|
Total stockholders equity
(net assets) |
|
|
5,205.5 |
|
|
|
4,905.1 |
|
|
|
1,732.8 |
|
|
|
1,756.1 |
|
|
|
5,197.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
Ps |
15,760.1 |
|
|
Ps |
15,586.2 |
|
|
Ps |
16,326.5 |
|
|
Ps |
16,659.8 |
|
|
Ps |
19,867.2 |
|
Total stockholders equity
(net assets) |
|
|
1,950.6 |
|
|
|
1,750.2 |
|
|
|
501.9 |
|
|
|
(265.0 |
) |
|
|
2,689.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican FRS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resources generated by (used
in) operating activities |
|
Ps |
888.4 |
|
|
Ps |
150.8 |
|
|
Ps |
859.6 |
|
|
Ps |
(502.1 |
) |
|
Ps |
(180.9 |
) |
Resources generated by (used
in) financing activities |
|
|
(884.7 |
) |
|
|
(573.4 |
) |
|
|
(651.1 |
) |
|
|
(63.1 |
) |
|
|
959.8 |
|
Resources generated by (used
in) investing activities |
|
|
(266.1 |
) |
|
|
256.8 |
|
|
|
(40.1 |
) |
|
|
1,030.6 |
|
|
|
(1,113.4 |
) |
Capital expenditures |
|
|
(227.0 |
) |
|
|
(64.3 |
) |
|
|
(181.9 |
) |
|
|
(119.4 |
) |
|
|
(513.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow provided by (used
in) operating activities |
|
|
1,693.9 |
|
|
Ps |
(55.9 |
) |
|
Ps |
828.6 |
|
|
Ps |
(357.4 |
) |
|
Ps |
440.3 |
|
Cash flow provided by (used
in) financing activities |
|
|
(1,606.7 |
) |
|
|
(39.5 |
) |
|
|
(501.7 |
) |
|
|
(459.2 |
) |
|
|
1,552.1 |
|
Cash flow provided by (used
in) investing activities |
|
|
(700.6 |
) |
|
|
578.1 |
|
|
|
(58.6 |
) |
|
|
1,029.3 |
|
|
|
(1,638.0 |
) |
|
|
|
(1) |
|
See note 3t to our audited consolidated financial statements. |
|
(2) |
|
Amounts of sales and long-term debt under Mexican FRS 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 FRS and U.S. 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.
6
Exchange Rate Information
Since November 1991, Mexico has had a free market for foreign exchange and, since 1994, the
Mexican government has allowed the peso to float freely against the dollar. The peso was relatively
stable from 1999 to 2001. In 2002 and 2003, the peso declined in value against the dollar and
appreciated in 2004, 2005 and 2006. We cannot assure you that the Mexican government will maintain
its current policies with regard to the peso or that the peso will not further depreciate or
appreciate significantly in the future.
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. The rates have not been restated in constant
currency units and therefore represent nominal historical figures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noon Buying Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
Year ended December 31, |
|
High |
|
Low |
|
Average(1) |
|
End |
2002 |
|
Ps |
10.42 |
|
|
Ps |
9.00 |
|
|
Ps |
9.67 |
|
|
Ps |
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 |
|
2006 |
|
|
11.46 |
|
|
|
10.43 |
|
|
|
10.91 |
|
|
|
10.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noon Buying Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
Month Ended |
|
High |
|
Low |
|
Average(2) |
|
End |
December 31, 2007 |
|
Ps |
10.99 |
|
|
Ps |
10.77 |
|
|
Ps |
10.85 |
|
|
Ps |
10.81 |
|
January 31, 2007 |
|
|
11.09 |
|
|
|
10.77 |
|
|
|
10.96 |
|
|
|
11.04 |
|
February 28, 2007 |
|
|
11.16 |
|
|
|
10.92 |
|
|
|
11.00 |
|
|
|
11.16 |
|
March 31, 2007 |
|
|
11.18 |
|
|
|
11.01 |
|
|
|
11.11 |
|
|
|
11.04 |
|
April 30, 2007 |
|
|
11.03 |
|
|
|
10.92 |
|
|
|
10.98 |
|
|
|
10.93 |
|
May 31, 2007 |
|
|
10.93 |
|
|
|
10.74 |
|
|
|
10.82 |
|
|
|
10.74 |
|
June (through June 29) |
|
|
10.98 |
|
|
|
10.74 |
|
|
|
10.84 |
|
|
|
10.79 |
|
|
|
|
(1) |
|
Average of month-end rates. |
|
(2) |
|
Average of daily rates. |
|
Source: Federal Reserve Bank of New York. |
The Mexican economy has had balance of payment deficits and shortages in foreign exchange
reserves. While the Mexican government does not currently restrict the ability of Mexican or
foreign persons or entities to convert pesos to dollars, we cannot assure you that the Mexican
government will not institute restrictive exchange control policies in the future, as has occurred
from time to time in the past. To the extent that the Mexican government institutes restrictive
exchange control policies in the future, our ability to transfer or to convert pesos into dollars
and other currencies for the purpose of making timely payments of interest and principal of
indebtedness, as well as to obtain foreign programming and other goods, would be adversely
affected. See Item 3: Key InformationRisk FactorsRisks Relating to MexicoDepreciation of the
Mexican peso relative to the dollar may impair our ability to service our debt and adversely affect
our profitability.
On June 29, 2007, the noon buying rate as reported by the Federal Reserve Bank of New York was
Ps 10.79 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.
7
Risks Related to 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, 2006, we had Ps 5,793.9 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. 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
Series B 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 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 of a downturn in general economic conditions or our
business concerns; and |
|
|
|
|
our ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes. |
8
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.
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 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
9
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 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 80.4% 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 80.4% 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.
If we have a catastrophic loss or unforeseen or recurring operational problems at any of our
facilities, we could suffer significant lost production and/or cost increases.
Our manufacturing facilities and distribution warehouses may suffer catastrophic loss due to
fire, flood, terrorism, or other natural or man-made events. If any of these facilities were to
experience natural disasters, power outages, and other catastrophic losses, it could disrupt our
operations, delay production, delay or reduce shipments, reduce revenue, and result in significant
expenses to repair or replace the facility. These expenses and losses may not be adequately covered
by property or business interruption insurance we maintain. Even if covered by insurance, our
inability to deliver our products to customers, even on a short-term basis, may cause us to lose
market share on a more permanent basis.
10
Adverse developments in our relationship with our employees could adversely affect our business.
As
of December 31, 2006, we employed approximately 8,639 persons and approximately 66.0% of
our work force was unionized. Our relationship with these unions generally has been satisfactory,
but occasional work stoppages have occurred. On May 28, 2007, members of the Sindicato de
Trabajadores de Fábricas de Papel Tuxtepec, S. A. de C. V., covering approximately 300 employees at
our Oaxaca mill, commenced a strike. In the annual review of our collective bargaining agreement with the Sindicato de Trabajadores
de Fábricas de Papel Tuxtepec, S. A. de C. V., the union presented wage demands that we did not
accept. As a result, the members of this union employed at our Oaxaca mill initiated a strike and
the operations of this mill were halted. On June 30, 2007, we reached an agreement with this union
as a result of which we expect to resume production at our Oaxaca mill on July 3, 2007. In addition to our collective
bargaining agreement with this union, we are party to collective bargaining agreements with 31 other
unions in Mexico and one in the United States. We may not be able to negotiate extensions of these
agreements or new agreements prior to the expiration date of these agreements. As a result, we may
experience additional labor disruptions in the future. A widespread work stoppage could have a
material adverse effect on our results of operations, financial position and cash flows if it were
to last for a significant period of time.
Risks Relating to Mexico
Political conditions in Mexico could materially and adversely affect Mexican economic policy or
business conditions and, in turn, our operations.
The Mexican government has exercised, and continues to exercise, significant influence
over the Mexican economy. Accordingly, Mexican governmental actions concerning the economy and
state-owned enterprises could have a significant impact on Mexican private sector entities in
general and us, in particular, and on market conditions, prices and returns on Mexican securities,
including ours.
Presidential and federal congressional elections were held in Mexico on July 2, 2006. Based on
preliminary election results, the Federal Electoral Institute announced on July 6, 2006, that
Felipe de Jesús Calderón Hinojosa of the center-right Partido Acción Nacional (the National Action
Party), or PAN, obtained a plurality of the vote, with a narrow margin over Andrés Manuel López
Obrador of the center-left Partido de la Revolución Democrática (the Party of the Democratic
Revolution), or PRD. Claiming electoral fraud, Mr. López Obrador initiated legal challenges to the
preliminary election results and commenced protests in Mexico City. On September 5, 2006, the
Federal Electoral Tribunal (Tribunal Electoral del Poder Judicial de la Federación) unanimously
determined in a non-appealable ruling that Mr. Calderón won the election and formally declared him
to be president-elect. Mr. Calderón was sworn in as Mexicos president on December 1, 2006,
succeeding Vicente Fox, of the same party. Mr. Calderóns term continues until November 30, 2012.
Mr. López Obrador has announced that he will continue to lead demonstrations protesting the
electoral process and the legitimacy of Mr. Calderóns electoral victory. We cannot predict the
impact that these protests may have on the Mexican government or on economic and business
conditions in Mexico.
Although the PAN won a plurality of the seats in the Mexican Congress in the election, no
party succeeded in securing a majority in either chamber of the Mexican Congress. The absence of a
clear majority by a single party is likely to continue at least until the next Congressional
election in July 2009. This situation, combined with the expected continued protests led by Mr.
López Obrador, members of the PRD and their supporters, may result in government gridlock and
political uncertainty. We cannot provide any assurances that political developments in Mexico, over
which we have no control, will not have an adverse effect on our business, financial condition or
results of operations.
Felipe Calderóns presidency may also bring significant changes in laws, public
policies and/or regulations that could adversely affect Mexicos political and economic situations,
which could adversely affect our business. Social and political instability in Mexico or other
adverse social or political developments in or affecting Mexico could adversely affect us and our
ability to obtain financing. It is possible that political uncertainty may adversely affect
financial markets.
11
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, 2006, 83.5% 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 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 4.2% in 2004, 3.0% in 2005 and 4.8% in 2006. 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), appreciated by 0.8% against the dollar in
2004, appreciated by 4.6% against the dollar in 2005, and depreciated by 1.7% against the dollar in
2006 . 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
929.0 million which was one of the factors leading to our net loss of Ps 3,788.6 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 5.2% in 2004, 3.3% in
2005 and 4.1% in 2006. However, Mexico has experienced high levels of inflation in the past. High
levels of inflation would cause our operating costs to increase because approximately 82.8% 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
12
to inflationary pressures. However, the prices that we charge for our products are generally
denominated in dollars or are denominated in pesos based on international reference prices
denominated in dollars, which we refer to as 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.
If foreign currency exchange controls and restrictions are imposed, we may not be able to service
our debt in U.S. dollars, which exposes investors to foreign currency exchange risk.
In the past, the Mexican economy has experienced balance of payments deficits, shortages in
foreign currency reserves and other problems that have affected the availability of foreign
currencies in Mexico. The Mexican government does not currently restrict or regulate the ability of
persons or entities to convert pesos into U.S. dollars. However, it has done so in the past and
could do so again in the future. We cannot assure you that the Mexican government will not
institute a restrictive currency exchange control policy in the future. Any such restrictive
foreign currency exchange control policy could prevent or restrict access to U.S. dollars and limit
our ability to service our U.S. dollar-denominated debt.
Mexican Antitrust Laws May Limit Our Ability to Expand and Operate Through Acquisitions or Joint
Ventures.
Mexicos federal antitrust laws and regulations may affect some of our activities, including
our ability to introduce new products and services, to enter into new or complementary businesses
or joint ventures and to complete acquisitions. Approval of the Comisión Federal de Competencia, or
Mexican Antitrust Commission, is required for us to acquire and sell significant businesses or to
enter into significant joint ventures. The Mexican Antitrust Commission may not approve any
proposed future acquisition or joint venture that we may pursue.
Risks Relating to Our Common Shares and ADSs
The market for the ADSs and the Common Shares is limited
Shares of our common stock, without par value, or our Common Shares, are listed on the Mexican
Stock Exchange, which is Mexicos only stock exchange. There is no public market outside of Mexico
for our Common 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 Mexican
securities market has experienced less liquidity and more volatility than has been experienced in
such other markets.
Prior to July 15, 2004, the American Depositary Shrares, or ADSs, were listed on the New York
Stock Exchange, or the NYSE. On May 25, 2004, following our
filing of a voluntary petition for commercial reorganization
(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 Common Shares directed by Banamex may affect the stock prices of our Common
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 Common Shares representing
approximately 28.0% of our issued and
13
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 Common Shares held by ACM or the trust if the price of the Common 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 Common 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 FRS. 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 FRS 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. Our Common 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 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 entitled to attend shareholders meetings, and they may vote only through
the depositary.
Under Mexican law, a shareholder is required to deposit its shares with a Mexican custodian in
order to attend a shareholders meeting. A holder of ADSs will not be able to meet this
requirement, and accordingly is not entitled to attend shareholders meetings. A holder of ADSs is
entitled to instruct the depositary as to how to vote the shares represented by ADSs, in accordance
with procedures provided for in the applicable deposit agreement, but a holder of ADSs will not be
able to vote its shares directly at a shareholders meeting. We cannot assure that holders of our
shares in the form of ADSs will receive notice of shareholders meetings from our ADS depositary in
sufficient time to enable such holders to return voting instructions to the ADS depositary in a
timely manner.
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
14
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 Common 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 our Common Shares 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.
15
Item 4. Information on Our Company.
We are one of the largest integrated paper producers based in Latin America in terms of sales,
with operations in Mexico and the United States. 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 2006, our total sales volume was 1,507.8 thousand short
tons.
We produce a variety of grades and sizes of containerboard at six paper mills in Mexico and
one in the United States, 78% of which we use to supply our 22 packaging plants, which in turn
manufacture corrugated containers and multi-wall sacks. In addition, our newsprint mill is the
largest producer of newsprint in Mexico, and we operate a paper mill in Mexico that produces uncoated
free sheet and a plywood plant.
We sell our products to a broad range of Mexican and United States manufacturers of consumable
and durable goods, including customers in the maquiladora sector and Mexicos major exporters. A
maquiladora is a factory that imports materials and equipment on a duty-free and tariff-free basis
for assembly or manufacturing and exports assembled products, usually back to the country that
supplied the materials and equipment. Our customers in the United States and Mexico include many of
the largest companies in the domestic and international industrial, construction, consumer,
agricultural and media sectors, such as Pepsico, Vitro, El Universal, Cemex, Apasco, Kimberly Clark
and Comisión Nacional de Libros de Texto Gratuitos. In 2006, our market share in Mexico was 32%
for sales of containerboard, 54% for sales of newsprint and 23% for sales of uncoated free sheet,
according to estimates published by the Mexican National Chamber for the Pulp and Paper Industry.
We estimate that our market share in Mexico for packaging products was 35% in 2006.
Our net sales were Ps 9,698.2 million in 2006. In 2006, approximately 26.2% of our sales were
made in dollars, with the balance primarily dollar-linked. In 2006, 83.5% of our total sales were
made in Mexico and 16.5% were made in and into the United States.
We are a corporation (sociedad anónima bursátil 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:
|
|
|
packaging paper, which includes linerboard, corrugating medium, kraft
paper, and tubing and folding cartons; |
|
|
|
|
printing and writing paper, which includes newsprint, bond paper,
business and writing forms and other papers used for photocopying and commercial
printing; |
|
|
|
|
sanitary paper; and |
|
|
|
|
specialty paper. |
We produce products within the packaging paper and printing and writing paper categories.
16
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.
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 2006 annual report of the Mexican National Chamber for the Pulp and Paper
Industry. The total size of Mexicos paper industry in 2006, based on apparent demand, was 7.4
million short tons according to the 2006 annual report of the Mexican National Chamber for the Pulp
and Paper Industry. Mexican production is distributed among 42 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
Apparent |
|
% |
|
% GDP |
Year |
|
Production |
|
Imports |
|
Exports |
|
Demand |
|
Change |
|
Change |
2002 |
|
|
4,451 |
|
|
|
1,997 |
|
|
|
227 |
|
|
|
6,221 |
|
|
|
5.1 |
% |
|
|
0.8 |
% |
2003 |
|
|
4,497 |
|
|
|
2,090 |
|
|
|
197 |
|
|
|
6,391 |
|
|
|
2.7 |
% |
|
|
1.4 |
% |
2004 |
|
|
4,766 |
|
|
|
2,227 |
|
|
|
282 |
|
|
|
6,711 |
|
|
|
5.0 |
% |
|
|
4.2 |
% |
2005 |
|
|
4,904 |
|
|
|
2,381 |
|
|
|
273 |
|
|
|
7,012 |
|
|
|
4.5 |
% |
|
|
2.8 |
% |
2006 |
|
|
4,975 |
|
|
|
2,719 |
|
|
|
290 |
|
|
|
7,404 |
|
|
|
5.6 |
% |
|
|
4.8 |
% |
|
|
|
Source: 2006 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 2002 to 2006 for packaging paper in short tons.
In 2006, packaging paper accounted for 45% of Mexicos total paper production and 42% of apparent
demand for paper. Mexican production of packaging paper as a percentage of apparent demand has
declined from 75.3% in 2002 to 72.0% in 2006.
Mexican Apparent Demand for Packaging Paper
(all figures in thousands of short tons, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
Apparent |
|
% |
Year |
|
Production |
|
Imports |
|
Exports |
|
Demand |
|
Change |
2002 |
|
|
2,622 |
|
|
|
928 |
|
|
|
68 |
|
|
|
3,482 |
|
|
|
6.1 |
% |
2003 |
|
|
2,645 |
|
|
|
955 |
|
|
|
54 |
|
|
|
3,546 |
|
|
|
1.8 |
% |
2004 |
|
|
2,788 |
|
|
|
1,054 |
|
|
|
111 |
|
|
|
3,731 |
|
|
|
5.2 |
% |
2005 |
|
|
2,829 |
|
|
|
1,114 |
|
|
|
107 |
|
|
|
3,836 |
|
|
|
2.8 |
% |
2006 |
|
|
2,241 |
|
|
|
876 |
|
|
|
6 |
|
|
|
3,111 |
|
|
|
(18.9 |
)% |
|
|
|
Source: 2006 Annual Report, Mexican National Chamber for the Pulp and Paper Industry |
17
The table below shows Mexican apparent demand in short tons from 2002 to 2006 for printing and
writing paper. In 2006, printing and writing paper accounted for 16.3% of Mexicos total paper
production and 19.0% of apparent demand for paper. Mexican production of printing and writing paper
as a percentage of apparent demand has declined from 66.5% in 2002 to 57.6% in 2006.
Mexican Apparent Demand for Printing and Writing Paper
(all figures in thousands of short tons, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
Apparent |
|
% |
Year |
|
Production |
|
Imports |
|
Exports |
|
Demand |
|
Change |
2002 |
|
|
769 |
|
|
|
409 |
|
|
|
22 |
|
|
|
1,156 |
|
|
|
5.2 |
% |
2003 |
|
|
763 |
|
|
|
448 |
|
|
|
11 |
|
|
|
1,200 |
|
|
|
3.8 |
% |
2004 |
|
|
761 |
|
|
|
492 |
|
|
|
20 |
|
|
|
1,233 |
|
|
|
2.8 |
% |
2005 |
|
|
795 |
|
|
|
569 |
|
|
|
23 |
|
|
|
1,341 |
|
|
|
8.4 |
% |
2006 |
|
|
809 |
|
|
|
613 |
|
|
|
17 |
|
|
|
1,405 |
|
|
|
4.8 |
% |
|
|
|
Source: 2006 Annual Report, Mexican National Chamber for the Pulp and Paper Industry. |
The table below shows Mexican apparent demand in short tons from 2002 to 2006 for newsprint in
short tons. In 2006, newsprint accounted for 6.0% 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 50.3% in 2002 to 47.9% in 2003, but recovered in 2004, 2005 and 2006 reaching 63.9%
in 2006.
Mexican Apparent Demand for Newsprint
(all figures in thousands of short tons, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
Apparent |
|
% |
Year |
|
Production |
|
Imports |
|
Exports |
|
Demand |
|
Change |
2002 |
|
|
217 |
|
|
|
214 |
|
|
|
|
|
|
|
431 |
|
|
|
(4.3 |
)% |
2003 |
|
|
213 |
|
|
|
235 |
|
|
|
3 |
|
|
|
445 |
|
|
|
3.3 |
% |
2004 |
|
|
278 |
|
|
|
188 |
|
|
|
1 |
|
|
|
465 |
|
|
|
4.5 |
% |
2005 |
|
|
282 |
|
|
|
164 |
|
|
|
6 |
|
|
|
440 |
|
|
|
(5.4 |
)% |
2006 |
|
|
299 |
|
|
|
170 |
|
|
|
1 |
|
|
|
468 |
|
|
|
6.3 |
% |
|
|
|
Source: 2006 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:
|
|
|
the rate of growth of the Mexican economy and the demand for packaging; |
|
|
|
|
prevailing inflation rates in Mexico; |
|
|
|
|
U.S. paper price levels; |
|
|
|
|
prevailing international prices for paper and packaging; and |
|
|
|
|
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.
18
Prevailing international prices for containerboard increased by 26.0% in 2004, increased by
approximately 3% in 2005 and increased by approximately 13% in 2006. Prevailing international
prices for uncoated free sheet increased by approximately 2% in 2004, 4% in 2005 and 18% in 2006.
Prevailing international prices for newsprint increased by 7.7% during 2004, approximately 7% in
2005 and 2% in 2006.
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:
|
|
|
resistance specifications; |
|
|
|
|
quality control; |
|
|
|
|
customer service; |
|
|
|
|
printing and graphics specifications; |
|
|
|
|
volume of production runs; and |
|
|
|
|
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. 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, newsprint and corrugated containers, based on information published by the Mexican
National Chamber for the Pulp and Paper Industry.
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
19
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 Pipsamex, and Durango
Paper Company (which was subsequently sold on October 7, 2002). In connection with the merger,
shares of our company were issued to members of the Rincón family in exchange for their shares of
CODUSA.
In November 2002, we defaulted on payments of principal and interest under our unsecured
indebtedness. On May 18, 2004, we filed a voluntary petition for commercial reorganization
(concurso mercantil) 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. We
negotiated 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. 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 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.
Significant Developments During 2006 and Recent Developments
Pipsamex Capital Increase
On February 13, 2006, Pipsamex issued and sold 2,177,042,255 shares of its series B capital
stock, representing 13.3% of Pipsamexs 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 total
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.
Conversion of Series A Shares and Series B Shares to Common Shares
On February 20, 2006, we created a new sole series of common stock, no par value, or Common
Shares. On August 11, 2006, we converted each of our outstanding Series A Shares and Series B
Shares into one newly issued Common Share. Following this recapitalization:
|
|
|
each of our outstanding Ordinary Participation Certificates, or CPOs, represented a
financial interest in one Common Share; |
|
|
|
|
each of our outstanding ADSs continued to represent two CPOs; and |
|
|
|
|
our Common Shares were listed on the Mexican Stock Exchange. |
On April 11, 2007, the Common Shares that had been deposited with 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 CPOs issued by the trustee, were transferred to BBVA Bancomer S.A., as
custodian of our American Depositary Receipt, or ADR, program. As a result, each of our
outstanding ADSs now represents two Common Shares.
20
Conversion to S.A.B. de C.V.
On December 8, 2006, in compliance with the new Mexican Securities Market Law (Ley del Mercado
de Valores), we adopted new bylaws under which we became a sociedad anónima bursátil de capital
variable. For a description of our new bylaws, see Item 10: Additional Information
Organizational Documents.
Corporate Reorganization
On December 31, 2006, our subsidiary Compañía Forestal de Durango, S.A. de C.V. transferred
its interests in Servicios Industriales Tizayuca, S.A. de C.V. to our subsidiary Inmobiliaria
Industrial Tizayuca, S.A. de C.V., or Tizayuca.
On January 10, 2007, Tizayuca formed the following companies to provide administrative
services and labor to our paper and corrugated container facilities:
|
|
|
Ectsa Industrial, S.A. de C.V. |
|
|
|
|
Cartonpack Industrial, S.A. de C.V. |
|
|
|
|
Eyemsa Industrial, S.A. de C.V. |
|
|
|
|
Administración Industrial Centauro, S.A. de C.V. |
|
|
|
|
Administradora Industrial Durango, S.A. de C.V. |
|
|
|
|
Atenmex, S.A. de C.V. |
|
|
|
|
Atensa, S.A. de C.V. |
|
|
|
|
Mexpape, S.A. de C.V. |
|
|
|
|
Fapatux, S.A. de C.V. |
|
|
|
|
Servicios Pipsamex, S.A. de C.V. |
On January 31, 2007, our subsidiaries Fábricas de Papel Tuxtepec, S.A. de C.V., Fábrica
Mexicana de Papel, S.A. de C.V., Fibras de Durango, S.A. de C.V. and Inmobiliaria Industrial de
Durango, S.A. de C.V. merged with and into Pipsamex.
On February 1, 2007, Tizayuca transferred its interests in Mexpape, S.A. de C.V., Fapatux,
S.A. de C.V. and Servicios Pipsamex, S.A. de C.V. to Pipsamex.
On February 15, 2007, our subsidiaries Envases y Empaques de México, S.A. de C.V., or Eyemex,
Empaques del Norte, S.A. de C.V., Cartonpack, S.A. de C.V., or Cartonpack, Durango Internacional,
S.A. de C.V., Industrias Centauro, S.A. de C.V., Compañía Papelera de Atenquique, S.A. de C.V.,
Compañía Forestal de Durango, S.A. de C.V., and Papel y Empaques Tizayuca, S.A. de C.V. merged with
and into our subsidiary Empaques de Cartón Titán, S.A. de C.V., or Titán.
21
As a result of these transactions, our organizational structure as of June 29, 2007 was as set
forth in the following chart.
|
|
|
|
|
* CONICEPA =
|
|
Compañía Norteamericana de Inversiones
en Celulosa y Papel, S.A. de C.V.
|
|
|
|
(1) 28.34% is indirectly controlled through Corporación Durango
|
|
|
Operating Divisions
We operate through six operating divisions distinguished by product type and location as
follows:
|
|
|
Paper: the Grupo Durango division, the Grupo Pipsamex division and Durango McKinley
Paper Companys paper division; |
|
|
|
|
Packaging: the Titán division and Durango McKinley Paper Companys packaging division; and |
|
|
|
|
Other: the Ponderosa division. |
Our operating divisions are:
|
|
|
Grupo Durango. The Grupo Durango division, which is part of our subsidiary Titán,
produces containerboard. In 2006, approximately 78% of the 753.0 thousand short tons of
linerboard and corrugating medium shipped by the Grupo Durango division was used to supply
the Titán division. The remainder of its production was sold to third party manufacturers
in Mexico and the United States. |
|
|
|
|
Grupo Pipsamex. The Grupo Pipsamex division, which consists of our subsidiary Pipsamex
and its subsidiaries, produces newsprint and bond paper. In 2006, the Grupo Pipsamex
division sold 162.8 |
22
|
|
|
thousand short tons of newsprint and 153.0 thousand short tons of uncoated free sheet. The
Grupo Pipsamex divisions sales are predominantly to the Mexican market with the balance
primarily sold in the United States. |
|
|
|
|
Durango McKinley Paper Company Paper Division. Durango McKinley Paper Company and its
subsidiary operate a paper division and a packaging division. The paper division consists
of a recycled linerboard manufacturer located in the southwestern United States. Durango
McKinley Paper Company is a significant collector of OCC material, which is processed to
create recycled fiber. This divisions sales are primarily to customers in the United
States and a substantial portion of its sales are made in exchange for paper supplied by
other paper producers to Durango McKinley Paper Companys packaging division. |
|
|
|
|
Titán. The Titán division, which is part of our subsidiary Titán, is a large paper-based
packaging manufacturer. The Titán divisions 2006 sales of 657.5 thousand short tons
consisted almost entirely of corrugated containers and multi-wall sacks. In 2006, the Grupo
Durango division supplied approximately 99% of the Titán divisions 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 divisions sales
are primarily to Mexico and the Mexican export sector. |
|
|
|
|
Durango McKinley Paper Company Packaging Division. The packaging division of Durango
McKinley Paper Company is a large paper-based packaging manufacturer. This divisions 2006
sales of 85.7 thousand short tons consisted entirely of corrugated containers. In 2006,
approximately 80% of the paper needs of Durango McKinley Paper Companys packaging division
were supplied by other paper producers in exchange for paper produced by Durango McKinley
Paper Company. This divisions sales are made primarily in Texas. |
|
|
|
|
Ponderosa. The Ponderosa division, which is operated by our subsidiary Ponderosa
Industrial de México, S.A. de C. V., or Ponderosa, manufactures plywood that it markets
throughout the NAFTA region. In 2006, the Ponderosa division sold 10.8 thousand short tons
of plywood. |
Our Products
General
Our main product groups are:
|
|
|
Papercontainerboard (linerboard and corrugating medium), newsprint and uncoated free
sheet (bond, book stock, miscellaneous free sheet); |
|
|
|
|
Packagingcorrugated containers and multi-wall sacks; and |
|
|
|
|
Otherplywood. |
23
The total capacity of our continuing operations by product and number of mills and plants as
of December 31, 2006, and our actual production for the periods indicated, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production at December 31, |
|
|
Installed Capacity at |
|
Mills/ |
|
|
|
|
|
|
Product Type |
|
December 31, 2006 |
|
Plants |
|
2006 |
|
2005 |
|
2004 |
|
|
(in thousands of short |
|
|
|
|
|
|
|
|
tons per year) |
|
|
|
|
|
(in thousands of short tons) |
Paper: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Containerboard (1) |
|
|
1,117.0 |
|
|
|
7 |
|
|
|
1,008.2 |
|
|
|
924.0 |
|
|
|
891.8 |
|
Newsprint |
|
|
164.0 |
|
|
|
1 |
|
|
|
163.9 |
|
|
|
148.1 |
|
|
|
160.4 |
|
Uncoated free sheet |
|
|
172.0 |
|
|
|
1 |
|
|
|
162.3 |
|
|
|
155.4 |
|
|
|
133.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Paper |
|
|
1,453.0 |
|
|
|
9 |
|
|
|
1,334.4 |
|
|
|
1,227.5 |
|
|
|
1,185.4 |
|
Packaging: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated containers (1) |
|
|
944.0 |
(2) |
|
|
19 |
|
|
|
711.0 |
|
|
|
662.8 |
|
|
|
632.5 |
|
Multi-wall sacks |
|
|
59.0 |
|
|
|
3 |
|
|
|
40.6 |
|
|
|
43.6 |
|
|
|
39.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Packaging |
|
|
1,003.0 |
|
|
|
22 |
|
|
|
751.6 |
|
|
|
706.4 |
|
|
|
671.6 |
|
Other products (3) |
|
|
62.0 |
|
|
|
3 |
|
|
|
10.8 |
|
|
|
9.9 |
|
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Production |
|
|
2,518.0 |
|
|
|
34 |
|
|
|
2,096.7 |
|
|
|
1,943.8 |
|
|
|
1,867.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes production of the Tizayuca mill and Tizayuca plant since March 31, 2006, the date on
which we entered into the operating lease with respect to these facilities. |
|
(2) |
|
Includes 32,000 short tons of capacity at our Puente de Vigas Plant. On December 30, 2005,
we suffered a casualty loss at this plant as a result of a fire. As a result, this plant was
out of service from December 30, 2005 until February 15, 2007. |
|
(3) |
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Product Type |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
Sales volume |
|
|
Net Sales |
|
|
% of Net Sales |
|
|
Sales volume |
|
|
Net Sales |
|
|
% of Net Sales |
|
|
Sales volume |
|
|
Net Sales |
|
|
% of Net Sales |
|
|
|
(in thousands of short tons or millions of constant pesos in purchasing power |
|
|
|
as of December 31, 2006, except for percentages) |
|
Paper: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Containerboard |
|
|
436.3 |
|
|
Ps |
1,977.7 |
|
|
|
20.4 |
% |
|
|
342.8 |
|
|
Ps |
1,439.0 |
|
|
|
17.0 |
% |
|
|
341.6 |
|
|
Ps |
1,641.9 |
|
|
|
19.6 |
% |
Newsprint |
|
|
162.8 |
|
|
|
1,139.6 |
|
|
|
11.8 |
|
|
|
142.4 |
|
|
|
974.6 |
|
|
|
11.5 |
|
|
|
158.1 |
|
|
|
994.1 |
|
|
|
11.9 |
|
Uncoated free sheet |
|
|
153.0 |
|
|
|
1,412.4 |
|
|
|
14.6 |
|
|
|
133.0 |
|
|
|
1,219.6 |
|
|
|
14.4 |
|
|
|
121.1 |
|
|
|
1,064.6 |
|
|
|
12.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Paper |
|
|
752.0 |
|
|
|
4,529.7 |
|
|
|
46.7 |
|
|
|
618.1 |
|
|
|
3,633.2 |
|
|
|
42.9 |
|
|
|
620.7 |
|
|
|
3,700.7 |
|
|
|
44.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Packaging: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated containers |
|
|
702.3 |
|
|
|
4,643.0 |
|
|
|
47.9 |
|
|
|
665.1 |
|
|
|
4,322.2 |
|
|
|
51.0 |
|
|
|
632.2 |
|
|
|
4,191.3 |
|
|
|
50.1 |
|
Multi-wall sacks |
|
|
40.9 |
|
|
|
395.7 |
|
|
|
4.1 |
|
|
|
42.0 |
|
|
|
404.7 |
|
|
|
4.8 |
|
|
|
39.9 |
|
|
|
361.3 |
|
|
|
4.3 |
|
Paper tubes (1) |
|
|
1.7 |
|
|
|
11.9 |
|
|
|
0.1 |
|
|
|
1.5 |
|
|
|
11.4 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Packaging |
|
|
745.0 |
|
|
|
5,050.6 |
|
|
|
52.1 |
|
|
|
708.6 |
|
|
|
4,738.2 |
|
|
|
55.9 |
|
|
|
672.1 |
|
|
|
4,552.6 |
|
|
|
54.4 |
|
Other products |
|
|
10.8 |
|
|
|
117.9 |
|
|
|
1.2 |
|
|
|
9.7 |
|
|
|
104.5 |
|
|
|
1.2 |
|
|
|
11.7 |
|
|
|
115.0 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales Volume |
|
|
1,507.8 |
|
|
Ps |
9,698.2 |
|
|
|
100.0 |
% |
|
|
1,336.5 |
|
|
Ps |
8,475.9 |
|
|
|
100.0 |
% |
|
|
1,304.5 |
|
|
Ps |
8,368.4 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In January, 2005, we purchased machinery to manufacture paper tubes. |
24
Paper Products
Below is a description of our paper products and their usage.
|
|
|
|
|
Product Description and Usage |
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. |
|
|
|
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. |
|
|
|
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.
