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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.
 Exact name of Registrant as specified in its charter
 Durango Corporation
 Translation of Registrants name into English
 United Mexican States  Jurisdiction of incorporation or organization
 
 (Address and telephone number of principal executive offices)
      o þ
  þ o
  o þ
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TABLE OF CONTENTS
 PART IITEM 1. Identity of Director, Senior Management and AdvisersITEM 2. Offer Statistics and Expected TimetableITEM 3. Key InformationITEM 4. Information on the CompanyITEM 4A. Unresolved Staff CommentsITEM 5. Operating and Financial Review and ProspectsITEM 6. Directors, Senior Management and EmployeesITEM 7. Major Shareholders and Related Party TransactionsITEM 8. Financial InformationITEM 9. The Offer and ListingITEM 10. Additional InformationITEM 11. Quantitative and Qualitative Disclosures About Market RiskITEM 12. Description of Securities Other than Equity SecuritiesPART IIITEM 13. Defaults, Dividend Arrearages and DelinquenciesITEM 14. Material Modifications to the Rights of Security Holders and Use of ProceedsITEM 15. Controls and ProceduresITEM 16A. Audit Committee Financial ExpertITEM 16B. Code of EthicsITEM 16C. Principal Accountant Fees and ServicesITEM 16D. Exemptions from the Listing Standards for Audit CommitteesITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated PurchasersPART IIIITEM 17. Financial StatementsITEM 18. Financial StatementsITEM 19. ExhibitsSIGNATURESEx-1.1 BylawsEx-8 List of SubsidiariesEx-12.1 Section 302 Certification of CEOEx-12.2 Section 302 Certification of CFOEx-13.1 Section 906 Certification of CEOEx-13.2 Section 906 Certification of CFO




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INTRODUCTION
  Presentation of Financial Information
 Currency and Exchange Rates
  Banco de Mexico
 Financial Statements
 Normas de Información Financiera
aplicables en México NIF
 Instituto Mexicano de Contadores Públicos, A.C. Indice Nacional de Precios al Consumidor
   1




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Rounding
  Market Data
 Cámara Nacional de la
Industria de la Celulosa y el Papel
  Special Note Regarding Forward-Looking Statements
  
    
    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




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
    
    our need for substantial capital; and
    
    interest rate levels.
    3




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PART I
 
 Item 1. Identity of Directors, Senior Management and Advisors.
  
 Item 2. Offer Statistics and Expected Timetable.
  
 Item 3. Key Information.
 Selected Consolidated Financial Data
     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
    8,987.8Cost of sales
    
    
    8,142.8
    
    
    
    7,386.2
    
    
    
    7,171.7
    
    
    
    6,557.8
    
    
    
    7,707.5Gross profit
    
    
    1,555.3
    
    
    
    1,089.6
    
    
    
    1,196.7
    
    
    
    1,069.2
    
    
    
    1,280.3Selling, general and
administrative expenses
    
    
    721.9
    
    
    
    705.4
    
    
    
    722.5
    
    
    
    726.6
    
    
    
    702.8Operating income
    
    
    833.4
    
    
    
    384.3
    
    
    
    474.2
    
    
    
    342.6
    
    
    
    577.6Other 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




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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
    
    
    
    44.2Exchange 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
    
    
    
    458.3Total 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
    
    
    
    751.1Employee 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
    
    
    
    2.3Income (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
    
    
    
    94,072,122U.S. GAAP:(2) (3)Net sales
    
    Ps
    9,698.2
    
    
    Ps
    8,473.1
    
    
    Ps
    8,442.9
    
    
    Ps
    7,725.3
    
    
    Ps
    7,363.9Operating 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
    261.2Total current assets
    
    
    3,638.3
    
    
    
    3,805.9
    
    
    
    4,107.6
    
    
    
    4,113.0
    
    
    
    4,151.9Property, plant and
equipment, net
    
    
    11,254.5
    
    
    
    11,356.5
    
    
    
    11,898.4
    
    
    
    12,759.2
    
    
    
    13,531.3
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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
    
    
    
    20,331.4Short-term debt, including
current portion of long-term
debt
    
    
    169.5
    
    
    
    268.1
    
    
    
    189.4
    
    
    
    6,817.0
    
    
    
    8,886.0Long-term debt
    
    
    5,624.5
    
    
    
    6,768.7
    
    
    
    7,469.5
    
    
    
    439.5
    
    
    
    1,155.2Common stock
    
    
    5,665.8
    
    
    
    5,665.8
    
    
    
    5,363.3
    
    
    
    4,363.3
    
    
    
    5,494.1Total majority stockholders
equity
    
    
    4,786.4
    
    
    
    4,844.5
    
    
    
    1,649.5
    
    
    
    1,679.5
    
    
    
    5,117.1Total minority stockholders
equity
    
    
    419.1
    
    
    
    60.6
    
    
    
    83.3
    
    
    
    76.6
    
    
    
    80.5Total stockholders equity
(net assets)
    
    
    5,205.5
    
    
    
    4,905.1
    
    
    
    1,732.8
    
    
    
    1,756.1
    
    
    
    5,197.6U.S. GAAP:(2)Total assets
    
    Ps
    15,760.1
    
    
    Ps
    15,586.2
    
    
    Ps
    16,326.5
    
    
    Ps
    16,659.8
    
    
    Ps
    19,867.2Total stockholders equity
(net assets)
    
    
    1,950.6
    
    
    
    1,750.2
    
    
    
    501.9
    
    
    
    (265.0
    )
    
    
    2,689.6Other 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
    )
    
    
    959.8Resources 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
    440.3Cash flow provided by (used
in) financing activities
    
    
    (1,606.7
    )
    
    
    (39.5
    )
    
    
    (501.7
    )
    
    
    (459.2
    )
    
    
    1,552.1Cash 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
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Exchange Rate Information
   Noon Buying RatePeriodYear ended December 31,
    
    High
    
    Low
    
    Average(1)
    
    End2002
    
    Ps
    10.42
    
    
    Ps
    9.00
    
    
    Ps
    9.67
    
    
    Ps
    10.432003
    
    
    11.41
    
    
    
    10.11
    
    
    
    10.79
    
    
    
    11.242004
    
    
    11.64
    
    
    
    10.81
    
    
    
    11.31
    
    
    
    11.152005
    
    
    11.41
    
    
    
    10.41
    
    
    
    10.89
    
    
    
    10.632006
    
    
    11.46
    
    
    
    10.43
    
    
    
    10.91
    
    
    
    10.80
 Noon Buying RatePeriodMonth Ended
    
    High
    
    Low
    
    Average(2)
    
    EndDecember 31, 2007
    
    Ps
    10.99
    
    
    Ps
    10.77
    
    
    Ps
    10.85
    
    
    Ps
    10.81January 31, 2007
    
    
    11.09
    
    
    
    10.77
    
    
    
    10.96
    
    
    
    11.04February 28, 2007
    
    
    11.16
    
    
    
    10.92
    
    
    
    11.00
    
    
    
    11.16March 31, 2007
    
    
    11.18
    
    
    
    11.01
    
    
    
    11.11
    
    
    
    11.04April 30, 2007
    
    
    11.03
    
    
    
    10.92
    
    
    
    10.98
    
    
    
    10.93May 31, 2007
    
    
    10.93
    
    
    
    10.74
    
    
    
    10.82
    
    
    
    10.74June (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.   Risk Factors
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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.
   Our operations are and will continue to be restricted by covenants in our debt agreements.
  
    
    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.
  
    
    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.
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We are vulnerable to cyclicality and fluctuations in pricing.
  We are vulnerable to competition in Mexico and the United States from producers of paper and
packaging products with substantial resources.
    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.
  Lack of water availability may adversely affect us.
 Comisión Nacional del Agua
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We may be adversely affected by the imposition and enforcement of more stringent environmental and
safety requirements.
 (Secretaría del Medio Ambiente y Recursos
Naturales)
 If we lose key members of our management team and are unable to attract other qualified personnel,
our business could be adversely affected.
  Our principal stockholders own 80.4% of our shares and may take actions not in the interest 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.
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Adverse developments in our relationship with our employees could adversely affect our business.
 Sindicato de
Trabajadores de Fábricas de Papel Tuxtepec, S. A. de C. V. Sindicato de Trabajadores
de Fábricas de Papel Tuxtepec, S. A. de C. V.
 Risks Relating to Mexico
 Political conditions in Mexico could materially and adversely affect Mexican economic policy or
business conditions and, in turn, our operations.
  Partido Acción Nacional Partido de la Revolución Democrática Tribunal Electoral del Poder Judicial de la Federación
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Adverse economic developments in Mexico may adversely affect our financial condition and results of
operations.
   Downturns in the Mexican economy adversely affect us.
  Depreciation of the Mexican peso relative to the dollar may impair our ability to service our debt
and adversely affect our profitability.
 Banco de México
  An increase in inflation may increase our operating costs but not our revenues.
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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.
  Mexican Antitrust Laws May Limit Our Ability to Expand and Operate Through Acquisitions or Joint
Ventures.
 Comisión Federal de Competencia
 Risks Relating to Our Common Shares and ADSs
 The market for the ADSs and the Common Shares is limited
  concurso mercantil
  Future sales of our Common Shares directed by Banamex may affect the stock prices of our Common
Shares and ADSs
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Because our accounting standards are different from those in other countries, investors may find it
difficult to accurately assess our business and financial operations.
  Comisión Nacional Bancaria y de Valores
 The protections afforded to minority shareholders in Mexico are different from those afforded to
minority shareholders in the United States.
  Holders of ADSs are not entitled to attend shareholders meetings, and they may vote only through
the depositary.
  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.
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The price of our Common Shares and ADSs may be affected by economic developments in other emerging
market countries.
  Investors may experience difficulties in enforcing civil liabilities against us or our directors,
officers and controlling persons.
  15




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Item 4. Information on Our Company.
     sociedad anónima bursátil de capital variable
  Paper and Packaging Industry Overview
  
    
    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.
  16




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North American Paper and Packaging Industry
  Mexican Paper Industry
 Apparent Demand for Paper Industry
    Mexican Apparent Demand
for the Paper Industry
(all figures in thousands of short tons, except percentages)
 Aggregate
    
    
    
    
    
    
    
    
    
    Apparent
    
    %
    
    % GDPYear
    
    Production
    
    Imports
    
    Exports
    
    Demand
    
    Change
    
    Change2002
    
    
    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  Mexican Apparent Demand for Packaging Paper
(all figures in thousands of short tons, except percentages)
 Aggregate
    
    
    
    
    
    
    
    
    
    Apparent
    
    %Year
    
    Production
    
    Imports
    
    Exports
    
    Demand
    
    Change2002
    
    
    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




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##### Table of Contents



Mexican Apparent Demand for Printing and Writing Paper
(all figures in thousands of short tons, except percentages)
 Aggregate
    
    
    
    
    
    
    
    
    
    Apparent
    
    %Year
    
    Production
    
    Imports
    
    Exports
    
    Demand
    
    Change2002
    
    
    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.  Mexican Apparent Demand for Newsprint
(all figures in thousands of short tons, except percentages)
 Aggregate
    
    
    
    
    
    
    
    
    
    Apparent
    
    %Year
    
    Production
    
    Imports
    
    Exports
    
    Demand
    
    Change2002
    
    
    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
  
    
    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.
  18




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##### Table of Contents




    
    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).
  Tariffs
   History and Development of Our Company
   19




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##### Table of Contents



concurso mercantil Ley de Concursos Mercantiles conciliadora Instituto Federal de Especialistas de Concursos Mercantiles
 Significant Developments During 2006 and Recent Developments
 Pipsamex Capital Increase
  Tizayuca Mill Lease Agreement
  Conversion of Series A Shares and Series B Shares to Common Shares
  
    
    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.
  20




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##### Table of Contents



Conversion to S.A.B. de C.V.
 Ley del Mercado
de Valores sociedad anónima bursátil de capital
variable
 Corporate Reorganization
   
    
    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.
    21




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##### Table of Contents



* 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
  
    
    Paper: the Grupo Durango division, the Grupo Pipsamex division and Durango McKinley
Paper Companys paper division;
    
    Packaging: the Titán division and Durango McKinley Paper Companys packaging division; and
    
    Other: the Ponderosa division.
  
    
    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




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##### Table of Contents



thousand short tons of newsprint and 153.0 thousand short tons of uncoated free sheet. The
Grupo Pipsamex divisions 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 divisions 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 Companys packaging division.
    
    Titán.The Titán division, which is part of our subsidiary Titán, is a large paper-based
packaging manufacturer. The Titán divisions 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 divisions 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 divisions 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 divisions 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 Companys packaging division
were supplied by other paper producers in exchange for paper produced by Durango McKinley
Paper Company. This divisions 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
  
    
    Papercontainerboard (linerboard and corrugating medium), newsprint and uncoated free
sheet (bond, book stock, miscellaneous free sheet);
    
    Packagingcorrugated containers and multi-wall sacks; and
    
    Otherplywood.
 23




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##### Table of Contents



Production at December 31,Installed Capacity at
    
    Mills/Product Type
    
    December 31, 2006
    
    Plants
    
    2006
    
    2005
    
    2004(in thousands of shorttons per year)
    
    
    
    
    
    (in thousands of short tons)Paper:Containerboard (1)
    
    
    1,117.0
    
    
    
    7
    
    
    
    1,008.2
    
    
    
    924.0
    
    
    
    891.8Newsprint
    
    
    164.0
    
    
    
    1
    
    
    
    163.9
    
    
    
    148.1
    
    
    
    160.4Uncoated free sheet
    
    
    172.0
    
    
    
    1
    
    
    
    162.3
    
    
    
    155.4
    
    
    
    133.1Total Paper
    
    
    1,453.0
    
    
    
    9
    
    
    
    1,334.4
    
    
    
    1,227.5
    
    
    
    1,185.4Packaging:Corrugated containers (1)
    
    
    944.0
    (2)
    
    
    19
    
    
    
    711.0
    
    
    
    662.8
    
    
    
    632.5Multi-wall sacks
    
    
    59.0
    
    
    
    3
    
    
    
    40.6
    
    
    
    43.6
    
    
    
    39.2Total Packaging
    
    
    1,003.0
    
    
    
    22
    
    
    
    751.6
    
    
    
    706.4
    
    
    
    671.6Other products (3)
    
    
    62.0
    
    
    
    3
    
    
    
    10.8
    
    
    
    9.9
    
    
    
    10.5Total 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.  Year Ended December 31,Product Type
    
    2006
    
    
    2005
    
    
    2004Sales 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 poweras 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
    
    
    
    11.9Uncoated free sheet
    
    
    153.0
    
    
    
    1,412.4
    
    
    
    14.6
    
    
    
    133.0
    
    
    
    1,219.6
    
    
    
    14.4
    
    
    
    121.1
    
    
    
    1,064.6
    
    
    
    12.7Total Paper
    
    
    752.0
    
    
    
    4,529.7
    
    
    
    46.7
    
    
    
    618.1
    
    
    
    3,633.2
    
    
    
    42.9
    
    
    
    620.7
    
    
    
    3,700.7
    
    
    
    44.2Packaging:Corrugated containers
    
    
    702.3
    
    
    
    4,643.0
    
    
    