Packaging Products
Below is a brief description of our packaging products and their usage.
|
|
|
|
|
Product Description and Usage |
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. |
|
|
|
Multi-wall sacks
|
|
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 2006, 83.5% of our total
sales were made in Mexico and 19.8% were made in and into the United States.
Our major customers in Mexico and the United States include:
25
|
|
|
|
|
Paper |
|
Packaging |
|
Other Products |
Mexico:
|
|
Mexico:
|
|
Mexico: |
|
|
|
|
|
El Universal Compañía Periodística |
|
|
|
|
Nacional, S.A. de C.V.
|
|
Nestle
|
|
Maderería El Cueramo, S.A. de C.V. |
Fernández Editores
|
|
Grupo Femsa
|
|
Triplay Alameda, S.A. de C.V. |
Comisión Nacional de Libros de |
|
|
|
|
Texto Gratuitos
|
|
Grupo Vitro, S.A. de C.V.
|
|
Cimbra-Mex, S.A. de C.V. |
Periodico Excelsior, S.A. de C.V.
Telmex
|
|
Grupo Pepsico, S.A. de C.V.
Kimberly Clark
de Mexico, S.A. de C.V. |
|
|
Grupo Milenio
|
|
Allen del Norte, S.A. de C.V. |
|
|
|
|
Grupo Apasco, S.A. de C.V. |
|
|
|
|
Crisa Libbey |
|
|
|
|
|
|
|
United States:
|
|
United States: |
|
|
Weyerhaeuser Company
|
|
Harris Packaging |
|
|
Georgia Pacific Co.
|
|
Bronco Packaging |
|
|
Boise Paper Solutions
|
|
Bana, Inc. |
|
|
Temple Inland Corrugated
Packaging
|
|
Victor Packaging Dallas |
|
|
Sales and Marketing
In 2006, sales to our 10 largest customers accounted for approximately 23% 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.
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, 2006, we had approximately 226 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 and
growers of fruits and vegetables, 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
26
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 2006,
approximately 73% of the fiber we used in our Mexican operations was recycled and approximately 39%
of this recycled fiber was imported from third party producers.
In 2006, our six recycling centers in Mexico provided approximately 30% of our fiber
requirements in Mexico and we obtained the balance of our recycled fiber requirements in the open
market. In the United States, our McKinley mill uses only recycled fiber. In 2006, our recycling
centers in Albuquerque, Phoenix and El Paso provided approximately 49% 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 unbleached kraft pulp. We are also able to produce 79,000 short tons per
year of chemical thermo-mechanical pulp, 52,000 short tons 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 unbleached 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 have concessions from the Mexican National Water Commission to operate the wells at our
production facilities in Mexico. The prices that we pay for these rights depend on the tariffs of
the region of Mexico in which the well is located as well as the volume of water consumed. Although
we are not required to recycle the water that we use under these concessions, we recycle a
substantial portion of the water we use.
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.
27
Accordingly, the ongoing water supply requirements at our McKinley mill are significantly less
than for conventional paper mills.
Energy
Our Tizayuca mill generates all of its 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 Federal Electricity Commission (Comisión Federal de Electricidad), the Mexican
state-owned electric company. The contracts for electric power supply signed with the Federal
Electricity Commission 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.
We use heating oil and natural gas to produce steam for our operations. Our purchases of
heating oil and natural gas account for approximately 35% of our energy consumption. We purchase
heating oil in the open market and we purchase natural gas from Petróleos Mexicanos.
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, 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, 2006, we owned approximately 110 trailer trucks and had access to 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 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.
28
Our Competition
In 2006, approximately 71% 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 2006, 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-Stone Container Corporation, International Paper Company, 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 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,
29
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, 2006:
|
|
|
|
|
|
|
Short tons |
|
|
per year |
Paper: |
|
|
|
|
Containerboard |
|
|
|
|
Centauro Mill (Durango) |
|
|
308,000 |
|
Tizayuca Mill (Hidalgo) (1) |
|
|
200,000 |
|
McKinley Mill (New Mexico, U.S.) |
|
|
220,000 |
|
Atenquique Mill (Jalisco) |
|
|
155,000 |
|
Monterrey Mill (Nuevo León) |
|
|
143,000 |
|
Texcoco Mill (Edo. de México) |
|
|
27,000 |
|
Tuxtepec Mill (Oaxaca) (2) |
|
|
64,000 |
|
|
|
|
|
|
Total |
|
|
1,117,000 |
|
Newsprint |
|
|
|
|
Tuxtepec Mill (Oaxaca) (2) |
|
|
164,000 |
|
|
|
|
|
|
Uncoated Free Sheet |
|
|
|
|
Mexpape Mill (Veracruz) |
|
|
172,000 |
|
|
|
|
|
|
|
|
|
1,453,000 |
|
|
|
|
|
|
|
|
|
|
|
Pulp: |
|
|
|
|
Unbleached Softwood Pulp |
|
|
|
|
Atenquique Mill (Jalisco) |
|
|
80,000 |
|
|
|
|
|
|
Bleached Chemical Thermomechanical Pulp |
|
|
|
|
Pipsamex Pulp Mill (Durango) (3) |
|
|
79,000 |
|
|
|
|
|
|
Thermomechanical Pulp (TMP) |
|
|
|
|
Tuxtepec Pulp Mill (Oaxaca) |
|
|
52,000 |
|
|
|
|
|
|
Bleached Bagasse Pulp |
|
|
|
|
Mexpape Pulp Mill (Veracruz) (3) |
|
|
79,000 |
|
|
|
|
|
|
Bleached Deinking Pulp |
|
|
|
|
Tuxtepec DIP Mill (Oaxaca) |
|
|
100,000 |
|
Mexpape DIPHB Mill (Veracruz) |
|
|
110,000 |
|
|
|
|
|
|
Total |
|
|
210,000 |
|
|
|
|
|
|
|
|
|
500,000 |
|
|
|
|
|
|
|
|
|
|
|
Packaging: |
|
|
|
|
Corrugated containers |
|
|
|
|
Mexico Plant (Edo. de México) |
|
|
59,000 |
|
Tizayuca Plant (Hidalgo) (1) |
|
|
100,000 |
|
Puente de Vigas Plant (Edo. de México) (1)(4) |
|
|
32,000 |
|
Tultitlan Plant (Edo. de México) |
|
|
59,000 |
|
30
|
|
|
|
|
|
|
Short tons |
|
|
per year |
Juárez Plant (Edo. de México) |
|
|
48,000 |
|
Izcalli Plant (Edo. de México) |
|
|
44,000 |
|
Apodaca Plant (Nuevo León) (1) |
|
|
56,000 |
|
Monterrey Plant (Nuevo León) |
|
|
54,000 |
|
San Nicolás Plant (Nuevo León) |
|
|
43,000 |
|
Nogalar Plant (Nuevo León) |
|
|
31,000 |
|
Zona Industrial Plant (Jalisco) (1) |
|
|
26,000 |
|
Tepatitlán Plant (Jalisco) |
|
|
52,000 |
|
Fresno Plant (Jalisco) |
|
|
49,000 |
|
Tapachula Plant (Chiapas) |
|
|
32,000 |
|
Querétaro Plant (Querétaro) |
|
|
44,000 |
|
Mexicali Plant (Baja California Norte) (1) |
|
|
37,000 |
|
Culiacán Plant (Sinaloa) (1) |
|
|
43,000 |
|
Chihuahua Plant (Chihuahua) |
|
|
35,000 |
|
Durango McKinley Paper Dallas Plant (Texas, U.S.) |
|
|
100,000 |
|
|
|
|
|
|
Total |
|
|
944,000 |
|
Multi-wall Sacks |
|
|
|
|
Cd. Guzmán Plant (Jalisco) |
|
|
30,000 |
|
Tula Plant (Hidalgo) (1) |
|
|
14,000 |
|
Apasco Plant (Edo. de México) |
|
|
15,000 |
|
|
|
|
|
|
Total |
|
|
59,000 |
|
|
|
|
|
|
|
|
|
1,003,000 |
|
|
|
|
|
|
Other: |
|
|
|
|
Plywood Anahuac Mill (Chihuahua) (3) |
|
|
26,000 |
|
Particleboard Durango Mill (Durango) (3) |
|
|
17,000 |
|
Plywood Durango Mill (Durango) |
|
|
19,000 |
|
|
|
|
|
|
Total |
|
|
62,000 |
|
|
|
|
|
|
|
|
|
(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, 2006, we have reflected this amount as containerboard capacity as of December 31,
2006. |
|
(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. As a
result, this plant was out of service from December 30, 2005 until February 15, 2007. |
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 4A. Unresolved Staff Comments.
Not applicable.
31
Item 5. Operating and Financial Review and Prospects.
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our audited consolidated financial statements at December 31,
2006 and 2005 and for the years ended December 31, 2006, 2005 and 2004 and the notes thereto
included in this annual report, as well as the information presented under
IntroductionPresentation of Financial and Other Information and Item 3: Key
InformationSelected Consolidated Financial Data. Our financial statements have been prepared in
accordance with Mexican FRS, which differ in certain respects from U.S. GAAP. See Note 23 to our
audited consolidated financial statements for a description of the main differences between Mexican
FRS and U.S. GAAP as they relate to us.
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 2006 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, 2006, 2005
and 2004; |
|
|
|
|
a discussion of our liquidity and capital resources, including our changes in financial
position for the years ended December 31, 2006, 2005 and 2004, and our long-term
indebtedness; |
|
|
|
|
a discussion of our capital expenditures and our contractual commitments; and |
|
|
|
|
a discussion of the principal differences between Mexican FRS 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 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 Mexican and U.S. market prices of corrugated containers, containerboard and
newsprint, which significantly affect our net revenue; |
32
|
|
|
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, and the prices at which we purchase energy, 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 level of our outstanding indebtedness and the interest we are obligated to pay on
this indebtedness, which affects our net financial expenses; |
|
|
|
|
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 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. |
Financial Presentation and Accounting Policies
Consolidated Financial Statements
We have prepared our audited consolidated financial statements at December 31, 2006 and 2005
and for the three years ended December 31, 2006 in accordance with Mexican FRS, which differ in
significant respects from U.S. GAAP. Note 23 to our audited consolidated financial statements
provides a description of the principal differences between Mexican FRS 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, 2006 and 2005 and for the three years ended December 31,
2006.
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 the production and sale of containerboard (linerboard and
corrugating medium), newsprint and uncoated free sheet. This segment includes the operating
results of our Grupo Durango division and our Grupo Pipsamex division in Mexico and Durango
McKinley Paper Companys paper division in the United States. |
33
|
|
|
Packaging - This segment includes the production and sale of corrugated containers,
multi-wall sacks and paper tubes. This segment includes the operating results of our Titán
division in Mexico and Durango McKinley Paper Companys packaging division in the United
States. |
|
|
|
|
Other - This segment includes the production and sale of plywood. This segment includes
the operating results of our Ponderosa division in Mexico. |
In 2006, paper products accounted for 46.7% of our net sales to third parties, packaging
products accounted for 52.1% 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 2004 and 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 FRS.
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.
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
34
differences that are expected to generate taxable income during the tax loss carryforward
periods. Subsequently, we consider any forecast of future taxable income and 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.
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 the carrying value of the assets. We recorded a gain as a result of the revaluation of
long-lived assets in use at five of our mills and plants of Ps 25.9 million and Ps 118.4 million
during 2006 and 2005, respectively, in other income (expenses).
The Company recalculates on an annual basis its estimations regarding the impairment
of long-lived assets under MFRS. These estimations are based on projections of revenues recognized at the end of the fiscal year
and the expected variances over sale prices and production volumes. Shall these expectations over sale prices and volumes
varied significantly the Company could recognize more losses for impairment purposes.
For U.S. GAAP purposes, as of January 1, 2002, we follow SFAS No. 144, Accounting for the
Impairment of Disposal of Long-Lived Assets, or 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.
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.
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 Mexican FRS, 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 was 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
35
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, established, among other
things, that the purchase method of accounting should be used to account for business acquisitions.
In addition, Statement B-7 modified the accounting treatment of goodwill, which is no longer
permitted to be amortized and is subject to annual impairment tests. Statement B-7 also provides
specific guidance for the accounting treatment of acquisitions of minority interests and transfers
of stock among entities under common control.
Under Statement D-5, Leasing, we capitalize leased assets related to industrial machinery
and equipment. These assets are depreciated in accordance with the depreciation rates of the common
acquired assets.
Principal Factors Affecting Our Results of Operations and Liquidity
Pricing of Our Products
In 2006, paper products accounted for 46.7% of our net sales to third parties and packaging
products accounted for 52.1% of our net sales to third parties. The pricing of our products is
influenced by a number of factors, including:
|
|
|
industry capacity utilization; |
|
|
|
|
recycled fiber prices; |
|
|
|
|
demand for packaging products as a result of the level of growth of the Mexican and U.S. economies; |
|
|
|
|
fluctuations in the exchange rate between the peso and the dollar; and |
|
|
|
|
prevailing inflation rates. |
Containerboard. Our prices for containerboard primarily reflect international paper prices.
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. During 2006, our average price per
short ton for containerboard increased by 8.0%, principally as a result of increased economic
activity in Mexico and the United States.
Uncoated Free Sheet. Our prices for uncoated free sheet primarily reflect international paper
prices. 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. During 2006, our average
price per short ton for uncoated free sheet increased by 0.7%, principally reflecting the recovery
of international prices of uncoated free sheet.
Newsprint. Our prices for newsprint primarily reflect international paper prices. 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. During 2006, our average price per short ton for newsprint increased by 2.2%,
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 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. During 2006, our average price per short ton for
36
corrugated containers increased by 1.7%, principally as a result of increased economic
activity in Mexico and the United States.
Cyclicality Affecting the Paper and Packaging Industry, Capacity Utilization and Disposition of
Chihuahua Particleboard Plant
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 paper prices, leading to declining operating margins.
We expect that these cyclical trends in international paper 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:
|
|
|
cyclical trends in general business and economic activity produce swings in demand for
paper and packaging products; |
|
|
|
|
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; |
|
|
|
|
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 |
|
|
|
|
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 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, 2006, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Containerboard(1) |
|
|
94 |
% |
|
|
100 |
% |
|
|
99 |
% |
Newsprint and uncoated free sheet(1) |
|
|
97 |
% |
|
|
96 |
% |
|
|
93 |
% |
Corrugated containers(2) |
|
|
94 |
% |
|
|
85 |
% |
|
|
83 |
% |
Multi-wall sacks(2) |
|
|
81 |
% |
|
|
78 |
% |
|
|
70 |
% |
|
|
|
(1) |
|
Calculated based on seven days per week and three shifts per day. |
|
(2) |
|
Calculated based on six days per week and three shifts per day. |
Acquisition of Tizayuca Mill and Plant and Disposition of Chihuahua Particleboard Plant
Acquisition of Tizayuca Mill and Plant
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 in the state of Hidalgo. The lease agreement has a term of 7.5
years and requires total 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.
Disposition of Chihuahua Particleboard Plant
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 200,000 short
tons and we ceased producing particleboard.
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 cost 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
2006, OCC and ONP represented approximately 42% 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. In 2006, our six
recycling centers in Mexico provided approximately 30% of our fiber requirements in Mexico and we
obtained the balance of our recycled fiber requirements in the open market. In the United States,
our McKinley mill uses only recycled fiber. In 2006, our recycling centers in Albuquerque, Phoenix
and El Paso provided approximately 49% of our fiber requirements in the United States and we
obtained the balance of our recycled fiber 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.
38
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 the
past three years we have not always been 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
In 2006, energy cost represented approximately 17% 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 under
standard contracts used for all Mexican companies and we produce the remainder at our own power
plants. These standard 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.
In addition, we use heating oil and natural gas to produce steam for our operations. Our
purchases of heating oil and natural gas account for approximately 35% of our energy consumption.
We purchase heating oil in the open market and we purchase natural gas from Petróleos Mexicanos.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in millions of constant pesos in purchasing power as of |
|
|
|
December 31, 2006) |
|
Mexico |
|
Ps |
12,345.1 |
|
|
Ps |
10,974.8 |
|
|
Ps |
10,422.7 |
|
United States |
|
|
2,299.6 |
|
|
|
2,388.7 |
|
|
|
2,458.9 |
|
Intercompany Sales |
|
|
(4,946.6 |
) |
|
|
(4,887.6 |
) |
|
|
(4,513.1 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
Ps |
9,698.2 |
|
|
Ps |
8,475.9 |
|
|
Ps |
8,368.4 |
|
|
|
|
|
|
|
|
|
|
|
In 2006:
|
|
|
approximately 71% 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 |
|
|
|
|
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
39
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 4.2% in 2004, 3.0% in 2005 and 4.8% in 2006. 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.
Effect of Level of Indebtedness and Interest Rates
At December 31, 2006, our total outstanding indebtedness on a consolidated basis was Ps
5,793.9 million. As a result of our substantial indebtedness, our company incurred interest
expenses of Ps 591.8 million in 2006, Ps 616.5 million in 2005 and Ps 1,205.3 million in 2004.
These interest expenses were substantial factors in our losses from continuing operations in 2004.
Our debt obligations with variable interest rates expose our company to market risks from
changes in the London interbank offered rate, or LIBOR. We do not have in place hedging
arrangements with respect to variations in LIBOR because we do not believe them to be cost
effective for our company.
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, Moodys Investors Service and
Fitch Inc. ceased rating our company and our debt instruments. In June 2007, Standard & Poors
resumed rating our company on a global basis and assigned an initial rating of B+ to our company.
On February 27, 2006, we announced a debt reduction program to be undertaken during 2006.
During 2006, we prepaid US$76 million of our outstanding debt and made amortization and payments at
maturity of an additional US$24 million. The following are the most significant pre-payments made
under this debt reduction program:
|
|
|
we prepaid US$56 million to Bancomext under certain outstanding loan agreements; |
|
|
|
|
we prepaid US$10 million to Bank of Albuquerque, representing the full amount
outstanding under our loan agreement with Bank of Albuquerque; |
|
|
|
|
we prepaid US$5 million to GE Capital Leasing under our capital leases, representing the
full amount outstanding under these leases; and |
|
|
|
|
we prepaid US$5 million to GE Capital Corporation under an outstanding capital lease. |
We 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.
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:
|
|
|
a substantial portion of our net sales are denominated in dollars or dollar-linked; |
|
|
|
|
we have significant amounts of dollar-denominated liabilities that require us to make
principal and interest payments in dollars; |
40
|
|
|
the operations of our subsidiary, Durango McKinley Paper Company, are conducted in the
United States; |
|
|
|
|
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 |
|
|
|
|
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 26% of our sales were made in dollars during 2006 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 2006, approximately 17% 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 appreciated by 0.8% against the dollar in 2004,
appreciated by 4.6% in 2005 and depreciated by 1.7% in 2006.
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, 2006, substantially all of our indebtedness was denominated in dollars. As a
result, when the peso depreciates against the dollar:
|
|
|
the interest costs on our dollar-denominated indebtedness in pesos increases, which
negatively affects our results of operations; |
|
|
|
|
the amount of our dollar-denominated indebtedness in pesos increases, and our total
liabilities in pesos increase; and |
|
|
|
|
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 2003.
Conversely, when the peso appreciates against the dollar:
|
|
|
the interest costs on our dollar-denominated indebtedness in pesos decreases, which
positively affects our results of operations; |
|
|
|
|
the amount of our dollar-denominated indebtedness in pesos decreases, and our total
liabilities in pesos decrease; and |
|
|
|
|
our financial expenses tend to decrease as a result of foreign exchange gains that we
must record. |
41
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.
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:
|
|
|
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 |
|
|
|
|
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 2004, 2005 and 2006 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(in millions of constant pesos in purchasing power as of December 31, |
|
|
2006, except percentages) |
Inflation |
|
|
4.1 |
% |
|
|
3.3 |
% |
|
|
5.2 |
% |
Gain from monetary position |
|
Ps |
252.0 |
|
|
Ps |
206.7 |
|
|
Ps |
488.3 |
|
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:
|
|
|
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; |
42
|
|
|
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 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 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 1,473.6 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 1,255.2 million) were issued to the holders of these claims. |
|
|
|
|
Unsecured creditors of our company with claims against our company in the amount of
US$510.3 million (Ps 5,517.2 million) related to our outstanding unsecured notes 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 4,690.1 million)
of our Series B notes with respect to these claims. |
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 33% in 2004, 30% in 2005 and 29% in 2006. 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 28% in
2007. This reduction in the income tax rate resulted in a decrease in the value of our deferred
income tax liability of Ps 18.0 million in 2005 and Ps 14.1 million in 2006, 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
43
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 was 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. 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 253.7
million in 2006 and Ps 190.6 million in 2005 and charged to results of operations.
Restated amounts as of December 31, 2006 and expiration dates are:
|
|
|
|
|
|
|
|
|
|
|
Tax Loss |
|
|
Recoverable |
|
Year of expiration |
|
Carryforwards |
|
|
Asset Taxes |
|
|
|
(millions of constant pesos) |
|
2007 |
|
Ps |
13.6 |
|
|
Ps |
29.5 |
|
2008 |
|
|
117.2 |
|
|
|
28.6 |
|
2009 |
|
|
131.7 |
|
|
|
22.4 |
|
2010 |
|
|
66.2 |
|
|
|
27.0 |
|
2011 |
|
|
58.5 |
|
|
|
25.1 |
|
2012 |
|
|
374.8 |
|
|
|
66.7 |
|
2013 |
|
|
959.6 |
|
|
|
62.6 |
|
2014 |
|
|
367.7 |
|
|
|
6.7 |
|
2015 |
|
|
1,060.7 |
|
|
|
1.1 |
|
2016 |
|
|
256.0 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
Total |
|
Ps |
3,405.8 |
|
|
Ps |
270.9 |
|
|
|
|
|
|
|
|
Recent Developments
On June 21, 2007, we commenced a cash tender offer for any and all of our outstanding Series B
notes. The tender offer will expire on July 19, 2007, unless we extend it. In connection with the
consummation of our repurchase of the tendered Series B notes, we intend to redeem all of the
Series B notes not purchased in the tender offer and prepay all amounts due under the Restructured
Credit Agreement. We intend to finance these transactions through the issuance of new debt
securities.
Concurrently with the Tender Offer, we are soliciting consents from each registered holder of
the Series B notes to proposed amendments to the indenture under which the Series B notes were
issued and the Common Agreement eliminating most of the covenants in the indenture and the Common
Agreement governing our actions, other than the covenants to pay principal of and interest on the
Series B notes when due, and the related events of default.
44
Results of Operations
The following discussion of our results of operations is based on our audited consolidated
financial statements prepared in accordance with Mexican FRS. 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, and the percentage of net
sales represented by each line item, for each of the three years ended December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in millions of constant pesos in purchasing power as of December 31, |
|
|
|
2006, except percentages) |
|
Net sales |
|
Ps |
9,698.2 |
|
|
|
100.0 |
% |
|
Ps |
8,475.9 |
|
|
|
100.0 |
% |
|
Ps |
8,368.4 |
|
|
|
100.0 |
% |
Cost of sales |
|
|
8,142.8 |
|
|
|
84.0 |
|
|
|
7,386.2 |
|
|
|
87.1 |
|
|
|
7,171.7 |
|
|
|
85.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,555.3 |
|
|
|
16.0 |
|
|
|
1,089.6 |
|
|
|
12.9 |
|
|
|
1,196.7 |
|
|
|
14.3 |
|
Selling, general and administrative expenses |
|
|
721.9 |
|
|
|
7.4 |
|
|
|
705.4 |
|
|
|
8.3 |
|
|
|
722.5 |
|
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
833.4 |
|
|
|
8.6 |
|
|
|
384.3 |
|
|
|
4.5 |
|
|
|
474.2 |
|
|
|
5.7 |
|
Other income (expense), net |
|
|
65.5 |
|
|
|
0.7 |
|
|
|
5.5 |
|
|
|
0.1 |
|
|
|
(434.8 |
) |
|
|
(5.2 |
) |
Net comprehensive financing cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(591.8 |
) |
|
|
(6.1 |
) |
|
|
(616.5 |
) |
|
|
(7.3 |
) |
|
|
(1,205.3 |
) |
|
|
(14.4 |
) |
Interest income |
|
|
31.2 |
|
|
|
0.3 |
|
|
|
44.3 |
|
|
|
0.5 |
|
|
|
43.2 |
|
|
|
0.5 |
|
Foreign exchange gain (loss) |
|
|
(87.2 |
) |
|
|
(0.9 |
) |
|
|
348.2 |
|
|
|
4.1 |
|
|
|
65.1 |
|
|
|
0.8 |
|
Monetary position gain |
|
|
252.0 |
|
|
|
2.6 |
|
|
|
206.7 |
|
|
|
2.4 |
|
|
|
488.3 |
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(395.8 |
) |
|
|
(4.1 |
) |
|
|
(17.3 |
) |
|
|
(0.2 |
) |
|
|
(608.7 |
) |
|
|
(7.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before
income taxes and employee statutory profit
sharing |
|
|
503.1 |
|
|
|
5.2 |
|
|
|
372.4 |
|
|
|
4.4 |
|
|
|
(569.3 |
) |
|
|
(6.8 |
) |
Income tax benefit |
|
|
(532.9 |
) |
|
|
(5.5 |
) |
|
|
(316.3 |
) |
|
|
(3.7 |
) |
|
|
523.1 |
|
|
|
6.3 |
|
Employee statutory profit sharing expense |
|
|
(3.5 |
) |
|
|
(0.0 |
) |
|
|
(0.8 |
) |
|
|
0.0 |
|
|
|
|
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before equity in income of associated
companies |
|
|
(33.3 |
) |
|
|
(0.3 |
) |
|
|
55.4 |
|
|
|
0.7 |
|
|
|
(46.2 |
) |
|
|
(0.6 |
) |
Equity in income of associated companies |
|
|
3.0 |
|
|
|
0.0 |
|
|
|
2.0 |
|
|
|
0.0 |
|
|
|
2.8 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(30.3 |
) |
|
|
(0.3 |
) |
|
|
57.3 |
|
|
|
0.7 |
|
|
|
(43.4 |
) |
|
|
(0.5 |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
113.2 |
|
|
|
1.3 |
|
|
|
109.8 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss) |
|
Ps |
(30.3 |
) |
|
|
(0.3 |
) |
|
Ps |
170.5 |
|
|
|
2.0 |
|
|
Ps |
66.5 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
The following table sets forth consolidated financial information for our business segments
for each of the three years ended December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(in millions of constant pesos in purchasing power as of |
|
|
December 31, 2006, except percentages) |
Paper: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales to third parties |
|
Ps |
4,529.7 |
|
|
Ps |
3,633.2 |
|
|
Ps |
3,700.7 |
|
Percentage of consolidated net sales |
|
|
46.7 |
% |
|
|
42.9 |
% |
|
|
44.2 |
% |
Intersegment sales |
|
|
4,335.7 |
|
|
|
4,363.5 |
|
|
|
4,194.7 |
|
Total sales |
|
|
8,865.3 |
|
|
|
7,996.7 |
|
|
|
7,895.4 |
|
Operating income (loss) |
|
|
510.2 |
|
|
|
127.5 |
|
|
|
57.9 |
|
Operating margin (%) |
|
|
11.3 |
% |
|
|
3.5 |
% |
|
|
1.6 |
% |
Depreciation and amortization |
|
|
276.3 |
|
|
|
287.9 |
|
|
|
305.0 |
|
Packaging: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales to third parties |
|
Ps |
5,050.6 |
|
|
Ps |
4,738.2 |
|
|
Ps |
4,552.6 |
|
Percentage of consolidated net sales |
|
|
52.1 |
% |
|
|
55.9 |
% |
|
|
54.4 |
% |
Intersegment sales |
|
|
429.4 |
|
|
|
430.1 |
|
|
|
318.4 |
|
Total sales |
|
|
5,480.0 |
|
|
|
5,168.3 |
|
|
|
4,871.0 |
|
Operating income |
|
|
329.7 |
|
|
|
246.2 |
|
|
|
415.1 |
|
Operating margin (%) |
|
|
6.5 |
% |
|
|
5.2 |
% |
|
|
9.1 |
% |
Depreciation and amortization |
|
|
121.4 |
|
|
|
138.8 |
|
|
|
143.0 |
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales to third parties |
|
Ps |
117.9 |
|
|
Ps |
104.5 |
|
|
Ps |
115.0 |
|
Percentage of consolidated net sales |
|
|
1.2 |
% |
|
|
1.2 |
% |
|
|
1.4 |
% |
Intersegment sales |
|
|
181.5 |
|
|
|
94.0 |
|
|
|
0.1 |
|
Total sales |
|
|
299.4 |
|
|
|
198.5 |
|
|
|
115.1 |
|
Operating income (loss) |
|
|
(6.4 |
) |
|
|
10.5 |
|
|
|
1.3 |
|
Operating margin (%) |
|
|
(5.5 |
)% |
|
|
10.0 |
% |
|
|
1.1 |
% |
Depreciation and amortization |
|
|
12.7 |
|
|
|
12.1 |
|
|
|
8.1 |
|
Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
Net Sales
Net sales increased by 14.4% in 2006, primarily due to (1) the 24.7% increase of net sales to
third parties of our paper segment, and (2) the 6.6% increase of net sales to third parties of our
packaging segment.