    47.9
    
    
    
    665.1
    
    
    
    4,322.2
    
    
    
    51.0
    
    
    
    632.2
    
    
    
    4,191.3
    
    
    
    50.1Multi-wall sacks
    
    
    40.9
    
    
    
    395.7
    
    
    
    4.1
    
    
    
    42.0
    
    
    
    404.7
    
    
    
    4.8
    
    
    
    39.9
    
    
    
    361.3
    
    
    
    4.3Paper 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
    
    
    
    54.4Other products
    
    
    10.8
    
    
    
    117.9
    
    
    
    1.2
    
    
    
    9.7
    
    
    
    104.5
    
    
    
    1.2
    
    
    
    11.7
    
    
    
    115.0
    
    
    
    1.4Total 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




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##### Table of Contents



Paper Products
  Product Description and UsageContainerboard
    
    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.
  Packaging Products
  Product Description and UsageCorrugated 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.
  Other Products
  Customers
   25




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##### Table of Contents



Paper
    
    Packaging
    
    Other ProductsMexico:
    
    Mexico:
    
    Mexico:El Universal Compañía PeriodísticaNacional, 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 deTexto 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 LibbeyUnited States:
    
    United States:Weyerhaeuser Company
    
    Harris PackagingGeorgia Pacific Co.
    
    Bronco PackagingBoise Paper Solutions
    
    Bana, Inc.Temple Inland Corrugated 
  Packaging
    
    Victor Packaging  Dallas
 Sales and Marketing
       26




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##### Table of Contents



Raw Materials
  Recycled Fiber
   Pulp
  ejidos,
 Water
    27




---



##### Table of Contents



Energy
 Comisión Federal de Electricidad
   Distribution and Supply of Our Products
      28




---



##### Table of Contents



Our Competition
      Environmental Matters
 (Ley General del
Equilibrio Ecológico y de Protección al Ambiente)
   29




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##### Table of Contents



Insurance
  Property, Plant and Equipment
  Short tonsper yearPaper:ContainerboardCentauro Mill (Durango)
    
    
    308,000Tizayuca Mill (Hidalgo) (1)
    
    
    200,000McKinley Mill (New Mexico, U.S.)
    
    
    220,000Atenquique Mill (Jalisco)
    
    
    155,000Monterrey Mill (Nuevo León)
    
    
    143,000Texcoco Mill (Edo. de México)
    
    
    27,000Tuxtepec Mill (Oaxaca) (2)
    
    
    64,000Total
    
    
    1,117,000NewsprintTuxtepec Mill (Oaxaca) (2)
    
    
    164,000Uncoated Free SheetMexpape Mill (Veracruz)
    
    
    172,0001,453,000Pulp:Unbleached Softwood PulpAtenquique Mill (Jalisco)
    
    
    80,000Bleached Chemical Thermomechanical PulpPipsamex Pulp Mill (Durango) (3)
    
    
    79,000Thermomechanical Pulp (TMP)Tuxtepec Pulp Mill (Oaxaca)
    
    
    52,000Bleached Bagasse PulpMexpape Pulp Mill (Veracruz) (3)
    
    
    79,000Bleached Deinking PulpTuxtepec DIP Mill (Oaxaca)
    
    
    100,000Mexpape DIPHB Mill (Veracruz)
    
    
    110,000Total
    
    
    210,000500,000Packaging:Corrugated containersMexico Plant (Edo. de México)
    
    
    59,000Tizayuca Plant (Hidalgo) (1)
    
    
    100,000Puente de Vigas Plant (Edo. de México) (1)(4)
    
    
    32,000Tultitlan Plant (Edo. de México)
    
    
    59,000
 30




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##### Table of Contents



Short tonsper yearJuárez Plant (Edo. de México)
    
    
    48,000Izcalli Plant (Edo. de México)
    
    
    44,000Apodaca Plant (Nuevo León) (1)
    
    
    56,000Monterrey Plant (Nuevo León)
    
    
    54,000San Nicolás Plant (Nuevo León)
    
    
    43,000Nogalar Plant (Nuevo León)
    
    
    31,000Zona Industrial Plant (Jalisco) (1)
    
    
    26,000Tepatitlán Plant (Jalisco)
    
    
    52,000Fresno Plant (Jalisco)
    
    
    49,000Tapachula Plant (Chiapas)
    
    
    32,000Querétaro Plant (Querétaro)
    
    
    44,000Mexicali Plant (Baja California Norte) (1)
    
    
    37,000Culiacán Plant (Sinaloa) (1)
    
    
    43,000Chihuahua Plant (Chihuahua)
    
    
    35,000Durango McKinley Paper Dallas Plant (Texas, U.S.)
    
    
    100,000Total
    
    
    944,000Multi-wall SacksCd. Guzmán Plant (Jalisco)
    
    
    30,000Tula Plant (Hidalgo) (1)
    
    
    14,000Apasco Plant (Edo. de México)
    
    
    15,000Total
    
    
    59,0001,003,000Other:Plywood Anahuac Mill (Chihuahua) (3)
    
    
    26,000Particleboard Durango Mill (Durango) (3)
    
    
    17,000Plywood Durango Mill (Durango)
    
    
    19,000Total
    
    
    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.  
 Item 4A. Unresolved Staff Comments.
  31




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##### Table of Contents



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
IntroductionPresentation of Financial and Other Information and Item 3: Key
InformationSelected 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 IntroductionSpecial Note
Regarding Forward-Looking Statements and Item 3: Key InformationRisk Factors.
 General
  
    
    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
   
    
    the Mexican and U.S. market prices of corrugated containers, containerboard and
newsprint, which significantly affect our net revenue;
 32




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##### Table of Contents




    
    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 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
  Business 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 our Grupo Durango division and our Grupo Pipsamex division in Mexico and Durango
McKinley Paper Companys paper division in the United States.
 33




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##### Table of Contents




    
    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 Companys 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.
  Discontinued Operations
  Critical Accounting Estimates
  Allowance for doubtful accounts
  Deferred taxes
   34




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##### Table of Contents



Property, plant and equipment
       Pension plans, seniority premiums and indemnities
  Negative goodwill
  35




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##### Table of Contents



Principal Factors Affecting Our Results of Operations and Liquidity
 Pricing of Our Products
  
    
    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.
 Uncoated Free Sheet.
 Newsprint.
 Packaging Products.
 36




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##### Table of Contents



Cyclicality Affecting the Paper and Packaging Industry, Capacity Utilization and Disposition of
Chihuahua Particleboard Plant
   
    
    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.
   Capacity Utilization
  37




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##### Table of Contents



Year Ended December 31,2006
    
    2005
    
    2004Containerboard(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
  Disposition of Chihuahua Particleboard Plant
  Effects of Fluctuations in Raw Materials Prices
  Recycled Fiber Costs
    38




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##### Table of Contents



Energy Costs
   Mexican and United States Demand for Our Products
  Year Ended December 31,2006
    
    
    2005
    
    
    2004(in millions of constant pesos in purchasing power as ofDecember 31, 2006)Mexico
    
    Ps
    12,345.1
    
    
    Ps
    10,974.8
    
    
    Ps
    10,422.7United States
    
    
    2,299.6
    
    
    
    2,388.7
    
    
    
    2,458.9Intercompany Sales
    
    
    (4,946.6
    )
    
    
    (4,887.6
    )
    
    
    (4,513.1
    )Total
    
    Ps
    9,698.2
    
    
    Ps
    8,475.9
    
    
    Ps
    8,368.4
  
    
    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.
  39




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##### Table of Contents



Effect of Level of Indebtedness and Interest Rates
     
    
    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.
  Effects of Fluctuations in Exchange Rates between the Peso and the Dollar
  
    
    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




---



##### Table of Contents




    
    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.
     
    
    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.
   
    
    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




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##### Table of Contents



Effects of Inflation
  
    
    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.
   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
   
    
    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




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##### Table of Contents




    
    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.
  concurso mercantil concurso mercantil
 conciliadora
  
    
    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
  Income Taxes and Employee Statutory Profit Sharing
   43




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##### Table of Contents



Asset Taxes
  Tax Loss Carryforwards and Recoverable Asset Taxes
   Tax Loss
    
    
    RecoverableYear of expiration
    
    Carryforwards
    
    
    Asset Taxes(millions of constant pesos)2007
    
    Ps
    13.6
    
    
    Ps
    29.52008
    
    
    117.2
    
    
    
    28.62009
    
    
    131.7
    
    
    
    22.42010
    
    
    66.2
    
    
    
    27.02011
    
    
    58.5
    
    
    
    25.12012
    
    
    374.8
    
    
    
    66.72013
    
    
    959.6
    
    
    
    62.62014
    
    
    367.7
    
    
    
    6.72015
    
    
    1,060.7
    
    
    
    1.12016
    
    
    256.0
    
    
    
    1.2Total
    
    Ps
    3,405.8
    
    
    Ps
    270.9
 Recent Developments
   44




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##### Table of Contents



Results of Operations
  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.
  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
    
    
    
    85.7Gross profit
    
    
    1,555.3
    
    
    
    16.0
    
    
    
    1,089.6
    
    
    
    12.9
    
    
    
    1,196.7
    
    
    
    14.3Selling, general and administrative expenses
    
    
    721.9
    
    
    
    7.4
    
    
    
    705.4
    
    
    
    8.3
    
    
    
    722.5
    
    
    
    8.6Operating income
    
    
    833.4
    
    
    
    8.6
    
    
    
    384.3
    
    
    
    4.5
    
    
    
    474.2
    
    
    
    5.7Other 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
    
    
    
    0.5Foreign exchange gain (loss)
    
    
    (87.2
    )
    
    
    (0.9
    )
    
    
    348.2
    
    
    
    4.1
    
    
    
    65.1
    
    
    
    0.8Monetary 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
    
    
    
    6.3Employee statutory profit sharing expense
    
    
    (3.5
    )
    
    
    (0.0
    )
    
    
    (0.8
    )
    
    
    0.0
    
    
    
    
    
    
    
    0.0Loss 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
    
    
    
    0.0Loss from continuing operations
    
    
    (30.3
    )
    
    
    (0.3
    )
    
    
    57.3
    
    
    
    0.7
    
    
    
    (43.4
    )
    
    
    (0.5
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    113.2
    
    
    
    1.3
    
    
    
    109.8
    
    
    
    1.3Consolidated net income (loss)
    
    Ps
    (30.3
    )
    
    
    (0.3
    )
    
    Ps
    170.5
    
    
    
    2.0
    
    
    Ps
    66.5
    
    
    
    0.8
 45




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##### Table of Contents



Year Ended December 31,2006
    
    2005
    
    2004(in millions of constant pesos in purchasing power as ofDecember 31, 2006, except percentages)Paper:Sales to third parties
    
    Ps
    4,529.7
    
    
    Ps
    3,633.2
    
    
    Ps
    3,700.7Percentage of consolidated net sales
    
    
    46.7
    %
    
    
    42.9
    %
    
    
    44.2
    %Intersegment sales
    
    
    4,335.7
    
    
    
    4,363.5
    
    
    
    4,194.7Total sales
    
    
    8,865.3
    
    
    
    7,996.7
    
    
    
    7,895.4Operating income (loss)
    
    
    510.2
    
    
    
    127.5
    
    
    
    57.9Operating margin (%)
    
    
    11.3
    %
    
    
    3.5
    %
    
    
    1.6
    %Depreciation and amortization
    
    
    276.3
    
    
    
    287.9
    
    
    
    305.0Packaging:Sales to third parties
    
    Ps
    5,050.6
    
    
    Ps
    4,738.2
    
    
    Ps
    4,552.6Percentage of consolidated net sales
    
    
    52.1
    %
    
    
    55.9
    %
    
    
    54.4
    %Intersegment sales
    
    
    429.4
    
    
    
    430.1
    
    
    
    318.4Total sales
    
    
    5,480.0
    
    
    
    5,168.3
    
    
    
    4,871.0Operating income
    
    
    329.7
    
    
    
    246.2
    
    
    
    415.1Operating margin (%)
    
    
    6.5
    %
    
    
    5.2
    %
    
    
    9.1
    %Depreciation and amortization
    
    
    121.4
    
    
    
    138.8
    
    
    
    143.0Other:Sales to third parties
    
    Ps
    117.9
    
    
    Ps
    104.5
    
    
    Ps
    115.0Percentage of consolidated net sales
    
    
    1.2
    %
    
    
    1.2
    %
    
    
    1.4
    %Intersegment sales
    
    
    181.5
    
    
    
    94.0
    
    
    
    0.1Total sales
    
    
    299.4
    
    
    
    198.5
    
    
    
    115.1Operating income (loss)
    
    
    (6.4
    )
    
    
    10.5
    
    
    
    1.3Operating 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
   
    
    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.
  46




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Cost of Sales
  Gross Profit and Gross Margin
  Selling, General and Administrative Expenses
  Operating Income
     47




---



##### Table of Contents



Other Income, Net
   Net Comprehensive Financing Cost
  Income Tax and Employee Statutory Profit Sharing Benefit (Expenses)
  Income from Discontinued Operations
  
    
    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)
  Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
 Net Sales
   48




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##### Table of Contents




    
    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.
  
    
    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.
   Cost of Sales
  Gross Profit and Gross Margin
  Selling, General and Administrative Expenses
  Operating Income
  49




---



##### Table of Contents



Other Income (Expense), Net
   
    
    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.
  Net Comprehensive Financing Cost
  Income Tax and Employee Statutory Profit Sharing Benefit (Expenses)
  Income (Loss) from Discontinued Operations
  50




---



##### Table of Contents




    
    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.
  
    
    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
  Liquidity and Capital Resources
  
    
    working capital requirements;
    
    servicing our indebtedness; and
    
    capital expenditures related to investments in operations, major maintenance and
expansion of plant facilities.
  
    
    cash flows from operating activities;
    
    short-term and long-term borrowings; and
    
    sales of debt securities in domestic and international capital markets.
   Changes in Financial Position
 Net Resources Provided by (Used in) Operating Activities
  51




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##### Table of Contents




    
    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.
   
    
    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.
  
    
    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.
  
    
    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.
  52




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##### Table of Contents



Net Resources Used in Financing Activities
    Net Resources Generated by (Used in) Investing Activities
     Indebtedness
  Short-Term Indebtedness
  53




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##### Table of Contents



Long-Term Indebtedness
  OutstandingPrincipal Amount atInstrument
    
    December 31, 2006
    
    Final MaturitySeries B notes
    
    US$426.8 million
    
    December 2012Restructured Credit Agreement
    
    US$95.0 million
    
    December 2012Bancomext Loan
    
    US$7.8 million
    
    September 2014Commerzbank Loan
    
    5.0 million
    
    January 2010GE Capital Leasing Leases
    
    US$0.4 million
    
    October 2013
  
    
    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.
  