Net sales to third parties of our paper segment increased by 24.7% in 2006, due to:
|
|
|
a 37.4% increase in net sales to third parties of containerboard, principally due to a
27.3% increase in our sales volume of containerboard and an 8.0% increase in our average
sales price for containerboard to Ps 4,533 per short ton in 2006 from Ps 4,198 per short
ton in 2005; |
|
|
|
|
a 15.8% increase in net sales to third parties of uncoated free sheet, principally due
to a 15.1% increase in our sales volume of uncoated free sheet and a 0.7% increase in our
average sales price for uncoated free sheet to Ps 9,231 per short ton in 2006 from Ps 9,171
per short ton in 2005; and |
|
|
|
|
a 16.9% increase in net sales to third parties of newsprint, principally due to a 14.4%
increase in our sales volume of newsprint, and a 2.2% increase in our average sales price
for newsprint to Ps 7,000 per short ton in 2006 from Ps 6,847 per short ton in 2005. |
Net sales to third parties of our packaging segment increased by 6.6% in 2006, primarily as a
result of a 7.4% increase in net sales to third parties of corrugated containers, principally due
to a 5.6% increase in our sales volume of corrugated containers, and a 1.7% increase in our average
sales price for corrugated containers to Ps 6,611 per short ton in 2006 from Ps 6,499 per short ton
in 2005.
46
Net sales to third parties of our other segment increased by 12.8% in 2006, primarily due to
10.5% increase in our sales volume of plywood, and a 2.1% increase in our average sales price for
plywood to Ps 10,964 per short ton in 2006 from Ps 10,741 per short ton in 2005.
Cost of Sales
Cost of sales increased by 10.2% in 2006, primarily due to increased sales volumes of paper
products. The principal components of our cost of sales are (1) fiber, consisting of OCC, ONP and
virgin fiber, (2) energy, including electricity purchased from others and natural gas and fuel oil
that we use to produce steam, and (3) labor. Average prices for recycled fiber, consisting of OCC
and ONP, which accounted for approximately 30% of our cost of goods sold in 2006, declined by 10%
in nominal dollar terms to US$152 per short ton in 2006 from US$169 per short ton in 2005. Our
energy cost, which represented approximately 17% of our cost of production in 2006, increased by
5%, primarily as a result of increased production volumes. On a unit cost basis, energy cost
declined by 7% in 2006. Our labor cost, which represented approximately 10% of our cost of
production in 2006, increased by 2.1%, primarily as a result of an increase in the number of our
employees at the higher end of our wage scale. On a unit cost basis, labor costs decreased by 10%
in 2006.
Gross Profit and Gross Margin
Gross profit increased by 42.7% in 2006, primarily as a result of the increase in net sales of
our paper and packaging segments and the improvement in our gross margin. Gross margin increased to
16.0% in 2006 compared to 12.9% in 2005.
Selling, General and Administrative Expenses
Our selling general and administrative expenses consist primarily of wages and remuneration
for our administrative, marketing and sales personnel, sales commissions, extetnal legal and
accounting services, and travel expenses. Selling, general and administrative expenses increased by
2.3% in 2006, while selling, general and administrative expenses as a percentage of our net sales
decreased to 7.4% in 2006 compared to 8.3% in 2005, primarily as a result of our greater control of
our selling, general and administrative expenses, which increased at a much lower pace than our net
sales.
Operating Income
Operating income increased to Ps 883.4 million in 2006 from Ps 384.3 million in 2005,
primarily as a result of the increase in our gross profit. Operating margin increased to 8.6% in
2006 compared to 4.5% in 2005.
Operating income in our paper segment increased to Ps 510.2 million in 2006 from Ps 127.5
million in 2005, primarily as a result of the increase in net sales of this segment and the
improvement in this segments operating margin. Operating margin of this segment increased to
11.3% in 2006 compared to 3.5% in 2005, principally due to price increases for newsprint and
uncoated free sheet and decreases in the principal unit costs of these products.
Operating income in our packaging segment increased by 33.9% to Ps 329.7 million in 2006 from
Ps 246.2 million in 2005, primarily as a result of the increase in net sales of this segment and
the improvement in this segments operating margin. Operating margin of this segment increased to
6.5% in 2006 compared to 5.2% in 2005, principally due to price increases for corrugated containers
that exceeded the increases in the unit costs of these products.
Operating loss in our other segment was Ps 6.4 million in 2006 compared to operating income of
Ps 10.5 million in 2005, primarily as a result of the negative margins generated by this segment.
Operating margin of this segment declined to (5.5)% in 2006 compared to 10.0% in 2005, primarily as
a result of the higher cost of sales of our other products.
47
Other Income, Net
Other income, net was Ps 65.5 million in 2006 compared to other income, net of Ps 5.5 million
in 2005. In 2006, other income, net arose primarily as a result of a Ps 68.6 million insurance
recovery related to a casualty loss at our Puente de Vigas Plant and a Ps 25.9 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 these gains was partially offset by a Ps 27.4 million restructuring expense
recorded in 2006 in connection with our financial restructuring, and a Ps 16.2 million loss on the
sale of property, plant and equipment, principally our sale of a business jet.
In 2005, other income, net arose primarily as a result of a Ps 118.4 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 68.4 million restructuring expense recorded in
2005 in connection with our financial restructuring.
Net Comprehensive Financing Cost
Net comprehensive financing cost increased to Ps 395.8 million in 2006 from Ps 17.3 million in
2005, primarily due to a foreign exchange loss of Ps 87.2 million in 2006 compared to a foreign
exchange gain of Ps 348.2 million in 2005 as a result of a 1.7% depreciation of the peso in 2006
compared to a 4.6% appreciation of the peso in 2005. The effects of this loss were partially
offset by (1) a 21.9% increase in monetary position gain in 2006, principally due to the increase
of Mexican inflation to 4.1% in 2006 compared to 3.3% in 2005, and (2) a 4.0% decrease in interest
expense in 2006, principally as a result of 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 increased by 69.2% in 2006,
principally due to a 62.6% increase in deferred taxes as a result of an increase in the valuation
allowance on tax loss carryforwards and recoverable tax assets. Our effective tax rate increased
to 105.9% in 2006 compared to 84.9% in 2005.
Income from Discontinued Operations
We had no discontinued operations in 2006. In 2005, our discontinued operations were the
operations of our Chihuahua particleboard mill, which we sold on July 15, 2005. Income from
discontinued operations was Ps 113.2 million in 2005, which consisted of:
|
|
|
income of Ps 61.8 million generated by our discontinued operations; |
|
|
|
|
a Ps 67.9 million income tax and employee statutory profit sharing benefit recorded with
respect to our discontinued operations; and |
|
|
|
|
a Ps 16.7 million loss recorded on the sale of our Chihuahua particleboard plant. |
Consolidated Net Income (Loss)
Reflecting the above factors, net loss was Ps 30.3 million in 2006 compared to net income of
Ps 170.5 million in 2005. Net income (loss) as a percentage of net sales was (0.3)% in 2006
compared to 2.0% in 2005.
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:
48
|
|
|
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 to
Ps 6,499 per short ton in 2005 from Ps 6,630 per short ton in 2004; 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 to Ps 9,627 per short ton in 2005 from Ps 9,064 per short
ton in 2004. |
Net sales to third parties of our paper segment decreased by 1.8% in 2005, due to:
|
|
|
a 12.4% decrease in net sales to third parties of containerboard, principally due to a
12.7% decrease in our average sales price for containerboard to Ps 4,198 per short ton in
2005 from Ps 4,807 in 2004, 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 to Ps
6,847 per short ton in 2005 from Ps 6,289 per short ton in 2004. |
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 to Ps 9,171 per short ton in 2005 from Ps 8,794 per short ton in 2004, 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 a
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.
49
Operating income in our paper segment increased to Ps 127.5 million in 2005 from Ps 57.9
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 10.5 million in 2005 compared to Ps 1.3 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 5.5 million in 2005 compared to other expense, net of Ps 434.8
million in 2004. In 2005, other income, net arose primarily as a result of a Ps 118.4 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 68.4 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 498.6 million expense recorded as a result of the impairment of long-lived assets
in use at five of our mills and plants; |
|
|
|
|
a Ps 347.0 million expense recorded as a result of the write-off of the debt issuance
expenses relating to our outstanding unsecured notes in connection with our financial
restructuring; and |
|
|
|
|
a Ps 155.5 million restructuring expense recorded in 2004 in connection with our
financial restructuring. |
These expenses were partially offset by other income of Ps 667.4 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 577.7 million) for US$7.5 million (Ps 92.7 million).
Net Comprehensive Financing Cost
Net comprehensive financing cost decreased by 97.2% in 2005, primarily due to (1) a 48.8%
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 foreign exchange gain to
Ps 348.2 million in 2005 compared to Ps 65.1 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 317.1 million in 2005 as
compared to a benefit of Ps 523.1 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.
50
In 2005, income from discontinued operations was composed of:
|
|
|
income of Ps 61.8 million generated by our discontinued operations; |
|
|
|
|
a Ps 67.9 million income tax and employee statutory profit sharing benefit recorded with
respect to our discontinued operations; and |
|
|
|
|
a Ps 16.4 million loss recorded on the sale of our Chihuahua particleboard plant. |
In 2004, income from discontinued operations was composed of:
|
|
|
income of Ps 73.2 million generated by our discontinued operations; and |
|
|
|
|
a Ps 36.6 million income tax and employee statutory profit sharing benefit recorded with
respect to our discontinued operations. |
Consolidated Net Income
Reflecting the above factors, net income increased to Ps 170.5 million in 2005 from Ps 66.5
million in 2004. Net income as a percentage of net sales increased to 2.0% in 2005 compared to 0.8%
in 2004.
Liquidity and Capital Resources
Our principal cash requirements consist of the following:
|
|
|
working capital requirements; |
|
|
|
|
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, 2006 and December 31, 2005, we had cash and cash equivalents of Ps 466.6
million and Ps 729.0 million, respectively. At December 31, 2006 and December 31, 2005, we had
working capital of Ps 1,807.2 million and Ps 2,100.1 million, respectively.
We believe that cash generated by our operating activities and other sources of liquidity will
be adequate to meet our debt service requirements, capital expenditures and working capital needs
for the next 12 months. 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 888.4 million in 2006, Ps 150.8 million in
2005 and Ps 859.6 million in 2004.
51
The significant factors that led to the provision of net resources by operating activities in
2006 were items not requiring or providing resources, principally:
|
|
|
depreciation and amortization of Ps 410.5 million; |
|
|
|
|
provision for deferred income tax of Ps 408.1 million; and |
|
|
|
|
a Ps 113.6 million decrease in inventories, primarily as a result of improved management
of our inventory. |
The effects of these items were partially offset by a Ps 108.6 million increase in our trade
accounts receivable, net, primarily as a result of an increase in net sales, and our Ps 30.3
million net loss.
The significant factors that led to the provision of net resources by operating activities in
2005 were our consolidated net income from continuing operations of Ps 57.3 million, net of items
not requiring or providing resources, principally:
|
|
|
depreciation and amortization of Ps 438.8 million; |
|
|
|
|
income from deferred income tax of Ps 250.9 million, primarily as a result of the
revaluation of long-lived assets in use at five of our mills and plants; and |
|
|
|
|
a Ps 118.4 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 a Ps 95.9 million decrease in other current assets, and a
Ps 94.1 million increase in trade accounts payable. The effects of these items were partially
offset by:
|
|
|
a Ps 296.0 million loss from discontinued operations, net of items that did not require resources; |
|
|
|
|
a Ps 141.1 million decrease in accrued expenses and taxes, other than income taxes; |
|
|
|
|
a Ps 104.3 million decrease in other liabilities, net; and |
|
|
|
|
a Ps 93.6 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 43.4 million, net of items not
requiring or providing resources, principally:
|
|
|
impairment of long-lived assets of Ps 498.6 million related to five of our mills and plants; |
|
|
|
|
depreciation and amortization of Ps 456.1 million; |
|
|
|
|
amortization of debt-issuance cost of Ps 351.9 million related to our outstanding
unsecured notes as a result of our financial restructuring; and |
|
|
|
|
deferred income tax expense of Ps 552.8 million, primarily as a result of the impairment
of our long-lived assets. |
These effects were supplemented by a Ps 141.1 million decrease in trade accounts receivables, net,
primarily as a result of greater efficiency in our collection process, net income of discontinued
operations, net of items not requiring the use of resources, of Ps 109.8 million, and a Ps 76.2
million decrease in inventories. The effects of these items were partially offset by a Ps 231.8
million decrease in trade accounts payable.
52
Net Resources Used in Financing Activities
Financing activities used net resources of Ps 884.7 million in 2006, Ps 573.4 million in 2005
and Ps 651.1 million in 2004. In 2006, net resources used in financing activities on a consolidated
basis primarily consisted of payments of long-term debt in the aggregate amount of Ps 1,081.5
million. The effects of these payments were partially offset by our receipt of an aggregate Ps
317.0 million as proceeds of the sale of 2,177,042,255 shares of series B capital stock of
Pipsamex, representing 13.3% of Pipsamexs outstanding capital stock.
In 2005, net resources used in financing activities on a consolidated basis primarily
consisted of (1) a Ps 4,150.6 million decrease in short-term and long-term debt, partially offset
by (2) a Ps 302.5 million increase in capital stock and a Ps 3,094.2 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 177.5
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 831.3 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 105.2 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 used net resources of Ps 266.1 million in 2006, generated net resources
of Ps 256.8 million in 2005 and used net resources of Ps 40.1 million in 2004.
In 2006, net resources used by investing activities on a consolidated basis primarily
consisted of (1) Ps 227.0 million of acquisitions of machinery and equipment consisting of land and
buildings for the Tizayuca mill and machinery for our packaging division, and (2) Ps 39.1 million
of investments in other assets.
In 2005, net resources generated by investing activities on a consolidated basis primarily
consisted of (1) Ps 347.9 million received as proceeds from the sale of our Chihuahua particleboard
plant, and (2) Ps 29.3 million received as proceeds from the sale of property, plant and equipment.
The effects of these transactions were partially offset by (1) Ps 64.3 million of acquisitions of
machinery and equipment, and (2) Ps 56.2 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 181.9 million. The effects of these
transactions were partially offset by the termination of restrictions placed on Ps 178.1 million of
the proceeds of the sales of our subsidiary Productora Nacional de Papel, S. A. de C. V., or
Pronal, and 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.
Indebtedness
At December 31, 2006, our total outstanding indebtedness on a consolidated basis was Ps
5,793.9 million, consisting of Ps 169.5 million of short-term indebtedness, including current
portion of long-term indebtedness (or 2.9% of our total indebtedness), and Ps 5,624.5 million of
long-term indebtedness (or 97.1% of our total indebtedness). All of our indebtedness at December
31, 2006 was denominated in foreign currencies. The weighted average interest rate on our
indebtedness was 8.9% at December 31, 2006, 7.6% at December 31, 2005 and 7.3% at December 31, 2004
(without giving effect to our financial restructuring).
Short-Term Indebtedness
At December 31, 2006, we had no outstanding short-term indebtedness, other than the current
portion of our long-term indebtedness.
53
Long-Term Indebtedness
The following table sets forth selected information with respect to our principal outstanding
long-term debt instruments at December 31, 2006.
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
Principal Amount at |
|
|
Instrument |
|
December 31, 2006 |
|
Final Maturity |
Series B notes |
|
US$426.8 million |
|
December 2012 |
Restructured Credit Agreement |
|
US$95.0 million |
|
December 2012 |
Bancomext Loan |
|
US$7.8 million |
|
September 2014 |
Commerzbank Loan |
|
5.0 million |
|
January 2010 |
GE Capital Leasing Leases |
|
US$0.4 million |
|
October 2013 |
Our obligations under the Restructured Credit Agreement and the Series B notes are guaranteed
by the following subsidiaries:
|
|
|
Titán; |
|
|
|
|
Ponderosa; |
|
|
|
|
Durango International, Inc.; |
|
|
|
|
Porteadores de Durango, S. A. de C. V.; |
|
|
|
|
Reciclajes Centauro, S. A. de C. V.; |
|
|
|
|
Compañía Norteamericana de Inversiones en Celulosa y Papel, S. A. de C. V.; |
|
|
|
|
Administración Corporativa de Durango, S. A. de C. V.; |
|
|
|
|
Líneas Aéreas Ejecutivas de Durango, S.A. de C.V.; |
|
|
|
|
Inmobiliaria Industrial Tizayuca, S.A. de C.V.; |
|
|
|
|
Servicios Industriales Tizayuca, S.A. de C.V. ; |
|
|
|
|
Atenmex, S.A. de C.V.; |
|
|
|
|
Atensa, S.A. de C.V.; |
|
|
|
|
Ectsa Industrial, S.A. de C.V.; |
|
|
|
|
Eyemsa Industrial, S.A. de C.V.; |
|
|
|
|
Cartonpack Industrial, S.A. de C.V.; |
|
|
|
|
Administradora Industrial Durango, S.A. de C.V.; and |
|
|
|
|
Administración Industrial Centauro, S.A. de C.V. |
In addition, our obligations under the Restructured Credit Agreement and the Series B notes are secured by:
|
|
|
the shares of Pipsamex and Durango McKinley Paper Company owned by our company; |
|
|
|
|
the real property of Administración Corporativa de Durango, S. A. de C. V. and Ponderosa; |
|
|
|
|
the real property of Titán that was owned by Titán, Eyemex, Cartonpack, Industrias
Centauro, S.A. de C.V., and Compañía Papelera de Atenquique, S.A. de C.V. prior to the
mergers of Eyemex, Cartonpack, Industrias Centauro, S.A. de C.V., and Compañía Papelera de
Atenquique, S.A. de C.V. with and into Titán; and |
|
|
|
|
certain assets of Titán that were owned by Titán, Eyemex and Cartonpack prior to the
merger of Eyemex and Cartonpack with and into Titán. |
Series B Notes
On February 23, 2005, we issued an aggregate principal amount of US$433.8 million (Ps 4,690.1
million) of our Series B notes in connection with our restructuring. The Series B 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. As of December 31, 2006, the aggregate principal amount of our outstanding
Series B notes was US$426.8 million (Ps 4,614.5 million).
54
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
1,255.2 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, 2006, the aggregate principal amount outstanding under the Restructured Credit
Agreement was US$95.0 million (Ps 1,027.1 million).
Other Secured Bank Debt
Bancomext Loan. Our subsidiary, Pipsamex, borrowed an aggregate principal amount of US$80.0
million (Ps 864.9 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 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 Pipsamex and is guaranteed by CODUSA. As
part of our debt reduction program, we voluntarily prepaid US$56.3 million under this loan
agreement during 2006. As of December 31, 2006, the aggregate principal amount outstanding under
this loan agreement was US$7.8 million (Ps 84.1 million).
Commerzbank Loan. Our subsidiary, Ponderosa, borrowed an aggregate principal amount of
10.7 million (Ps 173.7 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, 2006, the aggregate
principal amount outstanding under this loan was 5.0 million (Ps 63.5 million).
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 108.1 million) which were payable in 28 quarterly installments with the final payments
due in October 2008 and April 2009, respectively. The promissory notes bore 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. On March 31, 2006, we entered into an addendum to these financial lease
agreements under which the interest rate on the promissory notes was fixed at 8.17% per annum and
the remaining amounts due under the promissory notes as of that date are payable in 30 quarterly
installments with the final payments due in October 2013. As of December 31, 2006, the aggregate
principal amount outstanding under these promissory notes was US$0.4 million (Ps 4.8 million).
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; |
55
|
|
|
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 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. 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.
Contractual Commitments and Capital Expenditures
Contractual Commitments
The following table summarizes significant contractual obligations and commitments at December
31, 2006 that have an impact on our liquidity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
One to |
|
|
|
|
|
|
More |
|
|
|
|
|
|
Less than |
|
|
Three |
|
|
Three to |
|
|
than Five |
|
|
|
|
|
|
One Year |
|
|
Years |
|
|
Five Years |
|
|
Years |
|
|
Total |
|
|
|
(millions of constant pesos in purchasing power |
|
|
|
as of December 31, 2006) |
|
Indebtedness |
|
Ps |
168.8 |
|
|
Ps |
421.7 |
|
|
Ps |
423.4 |
|
|
Ps |
4,775.3 |
|
|
Ps |
5,789.1 |
|
Interest on indebtedness (1) |
|
|
539.5 |
|
|
|
941.7 |
|
|
|
763.3 |
|
|
|
299.5 |
|
|
|
2,544.0 |
|
Capital leases |
|
|
0.7 |
|
|
|
1.4 |
|
|
|
1.4 |
|
|
|
1.4 |
|
|
|
4.8 |
|
Operating leases (2) |
|
|
108.3 |
|
|
|
226.2 |
|
|
|
267.9 |
|
|
|
252.2 |
|
|
|
854.6 |
|
Notes payable |
|
|
54.9 |
|
|
|
73.4 |
|
|
|
42.3 |
|
|
|
26.1 |
|
|
|
196.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
Ps |
872.2 |
|
|
Ps |
1,664.4 |
|
|
Ps |
1,498.3 |
|
|
Ps |
5,354.5 |
|
|
Ps |
9,389.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of estimated future payments of interest on our indebtedness, calculated based on
interest rates and foreign exchange rates applicable at December 31, 2006 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, 2006 under
noncancelable operating leases of equipment to our subsidiaries. |
56
Capital Expenditures
Our capital expenditures on property, plant and equipment were Ps 227.0 million in 2006, Ps
140.4 million in 2005, and Ps 222.9 million in 2004. Our principal capital expenditures projects
during 2004 through 2006 included:
|
|
|
Ps 165.8 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; |
|
|
|
|
Ps 115.4 million in 2005 for the purchase of printers for the packaging division and
machinery and equipment for our paper mills; and |
|
|
|
|
Ps 118.3 million in 2006 for the purchase of land and buildings for the Tizayuca mill
and Ps 106.6 million in 2006 for the purchase of machinery for our packaging division. |
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.
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, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2008 |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
Estimated |
|
|
Estimated |
|
|
|
(in millions of constant pesos in purchasing power as of |
|
|
|
December 31, 2006) |
|
Capital expenditures (other than
environmental) |
|
Ps |
208.1 |
|
|
Ps |
127.9 |
|
|
Ps |
209.8 |
|
|
Ps |
208.1 |
|
|
Ps |
130.0 |
|
Environmental capital expenditures |
|
|
14.8 |
|
|
|
12.5 |
|
|
|
17.2 |
|
|
|
10.4 |
|
|
|
14.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Ps |
222.9 |
|
|
Ps |
140.4 |
|
|
Ps |
227.0 |
|
|
Ps |
218.5 |
|
|
Ps |
144.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our loan agreements and the Common Agreement governing the Restructured Credit Agreement and
the Series B notes contain significant restrictions on our ability to make capital expenditures. We
currently are budgeting total capital expenditures of approximately Ps 218.5 million for 2007 and
Ps 144.0 million for 2008. Our principal capital expenditures for 2007 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 FRS and U.S. GAAP
Our audited consolidated financial statements are prepared in accordance with Mexican FRS.
Mexican FRS differs in significant respects from U.S. GAAP. For more information about the
differences between Mexican FRS 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, 2006 and 2005 and for each of
the three years in the period ended December 31, 2006, 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
SFAS No. 155, Accounting for certain hybrid financial instruments-and amendment of FASB
Statements Nos. 133 and 140, was 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
57
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 is effective for all financial instruments acquired or issued after the
beginning of an entitys first fiscal year that begins after September 15, 2006. We are currently
evaluating the impact of adopting SFAS 155 on our financial condition and results of operations.
SFAS No. 156, Accounting for servicing of financial assets-an amendment of FASB Statement No.
140, was 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 that 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. We are currently evaluating the impact of adopting SFAS 156 on our
financial condition and results of operations.
SFAS No. 157 Fair Value Measurements was issued in September 2006. This Statement defines
fair value, establishes a framework for measuring fair value in generally accepted accounting
principles (GAAP), and expands disclosures about fair value measurements. This Statement applies
under other accounting pronouncements that require or permit fair value measurements, the Board
having previously concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, this Statement does not require any new fair value
measurements. However, for some entities, the application of this Statement will change current
practice. The definition of fair value retains the exchange price notion in earlier definitions of
fair value. This Statement clarifies that the exchange price is the price in an orderly transaction
between market participants to sell the asset or transfer the liability in the market in which the
reporting entity would transact for the asset or liability, that is, the principal or most
advantageous market for the asset or liability. The transaction to sell the asset or transfer the
liability is a hypothetical transaction at the measurement date, considered from the perspective of
a market participant that holds the asset or owes the liability. Therefore, the definition focuses
on the price that would be received to sell the asset or paid to transfer the liability (an exit
price), not the price that would be paid to acquire the asset or received to assume the liability
(an entry price). This Statement also emphasizes that fair value is a market-based measurement, not
an entity-specific measurement. This Statement shall be effective for financial statements issued
for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of
adopting SFAS 157 on our financial condition and results of operations.
SFAS No. 158 Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R) was published by FASB in
September 2006. This Statement improves financial reporting by requiring an employer to recognize
the overfunded or underfunded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the changes occur through
comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit
organization. This Statement also improves financial reporting by requiring an employer to measure
the funded status of a plan as of
58
the date of its year-end statement of financial position, with limited exceptions. This
Statement amends Statement 87, FASB Statement No. 88, Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, Statement 106, and FASB
Statement No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement
Benefits, and other related accounting literature. Upon initial application of this Statement and
subsequently, an employer should continue to apply the provisions in Statements 87, 88, and 106 in
measuring plan assets and benefit obligations as of the date of its statement of financial position
and in determining the amount of net periodic benefit cost.
The required date of adoption of the recognition and disclosure provisions of this Statement
an employer with publicly traded equity securities is required to initially recognize the funded
status of a defined benefit postretirement plan and to provide the required disclosures as of the
end of the fiscal year ending after December 15, 2006. Earlier application of the recognition or
measurement date provisions is encouraged; however, early application must be for all of an
employers benefit plans. Retrospective application of this Statement is not permitted. We are
currently evaluating the impact of adopting SFAS 158 on our financial condition and results of
operations.
EITF Issue No. 05-6, Determining the Amortization Period for Leasehold Improvements Purchased
after Lease Inception or Acquired in a Business Combination, was issued in June 2005. This
guidance determines that leasehold improvements acquired in a business combination should be
amortized over the shorter of the useful life of the assets or a term that includes required lease
period and renewals that are deemed to be reasonably assured at the date of acquisition. The Task
Force also agreed that leasehold improvements that are placed in service significantly after and
not contemplated at or near beginning of the lease term should be amortized over the shorter of the
useful life of the assets or a term that includes required lease periods and renewals that are
deemed to be reasonably assured at the date the leasehold improvement are purchased. This
consensus should be applied to leasehold improvements that are purchased or acquired in reporting
periods beginning after June 29, 2005. We do not anticipate that the adoption of EITF 05-6 will
have an impact on our financial condition or results of operations.
In July, 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting and reporting for income taxes where interpretation of the tax law may be uncertain.
FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of income tax uncertainties with respect to positions taken or expected
to be taken in income tax returns. The interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, and disclosure. FIN 48 is
effective for fiscal years beginning after December 15, 2006. We are currently evaluating the
impact of adopting FIN 48.
In June 2006, the EITF ratified the consensus on EITF Issue No. 06-3 (EITF 06-03), How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation). EITF 06-03 concluded that the presentation of
taxes assessed by a governmental authority that is directly imposed on a revenue-producing
transaction between a seller and a customer, such as sales, use, value-added and certain excise
taxes is an accounting policy decision that should be disclosed in a companys financial
statements. In addition, companies that record such taxes on a gross basis should disclose the
amounts of those taxes in interim and annual financial statements for each period for which an
income statement is presented if those amounts are significant. EITF 06-03 is effective for interim
and annual reporting periods beginning after December 15, 2006. The adoption of EITF 06-3 is not
expected to have any impact on our current financial condition or results of operations.
59
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.