    
    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
  54




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##### Table of Contents



Restructured Credit Agreement
  Other Secured Bank Debt
 Bancomext Loan +
 Commerzbank Loan  
 GE Capital Leasing Leases
 +
 Restrictive Covenants and Available Credit
  
    
    incur additional indebtedness;
    
    incur liens;
    
    issue guarantees;
    
    issue or sell capital stock of subsidiaries;
 55




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##### Table of Contents




    
    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.
    Off-Balance Sheet Arrangements
  Contractual Commitments and Capital Expenditures
 Contractual Commitments
  Payments Due by PeriodOne to
    
    
    
    
    
    
    MoreLess than
    
    
    Three
    
    
    Three to
    
    
    than FiveOne Year
    
    
    Years
    
    
    Five Years
    
    
    Years
    
    
    Total(millions of constant pesos in purchasing poweras of December 31, 2006)Indebtedness
    
    Ps
    168.8
    
    
    Ps
    421.7
    
    
    Ps
    423.4
    
    
    Ps
    4,775.3
    
    
    Ps
    5,789.1Interest on indebtedness (1)
    
    
    539.5
    
    
    
    941.7
    
    
    
    763.3
    
    
    
    299.5
    
    
    
    2,544.0Capital leases
    
    
    0.7
    
    
    
    1.4
    
    
    
    1.4
    
    
    
    1.4
    
    
    
    4.8Operating leases (2)
    
    
    108.3
    
    
    
    226.2
    
    
    
    267.9
    
    
    
    252.2
    
    
    
    854.6Notes payable
    
    
    54.9
    
    
    
    73.4
    
    
    
    42.3
    
    
    
    26.1
    
    
    
    196.7Total 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




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Capital Expenditures
  
    
    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.
   Years Ended December 31,2007
    
    
    20082004
    
    
    2005
    
    
    2006
    
    
    Estimated
    
    
    Estimated(in millions of constant pesos in purchasing power as ofDecember 31, 2006)Capital expenditures (other than
environmental)
    
    Ps
    208.1
    
    
    Ps
    127.9
    
    
    Ps
    209.8
    
    
    Ps
    208.1
    
    
    Ps
    130.0Environmental capital expenditures
    
    
    14.8
    
    
    
    12.5
    
    
    
    17.2
    
    
    
    10.4
    
    
    
    14.0Total
    
    Ps
    222.9
    
    
    Ps
    140.4
    
    
    Ps
    227.0
    
    
    Ps
    218.5
    
    
    Ps
    144.0
   Differences between Mexican FRS and U.S. GAAP
  New Accounting Pronouncements
  57




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58




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59




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Item 6. Directors, Senior Management and Employees.
 Directors
 (estatutos sociales)
    
    
    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.
   Name
    
    Current Title
    
    SinceMiguel Rincón(1)
    
    Chairman of the Board of Directors and Chief Executive Officer
    
    1982José Antonio Rincón(1)
    
    Vice-Chairman of the Board of Directors and Chief Operating Officer
    
    1982Mayela Rincón de Velasco(1)
    
    Director, Vice President and Chief Financial Officer
    
    1982Jesús Rincón(1)
    
    Director
    
    1987Wilfrido Rincón(1)
    
    Director
    
    1987Ignacio Rincón(1)
    
    Director
    
    1987
 60




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Name
    
    Current Title
    
    SinceÁngel Del Palacio
    
    Director
    
    2001Alfonso Fernández de Castro
    
    Director
    
    2001Buenaventura G. Saravia
    
    Director
    
    2001Roberto Isaac Hernández
    
    Director
    
    2001Martín Rincón(1)
    
    Director
    
    2003Juan Francisco Ealy Ortiz
    
    Director
    
    2005Jose Luis Michel Nava
    
    Director
    
    2005Javier Pérez Rocha
    
    Director
    
    2005Rebeca 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.  Miguel Rincón (Comisión Nacional Agropecuaría Comercial)
 Jose Antonio Rincón (Hospital General de Durango).
 Mayela Rincón de Velasco (Universidad Juárez del Estado de Durango). (Colegio de Contadores Públicos de Durango,
A.C.)
 Jesús Rincón Asociación Nacional de Productores de Tableros
y Aglomerados Asociación Mexicana de la Industria
Forestal
 Wilfrido Rincón (Consejo
Consultivo Forestal Nacional) Asociación Nacional de Forestales
 Ignacio Rincón (Asociación de Técnicos de la Celulosa y del Papel).
 61




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Ángel Del Palacio ITESM
 Alfonso Fernández de Castro
 Buenaventura G. Saravia ITESM
 Roberto Isaac Hernández ITESM
 Martín Rincón (Asociación Nacional de Distribuidores de Papel) (Asociación Nacional del Libro)
 Juan Francisco Ealy Ortiz
 Jose Luis Michel Nava
 Javier Pérez Rocha
 Rebeca Castaños Castaños
 Executive Officers
  62




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Name
    
    Current Title
    
    SinceMiguel Rincón(1)
    
    Chief Executive Officer
    
    1982José Antonio Rincón(1)
    
    Chief Operating Officer
    
    1982Mayela Rincón de Velasco(1)
    
    Chief Financial Officer
    
    1982Gustavo Peyro Medina
    
    Audit Managing Director
    
    1996Arturo Díaz Medina
    
    Administrative Managing Director
    
    1998Jesús Romo Carrasco
    
    Controller
    
    1988Gabriel Villegas Salazar
    
    Secretary of the Board and General Counsel
    
    1987
 
 (1)
    
    Miguel Rincón, José Antonio Rincón and Mayela Rincón de Velasco are siblings.  Gustavo Peyro Medina
 Arturo Díaz Medina .
 Jesús Romo Carrasco . . ITESM
 Gabriel Villegas Salazar
 Compensation of Directors and Executive Officers
   Audit and Corporate Practices Committee
  63




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
    
    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.
     Employees
 Sindicato de
Trabajadores de Fábricas de Papel Tuxtepec, S. A. de C. V.
 64




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As of December 312006
    
    
    2005
    
    
    2004Mexico (1)
    
    
    8,336
    
    
    
    7,721
    
    
    
    7,301United States
    
    
    303
    
    
    
    285
    
    
    
    282Total
    
    
    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.  Share Ownership of Directors and Officers
  
 Item 7. Major Stockholders and Related Party Transactions.
 Major Stockholders
   
    
    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.
    65




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
    
    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.
  Number ofshares
    
    %Rincón Family Trust (1)
    
    
    57,916,367
    
    
    
    52.3Administradora Corporativa y Mercantil, S.A. de C.V. (ACM) (2)
    
    
    15,068,000
    
    
    
    13.6Banamex Trust (3)
    
    
    15,911,511
    
    
    
    14.4Miguel Rincón (4)
    
    
    88,936,333
    
    
    
    80.4José Antonio Rincón (5)
    
    
    88,910,577
    
    
    
    80.4Jesús Rincón (6)
    
    
    88,895,878
    
    
    
    80.3Wilfrido Rincón (7)
    
    
    88,910,134
    
    
    
    80.4Ignacio Rincón (8)
    
    
    88,905,350
    
    
    
    80.4Martín Rincón (9)
    
    
    88,899,046
    
    
    
    80.3Mayela Rincón (10)
    
    
    72,993,174
    
    
    
    66.0All 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




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(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
   67




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Banamex Trust
  ACM Pledge
  Related Party Transactions
 Administradora Corporativa y Mercantil, S.A. de C.V.
  Transactions with Directors and their Affiliates
   
 Item 8. Financial Information.
  Legal Proceedings
 Comisión Nacional del Agua v. Productora Nacional de Papel, S.A. de C.V.
  68




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Tribunal Federal de Justicia Fiscal y Administrativa
  Other Litigation
  Dividend Policy
  Significant Changes
  
 Item 9. The Offer and Listing.
 General
     69




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##### Table of Contents



concurso mercantil
 Trading on the Mexican Stock Exchange, the New York Stock Exchange and the Pink Sheets
 Sistema Electrónico de
Negociación de Transacciones, Registro y Asignación
 Institución para el Depósito de
Valores
    70




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Mexican Stock Exchange
    
    New York Stock Exchange/Pesos per Series A Share/
    
    Pink Sheets (2)Common Share (1)
    
    Dollars per ADSHigh
    
    Low
    
    High
    
    Low2002
    
    Ps
    14.00
    
    
    Ps
    14.00
    
    
    US$
    5.55
    
    
    US$
    1.012003
    
    
    16.30
    
    
    
    3.00
    
    
    
    1.70
    
    
    
    0.402004
    
    
    19.98
    
    
    
    2.90
    
    
    
    3.85
    
    
    
    0.202005
    
    
    13.00
    
    
    
    4.11
    
    
    
    1.55
    
    
    
    0.152006
    
    
    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 ExchangePesos per Series A Share/
    
    Pink SheetsCommon Share (1)
    
    Dollars per ADSHigh
    
    Low
    
    High
    
    Low2005First Quarter
    
    Ps
    13.00
    
    
    Ps
    6.89
    
    
    US$
    1.55
    
    
    US$
    0.40Second Quarter
    
    
    12.00
    
    
    
    6.69
    
    
    
    1.25
    
    
    
    0.60Third Quarter
    
    
    9.00
    
    
    
    6.01
    
    
    
    0.85
    
    
    
    0.15Fourth Quarter
    
    
    9.00
    
    
    
    4.11
    
    
    
    1.25
    
    
    
    0.252006First Quarter
    
    
    12.97
    
    
    
    4.10
    
    
    
    1.05
    
    
    
    0.25Second Quarter
    
    
    8.33
    
    
    
    4.10
    
    
    
    1.25
    
    
    
    0.40Third Quarter
    
    
    12.85
    
    
    
    8.10
    
    
    
    1.95
    
    
    
    0.75Fourth Quarter
    
    
    13.25
    
    
    
    8.14
    
    
    
    2.00
    
    
    
    1.052007First Quarter
    
    
    16.00
    
    
    
    10.50
    
    
    
    3.00
    
    
    
    1.70Second 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 SheetsPesos per Common Share
    
    Dollars per ADSHigh
    
    Low
    
    High
    
    LowDecember 2006
    
    Ps
    11.50
    
    
    Ps
    10.56
    
    
    US$
    2.00
    
    
    US$
    1.75January 2007
    
    
    12.00
    
    
    
    10.50
    
    
    
    2.20
    
    
    
    2.00February 2007
    
    
    14.00
    
    
    
    10.50
    
    
    
    2.50
    
    
    
    1.70March 2007
    
    
    16.00
    
    
    
    14.00
    
    
    
    2.55
    
    
    
    2.00April 2007
    
    
    16.00
    
    
    
    14.00
    
    
    
    3.00
    
    
    
    2.40May 2007
    
    
    16.74
    
    
    
    13.50
    
    
    
    3.56
    
    
    
    2.80June 2007 (through June 29)
    
    
    16.00
    
    
    
    14.00
    
    
    
    3.20
    
    
    
    2.90
 
 Source: Mexican Stock Exchange; Pink Sheets LLC. 71




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Item 10. Additional Information.
 Organizational Documents
 estatutos sociales
 sociedad anónima bursátil de capital variable
 Registration and Transfer
  Voting Rights
  Ley General de Sociedades Mercantiles
 
    
    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.
    72




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
    
    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.
  Dividends
   Liquidation Rights
  73




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Changes in Capital Stock
  Pre-Emptive Rights
 Periódico Oficial del Estado de Durango
 Repurchase Obligation
  
    
    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.
  Other Provisions
 Variable Capital and Withdrawal Rights
 Right of Dissenting Stockholders to Tender Their Shares
 74




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Forfeiture of Shares
 Duration
 Conflict of Interest
 Purchase by our company of its Shares Ley del Mercado de Valores
 Shares Without Voting Rights
 Prohibition on Purchase of Shares by Subsidiaries of our Company
 Material Contracts
   Exchange Controls
  75




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Mexican Income Taxation
  establecimiento permanente
 Secretaría de Hacienda y Crédito Público
   Common Shares and ADSs
 Taxation of Dividends
 Ley del Impuesto Sobre la Renta
  76




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cuenta de utilidad fiscal
neta
 cuenta
de utilidad fiscal neta reinvertida
  Disposition of Common Shares and ADSs
    
    
    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.
  77




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Estate and Gift Taxes
  United States Federal Income Taxation
    
    
    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.
   
    
    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




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
    
    a trust (1) that validly elects to be treated as a United States person for U.S. federal
income tax purposes or (2)(a) the administration over which a U.S. court can exercise
primary supervision and (b) all of the substantial decisions of which one or more United
States persons have the authority to control.
   Ownership of ADSs in General
   Distributions
 i.e.
   79




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Sale or Exchange of Common Shares or ADSs
     Passive Foreign Investment Company Considerations
   80




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U.S. Backup Withholding Tax and Information Reporting
  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
  
 Item 11. Quantitative and Qualitative Disclosure about Market Risk.
  Interest Rate Risk
  81




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2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    Thereafter(in millions of
constant pesos in purchasing power as of December 31, 2006,except percentages)LiabilitiesFixed Rate DebtMillions of pesos
    
    
    0.7
    
    
    
    0.7
    
    
    
    0.7
    
    
    
    0.7
    
    
    
    0.7
    
    
    
    4,615.9Weighted Average rate
    
    
    9.98
    %
    
    
    9.98
    %
    
    
    9.99
    %
    
    
    9.99
    %
    
    
    9.99
    %
    
    
    9.99
    %Variable Rate DebtMillions of pesos
    
    
    168.8
    
    
    
    234.6
    
    
    
    187.0
    
    
    
    172.3
    
    
    
    251.1
    
    
    
    160.7Weighted Average rate
    
    
    8.64
    %
    
    
    8.52
    %
    
    
    8.50
    %
    
    
    8.53
    %
    
    
    8.53
    %
    
    
    8.53
    %Total DebtMillions of pesos
    
    
    169.5
    
    
    
    235.3
    
    
    
    187.7
    
    
    
    173.0
    
    
    
    251.8
    
    
    
    4,776.7Weighted Average rate
    
    
    9.75
    %
    
    
    9.78
    %
    
    
    9.82
    %
    
    
    9.87
    %
    
    
    9.94
    %
    
    
    9.94
    %
  Foreign Currency Exchange Rate Risk
    
 Item 12. Description of Securities Other than Equity Securities.
  82




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PART II
 
 Item 13. Defaults, Dividend Arrearages and Delinquencies.
  
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
  
 Item 15. Controls and Procedures.
 Disclosure Controls and Procedures
   Remediation of Material Weakness in Internal Control over Financial Reporting
  
    
    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 Managers 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 Managers 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 Managers 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.
  Changes in Internal Control over Financial Reporting
  Item 16. [Reserved].
  
 Item 16A. Audit Committee Financial Expert.
  
 Item 16B. Code of Ethics.
  83




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Item 16C. Principal Accountant Fees and Services.
 Audit Fees
  For the year ended December 31,2006
    
    
    2005(in thousands of constant pesos)Audit Fees
    
    Ps
    15,071
    
    
    Ps
    13,807Tax Fees
    
    
    
    
    
    
    135Other Fees
    
    
    120
    
    
    
    621Total Fees
    
    Ps
    15,191
    
    
    Ps
    14,564
 Audit fees and audit-related fees.
 Tax Fees.
 Other Fees.
 Audit and Corporate Practices Committees Pre-Approval Policy 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.
  84




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de minimus
 
 Item 16D. Exemptions from the Listing Standards for Audit Committees.
  
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
  85




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PART III
 
 Item 17. Financial Statements.
  
 Item 18. Financial Statements.
  