Our board of directors is our legal representative. Our board of directors must approve, among
other matters:
|
|
|
our general strategy; |
|
|
|
|
with the favorable opinion of the audit and corporate practices committees: |
|
|
|
any transactions with related parties, subject to certain limited exceptions; |
|
|
|
|
the appointment or removal of the general director and establish guidelines for the
appointment of executive officers; |
|
|
|
|
our financial statements and those of our subsidiaries; |
|
|
|
|
unusual or non-recurrent transactions and any transactions or series of related
transactions during any calendar year that involve (1) the acquisition or sale of
assets with a value equal to or exceeding 5% of our consolidated assets or (2) the
giving of collateral or guarantees or the assumption of liabilities, equal to or
exceeding 5% of our consolidated assets; and |
|
|
|
|
contracts with external auditors; |
|
|
|
calling shareholders meetings and acting on their resolutions; |
|
|
|
|
the financial statements and the accounting and internal control policies; and |
|
|
|
|
policies for disclosure of information. |
Meetings of the board of directors will be validly convened and held if a majority of our
members are present. Resolutions at the meetings will be valid if approved by a majority of the
members of the board of directors, unless our by-laws require a higher number. The chairman has a
tie-breaking vote. Notwithstanding the boards authority, our shareholders pursuant to decisions
validly taken at a shareholders meeting at all times may override the board.
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 |
60
|
|
|
|
|
Name |
|
Current Title |
|
Since |
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 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, 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).
61
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 Pipsamex. From 1998 to 2002, he was the commercial director of 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 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 in 2005 and 2006. Prior to that time, he
practiced law as a sole practicioner since 1978. From 1965 through 1978, he was a 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.
62
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 Carrasco 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).
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 a degree in law and studied American
law at the Iberoamericana University coordinated by the Georgetown University Law Center.
Compensation of Directors and Executive 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 2006 was Ps 24.7 million, including employee benefits. In 2007, we
expect that the aggregate amount of compensation paid to our executive officers will total
approximately Ps 25.9 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.
Audit and Corporate Practices Committee
Our audit and corporate practices 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, obtains
annual confirmation of independence, reviews the auditors working plan, communications and audit
reports. This committee also recommends to our board of
63
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
controls system and evaluates its effectiveness, supports our board of directors in the evaluation
and coordination of the annual internal audit programs, coordinates the internal and external
auditing work, and verifies the compliance with such statutes and regulations as are applicable to
our company.
Our audit and corporate practices committee is also responsible for the evaluation and review
of any transaction with our shareholders or related parties and may recommend the cancellation or
modification of such transactions.
Our audit and corporate practices committees duties also include:
|
|
|
providing opinions to our board of directors; |
|
|
|
|
when necessary, requesting and obtaining opinions from independent third parties; |
|
|
|
|
calling shareholder meetings; |
|
|
|
|
assisting the board in the preparation of annual reports and other reporting obligations; and |
|
|
|
|
reporting to the board. |
Our audit and corporate practices committee acts and adopts any resolution by majority vote.
In case of conflicts of interest, the members with conflicts do not participate in the vote. The
committee has such powers specifically granted to it by our bylaws and by the new Mexican
Securities Market Law and participates in such studies, advisory work and additional matters
submitted to it by our board of directors.
The members of our audit and corporate practices committee must meet at least four times per
year and informs the board of directors of its activities at least twice a year or at any other
time that the audit and corporate practices committee deems appropriate or becomes aware of any
acts or facts material to our company.
Our audit and corporate practices 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 and corporate practices committee are Rebeca Castaños Castaños,
Alfonso Fernández De Castro and Buenaventura G. Saravia. Rebeca Castaños Castaños is the president
of our audit and corporate practices committee.
Employees
At December 31, 2006, we had 8,639 employees (8,336 in Mexico and 303 in the United States)
and approximately 66.0% our work force was unionized. Our employees in Mexico are represented by 32
unions and our employees in the United States are represented by one union. We have not experienced
any work stoppages in our facilities or those of our subsidiaries during the last five years, other
than a strike covering approximately 300 employees at our Oaxaca mill that commenced on May 28,
2007. In the annual review of our collective bargaining agreement with the Sindicato de
Trabajadores de Fábricas de Papel Tuxtepec, S. A. de C. V., the union presented wage demands that
we did not accept. As a result, the members of this union employed at our Oaxaca mill initiated a
strike and the operations of this mill were halted. On June 30, 2007, we reached an agreement with this union as a result of which we expect to
resume production at our Oaxaca mill on July 3, 2007. We believe that we currently have good relations with our employees at all of
our other facilities.
64
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 |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Mexico (1) |
|
|
8,336 |
|
|
|
7,721 |
|
|
|
7,301 |
|
United States |
|
|
303 |
|
|
|
285 |
|
|
|
282 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
8,639 |
|
|
|
8,006 |
|
|
|
7,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 1,776, 1,453 and 1,457 temporary employees as of December 31, 2006, 2005 and
2004, respectively. Includes 192 employees of our discontinued operations as of December
31, 2004. |
We maintain a pension plan for certain employees in Mexico. In addition, in accordance with
the Mexican Labor Law, we provide seniority premium benefits to our employees in Mexico 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. Our subsidiaries in the United States have established the defined contribution
plans, including a 401(k) retirement savings plan, a health insurance plan, a disability plan, and
a life insurance plan.
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 29, 2007 represents 80.4% 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 one class of common stock, represented by the Common Shares. As of June 29, 2007, our
issued and outstanding capital stock consisted of 110,641,111 Common Shares. Each Common Share is
entitled to one vote at each meeting of our stockholders.
On February 20, 2006, we created a new sole series of common stock, no par value. On August
11, 2006, we converted each of our outstanding Series A Shares and Series B Shares into one newly
issued Common Share. Following this recapitalization:
|
|
|
each of our outstanding CPOs represented a financial interest in one Common Share; |
|
|
|
|
each of our outstanding ADSs continued to represent two CPOs; and |
|
|
|
|
our Common Shares were listed on the Mexican Stock Exchange. |
On April 11, 2007, the Common Shares that had been deposited with NAFIN as the trustee of the
CPO Trust were transferred to BBVA Bancomer S.A., as custodian of our ADR program. As a result,
each of our outstanding ADSs now represents two Common Shares.
As of June 29,
2007, there were 769,633 of our ADSs outstanding, each ADS representing two Common
Shares. As of June 29, 2007, approximately 1.4% of our outstanding Common Shares were represented by
ADSs and were held by approximately 280 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 80.4% of the issued and outstanding Common Shares and have
the power to elect the majority of the directors and to control our company. On April 30, 2007, our
stockholders voted to elect 15 directors.
65
The following table sets forth current information with respect to the beneficial ownership of
our common stock as of June 29, 2007 by:
|
|
|
each person known by us to beneficially own more than 5%, in the aggregate, 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 our shares that they own as
other holders of our shares of common stock.
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
shares |
|
% |
Rincón Family Trust (1) |
|
|
57,916,367 |
|
|
|
52.3 |
|
Administradora Corporativa y Mercantil, S.A. de C.V. (ACM) (2) |
|
|
15,068,000 |
|
|
|
13.6 |
|
Banamex Trust (3) |
|
|
15,911,511 |
|
|
|
14.4 |
|
Miguel Rincón (4) |
|
|
88,936,333 |
|
|
|
80.4 |
|
José Antonio Rincón (5) |
|
|
88,910,577 |
|
|
|
80.4 |
|
Jesús Rincón (6) |
|
|
88,895,878 |
|
|
|
80.3 |
|
Wilfrido Rincón (7) |
|
|
88,910,134 |
|
|
|
80.4 |
|
Ignacio Rincón (8) |
|
|
88,905,350 |
|
|
|
80.4 |
|
Martín Rincón (9) |
|
|
88,899,046 |
|
|
|
80.3 |
|
Mayela Rincón (10) |
|
|
72,993,174 |
|
|
|
66.0 |
|
All directors and executive officers as a group (19 persons) (11) |
|
|
88,986,735 |
|
|
|
80.4 |
|
|
|
|
* |
|
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 Common Shares owned by Miguel Rincón, 57,916,367 Common Shares owned by the
Rincón Family Trust, 15,068,000 Common Shares owned by ACM, and 15,911,511 Common Shares owned
by the Banamex Trust. Miguel Rincón disclaims beneficial ownership of the Common Shares owned
by ACM, except to the extent of his ownership of ACM. Miguel Rincón disclaims beneficial
ownership of the Common 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 Common Shares owned by José Antonio Rincón, 57,916,367 Common Shares owned by
the Rincón Family Trust, 15,068,000 Common Shares owned by ACM, and 15,911,511 Common Shares
owned by the Banamex Trust. José Antonio Rincón disclaims beneficial ownership of the Common
Shares owned by ACM, except to the extent of his ownership of ACM. José Antonio Rincón
disclaims beneficial ownership of the Common 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 57,916,367 Common Shares owned by the Rincón Family Trust, 15,068,000 Common Shares
owned by ACM, and 15,911,511 Common Shares owned by the Banamex Trust. Jesús Rincón disclaims
beneficial ownership of the Common Shares owned by ACM, except to the extent of his ownership
of ACM. Jesús Rincón disclaims beneficial ownership of the Common 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. |
66
|
|
|
(7) |
|
Includes 14,256 Common Shares owned by Wilfrido Rincón, 57,916,367 Common Shares owned by the
Rincón Family Trust, 15,068,000 Common Shares owned by ACM, and 15,911,511 Common Shares owned
by the Banamex Trust. Wilfrido Rincón disclaims beneficial ownership of the Common Shares
owned by ACM, except to the extent of his ownership of ACM. Wilfrido Rincón disclaims
beneficial ownership of the Common 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 Common Shares owned by Ignacio Rincón, 57,916,367 Common Shares owned by the
Rincón Family Trust, 15,068,000 Common Shares owned by ACM, and 15,911,511 Common Shares owned
by the Banamex Trust. Ignacio Rincón disclaims beneficial ownership of the Common Shares owned
by ACM, except to the extent of his ownership of ACM. Ignacio Rincón disclaims beneficial
ownership of the Common 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 Common Shares owned by Martín Rincón, 57,916,367 Common Shares owned by the
Rincón Family Trust, 15,068,000 Common Shares owned by ACM, and 15,911,511 Common Shares owned
by the Banamex Trust. Martín Rincón disclaims beneficial ownership of the Common Shares owned
by ACM, except to the extent of his ownership of ACM. Martín Rincón disclaims beneficial
ownership of the Common 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 Common Shares owned by Mayela Rincón, 57,916,367 Common Shares owned by the
Rincón Family Trust and 15,068,000 Common Shares owned by ACM. Mayela Rincón disclaims
beneficial ownership of the Common Shares owned by ACM. Mayela Rincón disclaims beneficial
ownership of the Common Shares owned by the Rincón Family Trust, except to the extent of her
beneficial ownership in the Rincón Family Trust. |
|
(11) |
|
Includes 90,857 Common Shares owned by directors and officers of our company, 57,916,367
Common Shares owned by the Rincón Family Trust, 15,068,000 Common Shares owned by ACM, and
15,911,511 Common Shares owned by the Banamex Trust. |
Rincón 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. On August 11, 2006, each of the Series A Shares were converted into one
Common Share. Between January 1, 2006 and June 29, 2007, the Rincón Family Trust acquired
1,566,000 Common Shares through market transactions.
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 Rincón 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.
67
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. On August 11,
2006, each of the Series A Shares were converted into one Common Share. The Common Shares held by
the Banamex Trust 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 Common 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 Common Shares held by the Banamex Trust if the
price of the Common 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 all of the Common 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 Common Shares owned by ACM if the price of the Common 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.
Related Party Transactions
Administradora Corporativa y Mercantil, S.A. de C.V.
ACM, a company owned and controlled by the Rincón family, borrowed funds from our company to
fund principal and interest payments on its indebtedness. The outstanding balance on these loans
was Ps 12.3 million at December 31, 2005. These loans were fully repaid during 2006. These loans
bore interest at a rate of 5% per annum and were scheduled to mature on December 31, 2012.
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, 2006,
we recorded net sales to El Universal of approximately US$11.1 million (Ps 120.3 million).
On February 13, 2006, Pipsamex issued and sold 2,177,042,255 shares of its series B capital
stock, representing 13.3% of Pipsamexs 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 reduction program.
Item 8. Financial Information.
See Item 18. Financial Statements.
Legal Proceedings
Comisión Nacional del Agua v. Productora Nacional de Papel, S.A. de C.V.
On November 14, 2003, the Company sold its investment in Pronal. On December 16, 2003, the
Mexican government through the Mexican National Water Commission made demand upon Pronal for
payment of Ps 213.0
68
million for water alleged to have been consumed by Pronal during the calendar years 2000 and
2001. On March 4, 2004, Pronal filed a declaratory action with the Federal Tax and Administrative
Court (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. Our management believes that there are insufficient
grounds for this suit and that the court will rule in its favor. However, we are evaluating the
option to participate in a program of the Mexican government that would allow us to resolve this
matter by paying 20% of the amount alleged to be due and receiving a waiver of all fines and
penalties.
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 Pipsamex
under the terms of the Stock Purchase Agreement executed on November 14, 2003, pursuant to which
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 Pipsamex, Pronal could also demand payment from
Corporacion Durango under a guaranty.
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 Common
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 Common Shares have been listed on the Mexican Stock Exchange since August 17, 2006. Prior
to that date, our Series A Shares were listed on the Mexican Stock Exchange. On February 20, 2006,
we created a new sole series of common stock, no par value. On August 11, 2006, we converted each
of our outstanding Series A Shares and Series B Shares into one newly issued Common Share.
Our ADSs are issued by The Bank of New York, as depositary. Prior to August 11, 2006, each of
our ADSs represented two CPOs, each of which represented a financial interest in one of our Series
A Shares. As a result of the conversion of our Series A Shares into Common Shares on August 11,
2006, from August 11, 2006 until April 11, 2007, each of our ADSs represented two CPOs, each of
which represented a financial interest in one of our Common Shares.
On April 11, 2007, the Common Shares that had been deposited with NAFIN, as the trustee of the
CPO Trust, were transferred to BBVA Bancomer S.A., as custodian of our ADR program. As a result,
since April 11, 2007, each of our outstanding ADSs has represented two Common Shares.
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.
69
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 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 2006, the five largest traded equity issues (measured by market capitalization)
represented approximately 55% 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 134
institutional investors. There is no formal over-the-counter market for securities in Mexico.
Under Mexican law, a shareholder is required to deposit its shares with a Mexican custodian in
order to attend a shareholders meeting. A holder of ADSs will not be able to meet this
requirement, and accordingly is not entitled to attend shareholders meetings. A holder of ADSs is
entitled to instruct the depositary as to how to vote the shares represented by ADSs, in accordance
with procedures provided for in the applicable deposit agreement, but a holder of ADSs will not be
able to vote its shares directly at a shareholders 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 prior to August 11, 2006 and our Common Shares
subsequent to August 17, 2006, (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.
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican Stock Exchange |
|
New York Stock Exchange/ |
|
|
Pesos per Series A Share/ |
|
Pink Sheets (2) |
|
|
Common Share (1) |
|
Dollars per ADS |
|
|
High |
|
Low |
|
High |
|
Low |
2002 |
|
Ps |
14.00 |
|
|
Ps |
14.00 |
|
|
US$ |
5.55 |
|
|
US$ |
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 |
|
|
|
1.55 |
|
|
|
0.15 |
|
2006 |
|
|
13.25 |
|
|
|
4.10 |
|
|
|
2.00 |
|
|
|
0.25 |
|
|
|
|
(1) |
|
Prices through August 11, 2006 are prices for Series A Shares. Prices after August 17, 2006
are for Common Shares. |
|
(2) |
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican Stock Exchange |
|
|
|
|
Pesos per Series A Share/ |
|
Pink Sheets |
|
|
Common Share (1) |
|
Dollars per ADS |
|
|
High |
|
Low |
|
High |
|
Low |
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
Ps |
13.00 |
|
|
Ps |
6.89 |
|
|
US$ |
1.55 |
|
|
US$ |
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 |
|
|
|
1.05 |
|
|
|
0.25 |
|
Second Quarter |
|
|
8.33 |
|
|
|
4.10 |
|
|
|
1.25 |
|
|
|
0.40 |
|
Third Quarter |
|
|
12.85 |
|
|
|
8.10 |
|
|
|
1.95 |
|
|
|
0.75 |
|
Fourth Quarter |
|
|
13.25 |
|
|
|
8.14 |
|
|
|
2.00 |
|
|
|
1.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
16.00 |
|
|
|
10.50 |
|
|
|
3.00 |
|
|
|
1.70 |
|
Second Quarter
(through June 29) |
|
|
16.74 |
|
|
|
13.50 |
|
|
|
3.56 |
|
|
|
2.40 |
|
|
|
|
(1) |
|
Prices through August 11, 2006 are prices for Series A Shares. Prices after August 17, 2006
are for Common Shares. |
Source: Mexican Stock Exchange; Pink Sheets LLC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican Stock Exchange |
|
Pink Sheets |
|
|
Pesos per Common Share |
|
Dollars per ADS |
|
|
High |
|
Low |
|
High |
|
Low |
December 2006 |
|
Ps |
11.50 |
|
|
Ps |
10.56 |
|
|
US$ |
2.00 |
|
|
US$ |
1.75 |
|
January 2007 |
|
|
12.00 |
|
|
|
10.50 |
|
|
|
2.20 |
|
|
|
2.00 |
|
February 2007 |
|
|
14.00 |
|
|
|
10.50 |
|
|
|
2.50 |
|
|
|
1.70 |
|
March 2007 |
|
|
16.00 |
|
|
|
14.00 |
|
|
|
2.55 |
|
|
|
2.00 |
|
April 2007 |
|
|
16.00 |
|
|
|
14.00 |
|
|
|
3.00 |
|
|
|
2.40 |
|
May 2007 |
|
|
16.74 |
|
|
|
13.50 |
|
|
|
3.56 |
|
|
|
2.80 |
|
June 2007 (through June 29) |
|
|
16.00 |
|
|
|
14.00 |
|
|
|
3.20 |
|
|
|
2.90 |
|
|
|
|
Source: Mexican Stock Exchange; Pink Sheets LLC. |
|
|
71
On June 29, 2007, the closing sales price of our Common Shares on the Mexican Stock Exchange
was Ps 14.80 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 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). On December 8, 2006, in compliance with the new Mexican Securities Market Law,
we adopted new bylaws under which we became a sociedad anónima bursátil de capital variable.
Registration and Transfer
The Common Shares are evidenced by share certificates in registered form. Our stockholders may
hold their Common 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, Common Shares are the only shares of our capital stock outstanding.
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:
|
|
|
amendments to our bylaws; |
|
|
|
|
anticipated dissolution of our company; |
|
|
|
|
merger and transformation of our company from one type of company to another; and |
|
|
|
|
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 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
72
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:
|
|
|
our board of directors; |
|
|
|
|
stockholders representing at least 10% of our outstanding shares by requesting our board
of directors or our audit and corporate practices committee to issue such a call; |
|
|
|
|
a Mexican court in the event our board of directors or our audit and corporate practices
committee do not comply with a valid request of our stockholders; and |
|
|
|
|
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: |
|
|
|
|
the annual report of our board of directors regarding our financial statements; |
|
|
|
|
the appointment of directors; or |
|
|
|
|
the compensation of our directors. |
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 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.
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 December 31, 2006,
our legal reserve was Ps 201.5 million. Allocation to the legal reserve is determined without
reference to inflation adjustment under Mexican FRS. 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
73
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 new Mexican Securities Market Law, 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:
|
|
|
the average quotation price for the 30 days in which our stock has been traded prior to
the date of the offer, provided that such 30 days occur within a six-month period; or |
|
|
|
|
the book value, as reflected in the last quarterly report filed with the CNBV and the
Mexican Stock Exchange, which may be modified if material information has not been
disclosed by our company. |
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 number of shares and the amount
offered to be paid for the shares owned by the public is not material, as determined by the CNBV.
Currently, a CNBV disposition has determined that such an offer is not necessary if the amount
offer is less than 300,000 UDIS.
Other Provisions
Variable Capital and Withdrawal Rights. Under our bylaws, neither the variable portion nor the
minimum fixed portion of our capital stock may be withdrawn by our stockholders.
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.
74
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 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. Under our bylaws, the duration of our existence is unlimited.
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 56 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, unless the acquisition is made by
applying resources in equity accounts other than the capital stock account.
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
that is considered publicly traded by the CNBV, unless issued with the prior approval of the CNBV.
For calculation of the percentage, shares with voting restrictions based on the nationality of the
related holders, will not be considered. We do not currently have shares without voting rights.
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
75
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.
Mexican Income Taxation
The following is a description of the material Mexican income tax consequences of the
purchasing, owning and disposing of Common Shares and ADSs. The tax treatment of a holder of the
Common Shares and the Common Shares represented by ADSs 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 Common Shares and ADSs by a holder
who is not a resident of Mexico and who will not hold Common Shares 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. When the
individual in question has a home in another country, the individual will be deemed a resident in
Mexico if his or her center of vital interests is located in Mexican territory. This will be
deemed to occur if (i) more than 50% of the aggregate income realized by such individual in the
calendar year is from a Mexican source, (ii) the principal center of his/her professional
activities is located in Mexico or (iii) the individual in question is of Mexican nationality
working as an Officer of the United Mexican States, even if the principal center of such
individuals professional activities is located outside of Mexico. A legal entity is a resident of
Mexico if it was incorporated under Mexican law or 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 29, 2007, 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
Common Shares 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 Common Shares and Common Shares
represented by ADSs, 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 and Common Shares.
The United States and Mexico have also entered into an agreement that regulates the exchange
of information regarding tax matters.
Common Shares and ADSs
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 Common Shares underlying the ADSs to a Foreign Holder will not be
subject to any withholding tax.
On the other hand, during 2005 Mexican companies paying dividends with profits that have not
yet been subject to the corporate income tax, are obligated to pay a tax of 30% of the amount
resulting from the increase to the
76
amount of the dividend multiplied by a factor of 1.4286, as if the distributed profits would
have been a profit after the payment of the tax. There are tax rate modifications for 2006 and
there will be subsequent changes in 2007. The tax rate applicable in 2006 is 29%. Such tax rate
will decrease 1% in 2007, to a minimum rate of 28%, while the applicable factor will be 1.4085
during 2006 and 1.3889 as of 2007.
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, prior to December 31, 2001, Mexican companies were authorized to defer a portion
of their taxes, provided that the company maintained 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 a factor of 1.5385.
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 Common Shares and ADSs
The sale or other disposition of shares or securities that represent the ownership of assets
by nonresidents are subject to income taxation in Mexico if (i) they are issued by a Mexican
resident, or (ii) more than 50% of the value of the shares or securities is attributable to
immovable property located in Mexico.
However, deposits of Common Shares in exchange for ADSs and withdrawals of Common Shares 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 Common Shares by a Foreign Holder will be:
|
|
|
Subject to Mexican income tax assessed at the rate of 25% on the total amount of the
transaction, without any deduction. The purchaser of Common 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 |
|
|
|
|
Subject to Mexican income tax assessed at the optional rate of 28% 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 by the Mexican tax authorities to be 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; or |
|
|
|
|
Exempt from Mexican income tax as long as (i) the transaction is carried out through an
authorized Stock Exchange in accoradance with the Securities and Exchange Law, or the
Common Shares are transferred through the Stock Exchange of a country with a Tax Treaty to
avoid double taxation, (ii) it is an individual or corporation, and (iii) it is not a
registered operation or protected cross-border. |
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 Common
Shares, 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.
77
Estate and Gift Taxes
A Foreign Holder will not be liable in Mexico for estate, gift, inheritance or similar taxes
with respect to its holdings of Common Shares or ADSs; provided, however, that gifts or any
gratuitous transfers of Common Shares 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 Common Shares 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 Common Shares or ADSs. This description addresses only the U.S. federal income tax
considerations of holders that will hold Common Shares 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.
All of the foregoing, however, may change at any time, and any change could be retroactive to
the issuance date of the Common Shares 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:
|
|
|
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; |
|
|
|
|
certain former citizens or long-term residents of the United States; |
|
|
|
|
holders that will hold Common Shares or ADSs through a partnership or other pass through entity; |
|
|
|
|
persons whose functional currency for U.S. federal income tax purposes is not the dollar; and |
|
|
|
|
persons that will hold Common Shares 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 Common Shares or ADSs as compensation for the performance of services,
persons that will hold Common Shares or ADSs 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 Common Shares or ADSs.
For purposes of this description, a U.S. Holder is a beneficial owner of Common Shares or ADSs
who for U.S. federal income tax purposes is:
|
|
|
a citizen or resident of the United States; |
|
|
|
|
a corporation (or other entity treated as such for U.S. federal income tax purposes)
created or organized in or under the laws of the United States or any state thereof,
including the District of Columbia; |
|
|
|
|
an estate the income of which is subject to U.S. federal income taxation regardless of
its source; or |
78
|
|
|
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. |
A non-U.S. Holder is a beneficial owner of the Common Shares or ADSs that is neither a U.S.
Holder nor a partnership (or other entity treated as such for U.S. federal income tax purposes).
If a partnership (or any other entity treated as a partnership for United States federal
income tax purposes) holds our Common Shares or ADSs, the tax treatment of a partner in such
partnership will generally depend on the status of the partner and the activities of the
partnership. Such a partner should consult its tax advisor as to its tax consequences.
Ownership of ADSs in General
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.
For U.S. federal income tax purposes, a holder of ADSs generally will be treated as the owner
of the Common Shares represented by such 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 Common Shares or ADSs distributed pro rata to all stockholders of our
company, including holders of ADSs) with respect to Common Shares 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 Common Shares 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 which, in the case of ADSs, is
the date they are received by the depositary. 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 Common Shares 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, for taxable years beginning before January
1, 2007, dividend income with respect to your common shares or ADSs should generally constitute
passive income, or in the case of certain U.S. Holders, financial services income, and, for
table years beginning after December 31, 2006, such dividend income should generally constitute
passive
79
category income, or in the case of certain U.S. Holders, general category income. Further,
in certain circumstances, if you have held our common shares or ADSs for less than a specified
minimum period during which you are not protected from risk of loss; or are obligated to make
payments related to dividends, you will not be allowed a foreign tax credit for foreign taxes
imposed on dividend income with respect to our Common Shares or ADSs. The rules governing the
foreign tax credit are complex. You are urged to consult your tax advisors regarding the
availability of the foreign tax credit under your particular circumstances.
Subject to the discussion below under Backup Withholding Tax and Information Reporting
Requirements, a Non-U.S. Holder of Common Shares or ADSs generally will not be subject to United
States federal income or withholding tax on dividends received on Common Shares 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 Common 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 Common Shares 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 Common Shares 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 Common Shares 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 Common 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 Common 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 Common
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
Common Shares generally will not result in taxable gain or loss for a U.S. Holder.
With respect to the sale or exchange of Common 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 Common 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 Common Shares 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 Common
Shares 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, 2006. Our companys status in future years will depend on our
companys assets and activities in those years. Our
80
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
Common Shares 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
Common Shares or ADSs.
If our company were a PFIC, a U.S. Holder of Common Shares 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 Common Shares 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, Common Shares or
ADSs, in each case, made within the United States, or by a U.S. payor or U.S. middleman, to a
holder of Common Shares 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.
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 COMMON SHARES OR ADSs. PROSPECTIVE PURCHASERS OF COMMON SHARES 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 20.3% of our
long-term interest-bearing debt at December 31, 2006 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 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.
81
The table below summarizes our debt obligations, which include notes, bank loans and leases,
at December 31, 2006. 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, 2006, which was Ps
10.8116 = US1.00.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
Thereafter |
|
|
(in millions of
constant pesos in purchasing power as of December 31, 2006, |
|
|
except percentages) |
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of pesos |
|
|
0.7 |
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
4,615.9 |
|
Weighted Average rate |
|
|
9.98 |
% |
|
|
9.98 |
% |
|
|
9.99 |
% |
|
|
9.99 |
% |
|
|
9.99 |
% |
|
|
9.99 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Rate Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of pesos |
|
|
168.8 |
|
|
|
234.6 |
|
|
|
187.0 |
|
|
|
172.3 |
|
|
|
251.1 |
|
|
|
160.7 |
|
Weighted Average rate |
|
|
8.64 |
% |
|
|
8.52 |
% |
|
|
8.50 |
% |
|
|
8.53 |
% |
|
|
8.53 |
% |
|
|
8.53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions of pesos |
|
|
169.5 |
|
|
|
235.3 |
|
|
|
187.7 |
|
|
|
173.0 |
|
|
|
251.8 |
|
|
|
4,776.7 |
|
Weighted Average rate |
|
|
9.75 |
% |
|
|
9.78 |
% |
|
|
9.82 |
% |
|
|
9.87 |
% |
|
|
9.94 |
% |
|
|
9.94 |
% |
In the event that the average interest rate applicable to our financial liabilities in 2007 is
1% higher than the average interest rate in 2006, our financial expenses would increase by
approximately Ps 57.9 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 dollar-linked. 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, 2006. 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 2007 as compared to
the peso/dollar exchange rate at December 31, 2006, our financial expenses indexed to the dollar in
2007 would increase by approximately Ps 54.1 million.
Item 12. Description of Securities Other than Equity Securities.
Not applicable.
82
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
Not applicable.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
Not applicable.
Item 15. Controls and Procedures.
Disclosure Controls and Procedures
We carried out an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(f) or 15d-15(f) of the Exchange Act) as of December 31, 2006. There are inherent
limitations to the effectiveness of any system of disclosure controls and procedure, 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.
Based upon our evaluation, our Chief Executive Officer and our Chief Financial Officer
concluded that our disclosure controls and procedures as of December 31, 2006 were effective to
provide reasonable assurance that information required to be disclosed in the reports we file and
submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that such information is accumulated and
communicated to our management, including Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
Remediation of Material Weakness in Internal Control over Financial Reporting
As previously reported in our annual report on Form 20-F for the fiscal year ended December
31, 2005, we had identified a material weakness in our internal controls over financial reporting
with respect to the preparation of our consolidated financial information and the determination of
our deferred tax provision. Our remediation activities initiated in 2005 and completed during 2006
included the following:
|
|
|
During 2006, we implemented effective procedures designed to ensure a consistent and
effective process of preparation and documentation of the consolidating financial
information presented in the notes to our consolidated financial statements. In
particular, we formalized specific controls, procedures and requirements for determining
the deferred tax provision and preparing and documenting the consolidating financial
information. These controls over financial reporting are designed to ensure that this
information presented in the notes to our consolidated financial statements is
appropriately prepared and determined in our consolidated financial statements. |
|
|
|
|
During 2006, we reassigned the roles and responsibilities of personnel over accounting
and financial reporting to the Financial Information Managers office to ensure that the
personnel responsible for the preparation of the financial information are not also
responsible for the supervision and review of the financial information and the
authorization of its release. |
|
|
|
|
In 2006, we revised our closing procedures for
the monthly, quarterly and annual reporting periods in order to centralize the processes
and information to be released in the Financial Information Managers office. |
|
|
|
|
In 2005 and 2006, we reduced the number of different information systems used by our subsidiaries and implemented uniform information systems at our subsidiaries in order to
eliminate the risk of errors in the financial information due to use of the different
information technology platforms. As a result we and all of our significant and material subsidiaries use only two ERP systems working Baan and SAP. |
|
|
|
|
From 2005, we strengthened the processes and controls for the review, calculation
methodologies applied and models for determining deferred taxes of all of the companies of
the group which are now centralized at the Financial Information Managers office.