 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 companys 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 Subsidiaries12.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 86




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SIGNATURES
  CORPORACIÓN DURANGO, S.A.B. DE C.V.By:
    
    /s/ Mayela Rincón Arredondo de VelascoName: Mayela Rincón Arredondo de VelascoTitle: Chief Financial Officer
  87




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INDEX TO FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    F-2Report of Independent Certified Accountants
    
    F-4Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    F-5Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004
    
    F-6Statements of Changes in Shareholders Equity for the years ended December 31, 2006, 2005 and 2004
    
    F-7Consolidated Statement of Changes in Financial Position for the years ended December 31, 2006, 2005 and 2004
    
    F-8Notes to the Consolidated Financial Statements
    
    F-9




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
  
 F-2




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F-3




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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
 
 22,
   
 KBA GROUP LLP
 
 F-4




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CORPORACIÓN DURANGO, S. A. B. DE C. V. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS  AS OF DECEMBER 31, 2006 AND 2005
 Expressed in thousands of constant Mexican pesos of purchasing power as of December 31, 2006
 2006
    
    
    2005AssetsCURRENT ASSETS:Cash and cash equivalents (Note 4)
    
    $
    466,603
    
    
    $
    728,963Accounts receivable  Net (Note 5)
    
    
    1,924,745
    
    
    
    1,803,856Related parties (Note 14)
    
    
    
    
    
    
    12,281Inventories  Net (Note 6)
    
    
    1,212,675
    
    
    
    1,244,473Prepaid expenses
    
    
    32,098
    
    
    
    16,289Other current assets
    
    
    2,156
    
    
    
    Total current assets
    
    
    3,638,277
    
    
    
    3,805,862PROPERTY, MACHINERY, PLANT AND
EQUIPMENT  NET (Note 7)
    
    
    11,254,499
    
    
    
    11,356,508OTHER ASSETS  NET (Note 8)
    
    
    266,308
    
    
    
    270,932Total assets
    
    $
    15,159,084
    
    
    $
    15,433,302Liabilities and Stockholders EquityCURRENT LIABILITIES:Current portion of long-term debt (Note 9)
    
    $
    169,489
    
    
    $
    268,088Notes payable
    
    
    54,883
    
    
    
    50,251Accrued interest
    
    
    6,414
    
    
    
    14,129Trade accounts payable
    
    
    921,141
    
    
    
    878,248Accrued expenses and taxes
    
    
    674,403
    
    
    
    493,970Employee statutory profit sharing
    
    
    4,782
    
    
    
    1,041Total current liabilities
    
    
    1,831,112
    
    
    
    1,705,727LONG-TERM LIABILITIES:Long-term debt (Note 9)
    
    
    5,624,457
    
    
    
    6,768,724Long-term notes payable
    
    
    141,680
    
    
    
    66,414Deferred income taxes (Note 16)
    
    
    2,049,230
    
    
    
    1,666,963Pension plans and seniority premiums (Note 11)
    
    
    307,084
    
    
    
    320,369Total long-term liabilities
    
    
    8,122,451
    
    
    
    8,822,470Total liabilities
    
    
    9,953,563
    
    
    
    10,528,197STOCKHOLDERS EQUITY:Common stock (Note 12)
    
    
    5,665,838
    
    
    
    5,665,838Additional paid-in capital
    
    
    4,669,618
    
    
    
    4,662,849Retained earnings
    
    
    3,048,077
    
    
    
    2,861,646Net (loss) income for the year
    
    
    (71,710
    )
    
    
    186,431Loss 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
    
    
    
    634,107Majority stockholders equity
    
    
    4,786,403
    
    
    
    4,844,456Minority stockholders equity in consolidated subsidiaries
    
    
    419,118
    
    
    
    60,649Total stockholders equity
    
    
    5,205,521
    
    
    
    4,905,105Commitments and contingencies (Notes 18 and 19)
    
    
    
    
    
    
    Subsequent Events (Note 20)
    
    
    
    
    
    
    Total liabilities and stockholders equity
    
    $
    15,159,084
    
    
    $
    15,433,302
  F-5




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CORPORACIÓN DURANGO, S. A. B. DE C. V. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS  FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
 Expressed in thousands of constant Mexican pesos of purchasing power as of December 31, 2006
 2006
    
    
    2005
    
    
    2004Net sales
    
    $
    9,698,173
    
    
    $
    8,475,857
    
    
    $
    8,368,372Cost of sales
    
    
    8,142,843
    
    
    
    7,386,213
    
    
    
    7,171,708Gross profit
    
    
    1,555,330
    
    
    
    1,089,644
    
    
    
    1,196,664Selling, general and administrative expenses
    
    
    721,935
    
    
    
    705,378
    
    
    
    722,462Operating income
    
    
    833,395
    
    
    
    384,266
    
    
    
    474,202Other 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
    
    
    
    43,187Exchange (loss) gain
    
    
    (87,236
    )
    
    
    348,163
    
    
    
    65,099Gain 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
    )
    
    
    523,119Employee 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
    
    
    
    109,815Consolidated net (loss) income
    
    $
    (30,270
    )
    
    $
    170,548
    
    
    $
    66,455Net (loss) income:Majority interest
    
    $
    (71,710
    )
    
    $
    186,431
    
    
    $
    66,636Minority interest
    
    
    41,440
    
    
    
    (15,883
    )
    
    
    (181
    )Consolidated net (loss) income
    
    $
    (30,270
    )
    
    $
    170,548
    
    
    $
    66,455Basic and diluted net (loss) income per share ofContinuing operations
    
    $
    (0.27
    )
    
    $
    0.53
    
    
    $
    (0.47
    )Discontinued operations
    
    
    
    
    
    
    1.04
    
    
    
    1.19Basic and diluted net (loss) income per share
    
    $
    (0.27
    )
    
    $
    1.57
    
    
    $
    0.72Weighted average number of shares outstanding
    
    
    110,641,111
    
    
    
    108,528,665
    
    
    
    91,834,192
  F-6




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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
 Expressed in thousands of constant Mexican pesos of purchasing power as of December 31, 2006
 Cumulative
    
    
    Cumulative
    
    
    Cumulative
    
    
    Minorityloss from
    
    
    initial effect
    
    
    translation
    
    
    stockholdersCommon
    
    
    Additional
    
    
    
    
    
    
    holding non
    
    
    of deferred
    
    
    adjustment
    
    
    equity
    
    
    Totalstock
    
    
    paid-in
    
    
    Retained
    
    
    monetary
    
    
    income
    
    
    of foreign
    
    
    in consolidated
    
    
    stockholders(Note 12)
    
    
    capital
    
    
    earnings
    
    
    assets
    
    
    taxes
    
    
    subsidiaries
    
    
    subsidiaries
    
    
    equityBalances as of January 1, 2004
    
    $
    5,363,286
    
    
    $
    1,568,689
    
    
    $
    2,795,010
    
    
    $
    (4,764,488
    )
    
    $
    (3,484,336
    )
    
    $
    201,332
    
    
    $
    76,649
    
    
    $
    1,756,142Increase in common stock (Note 12b.)
    