Activities were segregated among the personnel in the department,
ensuring appropriate supervision and supported by mandatory attendance at recurring training programs in this area. |
Codusas management has concluded that the activities undertaken above have remediated the
previously reported material weakness in its internal control over financial reporting. Accordingly
Codusas management believes that the financial statements included in this report fairly present
in all material respects our financial position, results of operations and cash flows for the
periods presented.
Changes in Internal Control over Financial Reporting
The activities noted above with respect to the remediation of the material weakness represent
changes in our internal control over financial reporting during 2006 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
Item 16. [Reserved].
Not applicable.
Item 16A. Audit Committee Financial Expert.
The members of our audit and corporate practices committee are Rebeca Castaños Castaños,
Alfonso Fernández De Castro and Buenaventura G. Saravia. Our Board of Directors has determined that
Rebeca Castaños Castaños is our audit committee financial expert within the meaning of applicable
law.
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.
83
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, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands of constant pesos) |
|
Audit Fees |
|
Ps |
15,071 |
|
|
Ps |
13,807 |
|
Tax Fees |
|
|
|
|
|
|
135 |
|
Other Fees |
|
|
120 |
|
|
|
621 |
|
|
|
|
|
|
|
|
Total Fees |
|
Ps |
15,191 |
|
|
Ps |
14,564 |
|
|
|
|
|
|
|
|
Audit fees and audit-related fees. Audit fees in the above table, which include all
audit-related fees, for the years ended December 31, 2006 and 2005, 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, 2006 and
2005.
Tax Fees. Tax fees in the above table for the years ended December 31, 2006 and 2005 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, 2005 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, 2006 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 0.8% for
2006 and 4.3% for 2005.
Audit and Corporate Practices Committees Pre-Approval Policy and Procedures
Our audit and corporate practices 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 and corporate
practices committee is guided by the following pre-approval policies and procedures:
|
|
|
the audit and corporate practices 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; |
|
|
|
|
the audit and corporate practices 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 |
|
|
|
|
the audit and corporate practices committee may delegate its authority to pre-approve
the covered services to one or more members of the audit and corporate practices committee. |
In considering whether to grant approval, the audit and corporate practices 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 and corporate practices 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 and corporate
practices committee on an annual basis at or about the start of each fiscal year.
84
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 and
corporate practices 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.
Item 16D. Exemptions from the Listing Standards for Audit Committees.
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
During the year ended December 31, 2006, 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.B. de
C.V.s equity securities that are registered by Corporación Durango, S.A.B. de C.V. pursuant to
Section 12 of the Exchange Act.
85
PART III
Item 17. Financial Statements.
Not applicable.
Item 18. Financial Statements.
See pages F-1 to F-74, incorporated herein by reference.
Item 19. Exhibits.
Documents filed as exhibits to this annual report:
|
|
|
1.1
|
|
Bylaws of our company, as amended (English translation) |
|
|
|
2.1
|
|
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) |
|
|
|
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 |
|
|
|
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 |
86
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.B. DE C.V. |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Mayela Rincón Arredondo de Velasco |
|
|
|
|
|
|
|
|
|
|
|
|
|
Name: Mayela Rincón Arredondo de Velasco |
|
|
|
|
|
|
Title: Chief Financial Officer |
|
|
Date: July 2, 2007
87
INDEX TO FINANCIAL STATEMENTS
|
|
|
Report of Independent Registered Public Accounting Firm |
|
F-2 |
Report of Independent Certified Accountants |
|
F-4 |
Consolidated Balance Sheets as of December 31, 2006 and 2005 |
|
F-5 |
Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004 |
|
F-6 |
Statements of Changes in Shareholders Equity for the years ended December 31, 2006, 2005 and 2004 |
|
F-7 |
Consolidated Statement of Changes in Financial Position for the years ended December 31, 2006, 2005 and 2004 |
|
F-8 |
Notes to the Consolidated Financial Statements |
|
F-9 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Corporación Durango, S. A. B. de C. V.:
We have audited the accompanying consolidated balance sheets of Corporación Durango, S. A. B. de C. V. and
subsidiaries (collectively the Company) as of December 31, 2006 and 2005, and the related
consolidated statements of operations, changes in stockholders equity and changes in financial
position for each of the three years in the period ended December 31, 2006. 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 (a whollyowned subsidiary) which statements reflect 7.5% of consolidated total assets as
of December 31, 2005, and 17% of 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 Durango International, Inc. and subsidiaries 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 in the financial statements, including the
Companys conversion of the amounts in the financial statements of Durango International, Inc. and
Subsidiaries as of December 31, 2005 and for the year then ended, prepared in accordance with
generally accepted accounting principles in the United States presented in U.S. dollars, to amounts
in accordance with Mexican financial reporting standards presented in Mexican pesos of equivalent
purchasing power al December 31, 2006. 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
for 2005 provide a reasonable basis for our opinion.
F-2
In our opinion, based in our audit and the report of the other auditor, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Corporación Durango, S. A. B. de C. V. and subsidiaries at
December 31, 2006 and 2005, and the consolidated results of their operations, the changes in their
stockholders equity and the changes in their financial position for each of the three years in the
period ended December 31, 2006, in conformity with Mexican Financial Reporting Standards.
Mexican Financial Reporting Standards vary in certain significant respects form 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 27, 2007. except for Note 23 as to which the date is July 2, 2007.
Javier Monroy, C.P.
Audit Partner
F-3
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-4
CORPORACIÓN DURANGO, S. A. B. DE C. V. AND SUBSIDIARIES
(formerly known as Corporación Durango, S. A. de C. V. and subsidiaries)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2006 AND 2005
(Notes 1, 2 and 3)
Expressed in thousands of constant Mexican pesos of purchasing power as of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Assets |
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents (Note 4) |
|
$ |
466,603 |
|
|
$ |
728,963 |
|
Accounts receivable Net (Note 5) |
|
|
1,924,745 |
|
|
|
1,803,856 |
|
Related parties (Note 14) |
|
|
|
|
|
|
12,281 |
|
Inventories Net (Note 6) |
|
|
1,212,675 |
|
|
|
1,244,473 |
|
Prepaid expenses |
|
|
32,098 |
|
|
|
16,289 |
|
Other current assets |
|
|
2,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
3,638,277 |
|
|
|
3,805,862 |
|
|
|
|
|
|
|
|
|
|
PROPERTY, MACHINERY, PLANT AND
EQUIPMENT NET (Note 7) |
|
|
11,254,499 |
|
|
|
11,356,508 |
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS NET (Note 8) |
|
|
266,308 |
|
|
|
270,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
15,159,084 |
|
|
$ |
15,433,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Current portion of long-term debt (Note 9) |
|
$ |
169,489 |
|
|
$ |
268,088 |
|
Notes payable |
|
|
54,883 |
|
|
|
50,251 |
|
Accrued interest |
|
|
6,414 |
|
|
|
14,129 |
|
Trade accounts payable |
|
|
921,141 |
|
|
|
878,248 |
|
Accrued expenses and taxes |
|
|
674,403 |
|
|
|
493,970 |
|
Employee statutory profit sharing |
|
|
4,782 |
|
|
|
1,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,831,112 |
|
|
|
1,705,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES: |
|
|
|
|
|
|
|
|
Long-term debt (Note 9) |
|
|
5,624,457 |
|
|
|
6,768,724 |
|
Long-term notes payable |
|
|
141,680 |
|
|
|
66,414 |
|
Deferred income taxes (Note 16) |
|
|
2,049,230 |
|
|
|
1,666,963 |
|
Pension plans and seniority premiums (Note 11) |
|
|
307,084 |
|
|
|
320,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
8,122,451 |
|
|
|
8,822,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
9,953,563 |
|
|
|
10,528,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
Common stock (Note 12) |
|
|
5,665,838 |
|
|
|
5,665,838 |
|
Additional paid-in capital |
|
|
4,669,618 |
|
|
|
4,662,849 |
|
Retained earnings |
|
|
3,048,077 |
|
|
|
2,861,646 |
|
Net (loss) income for the year |
|
|
(71,710 |
) |
|
|
186,431 |
|
Loss from holding non-monetary assets |
|
|
(5,535,742 |
) |
|
|
(5,682,079 |
) |
Cumulative initial effect of deferred income taxes |
|
|
(3,484,336 |
) |
|
|
(3,484,336 |
) |
Cumulative translation adjustment of foreign subsidiaries |
|
|
494,658 |
|
|
|
634,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Majority stockholders equity |
|
|
4,786,403 |
|
|
|
4,844,456 |
|
Minority stockholders equity in consolidated subsidiaries |
|
|
419,118 |
|
|
|
60,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
5,205,521 |
|
|
|
4,905,105 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 18 and 19) |
|
|
|
|
|
|
|
|
Subsequent Events (Note 20) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
15,159,084 |
|
|
$ |
15,433,302 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements, which were
authorized for their issuance dated April 27, 2007, by the Board of Directors.
F-5
CORPORACIÓN DURANGO, S. A. B. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Notes 1, 2 and 3)
Expressed in thousands of constant Mexican pesos of purchasing power as of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net sales |
|
$ |
9,698,173 |
|
|
$ |
8,475,857 |
|
|
$ |
8,368,372 |
|
Cost of sales |
|
|
8,142,843 |
|
|
|
7,386,213 |
|
|
|
7,171,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,555,330 |
|
|
|
1,089,644 |
|
|
|
1,196,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
721,935 |
|
|
|
705,378 |
|
|
|
722,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
833,395 |
|
|
|
384,266 |
|
|
|
474,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses) Net (Note 15) |
|
|
65,501 |
|
|
|
5,504 |
|
|
|
(434,840 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net comprehensive financing cost: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(591,766 |
) |
|
|
(616,495 |
) |
|
|
(1,205,261 |
) |
Interest income |
|
|
31,171 |
|
|
|
44,284 |
|
|
|
43,187 |
|
Exchange (loss) gain |
|
|
(87,236 |
) |
|
|
348,163 |
|
|
|
65,099 |
|
Gain on monetary position |
|
|
252,032 |
|
|
|
206,725 |
|
|
|
488,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(395,799 |
) |
|
|
(17,323 |
) |
|
|
(608,688 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before
income taxes and employee statutory profit sharing |
|
|
503,097 |
|
|
|
372,447 |
|
|
|
(569,326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (Note 16) |
|
|
(532,877 |
) |
|
|
(316,324 |
) |
|
|
523,119 |
|
Employee statutory profit sharing |
|
|
(3,501 |
) |
|
|
(761 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(536,378 |
) |
|
|
(317,085 |
) |
|
|
523,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before
equity in income of associated companies |
|
|
(33,281 |
) |
|
|
55,362 |
|
|
|
(46,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of associated companies |
|
|
3,011 |
|
|
|
1,978 |
|
|
|
2,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
|
(30,270 |
) |
|
|
57,340 |
|
|
|
(43,360 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations Net (Note 17) |
|
|
|
|
|
|
113,208 |
|
|
|
109,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net (loss) income |
|
$ |
(30,270 |
) |
|
$ |
170,548 |
|
|
$ |
66,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
Majority interest |
|
$ |
(71,710 |
) |
|
$ |
186,431 |
|
|
$ |
66,636 |
|
Minority interest |
|
|
41,440 |
|
|
|
(15,883 |
) |
|
|
(181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net (loss) income |
|
$ |
(30,270 |
) |
|
$ |
170,548 |
|
|
$ |
66,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net (loss) income per share of |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.27 |
) |
|
$ |
0.53 |
|
|
$ |
(0.47 |
) |
Discontinued operations |
|
|
|
|
|
|
1.04 |
|
|
|
1.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net (loss) income per share |
|
$ |
(0.27 |
) |
|
$ |
1.57 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding |
|
|
110,641,111 |
|
|
|
108,528,665 |
|
|
|
91,834,192 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements, which were
authorized for their issuance dated April 27, 2007, by the board of directors.
F-6
CORPORACIÓN DURANGO, S. A. B. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Notes 1, 2 and 3)
Expressed in thousands of constant Mexican pesos of purchasing power as of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
|
Cumulative |
|
|
Cumulative |
|
|
Minority |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loss from |
|
|
initial effect |
|
|
translation |
|
|
stockholders |
|
|
|
|
|
|
Common |
|
|
Additional |
|
|
|
|
|
|
holding non |
|
|
of deferred |
|
|
adjustment |
|
|
equity |
|
|
Total |
|
|
|
stock |
|
|
paid-in |
|
|
Retained |
|
|
monetary |
|
|
income |
|
|
of foreign |
|
|
in consolidated |
|
|
stockholders |
|
|
|
(Note 12) |
|
|
capital |
|
|
earnings |
|
|
assets |
|
|
taxes |
|
|
subsidiaries |
|
|
subsidiaries |
|
|
equity |
|
Balances as of January 1, 2004 |
|
$ |
5,363,286 |
|
|
$ |
1,568,689 |
|
|
$ |
2,795,010 |
|
|
$ |
(4,764,488 |
) |
|
$ |
(3,484,336 |
) |
|
$ |
201,332 |
|
|
$ |
76,649 |
|
|
$ |
1,756,142 |
|
Increase in common stock (Note 12b.) |
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51 |
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
66,636 |
|
|
|
(171,573 |
) |
|
|
|
|
|
|
74,868 |
|
|
|
6,645 |
|
|
|
(23,424 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2004 |
|
|
5,363,337 |
|
|
|
1,568,689 |
|
|
|
2,861,646 |
|
|
|
(4,936,061 |
) |
|
|
(3,484,336 |
) |
|
|
276,200 |
|
|
|
83,294 |
|
|
|
1,732,769 |
|
Increase in common stock |
|
|
302,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
302,501 |
|
Premium in issuance of shares |
|
|
|
|
|
|
3,094,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,094,160 |
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
186,431 |
|
|
|
(746,018 |
) |
|
|
|
|
|
|
357,907 |
|
|
|
(22,645 |
) |
|
|
(224,325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2005 |
|
|
5,665,838 |
|
|
|
4,662,849 |
|
|
|
3,048,077 |
|
|
|
(5,682,079 |
) |
|
|
(3,484,336 |
) |
|
|
634,107 |
|
|
|
60,649 |
|
|
|
4,905,105 |
|
Premium in issuance of shares |
|
|
|
|
|
|
6,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,769 |
|
Minority interest (Note 2c.) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
358,469 |
|
|
|
358,469 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
(71,710 |
) |
|
|
146,337 |
|
|
|
|
|
|
|
(139,449 |
) |
|
|
|
|
|
|
(64,822 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2006 |
|
$ |
5,665,838 |
|
|
$ |
4,669,618 |
|
|
$ |
2,976,367 |
|
|
$ |
(5,535,742 |
) |
|
$ |
(3,484,336 |
) |
|
$ |
494,658 |
|
|
$ |
419,118 |
|
|
$ |
5,205,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements, which were
authorized for their issuance dated April 27, 2007, by the board of directors.
F-7
CORPORACIÓN DURANGO, S. A. B. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(Notes 1, 2 and 3)
Expressed in thousands of constant Mexican pesos of purchasing power as of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities: |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Consolidated (loss) income from continuing operations |
|
$ |
(30,270 |
) |
|
$ |
57,340 |
|
|
$ |
(43,360 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Items applied to income that did not require (provide) resources: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
410,467 |
|
|
|
438,805 |
|
|
|
456,129 |
|
(Expense) income from deferred income tax |
|
|
408,107 |
|
|
|
250,913 |
|
|
|
(552,811 |
) |
(Revaluation) impairment of long-lived assets |
|
|
(25,917 |
) |
|
|
(118,412 |
) |
|
|
498,559 |
|
Other income (expenses) |
|
|
41,364 |
|
|
|
(27,165 |
) |
|
|
17,711 |
|
Amortization of debt issuance costs and other financing costs |
|
|
|
|
|
|
|
|
|
|
351,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
803,751 |
|
|
|
601,481 |
|
|
|
728,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable Net |
|
|
(108,608 |
) |
|
|
20,847 |
|
|
|
141,080 |
|
Inventories |
|
|
113,607 |
|
|
|
(93,639 |
) |
|
|
76,157 |
|
Other current assets |
|
|
(17,965 |
) |
|
|
95,915 |
|
|
|
(30,504 |
) |
Trade accounts payable |
|
|
42,893 |
|
|
|
94,089 |
|
|
|
(231,757 |
) |
Accrued interest |
|
|
(7,715 |
) |
|
|
(2,451 |
) |
|
|
|
|
Accrued expenses and taxes other than income taxes |
|
|
36,179 |
|
|
|
(141,094 |
) |
|
|
46,602 |
|
Other Net |
|
|
26,256 |
|
|
|
(104,258 |
) |
|
|
(3,459 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net resources provided by operating activities before discontinued
operations |
|
|
888,398 |
|
|
|
470,890 |
|
|
|
726,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations |
|
|
|
|
|
|
112,346 |
|
|
|
(17,132 |
) |
Liabilities of discontinued operations |
|
|
|
|
|
|
(136,449 |
) |
|
|
40,688 |
|
Discontinued operations net of items that did not require resources |
|
|
|
|
|
|
(296,032 |
) |
|
|
109,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations |
|
|
|
|
|
|
(320,135 |
) |
|
|
133,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net resources provided by operating activities |
|
|
888,398 |
|
|
|
150,755 |
|
|
|
859,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) of long-term debt |
|
|
12,463 |
|
|
|
(177,453 |
) |
|
|
(831,263 |
) |
Payments of long-term debt |
|
|
(1,081,464 |
) |
|
|
(4,150,550 |
) |
|
|
105,249 |
|
Common stock increase |
|
|
|
|
|
|
302,501 |
|
|
|
51 |
|
Additional paid-in capital |
|
|
6,769 |
|
|
|
3,094,160 |
|
|
|
|
|
Increase in minority interest |
|
|
317,030 |
|
|
|
|
|
|
|
|
|
Translation adjustment of foreign subsidiaries |
|
|
(139,449 |
) |
|
|
357,907 |
|
|
|
74,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net resources used in financing activities |
|
|
(884,651 |
) |
|
|
(573,435 |
) |
|
|
(651,095 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from the sale of discontinued operations |
|
|
|
|
|
|
347,936 |
|
|
|
|
|
Acquisition and sale of machinery and equipment |
|
|
(227,000 |
) |
|
|
(64,322 |
) |
|
|
(181,943 |
) |
Restricted cash |
|
|
|
|
|
|
|
|
|
|
178,137 |
|
Divestment in subsidiaries |
|
|
|
|
|
|
(56,189 |
) |
|
|
|
|
(Divestment of) investment in other assets |
|
|
(39,107 |
) |
|
|
29,347 |
|
|
|
(36,270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net resources (used in) generated by investing activities |
|
|
(266,107 |
) |
|
|
256,772 |
|
|
|
(40,076 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
|
(262,360 |
) |
|
|
(165,908 |
) |
|
|
168,416 |
|
Balance of cash and cash equivalents at beginning of year |
|
|
728,963 |
|
|
|
894,871 |
|
|
|
726,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of cash and cash equivalents at end of year |
|
$ |
466,603 |
|
|
$ |
728,963 |
|
|
$ |
894,871 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements, which were
authorized for their issuance dated April 27, 2007, by the board of directors.
F-8
CORPORACIÓN DURANGO, S. A. B. DE C. V. AND SUBSIDIARIES
(formerly known as Corporación Durango, S. A. de C. V. and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
Thousands of constant Mexican pesos of purchasing power as of December 31, 2006
NOTE 1 THE ENTITY:
a. |
|
Entity Corporación Durango, S. A. B. 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. |
|
On December 8, 2006, the board of Directors decided to modify the social denomination of
Corporación Durango, S. A. de C. V. to Corporación Durango, S. A. B. de C. V.; also, they
modified the Companys by-laws to reflect the new integration, organization and operation of
its corporate organisms and the new rights of the minority stockholders, in accordance to
Mexican Law of Stock Market, published on December 30, 2005. |
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 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, 2006 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 accompanying consolidated financial statements have been prepared
in accordance with the Mexican Financial Reporting Standards (NIFs for its initials in
Spanish), issued by the Mexican Board for Research and Development of Financial Reporting
Standards (CINIF for its initials in Spanish). |
|
|
|
On May 31, 2004, the Mexican Institute of Public Accountants (MIPA) formally transferred the
function of issuing financial information standards to the CINIF, consistently with the
international trend of requiring this function to be performed by an entity independent from the
accounting professional boards. |
F-9
|
|
Accordingly, the task of establishing Mexican GAAP bulletins and Circulars formerly issued by the
MIPA was transferred to CINIF, which adopted and subsequently renamed standards of Mexican GAAP
as NIF and determines that NIF encompasses: i) new bulletins established under the new function;
ii) any interpretation issued thereon iii) any Mexican GAAP bulletins that have not been amended,
replaced, revoked by the new NIFs; and iv) International Reporting Standards (IFRS) that are
supplementary guidance to be used when NIF or Mexican GAAP does not provide primary guidance. As
of January 1, 2006, all financial statements must be prepared in accordance with NIF. |
|
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. |
|
|
|
|
|
|
|
Group |
|
Ownership |
|
|
or Company |
|
percentage |
|
Activity |
Administración Corporativa de Durango, S. A. de C. V. and subsidiaries
|
|
|
100 |
% |
|
Administrative services |
|
|
|
|
|
|
|
Cartonpack, S.A. de C.V. (See Note 14e)
|
|
|
95 |
% |
|
Manufacturing of corrugated boxes |
|
|
|
|
|
|
|
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 subsidiaries
|
|
|
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 (See Note 14e)
|
|
|
87 |
% |
|
Manufacturing of newsprint and bond paper |
|
|
|
|
|
|
|
Industrias Centauro, S. A. de C. V.
|
|
|
99 |
% |
|
Manufacturing of paper for corrugated boxes |
|
|
|
|
|
|
|
Papel y Empaques Tizayuca, S.A. de C.V. (See Note 14d)
|
|
|
100 |
% |
|
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 |
F-10
d. |
|
Translation of financial statements of foreign subsidiaries The accounting policies of
the companys 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 2006, 2005 and 2004 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. |
|
e. |
|
These Financial Statements were reclassified for comparative purposes. |
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES:
The accompanying financial statements were authorized for issuance on April 27, 2007 by Board of
Directors.
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. |
|
The consolidation process was done based on subsidiaries audited financial statements. See
Note 14. |
|
b. |
|
Investments in capital stock of affiliated and associated companies are valued by the
participation method when the Company exercises significant influence on the investee. The
acquisition cost of the capital stock 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. |
|
c. |
|
Inventories and cost of sales are stated using the average cost method and are later restated
using factors derived from changes in the NCPI at replacement cost based on the most recent
purchase price or production cost. The value should not exceed its market value. See Note 6. |
|
d. |
|
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. |
F-11
|
|
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. |
|
|
|
Depreciation is calculated based on the probable useful live as determined by independent
appraisers, for machinery and industrial equipment is 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. |
|
e. |
|
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. |
|
f. |
|
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, 2006, 2005 and 2004, and, as
a result, recorded a favorable adjustment of $25,917 and $118,412, and a charge of $498,559,
respectively, in other income. |
F-12
g. |
|
Investments in derivative financial instruments for trading purposes, are recognized as
assets and liabilities at their fair value. Realized and unrealized gains or losses on those
instruments are recorded in income. |
|
|
|
On January 1, 2005, the company adopted Statement C-10, Derivative Financial Instruments and
Coverage Operations. This Statement, provides guidance for recording, valuation and disclosure
criteria applicable to all derivative financials instruments, requires that the effectiveness of
hedges of cash flows and of net investment in subsidiaries located abroad be evaluated and that
the effective portion of the gains or losses on hedging instruments be recognized within
comprehensive income. The Company has segregated service contracts in foreign currency
representing an exchange rate risk during the term of such contracts, the adoption of this
Statement as of December 31, 2006 resulted in an income for $43,127. |
|
h. |
|
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. |
|
i. |
|
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. |
|
j. |
|
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 statements of
operations due to uncertainly 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. |
|
k. |
|
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,
which, 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, 2006 for this item was $5,929, 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. |
F-13
|
|
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. |
|
l. |
|
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. |
|
m. |
|
Common stock, legal reserve, premium in issuance of shares 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. |
|
n. |
|
Additional paid-in capital represents the excess of payments for shares described over their
par value, and is restated applying NCPI factor. |
|
n. |
|
Cumulative loss from holding non-monetary assets, 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. |
|
o. |
|
Comprehensive (loss) income represents the net (loss) income, 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. |
|
p. |
|
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 4.05% in
2006, 3.33% in 2005 and 5.19% in 2004. |
|
q. |
|
Net (loss) income per common share is calculated by dividing the net (loss) income of
majority stockholders for the period by the weighted average number of shares outstanding
during 2006, 2005 and 2004. There are no effects from potential dilutive shares. |
|
r. |
|
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. |
|
s. |
|
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 |
F-14
|
|
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. |
|
|
|
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 . |
|
t. |
|
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. |
|
u. |
|
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. |
|
v. |
|
As of January 1, 2005, Statement B-7, Business Acquisitions, established, among other
things, the purchase method to account for business acquisition. In addition, Statement B-7
modified the accounting treatment of goodwill, which is no longer permitted to be amortized
and is subject to annual impairment evaluation. Also provides specific guidance for the
acquisition of minority interest and transfer of assets of stock among entities of common
control. |
|
w. |
|
Leasing operations are registered under Statement D-5, Leasing. The Company only
capitalizes financial leased assets related to industrial machinery and equipment. These
assets are depreciated under the depreciation rates of the acquired assets. |
F-15
NOTE 4 CASH AND CASH EQUIVALENTS:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Cash |
|
$ |
136,542 |
|
|
$ |
427,815 |
|
Cash equivalents |
|
|
330,061 |
|
|
|
301,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
466,603 |
|
|
$ |
728,963 |
|
|
|
|
|
|
|
|
NOTE 5 ACCOUNTS RECEIVABLE:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Trade accounts receivable |
|
$ |
1,867,534 |
|
|
$ |
1,801,506 |
|
Recoverable taxes |
|
|
|
|
|
|
46,710 |
|
Other |
|
|
198,264 |
|
|
|
116,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,065,798 |
|
|
|
1,964,827 |
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
|
(141,053 |
) |
|
|
(160,971 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,924,745 |
|
|
$ |
1,803,856 |
|
|
|
|
|
|
|
|
F-16
NOTE 6 INVENTORIES:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Finished goods |
|
$ |
172,684 |
|
|
$ |
289,700 |
|
Production-in-process |
|
|
8,930 |
|
|
|
7,578 |
|
Raw materials |
|
|
568,504 |
|
|
|
495,301 |
|
Spare parts and materials |
|
|
285,850 |
|
|
|
295,001 |
|
Molds and dies |
|
|
77,082 |
|
|
|
81,790 |
|
Other |
|
|
18,712 |
|
|
|
11,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,131,762 |
|
|
|
1,180,496 |
|
Allowance for obsolete inventories |
|
|
(33,940 |
) |
|
|
(34,106 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,097,822 |
|
|
|
1,146,390 |
|
Advances to suppliers |
|
|
51,336 |
|
|
|
40,016 |
|
Merchandise-in-transit |
|
|
63,517 |
|
|
|
58,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,212,675 |
|
|
$ |
1,244,473 |
|
|
|
|
|
|
|
|
NOTE 7 PROPERTY, MACHINERY AND EQUIPMENT:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Buildings |
|
$ |
3,894,038 |
|
|
$ |
3,843,004 |
|
Machinery and industrial equipment * |
|
|
18,526,572 |
|
|
|
18,678,591 |
|
Transportation equipment, computer equipment and
office furniture and equipment |
|
|
1,404,477 |
|
|
|
1,474,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,825,087 |
|
|
|
23,995,783 |
|
Accumulated depreciation |
|
|
(13,672,984 |
) |
|
|
(13,593,769 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,152,103 |
|
|
|
10,402,014 |
|
Land |
|
|
893,475 |
|
|
|
898,763 |
|
Construction-in-progress |
|
|
208,921 |
|
|
|
55,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,254,499 |
|
|
$ |
11,356,508 |
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2006, 2005 and 2004 was $389,981, $405,887
and $425,004, respectively.
F-17
For the years ended December 31, 2006, 2005 and 2004, under the provisions of Statement C-15, the
Company recognized an increase (decrease) in fixed assets value for $25,917, $118,412 and
($498,559), respectively, which were reflected in the consolidated statement of operations as other
income and (expenses). The related deferred income tax effect was a charge of $7,257, $33,155 and
a credit of $139,589 in 2006, 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: |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Machinery and industrial equipment |
|
$ |
18,500,655 |
|
|
$ |
18,560,179 |
|
Revaluation impairment |
|
|
25,917 |
|
|
|
118,412 |
|
Depreciation |
|
|
(10,497,271 |
) |
|
|
(10,529,234 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and industrial equipment |
|
$ |
8,029,301 |
|
|
$ |
8,149,357 |
|
|
|
|
|
|
|
|
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 $124,127
for Empaques del Norte, S. A. de C. V., $11,517 for Líneas Aéreas Ejecutivas de Durango, S. A. de
C. V. and $26,332 for Inmobiliaria Industrial de Durango, S. A. de C. V., in each case recorded as
a fair value impairment adjustment to the fixed assets of each Company.
As of December 31, 2006, 2005 and 2004, the Company had temporarily idle assets with a net carrying
amount of $364, $379 and $11,796, respectively.
The Companys capitalized lease assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Machinery and industrial equipment |
|
$ |
93,739 |
|
|
$ |
182,922 |
|
Accumulated depreciation |
|
|
(3,186 |
) |
|
|
(14,262 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
90,553 |
|
|
$ |
168,660 |
|
|
|
|
|
|
|
|
At December 31, 2006, the Company has pre-paid substantially all of the balance of its financial
leases; the remaining balance is $4,815.
F-18
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, the Companys financial leases are collateralized with substantially all of its machinery
and equipment.
The carrying value of capitalized comprehensive financing costs at December 31, 2006, 2005 and 2004
was $68,992, $72,234 and $57,315, respectively.
NOTE 8 OTHER ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
derivative |
|
|
Intangible |
|
|
|
|
|
|
|
|
|
|
|
|
lease- |
|
|
asset related |
|
|
Debt |
|
|
|
|
|
|
|
|
|
agreement |
|
|
to seniority |
|
|
issuance |
|
|
|
|
|
|
|
December 31, 2006 |
|
(Note 3g.) |
|
|
premiums |
|
|
costs |
|
|
Other |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2006 |
|
$ |
|
|
|
$ |
172,050 |
|
|
$ |
680,130 |
|
|
$ |
202,288 |
|
|
$ |
1,054,468 |
|
Net movement |
|
|
40,972 |
|
|
|
(23,245 |
) |
|
|
|
|
|
|
(1,865 |
) |
|
|
15,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2006 |
|
|
40,972 |
|
|
|
148,805 |
|
|
|
680,130 |
|
|
|
200,423 |
|
|
|
1,070,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2006 |
|
|
|
|
|
|
|
|
|
|
680,130 |
|
|
|
103,406 |
|
|
|
783,536 |
|
Amortization for the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,486 |
|
|
|
20,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
680,130 |
|
|
|
123,892 |
|
|
|
804,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balances as of December 31, 2006 |
|
$ |
40,972 |
|
|
$ |
148,805 |
|
|
$ |
|
|
|
$ |
76,531 |
|
|
$ |
266,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible |
|
|
|
|
|
|
|
|
|
|
|
|
asset related |
|
|
Debt |
|
|
|
|
|
|
|
|
|
to seniority |
|
|
issuance |
|
|
|
|
|
|
|
December 31, 2005 |
|
premiums |
|
|
costs |
|
|
Other |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2005 |
|
$ |
203,882 |
|
|
$ |
680,130 |
|
|
$ |
231,635 |
|
|
$ |
1,115,647 |
|
Net movement |
|
|
(31,832 |
) |
|
|
|
|
|
|
(29,347 |
) |
|
|
(61,179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2005 |
|
|
172,050 |
|
|
|
680,130 |
|
|
|
202,288 |
|
|
|
1,054,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2005 |
|
|
|
|
|
|
680,130 |
|
|
|
70,488 |
|
|
|
750,618 |
|
Amortization for the period |
|
|
|
|
|
|
|
|
|
|
32,918 |
|
|
|
32,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2005 |
|
|
|
|
|
|
680,130 |
|
|
|
103,406 |
|
|
|
783,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balances as of December 31, 2005 |
|
$ |
172,050 |
|
|
$ |
|
|
|
$ |
98,882 |
|
|
$ |
270,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible |
|
|
|
|
|
|
|
|
|
|
|
|
asset related |
|
|
Debt |
|
|
|
|
|
|
|
|
|
to seniority |
|
|
issuance |
|
|
|
|
|
|
|
December 31, 2004 |
|
premiums |
|
|
costs |
|
|
Other |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2004 |
|
$ |
114,295 |
|
|
$ |
681,684 |
|
|
$ |
187,167 |
|
|
$ |
983,146 |
|
Net movement |
|
|
89,587 |
|
|
|
(1,554 |
) |
|
|
44,468 |
|
|
|
132,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2004 |
|
|
203,882 |
|
|
|
680,130 |
|
|
|
231,635 |
|
|
|
1,115,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2004 |
|
|
|
|
|
|
333,096 |
|
|
|
39,363 |
|
|
|
372,459 |
|
Amortization for the period |
|
|
|
|
|
|
347,034 |
|
|
|
31,125 |
|
|
|
378,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2004 |
|
|
|
|
|
|
680,130 |
|
|
|
70,488 |
|
|
|
750,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balances as of December 31, 2004 |
|
$ |
203,882 |
|
|
$ |
|
|
|
$ |
161,147 |
|
|
$ |
365,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2004, the Company wrote-off debt issuance costs in the amount of $347,034, due to advanced
maturity of the related bonds, and to the financial restructuring.
NOTE 9 SHORT AND LONG-TERM DEBT:
a. |
|
Short-term and long-term debt not capitalized to equity, is as follows: |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Current portion of long-term debt |
|
$ |
169,489 |
|
|
$ |
268,088 |
|
Long-term debt |
|
|
5,624,457 |
|
|
|
6,768,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,793,946 |
|
|
$ |
7,036,812 |
|
|
|
|
|
|
|
|
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 the
Companys products into the Mexican market. |
F-20
|
|
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. |
|
|
|
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 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 commercial
reorganization (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 unsecured financial creditors (Steering Group) and members of the Ad hoc
Committee of bondholders 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 |
F-21
|
|
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 12 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. |
|
|
|
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 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
$1,676,556 (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 $1,347,009 (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
$5,920,333 (US$510.3 million) related to its 12 5/8 Senior Notes due 2003 (the 2003 Senior
Notes), its 13 1/8 Senior Notes due 2006 (the 2006 Senior Notes), its 13 1/2 Senior Notes
due 2008 (the 2008 Senior Notes), its 13 3/4 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 $5,032,370 (US$433.8
million) of its 2012 Senior Notes in respect to these claims. The 2012 Senior |
F-22
|
|
|
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. |
|
|
|
|
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$57 million. This
program has been sourced by majority stockholders capital contribution, some non-strategic
assets divestments and cash flow. |
c. |
|
Total current portion of long-term debt and long-term debt by composition, is as follows: |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Senior Notes |
|
$ |
4,614,539 |
|
|
$ |
4,799,879 |
|
Bank loans |
|
|
1,027,050 |
|
|
|
1,220,554 |
|
Financial lease agreements |
|
|
4,815 |
|
|
|
112,782 |
|
Other long-term debt |
|
|
147,542 |
|
|
|
903,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,793,946 |
|
|
$ |
7,036,812 |
|
|
|
|
|
|
|
|
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 $218,529 (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 |
F-23
of its financial restructuring, the aggregate amount of accrued and unpaid interest of the 2003
Senior Notes was $280,134 (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.
2006 Senior Notes. At December 31, 2004, before recognizing the effects of the financial
restructuring, the Company had outstanding $3,617,106 (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 $4,700,018 (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 $124,225 (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 $162,582 (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 $2,097,791 (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 $2,829,547 (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 $59,937 (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.
F-24
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 $4,799,879 (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.
(2) Bank loans and letters of credit
Banamex Loan. The Company borrowed an aggregate principal amount of $1,126,813 (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 $903,077
(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
$216,919 (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 $87,507 (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. At
December 31, 2004, before recognizing the effects of its financial restructuring, the outstanding
principal amount under this promissory note was $61,136 (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 $17,777 (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 $319,824
(US$26.7 million) from California Commerce Bank under two loan agreements. The first California
Commerce Bank loan agreement in the principal amount of $140,013 (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
$179,811 (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
F-25
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 $289,855 (US$24.2
million) and the aggregate amount of due and unpaid interest under the California Commerce Bank
loan agreements was $37,792 (US$3.3 million). As part of its financial 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 $599,369 (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
$119,874 (US$10 million) and the aggregate amount of due and unpaid interest under this loan was
$7,357 (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 $263,722 (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
$203,785 (US$17.0 million) and the aggregate amount of due and unpaid interest under this loan
was $22,414 (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.
F-26
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 $31,355
(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 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 $31,355
(US$2.6 million) and the aggregate amount of due and unpaid interest under this reimbursement
obligation was $4,058 (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 $37,160
(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. 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 $28,405 (US$2.4 million) and the aggregate amount of due and unpaid interest under
this reimbursement obligation was $3,506 (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.
F-27
(3) Financial lease agreements
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 $119,687 (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 March 31, 2006 an Addendum to the agreements was made to increase the leasing
period into 30 quarterly successive and consecutive payments with a maturity date as of October
1, 2013, and bear an interest of 8.17%. As of December 31, 2006, the aggregate principal amount
outstanding under these promissory notes was $4,815 (US$0.4 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 $958,989 (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 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 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,
2006 and 2005, the aggregate principal amount outstanding under this loan agreement was $84,084
(US$7.8 million) and $615,454 (US$55.6 millions), respectively.
The Companys subsidiary, Fábrica Mexicana de Papel, S. A. de C. V., borrowed an aggregate
principal amount of $184,606 (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 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
F-28
certain other subsidiaries of Grupo Pipsamex and is guaranteed by CODUSA. As of December 31,
2006, this loan was totally paid. As of December 31, 2005, the aggregate principal amount
outstanding under this loan agreement was $93,754 (US$8.5 million).
Bank of Albuquerque Loan. The Companys subsidiary, Durango McKinley Paper Company, borrowed an
aggregate principal amount of $266,070 (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 $116,405 (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 receivable, 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, 2006,
this loan was totally paid. As of December 31, 2005, the aggregate principal amount outstanding
under this loan agreement was $110,863 (US$10.0 million).
Commerzbank Loan. The Companys subsidiary, Ponderosa, borrowed an aggregate principal amount of
$173,669 (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, 2006 and 2005,
the aggregate principal amount outstanding under this loan was $63,458 (5.0 million) and
$83,526 (6.4 million), respectively.
(5) Reduction in the 2005 carrying value debt.
Reduction in the 2005 of $1,163,256 (15% of the principal of the restructured debt) and accrued
interest of $2,146,473, that combined summarized $3,396,661, was exchanged for a 17% of the
Company capital stock during 2005.
(6) Restrictive Covenants and Available Credit.
The instruments governing our indebtedness contain financial and other covenants that restrict,
among other things, the ability of the Company and most of their subsidiaries to:
|
|
incur additional indebtedness; |
|
|
|
incur liens; |
|
|
|
issue guarantees; |
F-29
|
|
|
issue or sell capital stock of subsidiaries; |
|
|
|
|
pay dividends or make certain other restricted payments; |
|
|
|
|
consummate certain asset sales or |
|
|
|
|
enter into certain transactions with affiliates. |
|
|
DEBT AT DECEMBER 31, 2006 AND 2005 |
|
|
|
TRANCHE A. |
|
|
|
On February 23, 2005, the Company issued Senior Notes with an aggregate principal amount of
$1,347,009 (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, 2006 and 2005 was
$1,027,050 (US$95.0 million) and $1,220,554 (US$110.3 million), respectively. |
|
|
|
TRANCHE B. |
|
|
|
On February 23, 2005, the Company issued Senior Notes with an aggregate principal amount of
$5,032,370 (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,
2006 and 2005 was $4,614,538 (US$426.8 million) and $4,799,879 (US$433.8 million), respectively. |
|
d. |
|
Long-term debt maturities are: |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
2007 |
|
$ |
|
|
|
$ |
349,373 |
|
2008 |
|
|
235,331 |
|
|
|
289,945 |
|
2009 |
|
|
187,729 |
|
|
|
258,586 |
|
2010 |
|
|
172,964 |
|
|
|
243,588 |
|
2011 |
|
|
251,776 |
|
|
|
234,308 |
|
2012 |
|
|
4,775,965 |
|
|
|
5,034,187 |
|
2013 and thereafter |
|
|
692 |
|
|
|
358,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,624,457 |
|
|
$ |
6,768,724 |
|
|
|
|
|
|
|
|
F-30
e. |
|
The minimum rental commitments under financial leases are as follows: |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Total minimum lease obligations |
|
$ |
4,815 |
|
|
$ |
117,052 |
|
Unearned interest |
|
|
|
|
|
|
(4,720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of lease obligations |
|
|
4,815 |
|
|
|
112,782 |
|
Current portion of lease obligations |
|
|
688 |
|
|
|
23,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of lease obligations |
|
$ |
4,127 |
|
|
$ |
89,696 |
|
|
|
|
|
|
|
|
Financial leases obligations, which include a purchase option at the end of the lease term, are
payable as follows:
|
|
|
|
|
2007 |
|
$ |
688 |
|
2008 |
|
|
687 |
|
2009 |
|
|
687 |
|
2010 |
|
|
687 |
|
2011 |
|
|
687 |
|
2012 |
|
|
687 |
|
2013 |
|
|
692 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,815 |
|
|
|
|
|
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 Companys long-term debt consists of
debt instruments that bear interest at fixed or variable rates. |
F-31
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 well-known 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:
a. Pension Plans and Seniority Premiums.
México The Company maintains a pension plan for certain employees. In addition, in accordance
with the Mexican Federal 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 related liability and annual benefit cost are calculated by
independent actuaries in accordance with the plans basis, using the unit projected credit method
The pension plans and seniority premiums are unfunded.
The present values of these obligations, are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Accumulated benefit obligation |
|
$ |
205,165 |
|
|
$ |
210,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation |
|
$ |
229,010 |
|
|
$ |
233,906 |
|
Unrecognized items: |
|
|
|
|
|
|
|
|
Variances for assumptions and adjustments based on
experience |
|
|
20,133 |
|
|
|
19,777 |
|
Transition asset |
|
|
(108,723 |
) |
|
|
(120,932 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net projected liability |
|
|
140,420 |
|
|
|
132,751 |
|
Additional minimum liability |
|
|
64,745 |
|
|
|
78,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
205,165 |
|
|
$ |
210,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset |
|
$ |
63,262 |
|
|
$ |
77,290 |
|
|
|
|
|
|
|
|
F-32
The real rates (net of inflation) used in the actuarial calculations for the years ended December
31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
Discount rate |
|
|
5 |
% |
|
|
5 |
% |
Salary increases |
|
|
2 |
% |
|
|
2 |
% |
The amortization periods for the unamortized items are as follows:
|
|
|
|
|
|
|
|
|
|
|
Remaining Years |
|
|
2006 |
|
2005 |
Transition asset |
|
|
16 |
|
|
|
17 |
|
Variances in assumptions and adjustments based on experience |
|
|
16 |
|
|
|
17 |
|
United States of America - The Companys 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, 2006, 2005 and 2004, total expenses related to these plans were $24,063, $20,023 and
$29,110 respectively.
As of December 31, 2006 and 2005 the Company did not have any defined benefits plans.
b. Post-retirement obligations
The Company has granted post-retirement benefits to its employees. As a result, the Company
recognized labor liabilities for post-retirement obligations.
The present value of these obligations is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Accumulated post-retirement benefit obligation |
|
$ |
91,162 |
|
|
$ |
101,852 |
|
|
|
|
|
|
|
|
F-33
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Post-retirement other benefit obligation |
|
$ |
95,035 |
|
|
$ |
105,361 |
|
Variances for assumptions and adjustments based on
experience |
|
|
(12,518 |
) |
|
|
(12,724 |
) |
Unrecognized prior service cost to be amortized over 16 years |
|
|
(86,208 |
) |
|
|
(93,134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net projected liability |
|
|
(3,691 |
) |
|
|
(497 |
) |
Additional minimum liability |
|
|
94,853 |
|
|
|
102,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
91,162 |
|
|
$ |
101,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset |
|
$ |
82,689 |
|
|
$ |
90,133 |
|
|
|
|
|
|
|
|
c. Retirement compensation
The present value of these obligations, is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Accumulated post-retirement benefit obligation |
|
$ |
10,757 |
|
|
$ |
7,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement other benefit obligation |
|
$ |
20,263 |
|
|
$ |
17,409 |
|
Variances for assumptions and adjustments based on
experience |
|
|
1,622 |
|
|
|
|
|
Unrecognized prior service cost to be amortized over 16 years |
|
|
(14,078 |
) |
|
|
(14,304 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net projected liability |
|
|
7,807 |
|
|
|
3,105 |
|
Additional minimum liability |
|
|
2,950 |
|
|
|
4,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,757 |
|
|
$ |
7,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset |
|
$ |
2,854 |
|
|
$ |
4,627 |
|
|
|
|
|
|
|
|
F-34
d. Total labor obligations presented in the balance sheet are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Seniority premiums and pensions |
|
$ |
205,165 |
|
|
$ |
210,785 |
|
Post-retirement obligations |
|
|
91,162 |
|
|
|
101,852 |
|
Retirement compensation |
|
|
10,757 |
|
|
|
7,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
307,084 |
|
|
$ |
320,369 |
|
|
|
|
|
|
|
|
Total intangible asset labor obligations are as follow:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Seniority premiums and pensions |
|
$ |
63,262 |
|
|
$ |
77,290 |
|
Post-retirement obligations |
|
|
82,689 |
|
|
|
90,133 |
|
Retirement compensation |
|
|
2,854 |
|
|
|
4,627 |
|
|
|
|
|
|
|
|
|
|
|
$ |
148,805 |
|
|
$ |
172,050 |
|
|
|
|
|
|
|
|
Net period cost, is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Service cost |
|
$ |
12,047 |
|
|
$ |
10,800 |
|
Amortization of transition asset, variances for
assumptions and adjustments based on experience |
|
|
17,564 |
|
|
|
17,409 |
|
Financial cost |
|
|
14,764 |
|
|
|
15,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net period cost |
|
$ |
44,375 |
|
|
$ |
43,346 |
|
|
|
|
|
|
|
|
F-35
NOTE 12 STOCKHOLDERS EQUITY:
a. Shares of common stock at par value as of December 31, are comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
Inflation |
|
|
|
|
|
|
Number of |
|
|
Par |
|
|
restatement |
|
|
|
|
|
|
shares |
|
|
value |
|
|
effect |
|
|
Total |
|
Fixed capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unique Series |
|
|
65,419,089 |
|
|
$ |
982,074 |
|
|
$ |
2,042,648 |
|
|
$ |
3,024,722 |
|
Variable capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unique Series |
|
|
45,222,022 |
|
|
|
678,873 |
|
|
|
1,962,243 |
|
|
|
2,641,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,641,111 |
|
|
$ |
1,660,947 |
|
|
$ |
4,004,891 |
|
|
$ |
5,665,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 20, 2006, Board of Directors decided to change the series A and B for an unique
series of ordinary shares, which confer same rights and obligations to they owners.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Inflation |
|
|
|
|
|
|
Number of |
|
|
Par |
|
|
restatement |
|
|
|
|
|
|
shares |
|
|
value |
|
|
effect |
|
|
Total |
|
Fixed capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A |
|
|
46,613,171 |
|
|
$ |
699,760 |
|
|
$ |
2,022,461 |
|
|
$ |
2,722,221 |
|
Series B |
|
|
18,805,918 |
|
|
|
282,314 |
|
|
|
20,187 |
|
|
|
302,501 |
|
Variable capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A |
|
|
45,222,022 |
|
|
|
678,873 |
|
|
|
1,962,243 |
|
|
|
2,641,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,641,111 |
|
|
$ |
1,660,947 |
|
|
$ |
4,004,891 |
|
|
$ |
5,665,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
|
|
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 May 17, 2004, the Board of Directors approved contributing $51 to the companys fixed
share capital and the subsequent sale of 3,071 treasury shares. |
|
c. |
|
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, 2006, 2005 and 2004 the legal
reserve, in historical nominal pesos, was $201,477, $193,281 and $193,281, respectively. |
|
d. |
|
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 2006, the rate was
29% (30% in 2005 and 33% in 2004) 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. |
|
e. |
|
The balances of the tax account related to stockholders equity, are as follows: |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Contributed capital account |
|
$ |
3,876,816 |
|
|
$ |
3,925,146 |
|
After tax profits account |
|
|
1,953,729 |
|
|
|
1,876,295 |
|
Reinvested after tax profits account |
|
|
985,927 |
|
|
|
985,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,816,472 |
|
|
$ |
6,787,368 |
|
|
|
|
|
|
|
|
F-37
NOTE 13 FOREIGN CURRENCY TRANSACTIONS AND BALANCES:
a. The foreign currency monetary position is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Thousands of U.S. dollars: |
|
|
|
|
|
|
|
|
Monetary assets |
|
US$ |
40,308 |
|
|
US$ |
64,042 |
|
Monetary liabilities |
|
|
(571,487 |
) |
|
|
(665,179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monetary (liability) position, net |
| US$ |
(531,179 | ) |
| US$ |
(601,137 |
) |
|
|
|
|
|
|
|
Equivalent in Mexican pesos |
|
$ |
(5,742,895 |
) |
|
$ |
(6,392,727 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thousands of Euros: |
|
|
|
|
|
|
|
|
Monetary (liability) position, net |
| |
(13,767 |
) | |
|
(8,317 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent in Mexican pesos |
|
$ |
(195,953 |
) |
|
$ |
(104,287 |
) |
|
|
|
|
|
|
|
b. Non-monetary assets of foreign origin at December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance in |
|
|
|
|
|
|
foreign |
|
Equivalent |
|
|
|
|
currency |
|
in Mexican |
|
|
Currency |
|
(thousands) |
|
pesos |
Inventories
|
|
U.S. dollar
|
|
|
31,099 |
|
|
$ |
336,229 |
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and industrial equipment: |
|
|
|
|
|
|
|
|
|
|
United States of America
|
|
U.S. dollar
|
|
|
392,883 |
|
|
|
4,247,694 |
|
Brazil
|
|
Real
|
|
|
190,092 |
|
|
|
962,607 |
|
Japan
|
|
Yen
|
|
|
3,534,443 |
|
|
|
320,574 |
|
Germany
|
|
Euro
|
|
|
24,239 |
|
|
|
345,003 |
|
Canada
|
|
Canadian dollar
|
|
|
40,769 |
|
|
|
378,316 |
|
Other
|
|
Several
|
|
|
|
|
|
|
370,116 |
|
F-38
c. |
|
The condensed financial information of the principal foreign countries in which the Company
operates before inter-company eliminations, is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands of |
|
|
U.S. dollars) |
|
|
2006 |
|
2005 |
|
2004 |
United States of America |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
212,485 |
|
|
|
213,216 |
|
|
|
212,347 |
|
Income from operations |
|
|
14,562 |
|
|
|
2,337 |
|
|
|
3,352 |
|
Net income (loss) |
|
|
176 |
|
|
|
(15,488 |
) |
|
|
(1,867 |
) |
Current assets |
|
|
133,819 |
|
|
|
132,768 |
|
|
|
206,049 |
|
Total assets |
|
|
316,723 |
|
|
|
317,285 |
|
|
|
278,272 |
|
Current liabilities |
|
|
61,918 |
|
|
|
65,869 |
|
|
|
71,118 |
|
Total liabilities |
|
|
79,836 |
|
|
|
87,207 |
|
|
|
92,265 |
|
d. Transactions denominated in foreign currency were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands of |
|
|
U.S. dollars) |
|
|
2006 |
|
2005 |
|
2004 |
Export sales |
|
|
234,874 |
|
|
|
189,563 |
|
|
|
205,617 |
|
Interest expense |
|
|
(50,792 |
) |
|
|
(50,544 |
) |
|
|
(90,306 |
) |
Interest income |
|
|
573 |
|
|
|
534 |
|
|
|
68 |
|
Import purchases |
|
|
(261,014 |
) |
|
|
(219,570 |
) |
|
|
(238,801 |
) |
Acquisition (sales) of machinery and equipment |
|
|
5,401 |
|
|
|
14,829 |
|
|
|
(555 |
) |
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 27, |
|
|
2006 |
|
2005 |
|
2007 |
U.S. dollar |
|
$ |
10.8116 |
|
|
$ |
10.6344 |
|
|
$ |
10.9200 |
|
Euros |
|
|
14.2335 |
|
|
|
12.5390 |
|
|
|
14.8795 |
|
F-39
NOTE 14 TRANSACTIONS AND BALANCES WITH RELATED PARTIES:
a. |
|
Transactions with related parties carried out in the ordinary course of business, were as
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Interest income |
|
$ |
|
|
|
$ |
|
|
|
$ |
14,525 |
|
Sale of paper |
|
|
|
|
|
|
|
|
|
|
5,263 |
|
Air transportation services |
|
|
|
|
|
|
|
|
|
|
37,687 |
|
Other (expenses) income |
|
|
|
|
|
|
|
|
|
|
(1,053 |
) |
b. Accounts receivable from related parties as of December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Administradora Corporativa y Mercantil, S. A. de C. V. * |
|
$ |
|
|
|
$ |
12,281 |
|
|
|
|
|
|
|
|
* |
|
Administradora Corporativa y Mercantil, S. A. de C. V, a company owned and controlled by
the Rincón family, borrowed founds from the Company to fund principal and interest payments
on its indebtedness. The outstanding balance on these loans was $12,281 at December 31,
2005. These loans were fully repaid during 2006. These loans bore interest rate of 5% per
annum and was due to mature on December 31, 2012. |
|
|
Transactions with Directors and their Affiliates The Company sells newsprint to El Universal at
prices that are not materially more favorable than sales to other third parties. Juan Francisco
Ealy Ortiz, one of CODUSAs Directors, is the Chairman, Chief Executive Officer and Managing
Director of El Universal. During the years ended December 31,
2006, 2005 and 2004, the Company recorded
net sales to El Universal of approximately $120
(US$11.1 million), $166 (US$15.0 million) and $149
(US$13.0 million).
|
|
c. |
|
Acquisition of new subsidiaries: |
|
|
|
On April 11, 2005, the Company acquired 99.99% of the capital stock of Empaques del Norte, S. A.
de C. V. for $67,558 (US$5.8 million). The due amount to the previous stockholder as of December
31, 2005, was of $8,862. See note 7. |
|
|
|
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 $16. 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. |
F-40
|
|
On June 28, 2005, the Company acquired 99.99% of the capital stock of Inmobiliaria Industrial de
Durango, S. A. de C. V. for $765. This company was owned by some of the Rincón family members.
See note 7. |
|
d. |
|
Creation of new subsidiaries: |
|
|
|
Corporación Durango, S. A. B. 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 for US$50 million with a 7.5 year term. 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. |
|
e. |
|
Ownership percentage movements: |
|
|
|
On February 13, 2006, Grupo Pipsamex, S. A. de C. V. issued and sold 2,177,042,255 shares of its
series B capital stock representing 13.3% of Pipsamexs outstanding capital stock to NKM
Corporativo, S. A. de C. V., a company owned and controlled by the Rincón family, for $314,610.
The proceeds of this sale were used to fund a portion of our debt reduction program. |
|
|
|
On December 31, 2006, Corporación Durango, S. A. B. de C. V., capitalized Cartonpack, S. A.
de C. V., for an amount of $3,066,509, with a 94.7% participation in that Company. |
NOTE 15 OTHER INCOME (EXPENSES), NET:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Loss on sale of property, plant and equipment |
|
$ |
(16,189 |
) |
|
$ |
(1,765 |
) |
|
$ |
(23,771 |
) |
Restructuring expenses |
|
|
(27,374 |
) |
|
|
(68,379 |
) |
|
|
(155,492 |
) |
Write-off of debt issuance costs |
|
|
|
|
|
|
|
|
|
|
(347,034 |
) |
Revaluation (impairment) of long-lived assets in use |
|
|
25,917 |
|
|
|
118,412 |
|
|
|
(498,559 |
) |
Debt repurchase at market price (1) |
|
|
|
|
|
|
|
|
|
|
667,430 |
|
Recovery from insurance company |
|
|
68,649 |
|
|
|
|
|
|
|
|
|
Other income (expenses) Net |
|
|
14,498 |
|
|
|
(42,764 |
) |
|
|
(77,414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
65,501 |
|
|
$ |
5,504 |
|
|
$ |
(434,840 |
) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
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 ($577.7 million) issued by Durango Paper |
F-41
|
|
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 ($92.7 million) which the parties agreed was the fair market value
of these notes. |
NOTE 16 INCOME TAX (IT), ASSET TAX (AT) AND EMPLOYEES STATUTORY PROFIT SHARING (EPS):
The tax result differs from the accounting result due to temporary and permanent differences, the
latter arising basically from recognition in the effects of inflation on different bases and to
non-deductible expenses.
As a result of the amendments to the Income Tax Law in effect as of November 13, 2004, the IT rate
will be 29% and 28% in 2006 and 2007, respectively. Therefore, the effect of those statutory
income tax rate reductions were considered in valuing deferred income taxes, creating for 2006 and
2005, a decrease in income tax liability of $14,073 and of $17,957, respectively, which increased
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 and the
holding company are consolidated at 100% of such proportion for 2006 and 2005. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Current |
|
$ |
(208,903 |
) |
|
$ |
(127,165 |
) |
|
$ |
(38,988 |
) |
Deferred |
|
|
(408,107 |
) |
|
|
(250,913 |
) |
|
|
552,811 |
|
Benefit from tax consolidation |
|
|
84,133 |
|
|
|
61,754 |
|
|
|
9,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(532,877 |
) |
|
$ |
(316,324 |
) |
|
$ |
523,119 |
|
|
|
|
|
|
|
|
|
|
|
F-42
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,
2006, 2005 and 2004 is: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
Statutory income tax rate |
|
|
29 |
% |
|
|
30 |
% |
|
|
33 |
% |
Plus (less) the effect of permanent differences: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible expenses |
|
|
3.86 |
% |
|
|
16.72 |
% |
|
|
(5.43 |
%) |
Other |
|
|
9.56 |
% |
|
|
13.17 |
% |
|
|
10.23 |
% |
Cancellation rule 106 |
|
|
9.78 |
% |
|
|
|
|
|
|
|
|
Effects of inflation |
|
|
(5.13 |
%) |
|
|
(7.24 |
%) |
|
|
7.05 |
% |
Effect of the rate reduction on deferred IT |
|
|
8.84 |
% |
|
|
(18.89 |
%) |
|
|
16.59 |
% |
Change in valuation allowance of recoverable
deferred IT asset and AT |
|
|
50.01 |
% |
|
|
51.17 |
% |
|
|
33.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective IT rate |
|
|
105.92 |
% |
|
|
84.93 |
% |
|
|
94.45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
c. |
|
The main components of the net deferred IT liability balance are: |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Deferred IT liability (asset): |
|
|
|
|
|
|
|
|
Property, machinery and equipment |
|
$ |
2,469,127 |
|
|
$ |
2,533,261 |
|
Inventories |
|
|
(67,815 |
) |
|
|
(125,928 |
) |
Allowance for doubtful accounts |
|
|
(47,056 |
) |
|
|
(51,783 |
) |
Accrued expenses |
|
|
(85,984 |
) |
|
|
(42,624 |
) |
Deferred assets |
|
|
24,703 |
|
|
|
(27,916 |
) |
Other, net |
|
|
(112,096 |
) |
|
|
(67,951 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred IT from temporary differences |
|
|
2,180,879 |
|
|
|
2,217,059 |
|
Tax loss carryforwards |
|
|
(953,634 |
) |
|
|
(1,045,992 |
) |
Recoverable AT carryforwards |
|
|
(270,851 |
) |
|
|
(343,208 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
956,394 |
|
|
|
827,859 |
|
Valuation allowance |
|
|
1,092,836 |
|
|
|
839,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net long-term deferred IT liability |
|
$ |
2,049,230 |
|
|
$ |
1,666,963 |
|
|
|
|
|
|
|
|
(1) |
|
Certain reclassifications among line items have been made that did not impact the total net
deferred income tax liability. |
F-43
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, 2006 and 2005, 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. |
|
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, 2006 are as follows: |
|
|
|
|
|
|
|
|
|
Year of |
|
Tax loss |
|
|
Recoverable |
|
Expiration |
|
carryforwards |
|
|
AT |
|
2007 |
|
$ |
13,550 |
|
|
$ |
29,510 |
|
2008 |
|
|
117,206 |
|
|
|
28,624 |
|
2009 |
|
|
131,670 |
|
|
|
22,359 |
|
2010 |
|
|
66,198 |
|
|
|
26,982 |
|
2011 |
|
|
58,481 |
|
|
|
25,120 |
|
2012 |
|
|
374,777 |
|
|
|
66,704 |
|
2013 |
|
|
959,627 |
|
|
|
62,591 |
|
2014 |
|
|
367,701 |
|
|
|
6,658 |
|
2015 |
|
|
1,060,652 |
|
|
|
1,106 |
|
2016 |
|
|
255,974 |
|
|
|
1,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,405,836 |
|
|
$ |
270,851 |
|
|
|
|
|
|
|
|
g. |
|
For the years ended December 31, 2006, 2005 and 2004, the change in gain (loss) from holding
non-monetary assets includes the effect of the deferred income tax of $130,964, $154,656 and
$277,610, 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 and 2004. Discontinued operations were as follows:
F-44
On July 15, 2005, CODUSAs subsidiaries, Ponderosa and Compañía Forestal de Durango, S. A. de C.
V., sold the assets of the Companys Chihuahua particleboard plant for $347,936 (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 statements of operations reflect the effects of discontinued operations, which were comprised
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Net sales |
|
$ |
172,771 |
|
|
$ |
360,270 |
|
Cost of sales |
|
|
146,827 |
|
|
|
301,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
25,944 |
|
|
|
58,540 |
|
Operating expenses Net |
|
|
22,842 |
|
|
|
33,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
3,102 |
|
|
|
25,446 |
|
|
|
|
|
|
|
|
|
|
Net comprehensive financing income Net |
|
|
79,341 |
|
|
|
47,435 |
|
Other (expenses) income Net |
|
|
(20,692 |
) |
|
|
331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
61,751 |
|
|
|
73,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from sales of discontinued operations |
|
|
347,936 |
|
|
|
|
|
Cost of sales of assets of discontinued operations |
|
|
364,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sales of discontinued operations |
|
|
(16,417 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT and EPS |
|
|
67,874 |
|
|
|
36,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations |
|
$ |
113,208 |
|
|
$ |
109,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
7,229 |
|
|
$ |
16,372 |
|
|
|
|
|
|
|
|
NOTE 18 COMMITMENTS:
a. |
|
Some of the Mexican subsidiaries lease certain equipment under non-cancelable operating
leases. Rental expenses totaled $117,484, $53,288 and $53,718 for the years ended December
31, 2006, 2005 and 2004, respectively. As of December 31, 2006, estimated future minimum
lease payments were as follows: |
F-45
|
|
|
|
|
Year |
|
Amount |
|
2007 |
|
$ |
99,125 |
|
2008 |
|
|
102,393 |
|
2009 |
|
|
108,237 |
|
2010 |
|
|
123,593 |
|
2011 and thereafter |
|
|
393,306 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
826,654 |
|
|
|
|
|
b. |
|
McKinley Paper Company leases certain equipment under non-cancelable operating leases. Rental
expenses under these leases were $8,329, $9,641 and $3,811 for the years ended December 31,
2006, 2005 and 2004, respectively. As of December 31, 2006, estimated future minimum lease
payments were as follows: |
|
|
|
|
|
Year |
|
Amount |
|
2007 |
|
$ |
9,211 |
|
2008 |
|
|
8,174 |
|
2009 |
|
|
7,352 |
|
2010 |
|
|
3,222 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27,959 |
|
|
|
|
|
NOTE 19 CONTINGENCIES:
a. |
|
On November 14, 2003, the Company sold its investment in Productora Nacional de Papel, S.
A. de C. V. (Pronal). Subsequent to the sale of Pronal, the Mexican National Water Commission
billed the Company $213,000 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. However, the Company is evaluating an option by a decree allowing for
an 80% discount of the due amount and a 100% discount of fines and other expenses. |
b. |
|
Similarly, subsequent to the sale of Productora Nacional de Papel, S. A. de C. V., the
Mexican National Water Commission billed the Company $2,100 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. In 2005, the Company filed an appeal with the Federal Tax and
Administrative Court, and is currently accounting the acceptance of this appeal. |
F-46
c. |
|
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. |
d. |
|
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 enforcement 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, 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 and Resources Conservation and Recovery
Act 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 programs will minimize the impact
that changing regulations have on capital expenditures for environmental compliance. |
e. |
|
The Mexican tax authority may have a different criteria from the Companys as a result of tax
documentation review. |
F-47
f. |
|
On May 26, 2006, the subsidiary Fábrica Mexicana de Papel, S. A. de C. V., interposed a
demand of nullity, against the resolution that determines a tax assessment for $15,176
regarding 1984 fiscal year, previous date of the acquisition of the subsidiary, for dividend
distribution supposedly associated to non deducible expenses. The Company is evaluating the
option that allows the partial waiver of taxes, published on April 2007. |
NOTE 20 SUBSEQUENT EVENTS:
a. |
|
On January 10, 2007, twelve companies were created to provide administrative services and
labor to the Companys paper and corrugated container facilities. Inmobiliaria Industrial
Tizayuca, S.A. de C.V. is the stockholder, as follows: |
|
|
|
|
|
|
|
|
|
Ownership |
|
|
Company |
|
percentage |
|
Activity |
Secodusa, S. A. de C. V.
|
|
|
100 |
% |
|
Administrative services |
Servicios Pipsamex, S. A. de C. V.
|
|
|
100 |
% |
|
Administrative services |
Mexpape, S. A. de C. V.
|
|
|
100 |
% |
|
Administrative services |
Fapatux, S. A. de C. V.
|
|
|
100 |
% |
|
Administrative services |
Ectsa Industrial, S. A. de C. V.
|
|
|
100 |
% |
|
Administrative services |
Enosa Industrial, S. A. de C. V.
|
|
|
100 |
% |
|
Administrative services |
Cartonpack Industrial, S. A. de C. V.
|
|
|
100 |
% |
|
Administrative services |
Eyemsa Industrial, S. A. de C. V.
|
|
|
100 |
% |
|
Administrative services |
Administración Industrial Centauro, S.
A. de C. V.
|
|
|
100 |
% |
|
Administrative services |
Administradora Industrial Durango, S. A.
de C. V.
|
|
|
100 |
% |
|
Administrative services |
Atenmex, S. A. de C. V.
|
|
|
100 |
% |
|
Administrative services |
Atensa, S. A. de C. V.
|
|
|
100 |
% |
|
Administrative services |
b. |
|
On January 31, 2007, Board of Directors approved the merger of Grupo Pipsamex, S. A. de C.
V., with the following companies: Fábricas de Papel Tuxtepec, S. A. de C. V., Fábrica Mexicana
de Papel, S. A. de C. V., Fibras de Durango, S. A. de C. V. and Inmobiliaria Industrial de
Durango, S. A. de C. V. Grupo Pipsamex, S. A. de C. V., was the surviving company in these
mergers. |
c. |
|
On February 6, 2007, Administración Corporativa Titán, S. A. de C. V., was created, being
Corporación Durango, S. A. B. de C. V. the holding company. |
F-48
d. |
|
On February 10, 2007, Board of Directors approved the merger of Empaques de Cartón Titán, S.
A. de C. V. (Ectsa) with the following companies: Envases y Empaques de México, S. A. de C.
V., Empaques del Norte, S. A. de C. V., Cartonpack, S. A. de C. V., Durango Internacional, S.
A. de C. V., Industrias Centauro, S. A. de C. V., Compañía Papelera de Atenquique, S. A. de C.
V., Compañía Forestal de Durango, S. A. de C. V., and Papel y Empaques Tizayuca, S. A. de C.
V. Ectsa was the surviving company in these merger. |
e. |
|
On February 28, 2007, board of Directors approved the merger of Empaques de Cartón Titán, S.
A. de C. V. with Administración Corporativa Titán, S. A. de C. V. |
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.
Other This segment includes the production and sale of plywood.
a. Information by operating segments of continuing operations:
F-49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
Paper |
|
|
Packaging |
|
|
segments |
|
|
segments |
|
|
Eliminations |
|
|
consolidated |
|
Sales to external customers |
|
$ |
4,529,681 |
|
|
$ |
5,050,630 |
|
|
$ |
117,862 |
|
|
$ |
9,698,173 |
|
|
$ |
|
|
|
$ |
9,698,173 |
|
Intersegment sales |
|
|
4,335,657 |
|
|
|
429,407 |
|
|
|
181,536 |
|
|
|
4,946,600 |
|
|
|
(4,946,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
|
8,865,338 |
|
|
|
5,480,037 |
|
|
|
299,398 |
|
|
|
14,644,773 |
|
|
|
(4,946,600 |
) |
|
|
9,698,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
276,310 |
|
|
|
121,421 |
|
|
|
12,736 |
|
|
|
410,467 |
|
|
|
|
|
|
|
410,467 |
|
Income (loss) from operations |
|
|
510,162 |
|
|
|
329,661 |
|
|
|
(6,428 |
) |
|
|
833,395 |
|
|
|
|
|
|
|
833,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
20,312,241 |
|
|
|
28,011,960 |
|
|
|
1,127,027 |
|
|
|
49,451,228 |
|
|
|
(34,292,144 |
) |
|
|
15,159,084 |
|
Acquisition and sale of property,
plant and equipment |
|
|
225,192 |
|
|
|
84,522 |
|
|
|
(82,714 |
) |
|
|
227,000 |
|
|
|
|
|
|
|
227,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment |
|
|
65,068 |
|
|
|
|
|
|
|
(39,151 |
) |
|
|
25,917 |
|
|
|
|
|
|
|
25,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
506,193 |
|
|
|
1,636,977 |
|
|
|
37,111 |
|
|
|
2,180,281 |
|
|
|
(2,149,110 |
) |
|
|
31,171 |
|
Interest expense |
|
|
(636,600 |
) |
|
|
(2,030,786 |
) |
|
|
(83,893 |
) |
|
|
(2,751,279 |
) |
|
|
2,159,513 |
|
|
|
(591,766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax |
|
|
(416,749 |
) |
|
|
(86,749 |
) |
|
|
(29,379 |
) |
|
|
(532,877 |
) |
|
|
|
|
|
|
(532,877 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
Paper |
|
|
Packaging |
|
|
segments |
|
|
segments |
|
|
Eliminations |
|
|
consolidated |
|
Sales to external customers |
|
$ |
3,633,168 |
|
|
$ |
4,738,207 |
|
|
$ |
104,482 |
|
|
$ |
8,475,857 |
|
|
$ |
|
|
|
$ |
8,475,857 |
|
Intersegment sales |
|
|
4,363,498 |
|
|
|
430,087 |
|
|
|
94,039 |
|
|
|
4,887,624 |
|
|
|
(4,887,624 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
|
7,996,666 |
|
|
|
5,168,294 |
|
|
|
198,521 |
|
|
|
13,363,481 |
|
|
|
(4,887,624 |
) |
|
|
8,475,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
287,917 |
|
|
|
138,835 |
|
|
|
12,053 |
|
|
|
438,805 |
|
|
|
|
|
|
|
438,805 |
|
Income (loss) from operations |
|
|
127,544 |
|
|
|
246,229 |
|
|
|
10,493 |
|
|
|
384,266 |
|
|
|
|
|
|
|
384,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
19,719,939 |
|
|
|
28,826,593 |
|
|
|
1,298,117 |
|
|
|
49,844,649 |
|
|
|
(34,411,347 |
) |
|
|
15,433,302 |
|
Acquisition and sale of property,
plant and equipment |
|
|
70,964 |
|
|
|
(15,138 |
) |
|
|
8,496 |
|
|
|
64,322 |
|
|
|
|
|
|
|
64,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment |
|
|
118,412 |
|
|
|
|
|
|
|
|
|
|
|
118,412 |
|
|
|
|
|
|
|
118,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
689,948 |
|
|
|
3,187,922 |
|
|
|
11,061 |
|
|
|
3,888,931 |
|
|
|
(3,844,647 |
) |
|
|
44,284 |
|
Interest expense |
|
|
(1,154,695 |
) |
|
|
(2,990,211 |
) |
|
|
(40,643 |
) |
|
|
(4,185,549 |
) |
|
|
3,569,054 |
|
|
|
(616,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax |
|
|
455,160 |
|
|
|
(657,513 |
) |
|
|
(113,971 |
) |
|
|
(316,324 |
) |
|
|
|
|
|
|
(316,324 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
Paper |
|
|
Packaging |
|
|
segments |
|
|
segments |
|
|
Eliminations |
|
|
consolidated |
|
Sales to external customers |
|
$ |
3,700,712 |
|
|
$ |
4,552,641 |
|
|
$ |
115,019 |
|
|
$ |
8,368,372 |
|
|
$ |
|
|
|
$ |
8,368,372 |
|
Intersegment sales |
|
|
4,194,662 |
|
|
|
318,359 |
|
|
|
112 |
|
|
|
4,513,133 |
|
|
|
(4,513,133 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
|
7,895,374 |
|
|
|
4,871,000 |
|
|
|
115,131 |
|
|
|
12,881,505 |
|
|
|
(4,513,133 |
) |
|
|
8,368,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
305,032 |
|
|
|
143,039 |
|
|
|
8,058 |
|
|
|
456,129 |
|
|
|
|
|
|
|
456,129 |
|
Income (loss) from operations |
|
|
57,852 |
|
|
|
415,100 |
|
|
|
1,250 |
|
|
|
474,202 |
|
|
|
|
|
|
|
474,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
22,661,917 |
|
|
|
32,635,149 |
|
|
|
1,296,235 |
|
|
|
56,593,301 |
|
|
|
(40,334,646 |
) |
|
|
16,258,655 |
|
Acquisition and sale of property,
plant and equipment |
|
|
98,745 |
|
|
|
59,574 |
|
|
|
23,624 |
|
|
|
181,943 |
|
|
|
|
|
|
|
181,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment |
|
|
(498,559 |
) |
|
|
|
|
|
|
|
|
|
|
(498,559 |
) |
|
|
|
|
|
|
(498,559 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
666,617 |
|
|
|
2,010,286 |
|
|
|
1,290 |
|
|
|
2,678,193 |
|
|
|
(2,635,006 |
) |
|
|
43,187 |
|
Interest expense |
|
|
(991,757 |
) |
|
|
(2,804,490 |
) |
|
|
(4,491 |
) |
|
|
(3,800,738 |
) |
|
|
2,595,477 |
|
|
|
(1,205,261 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax |
|
|
1,134,537 |
|
|
|
(747,231 |
) |
|
|
135,813 |
|
|
|
523,119 |
|
|
|
|
|
|
|
523,119 |
|
F-50
b. General information of continuing operations by product:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Packaging |
|
|
|
|
|
|
|
|
|
|
|
|
- Corrugated container |
|
$ |
4,643,005 |
|
|
$ |
4,322,156 |
|
|
$ |
4,191,344 |
|
- Paper sacks |
|
|
395,722 |
|
|
|
404,660 |
|
|
|
361,297 |
|
- Tubes |
|
|
11,903 |
|
|
|
11,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper- |
|
|
|
|
|
|
|
|
|
|
|
|
- Containerboard |
|
|
1,977,707 |
|
|
|
1,438,971 |
|
|
|
1,641,941 |
|
- Newsprint |
|
|
1,139,593 |
|
|
|
974,629 |
|
|
|
994,124 |
|
- Uncoated free sheet |
|
|
1,412,381 |
|
|
|
1,219,568 |
|
|
|
1,064,647 |
|
- Other segments |
|
|
117,862 |
|
|
|
104,482 |
|
|
|
115,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
9,698,173 |
|
|
$ |
8,475,857 |
|
|
$ |
8,368,372 |
|
|
|
|
|
|
|
|
|
|
|
c. General segment information of continuing operations by geographical area:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
Acquisition and sale |
|
|
|
|
|
|
|
Total |
|
|
of property, plant |
|
|
|
Net sales |
|
|
assets |
|
|
and equipment |
|
Mexico |
|
$ |
12,345,130 |
|
|
$ |
46,026,950 |
|
|
$ |
222,089 |
|
United States of America |
|
|
2,299,643 |
|
|
|
3,424,278 |
|
|
|
4,911 |
|
Intersegment eliminations |
|
|
(4,946,600 |
) |
|
|
(34,292,144 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
9,698,173 |
|
|
$ |
15,159,084 |
|
|
$ |
227,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Acquisition and sale |
|
|
|
|
|
|
|
Total |
|
|
of property, plant |
|
|
|
Net sales |
|
|
assets |
|
|
and equipment |
|
Mexico |
|
$ |
10,974,771 |
|
|
$ |
46,327,161 |
|
|
$ |
54,700 |
|
United States of America |
|
|
2,388,710 |
|
|
|
3,517,488 |
|
|
|
9,622 |
|
Intersegment eliminations |
|
|
(4,887,624 |
) |
|
|
(34,411,347 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
8,475,857 |
|
|
$ |
15,433,302 |
|
|
$ |
64,322 |
|
|
|
|
|
|
|
|
|
|
|
F-51
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
Acquisition and sale |
|
|
|
|
|
|
|
Total |
|
|
of property, plant |
|
|
|
Net sales |
|
|
assets |
|
|
and equipment |
|
Mexico |
|
$ |
10,422,651 |
|
|
$ |
55,278,296 |
|
|
$ |
188,597 |
|
United States of America |
|
|
2,458,854 |
|
|
|
1,315,005 |
|
|
|
(6,654 |
) |
Intersegment eliminations |
|
|
(4,513,133 |
) |
|
|
(40,334,646 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
8,368,372 |
|
|
$ |
16,258,655 |
|
|
$ |
181,943 |
|
|
|
|
|
|
|
|
|
|
|
d. |
|
Additional revenue analysis: |
|
|
|
Annual revenues from the following client groups to which the Company sells are: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
Net income |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Packaging - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food and beverage |
|
$ |
3,552,164 |
|
|
$ |
3,309,670 |
|
|
$ |
3,204,743 |
|
Agribusiness |
|
|
487,516 |
|
|
|
458,044 |
|
|
|
493,252 |
|
Agriculture |
|
|
436,442 |
|
|
|
362,978 |
|
|
|
328,835 |
|
Maquila sector |
|
|
213,578 |
|
|
|
259,270 |
|
|
|
252,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper sacks - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cement |
|
|
281,754 |
|
|
|
244,415 |
|
|
|
224,355 |
|
Lime and plaster |
|
|
53,818 |
|
|
|
71,220 |
|
|
|
72,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Editorial |
|
|
2,311,750 |
|
|
|
1,962,449 |
|
|
|
1,716,019 |
|
Scholastic |
|
|
444,393 |
|
|
|
406,353 |
|
|
|
515,834 |
|
|
Forest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture manufacturers |
|
|
117,862 |
|
|
|
104,482 |
|
|
|
115,014 |
|
Other |
|
|
1,798,896 |
|
|
|
1,296,976 |
|
|
|
1,444,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,698,173 |
|
|
$ |
8,475,857 |
|
|
$ |
8,368,372 |
|
|
|
|
|
|
|
|
|
|
|
F-52
NOTE 22 NEW ACCOUNTING PRINCIPLES:
Beginning January 1, 2007, the dispositions of the following Mexican Financial Reporting Standards
(NIFs) issued by the Mexican Financial Reporting Standards Board (CINIF) became effective. These
dispositions will not have a significant impact on the financial information:
NIF B-3 Income statement Incorporates, among others, a new approach to classify income costs
and expenses in ordinary and non-ordinary, eliminates special and extraordinary items and
establishes employees profit sharing as on ordinary expense and not as a profit tax.
NIF B-13 Subsequent events Requires, among others, recognition of assets and liabilities
restructuring in the periods in which they actually take place and the recognition of creditors
waivers to enforce their right to demand debts in the event of lack of compliance of the entity
with debt agreement commitments. These issues will only be disclosed in the notes to the financial
statements.
NIF C-13 Related parties Extends, among others, the definition (scope) of the related parties
concept and increases the disclosure requirements in the notes to the financial statements.
NIF D-6 Capitalization of the Financing Integral Result Establishes, among others, the
obligation of capitalization of the financing integral result and the rules for its capitalization.
NOTE 23 RECONCILIATION BETWEEN MEXICAN AND U.S. GAAP
The Companys consolidated financial statements are prepared in accordance with Mexican Financial
Reporting Standards (MFRS or NIF, for its initials in Spanish) or (Mexican GAAP), which differ in
certain significant respects from U.S. GAAP. The Mexican GAAP consolidated financial statements
include the effects of inflation as provided for under Bulletin B-10 and its amendments, whereas
financial statements prepared under U.S. GAAP are presented on a historical cost basis. The
reconciliation to U.S. GAAP includes a reconciling item for the effect of applying the option
provided by the Fifth Amendment for the restatement of fixed assets of non-Mexican origin because,
as described below, this provision of inflation accounting under Mexican GAAP does not meet the
consistent reporting currency requirements of Regulation S-X. The reconciliation does not include
the reversal of the other adjustments to the financial statements for the effects of inflation
required under Mexican GAAP because the application of Bulletin B-10 represents a comprehensive
measure of the effects of price level changes in the inflationary Mexican economy and, as such, is
considered a more meaningful presentation than historical cost-based financial reporting for both
Mexican and U.S. accounting purposes.
The main differences between Mexican GAAP and U.S. GAAP and their effect on consolidated statements
of operations as of December 31, 2006, 2005 and 2004 and stockholders equity as of December 31,
2006 and 2005 is presented below, with an explanation of the adjustments.
F-53
Reconciliation of consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Majority interest net (loss) gain as reported under Mexican GAAP |
|
|
|
$ |
(71,710 |
) |
|
$ |
186,431 |
|
|
$ |
66,636 |
|
Deferred income taxes |
|
i |
|
|
(77,235 |
) |
|
|
966,437 |
|
|
|
(161,532 |
) |
Deferred employee profit sharing |
|
i |
|
|
(1,184 |
) |
|
|
79,243 |
|
|
|
124,134 |
|
Purchase accounting adjustment depreciation |
|
ii |
|
|
138,599 |
|
|
|
138,032 |
|
|
|
116,090 |
|
Effect of fifth amendment to Statement B-10 |
|
iii |
|
|
(57,328 |
) |
|
|
(55,330 |
) |
|
|
(58,844 |
) |
Debt issuance costs and repurchase of bonds |
|
iv |
|
|
|
|
|
|
(257,125 |
) |
|
|
322,141 |
|
Capitalized financing costs |
|
v |
|
|
6,358 |
|
|
|
(30,810 |
) |
|
|
39,383 |
|
Effect of Statement B-15 on restatement to constant currency |
|
vi |
|
|
|
|
|
|
2 |
|
|
|
(1,275 |
) |
Adjustment to impairment of long-lived assets |
|
vii |
|
|
(216,092 |
) |
|
|
(157,062 |
) |
|
|
340,418 |
|
Adjustment for Tizayuca Transaction: |
|
viii |
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative |
|
|
|
|
(43,127 |
) |
|
|
|
|
|
|
|
|
Financing lease |
|
|
|
|
29,512 |
|
|
|
|
|
|
|
|
|
Deferred start-up, research and development costs |
|
ix |
|
|
3,167 |
|
|
|
4,433 |
|
|
|
3,979 |
|
Troubled debt restructuring effect, net of inflation and exchange
rate effects |
|
x |
|
|
462,335 |
|
|
|
545,707 |
|
|
|
|
|
Effect of U.S. GAAP adjustments on minority interest |
|
xi |
|
|
147 |
|
|
|
3,170 |
|
|
|
(3,633 |
) |
Reversal of (loss) income on sale of discontinued operations |
|
xii |
|
|
|
|
|
|
(11,649 |
) |
|
|
|
|
Severance payments |
|
xiii |
|
|
171 |
|
|
|
(12,061 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP net income |
|
|
|
$ |
173,613 |
|
|
$ |
1,399,418 |
|
|
$ |
787,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of consolidated stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
|
|
2006 |
|
|
2005 |
|
Total stockholders equity corresponding to majority interest as
reported under Mexican GAAP |
|
|
|
$ |
4,786,403 |
|
|
$ |
4,844,456 |
|
Deferred income taxes |
|
i |
|
|
823,474 |
|
|
|
924,173 |
|
Deferred employee profit sharing |
|
i |
|
|
(718,779 |
) |
|
|
(717,596 |
) |
Purchase accounting adjustments: |
|
ii |
|
|
|
|
|
|
|
|
Accumulated negative goodwill |
|
|
|
|
(4,249,371 |
) |
|
|
(4,249,371 |
) |
Accumulated depreciation |
|
|
|
|
1,186,368 |
|
|
|
1,047,768 |
|
Effect of fifth amendment to Statement B-10: |
|
iii |
|
|
|
|
|
|
|
|
Fixed assets |
|
|
|
|
3,664,418 |
|
|
|
3,401,624 |
|
Accumulated depreciation |
|
|
|
|
(2,219,240 |
) |
|
|
(1,934,391 |
) |
Capitalized financing costs: |
|
v |
|
|
|
|
|
|
|
|
Capitalized Interes |
|
|
|
|
103,488 |
|
|
|
95,493 |
|
Acumulated amortization |
|
|
|
|
(7,933 |
) |
|
|
(6,296 |
) |
Effect of Statement B-15 on restatement to constant currency |
|
vi |
|
|
|
|
|
|
(1,320 |
) |
Adjustment to impairment on long-lived assets |
|
vii |
|
|
739,092 |
|
|
|
955,183 |
|
Adjustment for Tizayuca Transaction: |
|
viii |
|
|
|
|
|
|
|
|
Embedded derivative |
|
|
|
|
(43,127 |
) |
|
|
|
|
Financing lease |
|
|
|
|
29,512 |
|
|
|
|
|
Deferred start-up, research and development costs: |
|
ix |
|
|
(1,530 |
) |
|
|
(4,697 |
) |
Reversal of premium on issuance of shares related to the troubled
debt restructuring effect |
|
x |
|
|
(2,142,652 |
) |
|
|
(2,604,987 |
) |
Severance payments |
|
xiii |
|
|
(9,506 |
) |
|
|
(9,677 |
) |
Effect of U.S. GAAP adjustments on minority interest |
|
xi |
|
|
9,965 |
|
|
|
9,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. GAAP shareholders equity |
|
|
|
$ |
1,950,582 |
|
|
$ |
1,750,180 |
|
|
|
|
|
|
|
|
|
|
F-54
Provided below is an analysis of the changes in stockholders equity under U.S. GAAP:
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
Balance at beginning of the year |
|
$ |
1,750,180 |
|
|
$ |
502,329 |
|
Net income under U.S. GAAP |
|
|
173,613 |
|
|
|
1,399,418 |
|
Gain (deficit) from restatement |
|
|
158,148 |
|
|
|
(721,529 |
) |
Cumulative translation adjustment |
|
|
(138,129 |
) |
|
|
323,995 |
|
Increase in capital stock and additional paid in capital, net |
|
|
6,769 |
|
|
|
245,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the year |
|
$ |
1,950,581 |
|
|
$ |
1,750,180 |
|
|
|
|
|
|
|
|
Comprehensive loss
Comprehensive loss under Mexican GAAP is as follows:
Accumulated Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Majority interest net (loss) income under Mexican GAAP |
|
$ |
(71,710 |
) |
|
$ |
186,431 |
|
|
$ |
66,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net: |
|
|
6,888 |
|
|
|
(388,111 |
) |
|
|
(96,705 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net majority comprehensive loss |
|
$ |
(64,822 |
) |
|
$ |
(201,680 |
) |
|
$ |
(30,069 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(8,525,420 |
) |
|
$ |
(8,532,308 |
) |
|
$ |
(8,144,197 |
) |
|
|
|
|
|
|
|
|
|
|
The components of other accumulated comprehensive loss as of December 31, 2006, 2005 and 2004
under Mexican GAAP, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Effects of |
|
|
(Loss) from |
|
|
Accumulated |
|
|
|
effect of |
|
|
translation |
|
|
holding |
|
|
other |
|
|
|
deferred |
|
|
of foreign |
|
|
non monetary |
|
|
comprehensive |
|
|
|
income tax |
|
|
subsidiaries |
|
|
assets(1) |
|
|
loss |
|
Balances at January 1, 2004 |
|
$ |
(3,484,336 |
) |
|
$ |
201,332 |
|
|
$ |
(4,764,488 |
) |
|
$ |
(8,047,492 |
) |
Current period changes |
|
|
|
|
|
|
74,868 |
|
|
|
(171,573 |
) |
|
|
(96,705 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004 |
|
|
(3,484,336 |
) |
|
|
276,200 |
|
|
|
(4,936,061 |
) |
|
|
(8,144,197 |
) |
Current period changes |
|
|
|
|
|
|
357,907 |
|
|
|
(746,018 |
) |
|
|
(388,111 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
(3,484,336 |
) |
|
|
634,107 |
|
|
|
(5,682,079 |
) |
|
|
(8,532,308 |
) |
Current period changes |
|
|
|
|
|
|
(139,449 |
) |
|
|
146,337 |
|
|
|
6,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
$ |
(3,484,336 |
) |
|
$ |
494,658 |
|
|
$ |
(5,535,742 |
) |
|
$ |
(8,525,420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For 2006, 2005 and 2004, loss from holding non-monetary assets includes deferred tax
effect of ($23,464), ($94,701) and ($85,402), respectively, as a result of the application of
Statement D-4. |
F-55
Effects of the U.S. GAAP adjustments on discontinued operations
Reconciliation of consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
|
|
2005 |
|
|
2004 |
|
Income (loss) as reported under Mexican GAAP |
|
|
|
$ |
113,208 |
|
|
$ |
109,815 |
|
Deferred income taxes |
|
i |
|
|
(9,693 |
) |
|
|
214 |
|
Deferred employee profit sharing |
|
i |
|
|
22,247 |
|
|
|
14,371 |
|
Purchase accounting adjustments depreciation |
|
ii |
|
|
|
|
|
|
12,127 |
|
Effect of fifth amendment to Statement B-10 |
|
iii |
|
|
|
|
|
|
74 |
|
DPC liability |
|
|
|
|
|
|
|
|
|
|
Adjustment to impairment of long-lived assets |
|
vii |
|
|
|
|
|
|
(15,559 |
) |
Reversal of (loss) income on sale of discontinued operations
|
|
xii |
|
|
(11,649 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP income (loss) |
|
|
|
$ |
114,113 |
|
|
$ |
121,042 |
|
|
|
|
|
|
|
|
|
|
The Company does not have discontinued operations in 2006.
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-56
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, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Income and asset tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
124,770 |
|
|
$ |
65,419 |
|
|
$ |
30,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
449,458 |
|
|
|
(734,972 |
) |
|
|
(294,570 |
) |
Foreign |
|
|
33,508 |
|
|
|
(4,824 |
) |
|
|
(75,726 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
482,966 |
|
|
|
(739,796 |
) |
|
|
(370,296 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income and asset tax provision (benefit) continuing operations |
|
$ |
607,736 |
|
|
$ |
(674,377 |
) |
|
$ |
(340,072 |
) |
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
|
|
|
|
|
|
Tax effect on |
|
|
|
|
|
|
|
|
|
|
US GAAP |
|
|
|
|
|
|
Mexican GAAP |
|
|
adjustments |
|
|
US GAAP |
|
Deferred income tax liabilities (assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory |
|
$ |
82,726 |
|
|
$ |
|
|
|
$ |
82,726 |
|
Inventory Rule 106 |
|
|
(150,541 |
) |
|
|
|
|
|
|
(150,541 |
) |
Property, plant and equipment |
|
|
2,469,127 |
|
|
|
(108,886 |
) |
|
|
2,360,241 |
|
Other assets |
|
|
(16,963 |
) |
|
|
36,224 |
|
|
|
19,261 |
|
Allowance for doubtful accounts |
|
|
(47,056 |
) |
|
|
|
|
|
|
(47,056 |
) |
Accrued expenses |
|
|
(208,393 |
) |
|
|
(138,791 |
) |
|
|
(347,184 |
) |
Troubled debt restructuring |
|
|
|
|
|
|
(599,943 |
) |
|
|
(599,943 |
) |
Other reserves |
|
|
51,979 |
|
|
|
(12,078 |
) |
|
|
39,901 |
|
Asset tax credits |
|
|
(270,851 |
) |
|
|
|
|
|
|
(270,851 |
) |
Tax loss carryforwards |
|
|
(953,634 |
) |
|
|
|
|
|
|
(953,634 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred income tax (asset) liability continuing
operations |
|
|
956,394 |
|
|
|
(823,474 |
) |
|
|
132,920 |
|
Valuation allowance |
|
|
1,092,836 |
|
|
|
|
|
|
|
1,092,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred income tax liability |
|
$ |
2,049,230 |
|
|
$ |
(823,474 |
) |
|
$ |
1,225,756 |
|
|
|
|
|
|
|
|
|
|
|
F-57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 |
|
|
|
|
|
|
|
Tax effect on |
|
|
|
|
|
|
|
|
|
|
US GAAP |
|
|
|
|
|
|
Mexican GAAP |
|
|
adjustments |
|
|
US GAAP |
|
Deferred income tax liabilities (assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory |
|
$ |
85,071 |
|
|
$ |
|
|
|
$ |
85,071 |
|
Inventory Rule 106 |
|
|
(210,999 |
) |
|
|
|
|
|
|
(210,999 |
) |
Property, plant and equipment |
|
|
2,533,261 |
|
|
|
(193,198 |
) |
|
|
2,340,063 |
|
Other assets |
|
|
(28,715 |
) |
|
|
(1,578 |
) |
|
|
(30,293 |
) |
Allowance for doubtful accounts |
|
|
(51,782 |
) |
|
|
|
|
|
|
(51,782 |
) |
Accrued expenses |
|
|
(105,796 |
) |
|
|
|
|
|
|
(105,796 |
) |
Troubled debt restructuring |
|
|
|
|
|
|
(729,397 |
) |
|
|
(729,397 |
) |
Other reserves |
|
|
(3,717 |
) |
|
|
|
|
|
|
(3,717 |
) |
Asset tax credits |
|
|
(343,208 |
) |
|
|
|
|
|
|
(343,208 |
) |
Tax loss carryforwards |
|
|
(1,045,992 |
) |
|
|
|
|
|
|
(1,045,992 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred income tax (asset) liability continuing
operations |
|
|
828,123 |
|
|
|
(924,173 |
) |
|
|
(96,050 |
) |
Valuation allowance |
|
|
838,840 |
|
|
|
|
|
|
|
838,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred income tax liability |
|
$ |
1,666,963 |
|
|
$ |
(924,173 |
) |
|
$ |
742,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
Deferred employee profit sharing liabilities (assets): |
|
|
|
|
|
|
|
|
|
Inventory |
|
$ |
30,368 |
|
|
$ |
30,382 |
|
Inventory Rule 106 |
|
|
(53,765 |
) |
|
|
(75,357 |
) |
Property, plant and equipment |
|
|
826,310 |
|
|
|
827,696 |
|
Other assets |
|
|
8,321 |
|
|
|
711 |
|
Allowance for doubtful accounts |
|
|
(13,437 |
) |
|
|
(16,097 |
) |
Other |
|
|
(79,018 |
) |
|
|
(49,739 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred employee profit sharing liability |
|
$ |
718,779 |
|
|
$ |
717,596 |
|
|
|
|
|
|
|
|
For the years ended December 31, 2006 and 2005, 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, 2004 |
|
$ |
1,596,248 |
|
|
$ |
1,543,811 |
|
|
$ |
52,437 |
|
At December 31, 2005 |
|
|
1,666,963 |
|
|
|
742,790 |
|
|
|
924,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change |
|
$ |
70,715 |
|
|
$ |
(801,021 |
) |
|
$ |
871,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liability: |
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005 |
|
$ |
1,666,963 |
|
|
$ |
742,790 |
|
|
$ |
924,173 |
|
At December 31, 2006 |
|
|
2,049,230 |
|
|
|
1,225,756 |
|
|
|
823,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change |
|
$ |
382,267 |
|
|
$ |
482,966 |
|
|
$ |
(100,699 |
) |
|
|
|
|
|
|
|
|
|
|
F-58
Deferred tax liability in 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican |
|
|
U.S. |
|
|
|
|
|
|
GAAP |
|
|
GAAP |
|
|
Difference |
|
Reflected in: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax expense line item |
|
$ |
408,107 |
|
|
$ |
482,966 |
|
|
$ |
(74,859 |
) |
Loss on monetary position |
|
|
(2,376 |
) |
|
|
|
|
|
|
(2,376 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income statement effect |
|
|
405,731 |
|
|
|
482,966 |
|
|
|
(77,235 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from holding non-monetary
assets(1) |
|
|
(23,464 |
) |
|
|
|
|
|
|
(23,464 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in deferred tax liability |
|
$ |
382,267 |
|
|
$ |
482,966 |
|
|
$ |
(100,699 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred tax liability in 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican |
|
|
U.S. |
|
|
|
|
|
|
GAAP |
|
|
GAAP |
|
|
Difference |
|
Reflected in: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax gain line item |
|
$ |
182,380 |
|
|
$ |
(801,021 |
) |
|
$ |
983,401 |
|
Loss on monetary position |
|
|
(16,964 |
) |
|
|
|
|
|
|
(16,964 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income statement effect |
|
|
165,416 |
|
|
|
(801,021 |
) |
|
|
966,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from holding non-monetary
assets(1) |
|
|
(94,701 |
) |
|
|
|
|
|
|
(94,701 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in deferred tax
liability |
|
$ |
70,715 |
|
|
$ |
(801,021 |
) |
|
$ |
871,736 |
|
|
|
|
|
|
|
|
|
|
|
F-59
Deferred tax liability in 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican |
|
|
U.S. |
|
|
|
|
|
|
GAAP |
|
|
GAAP |
|
|
Difference |
|
Reflected in: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax gain line item |
|
$ |
(589,413 |
) |
|
$ |
(406,752 |
) |
|
$ |
(182,661 |
) |
Gain on monetary position |
|
|
21,129 |
|
|
|
|
|
|
|
21,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income statement effect |
|
|
(568,284 |
) |
|
|
(406,752 |
) |
|
|
(161,532 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from holding non-monetary
assets(1) |
|
|
(85,402 |
) |
|
|
|
|
|
|
(85,402 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in deferred tax
liability |
|
$ |
(653,686 |
) |
|
$ |
(406,752 |
) |
|
$ |
(246,934 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
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
F-60
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 $322,141 representing
the unamortized debt issuance cost, as part of the restructuring process of its debt. For U.S.
GAAP, purpose this was expensed in 2005.
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, 2006).
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, 2006 purchasing power is included as a
one-line adjustment in the reconciliation to U.S. GAAP of net income (loss) and stockholders
equity.
F-61
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Consolidated statements of operations: |
|
|
|
|
|
|
|
|
As previously reported, indexed for effects of inflation in Mexico |
|
$ |
186,433 |
|
|
$ |
65,361 |
|
As reported under Statement B-15 |
|
|
186,431 |
|
|
|
66,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2 |
|
|
$ |
(1,275 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated stockholders equity: |
|
|
|
|
|
|
|
|
As previously reported, indexed for effects of inflation in Mexico |
|
$ |
4,843,136 |
|
|
$ |
1,682,329 |
|
As reported under Statement B-15 |
|
|
4,844,456 |
|
|
|
1,649,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,320 |
) |
|
$ |
32,854 |
|
|
|
|
|
|
|
|
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. Impairments recognized under Mexican GAAP for 2004 were higher than impairments calculated for U.S.
GAAP purposes. However, in 2006 and 2005 the Company recorded a positive adjustment under Mexican
GAAP as a result of the revaluation of certain long lived assets and thus the reversal of prior
years entries for impairment. For U.S. GAAP purposes the Company reversed these entries as
restoration of a previously recognized impairment loss is prohibited. Adjustments for 2006, 2005
and 2004 were ($216,092), ($157,062) and $340,418, respectively.
viii. Tizayuca Transaction:
During 2006, the Company entered into an agreement with group of creditors to acquire assets of
Cartonajes Estrella, a bankrupt corporation. The Company acquired in a combined set of
transactions, land & building, machinery, inventory and the workforce. The company also assumed
labor liabilities related to workforce as at the acquisition date. Additionally, the Company also
entered into a lease agreement for most of the machinery and equipment located at the plant. The
acquisition of the various assets of Cartonajes Estrella was considered a business combination
under Mexican GAAP and
F-62
U.S. GAAP. However, while for Mexican GAAP the lease agreement was classified as operating, for
U.S. GAAP purposes the transaction normal be accounted for a financing arrangement (see applicable guidance in paragraphs below). This
derived in the recognition of a negative goodwill amounting to $2,076,824 which was allocated pro
rata to the acquired non-current assets.
Below is the fair value allocation as result of business combination under U.S. GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net |
|
|
Fair value of net assets on |
|
Negative Goodwill |
|
assets at fair value |
|
|
March 31, 2006 |
|
allocation |
|
on March 31, 2006 |
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Machinery |
|
|
2,342,103 |
|
|
|
(1,960,800 |
) |
|
|
381,303 |
|
Land & Building |
|
|
108,935 |
|
|
|
(94,237 |
) |
|
|
14,698 |
|
Other |
|
|
21,787 |
|
|
|
(21,787 |
) |
|
|
|
|
Inventory |
|
|
10,894 |
|
|
|
|
|
|
|
10,894 |
|
Deferred Taxes |
|
|
126,887 |
|
|
|
|
|
|
|
126,887 |
|
|
|
|
|
|
|
2,610,606 |
|
|
|
(2,076,824 |
) |
|
|
533,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
(10,894 |
) |
|
|
|
|
|
|
(10,894 |
) |
Non-current liabilities |
|
|
(522,888 |
) |
|
|
|
|
|
|
(522,888 |
) |
|
|
|
|
Value in excess over investment
(negative goodwill) |
|
|
2,076,824 |
|
|
|
(2,076,824 |
) |
|
|
|
|
|
|
|
Under U.S. GAAP, the basis for concluding that the lease agreement represents a financing lease is
the concept of sales leaseback transaction under FAS 98 and integral equipments as prescribed by
EITF 00-13. An adjustment of $29,512 was posted to reflect the change in treatment of the lease
transaction between Mexican and US GAAP. The adjustment was based on the difference between rental
expense recognized under Mexican GAAP and amortization of the lease asset plus interest expense of
lease obligation as calculated for US GAAP purpose.
The adjustment was calculated based on the assumption that the Company is going to ultimately
execute the purchase option. Also, fair market value and estimated useful life as obtain from third
party independent valuators of the machine was used in deriving the adjustment.
F-63
Maturity debt table for financing leases in effect at December 31, 2006 are shown in the table
below:
|
|
|
|
|
|
|
Amount |
|
2006 |
|
$ |
35,068 |
|
2007 |
|
|
70,137 |
|
2008 |
|
|
75,982 |
|
2009 |
|
|
81,825 |
|
2010 |
|
|
99,359 |
|
2011 |
|
|
1167,893 |
|
2012 |
|
|
116,893 |
|
2013 |
|
|
116,893 |
|
|
|
|
|
Total |
|
|
713,050 |
|
|
Less: Amount |
|
|
(202,797 |
) |
|
|
|
|
|
|
|
$ |
420,253 |
|
|
|
|
|
Finally, the lease payments are fixed in US dollars and functional currency of the Company and
lessors is Mexican Peso. Therefore, under Mexican GAAP the company recorded an embedded derivative
relating to this operating lease. Under US GAAP, financing lease is considered a financial instrument
and thus embedded derivative is derecognized as bifurcation would not be applicable. Thus an
adjustment of 43,127 was posted on US GAAP reconciliation to derecognize the embedded derivative.
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 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 2006, 2005 and 2004 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 in 2005. As of the date of the restructuring the carrying value of the old debt
amounted to $9,988.4 million, and the face value of the new debt issued amounted to $6,379.4
million. Such difference was settled with shares issued by the Company.
F-64
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. No gain or loss was
recorded on the restructured debt. The Company recorded interest amount of $518,566 during 2006.
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 on the new debt
provided to the holders is determined using an effective interest rate that equates the present
value of the future cash payments specified in the new debt, with the carrying amount of the debt.
During 2006, the company accrued $112,490 for interest.
The following table shows the adjustment required for US GAAP purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US GAAP |
|
MEX GAAP |
|
ADJUSTMENT |
|
|
|
Total debt balance as of December 31, 2005 |
|
|
8,625,658 |
|
|
|
6,020,670 |
|
|
|
2,604,987 |
|
|
Plus: Accrued interest as of December 31, 2006 |
|
|
112,490 |
|
|
|
518,566 |
|
|
|
(406,076 |
) |
Less Payments of the period |
|
|
(1,081,464 |
) |
|
|
(1,081,464 |
) |
|
|
|
|
Exchange loss an monetary position |
|
|
(199,883 |
) |
|
|
(143,624 |
) |
|
|
(56,259 |
) |
|
|
|
Total debt
Balances as of December 31, 2006 |
|
|
7,456,801 |
|
|
|
5,457,772 |
|
|
|
2,142,652 |
|
|
|
|
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 Durango Paper Company (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
F-65
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 January
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 $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 $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 recorded for U.S. GAAP purposes the remaining amount of the liability not yet recognized
under Mexican GAAP which totaled $16,731. Durango has determined that not recognizing this
liability for U.S. GAAP purposes in prior years was not significant.
SUPPLEMENTAL U.S. GAAP DISCLOSURES
a. Condensed information
The following tables present the Companys condensed balance sheets as of December 31, 2006 and
2005 and statements of operations for the three years ended December 31, reflecting U.S. GAAP
adjustments. All amounts have been indexed to December 31, 2006 constant Mexican Pesos, using the
Mexican NCPI factor:
F-66
CONDENSED CONSOLIDATED BALANCE SHEETS:
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
466,603 |
|
|
$ |
728,775 |
|
Accounts receivable, net |
|
|
1,924,745 |
|
|
|
1,803,483 |
|
Inventories, net |
|
|
1,212,675 |
|
|
|
1,244,239 |
|
Deferred income tax and employee profit sharing |
|
|
903,628 |
|
|
|
849,853 |
|
Other |
|
|
29,943 |
|
|
|
28,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
4,537,594 |
|
|
|
4,654,920 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
10,865,615 |
|
|
|
10,665,092 |
|
Other assets |
|
|
356,863 |
|
|
|
266,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
15,760,072 |
|
|
$ |
15,586,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt, notes payable and current portion of long-term
debt |
|
$ |
169,489 |
|
|
$ |
268,004 |
|
Accrued liabilities and other payables |
|
|
1,714,405 |
|
|
|
1,436,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,883,894 |
|
|
|
1,704,235 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
7,767,109 |
|
|
|
9,373,584 |
|
Seniority premiums |
|
|
316,590 |
|
|
|
330,046 |
|
Deferred income tax and employee profit sharing |
|
|
2,848,161 |
|
|
|
2,311,015 |
|
Other long-term debt |
|
|
584,583 |
|
|
|
66,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
11,516,443 |
|
|
|
12,081,001 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
13,400,337 |
|
|
|
13,785,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
409,153 |
|
|
|
50,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
1,950,582 |
|
|
|
1,750,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
15,760,072 |
|
|
$ |
15,586,247 |
|
|
|
|
|
|
|
|
F-67
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net sales |
|
$ |
9,698,173 |
|
|
$ |
8,473,104 |
|
|
$ |
8,442,917 |
|
Cost of sales |
|
|
8,094,503 |
|
|
|
7,379,275 |
|
|
|
7,235,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,603,670 |
|
|
|
1,093,829 |
|
|
|
1,206,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
607,840 |
|
|
|
616,942 |
|
|
|
714,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
995,830 |
|
|
|
476,887 |
|
|
|
492,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing cost: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
216,365 |
|
|
|
295,485 |
|
|
|
1,166,571 |
|
Interest income |
|
|
(31,171 |
) |
|
|
(44,278 |
) |
|
|
(43,224 |
) |
Foreign exchange (gain) loss, net |
|
|
171,324 |
|
|
|
(278,928 |
) |
|
|
(65,098 |
) |
Gain from monetary position, net |
|
|
(368,248 |
) |
|
|
(455,382 |
) |
|
|
(506,930 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,730 |
) |
|
|
(483,103 |
) |
|
|
551,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expenses) income, net |
|
|
(187,929 |
) |
|
|
(370,091 |
) |
|
|
386,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provisions, equity in income of
associated companies, minority interest and discontinued
operations |
|
|
819,631 |
|
|
|
589,899 |
|
|
|
326,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for: |
|
|
|
|
|
|
|
|
|
|
|
|
Income and asset tax (benefit) expense |
|
|
607,736 |
|
|
|
(674,377 |
) |
|
|
(340,072 |
) |
Minority interest |
|
|
41,293 |
|
|
|
(19,052 |
) |
|
|
3,450 |
|
Equity in income of associated companies |
|
|
(3,011 |
) |
|
|
(1,977 |
) |
|
|
(2,847 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
|
173,613 |
|
|
|
1,285,305 |
|
|
|
666,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net |
|
|
|
|
|
|
114,113 |
|
|
|
121,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
173,613 |
|
|
$ |
1,399,418 |
|
|
$ |
787,497 |
|
|
|
|
|
|
|
|
|
|
|
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, 2006, 2005 and 2004 are as
follows:
F-68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP net income (loss) from continuing operations |
|
$ |
173,613 |
|
|
$ |
1,285,305 |
|
|
$ |
666,455 |
|
Adjustment to reconcile net income to net cash flows provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
286,080 |
|
|
|
300,659 |
|
|
|
355,151 |
|
Minority interest |
|
|
41,293 |
|
|
|
(19,053 |
) |
|
|
3,450 |
|
Deferred income taxes |
|
|
482,966 |
|
|
|
(739,792 |
) |
|
|
(370,310 |
) |
Deferred employee profit sharing |
|
|
1,183 |
|
|
|
(58,419 |
) |
|
|
(109,763 |
) |
Allowance for doubtful accounts |
|
|
17,118 |
|
|
|
33,809 |
|
|
|
50,775 |
|
Inventory obsolescence allowance |
|
|
2,484 |
|
|
|
5,018 |
|
|
|
2,043 |
|
Gain from monetary position |
|
|
(351,052 |
) |
|
|
(278,927 |
) |
|
|
(506,907 |
) |
Loss (gain) on sale of non-strategic assets |
|
|
(102,569 |
) |
|
|
(11,094 |
) |
|
|
39,274 |
|
Impairment on long-lived assets |
|
|
190,175 |
|
|
|
38,649 |
|
|
|
142,557 |
|
Unrealized foreign exchange loss, net |
|
|
50,086 |
|
|
|
(167,262 |
) |
|
|
22,580 |
|
Amortization of debt issuance costs and other financing costs |
|
|
|
|
|
|
|
|
|
|
25,951 |
|
Other |
|
|
41,190 |
|
|
|
(15,103 |
) |
|
|
17,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
832,567 |
|
|
|
373,790 |
|
|
|
338,966 |
|
F-69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
(387,026 |
) |
|
$ |
(99,167 |
) |
|
$ |
(97,462 |
) |
Inventories, net |
|
|
159,787 |
|
|
|
(98,657 |
) |
|
|
74,111 |
|
Prepaid expenses |
|
|
(1,800 |
) |
|
|
(3,342 |
) |
|
|
(5,264 |
) |
Other liabilities |
|
|
1,012,788 |
|
|
|
91,738 |
|
|
|
396,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow (used in) provided by operating activities before
discontinued operations |
|
|
1,616,316 |
|
|
|
264,362 |
|
|
|
706,474 |
|
Discontinued operations |
|
|
|
|
|
|
(320,260 |
) |
|
|
122,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by operating activities: |
|
|
1,616,316 |
|
|
|
(55,898 |
) |
|
|
828,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Bank loans |
|
|
(525,193 |
) |
|
|
137,926 |
|
|
|
538 |
|
Payments of long-term debt |
|
|
(1,081,464 |
) |
|
|
(177,453 |
) |
|
|
(502,271 |
) |
Increase in capital stock |
|
|
|
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by financing activities |
|
|
(1,606,657 |
) |
|
|
(39,527 |
) |
|
|
(501,682 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of fixed assets |
|
|
(625,412 |
) |
|
|
(109,500 |
) |
|
|
(217,208 |
) |
Proceeds from sale of non-strategic assets |
|
|
86,115 |
|
|
|
101,538 |
|
|
|
16,716 |
|
Investments in subsidiaries |
|
|
|
|
|
|
(56,189 |
) |
|
|
|
|
Restricted cash |
|
|
|
|
|
|
|
|
|
|
178,128 |
|
Other assets |
|
|
(42,274 |
) |
|
|
282,039 |
|
|
|
(36,268 |
) |
Proceeds from sale of discontinued operations |
|
|
|
|
|
|
360,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities |
|
|
(581,571 |
) |
|
|
578,114 |
|
|
|
(58,632 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of inflation and exchange rate changes on cash and cash
equivalents |
|
|
309,738 |
|
|
|
(651,591 |
) |
|
|
(96,812 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(262,172 |
) |
|
|
(168,902 |
) |
|
|
171,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
728,775 |
|
|
|
897,677 |
|
|
|
726,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
466,603 |
|
|
$ |
728,775 |
|
|
$ |
897,677 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of capitalized interest |
|
$ |
582,170 |
|
|
$ |
602,556 |
|
|
$ |
37,943 |
|
Income and asset tax |
|
|
2,924 |
|
|
|
26,924 |
|
|
|
114,429 |
|
|
|
|
|
|
|
|
|
|
|
F-70
Non cash transactions:
|
|
|
|
|
|
|
2006 |
|
Premium in issuance of shares |
|
$ |
6,769 |
|
|
|
|
|
|
|
|
|
|
Financing lease Agreement |
|
$ |
533,782 |
|
|
|
|
|
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 2006 and 2005, reconciled with the amounts reported in the consolidated balance sheets under
U.S. GAAP.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Actual benefit obligation: |
|
$ |
205,165 |
|
|
$ |
210,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Projected benefit obligation, beginning of year |
|
$ |
233,906 |
|
|
$ |
248,910 |
|
Service cost |
|
|
12,047 |
|
|
|
10,800 |
|
Interest cost |
|
|
14,764 |
|
|
|
15,137 |
|
Actuarial loss |
|
|
17,564 |
|
|
|
17,409 |
|
Benefits paid and variations in assumptions |
|
|
(49,271 |
) |
|
|
(58,350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations, end of year |
|
$ |
229,010 |
|
|
$ |
233,906 |
|
|
|
|
|
|
|
|
F-71
|
|
Post retirement benefits |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Actual benefit obligation: |
|
$ |
91,162 |
|
|
$ |
101,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Projected benefit obligation, beginning of year |
|
$ |
105,361 |
|
|
$ |
108,237 |
|
Service cost |
|
|
278 |
|
|
|
416 |
|
Interest cost |
|
|
4,880 |
|
|
|
5,142 |
|
Benefits paid |
|
|
(15,484 |
) |
|
|
(8,434 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation, end of year |
|
$ |
95,035 |
|
|
$ |
105,361 |
|
|
|
|
|
|
|
|
There were no plan assets during 2006 or 2005.
|
|
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, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Actual benefit obligation: |
|
$ |
10,757 |
|
|
$ |
7,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Projected benefit obligation, beginning of year |
|
$ |
17,409 |
|
|
$ |
15,155 |
|
Service cost |
|
|
779 |
|
|
|
3,241 |
|
Interest cost |
|
|
4,307 |
|
|
|
1,255 |
|
Benefits paid |
|
|
(2,232 |
) |
|
|
(2,242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation, end of year |
|
$ |
20,263 |
|
|
$ |
17,409 |
|
|
|
|
|
|
|
|
Total labor obligations showed in Balance Sheet are as follows:
|
|
|
|
|
|
|
|
|
Seniority premiums and pensions |
|
$ |
205,165 |
|
|
$ |
210,785 |
|
Postretirement obligations |
|
|
91,162 |
|
|
|
101,852 |
|
Severance payments |
|
|
20,263 |
|
|
|
17,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
316,590 |
|
|
$ |
330,046 |
|
|
|
|
|
|
|
|
F-72
|
|
Valuation and qualifying accounts: |
The following table presents the roll forward of the allowance for doubtful accounts for the years
ended December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Balance at the beginning of the period |
|
$ |
(160,971 |
) |
|
$ |
(182,814 |
) |
|
$ |
(162,808 |
) |
Effects of inflation |
|
|
6,266 |
|
|
|
4,881 |
|
|
|
7,676 |
|
Increase in the allowance |
|
|
(17,118 |
) |
|
|
(33,809 |
) |
|
|
(50,776 |
) |
Write-offs |
|
|
30,770 |
|
|
|
50,771 |
|
|
|
23,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period |
|
$ |
(141,053 |
) |
|
$ |
(160,971 |
) |
|
$ |
(182,814 |
) |
|
|
|
|
|
|
|
|
|
|
The following table presents the roll forward of the inventory obsolescence allowance for the
years ended December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Balance at the beginning of the period |
|
$ |
(34,105 |
) |
|
$ |
(32,091 |
) |
|
$ |
(32,056 |
) |
Effects of inflation |
|
|
1,327 |
|
|
|
1,034 |
|
|
|
1,582 |
|
Increase in the allowance |
|
|
(2,484 |
) |
|
|
(5,018 |
) |
|
|
(2,043 |
) |
Write-offs |
|
|
1,322 |
|
|
|
1,970 |
|
|
|
426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period |
|
$ |
(33,940 |
) |
|
$ |
(34,105 |
) |
|
$ |
(32,091 |
) |
|
|
|
|
|
|
|
|
|
|
New Accounting pronouncements
SFAS No. 155, Accounting for certain hybrid financial instruments-and amendment of FASB
Statements Nos. 133 and 140 was 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 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 Company is currently evaluating the impact of adopting SFAS
155 on its financial condition and results of operations.
SFAS No. 156, Accounting for servicing of financial assets-an amendment of FASB Statement No. 140
was 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
F-73
year, provided that 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 Company is currently evaluating
the impact of adopting SFAS 156 on its financial condition and results of operations.
SFAS No. 157 Fair Value Measurements was issued in September 2006. This Statement defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the relevant measurement
attribute. Accordingly, this Statement does not require any new fair value measurements. However,
for some entities, the application of this Statement will change current practice. The definition
of fair value retains the exchange price notion in earlier definitions of fair value. This
Statement clarifies that the exchange price is the price in an orderly transaction between market
participants to sell the asset or transfer the liability in the market in which the reporting
entity would transact for the asset or liability, that is, the principal or most advantageous
market for the asset or liability. The transaction to sell the asset or transfer the liability is a
hypothetical transaction at the measurement date, considered from the perspective of a market
participant that holds the asset or owes the liability. Therefore, the definition focuses on the
price that would be received to sell the asset or paid to transfer the liability (an exit price),
not the price that would be paid to acquire the asset or received to assume the liability (an entry
price). This Statement also emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. This Statement shall be effective for financial statements issued for
fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of
adopting SFAS 157 on its financial condition and results of operations.
SFAS No. 158 Employers Accounting for Defined Benefit Pension and Other Postretirement Plans
an amendment of FASB Statements No. 87, 88, 106, and 132(R) was published by FASB in September
2006. This Statement improves financial reporting by requiring an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the changes occur through
comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit
organization. This Statement also improves financial reporting by requiring an employer to measure
the funded status of a plan as of the date of its year-end statement of financial position, with
limited exceptions. This Statement amends Statement 87, FASB Statement No. 88, Employers
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits, Statement 106, and FASB Statement No. 132 (revised 2003), Employers Disclosures about
Pensions and Other Postretirement Benefits, and other related accounting literature. Upon initial
application of this Statement and subsequently, an employer should continue to apply the provisions
in Statements 87, 88, and 106 in measuring plan assets and benefit obligations as of the date of
its statement of financial position and in determining the amount of net periodic benefit cost.
The required date of adoption of the recognition and disclosure provisions of this Statement an
employer with publicly traded equity securities is required to initially recognize the funded
status of a defined benefit postretirement plan and to provide the required disclosures as of the
end of the fiscal year ending after December 15, 2006. Earlier application of the recognition or
measurement date provisions is encouraged; however, early application must be for all of an
employers benefit plans. Retrospective application of this Statement is not permitted. The Company
is currently evaluating the impact of adopting SFAS 158 on its financial condition and results of
operations.
EITF Issue No. 05-6, Determining the Amortization Period for Leasehold Improvements Purchased
after Lease Inception or Acquired in a Business Combination, was issued in June 2005. This
guidance determines that leasehold improvements acquired in a business combination should be
amortized over the shorter of the useful life of the assets or a term that includes required lease
period and renewals that are deemed to be reasonably assured at
F-74
the date of acquisition. The Task
Force also agreed that leasehold improvements that are placed in service
significantly after and not contemplated at or near beginning of the lease term should be amortized
over the shorter of the useful life of the assets or a term that includes required lease periods
and renewals that are deemed to be reasonably assured at the date the leasehold improvement are
purchased. This consensus should be applied to leasehold improvements that are purchased or
acquired in reporting periods beginning after June 29, 2005. The Company does not anticipate that
the adoption of EITF 05-6 will have an impact on its financial condition or results of operations.
In July, 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting and
reporting for income taxes where interpretation of the tax law may be uncertain. FIN 48 prescribes
a comprehensive model for the financial statement recognition, measurement, presentation and
disclosure of income tax uncertainties with respect to positions taken or expected to be taken in
income tax returns. The interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, and disclosure. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of
adopting FIN 48.
In June 2006, the EITF ratified the consensus on EITF Issue No. 06-3 (EITF 06-03), How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation). EITF 06-03 concluded that the presentation of
taxes assessed by a governmental authority that is directly imposed on a revenue-producing
transaction between a seller and a customer, such as sales, use, value-added and certain excise
taxes is an accounting policy decision that should be disclosed in a companys financial
statements. In addition, companies that record such taxes on a gross basis should disclose the
amounts of those taxes in interim and annual financial statements for each period for which an
income statement is presented if those amounts are significant. EITF 06-03 is effective for interim
and annual reporting periods beginning after December 15, 2006. The adoption of EITF 06-3 is not
expected to have any impact on the Companys current financial condition or results of operations.
- - - -
- - - - - - - - - - - - -
F-75