    
    51
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51Comprehensive 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
    
    
    
    1,732,769Increase in common stock
    
    
    302,501
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    302,501Premium in issuance of shares
    
    
    
    
    
    
    3,094,160
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,094,160Comprehensive 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
    
    
    
    4,905,105Premium in issuance of shares
    
    
    
    
    
    
    6,769
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,769Minority interest (Note 2c.)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    358,469
    
    
    
    358,469Comprehensive 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
  F-7




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##### Table of Contents



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
 Expressed in thousands of constant Mexican pesos of purchasing power as of December 31, 2006
 Operating activities:
    
    2006
    
    
    2005
    
    
    2004Consolidated (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
    )
    
    
    498,559Other income (expenses)
    
    
    41,364
    
    
    
    (27,165
    )
    
    
    17,711Amortization of debt issuance costs and other financing costs
    
    
    
    
    
    
    
    
    
    
    351,869803,751
    
    
    
    601,481
    
    
    
    728,097Changes in operating assets and liabilities:(Increase) decrease in:Trade accounts receivable  Net
    
    
    (108,608
    )
    
    
    20,847
    
    
    
    141,080Inventories
    
    
    113,607
    
    
    
    (93,639
    )
    
    
    76,157Other 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
    )
    
    
    46,602Other  Net
    
    
    26,256
    
    
    
    (104,258
    )
    
    
    (3,459
    )Net resources provided by operating activities before discontinued
operations
    
    
    888,398
    
    
    
    470,890
    
    
    
    726,216Assets of discontinued operations
    
    
    
    
    
    
    112,346
    
    
    
    (17,132
    )Liabilities of discontinued operations
    
    
    
    
    
    
    (136,449
    )
    
    
    40,688Discontinued operations  net of items that did not require resources
    
    
    
    
    
    
    (296,032
    )
    
    
    109,815(Loss) income from discontinued operations
    
    
    
    
    
    
    (320,135
    )
    
    
    133,371Net resources provided by operating activities
    
    
    888,398
    
    
    
    150,755
    
    
    
    859,587Financing activities:Increase (decrease) of long-term debt
    
    
    12,463
    
    
    
    (177,453
    )
    
    
    (831,263
    )Payments of long-term debt
    
    
    (1,081,464
    )
    
    
    (4,150,550
    )
    
    
    105,249Common stock increase
    
    
    
    
    
    
    302,501
    
    
    
    51Additional paid-in capital
    
    
    6,769
    
    
    
    3,094,160
    
    
    
    Increase in minority interest
    
    
    317,030
    
    
    
    
    
    
    
    Translation adjustment of foreign subsidiaries
    
    
    (139,449
    )
    
    
    357,907
    
    
    
    74,868Net 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
    
    
    
    
    
    
    
    
    
    
    178,137Divestment 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
    )
    
    
    168,416Balance of cash and cash equivalents at beginning of year
    
    
    728,963
    
    
    
    894,871
    
    
    
    726,455Balance of cash and cash equivalents at end of year
    
    $
    466,603
    
    
    $
    728,963
    
    
    $
    894,871
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CORPORACIÓN DURANGO, S. A. B. 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 Directors 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 Companys 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.
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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 Companys significant consolidated subsidiaries is shown below. All
significant intercompany balances and transactions have been eliminated in these consolidated
financial statements.
 Group
    
    Ownershipor Company
    
    percentage
    
    ActivityAdministración Corporativa de Durango, S. A. de C. V. and subsidiaries
    
    
    100
    %
    
    Administrative servicesCartonpack, S.A. de C.V. (See Note 14e)
    
    
    95
    %
    
    Manufacturing of corrugated boxesCompañía Forestal de Durango, S. A. de C. V.
    
    
    100
    %
    
    Administrative servicesCompañía Papelera de Atenquique, S. A. de C. V.
    
    
    98
    %
    
    Manufacturing of paper for corrugated boxesDurango 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 servicesEmpaques de Cartón Titán, S. A. de C. V. and subsidiaries
    
    
    100
    %
    
    Manufacturing of corrugated boxes and multi-wall sacksGrupo Pipsamex, S. A. de C. V. and subsidiaries (See Note 14e)
    
    
    87
    %
    
    Manufacturing of newsprint and bond paperIndustrias Centauro, S. A. de C. V.
    
    
    99
    %
    
    Manufacturing of paper for corrugated boxesPapel y Empaques Tizayuca, S.A. de C.V. (See Note 14d)
    
    
    100
    %
    
    Manufacturing of paper for corrugated boxesPonderosa Industrial de México, S. A. de C. V.
    
    
    100
    %
    
    Manufacturing of plywoodPorteadores de Durango S. A. de C. V. and subsidiaries
    
    
    100
    %
    
    Hauling freight
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d.
    
    Translation of financial statements of foreign subsidiaries  The accounting policies of
the companys 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
   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.
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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:
 YearsBuildings
    
    25-50Machinery and industrial equipment
    
    23-40Transportation equipment
    
    1-5Computer equipment
    
    1-3Office 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.
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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.
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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




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##### Table of Contents



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 customers 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.
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NOTE 4  CASH AND CASH EQUIVALENTS
 December 31,2006
    
    
    2005Cash
    
    $
    136,542
    
    
    $
    427,815Cash equivalents
    
    
    330,061
    
    
    
    301,148$
    466,603
    
    
    $
    728,963
 NOTE 5  ACCOUNTS RECEIVABLE
 December 31,2006
    
    
    2005Trade accounts receivable
    
    $
    1,867,534
    
    
    $
    1,801,506Recoverable taxes
    
    
    
    
    
    
    46,710Other
    
    
    198,264
    
    
    
    116,6112,065,798
    
    
    
    1,964,827Allowance for doubtful accounts
    
    
    (141,053
    )
    
    
    (160,971
    )$
    1,924,745
    
    
    $
    1,803,856
 F-16




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##### Table of Contents



NOTE 6  INVENTORIES
 December 31,2006
    
    
    2005Finished goods
    
    $
    172,684
    
    
    $
    289,700Production-in-process
    
    
    8,930
    
    
    
    7,578Raw materials
    
    
    568,504
    
    
    
    495,301Spare parts and materials
    
    
    285,850
    
    
    
    295,001Molds and dies
    
    
    77,082
    
    
    
    81,790Other
    
    
    18,712
    
    
    
    11,1261,131,762
    
    
    
    1,180,496Allowance for obsolete inventories
    
    
    (33,940
    )
    
    
    (34,106
    )1,097,822
    
    
    
    1,146,390Advances to suppliers
    
    
    51,336
    
    
    
    40,016Merchandise-in-transit
    
    
    63,517
    
    
    
    58,067$
    1,212,675
    
    
    $
    1,244,473
 NOTE 7  PROPERTY, MACHINERY AND EQUIPMENT
 December 31,2006
    
    
    2005Buildings
    
    $
    3,894,038
    
    
    $
    3,843,004Machinery and industrial equipment *
    
    
    18,526,572
    
    
    
    18,678,591Transportation equipment, computer equipment and
office furniture and equipment
    
    
    1,404,477
    
    
    
    1,474,18823,825,087
    
    
    
    23,995,783Accumulated depreciation
    
    
    (13,672,984
    )
    
    
    (13,593,769
    )10,152,103
    
    
    
    10,402,014Land
    
    
    893,475
    
    
    
    898,763Construction-in-progress
    
    
    208,921
    
    
    
    55,731$
    11,254,499
    
    
    $
    11,356,508
  F-17




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##### Table of Contents



*
    
    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
    
    
    2005Machinery and industrial equipment
    
    $
    18,500,655
    
    
    $
    18,560,179Revaluation impairment
    
    
    25,917
    
    
    
    118,412Depreciation
    
    
    (10,497,271
    )
    
    
    (10,529,234
    )Machinery and industrial equipment
    
    $
    8,029,301
    
    
    $
    8,149,357
    December 31,2006
    
    
    2005Machinery and industrial equipment
    
    $
    93,739
    
    
    $
    182,922Accumulated depreciation
    
    
    (3,186
    )
    
    
    (14,262
    )$
    90,553
    
    
    $
    168,660
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##### Table of Contents



NOTE 8  OTHER ASSETS
 Embeddedderivative
    
    
    Intangiblelease-
    
    
    asset related
    
    
    Debtagreement
    
    
    to seniority
    
    
    issuanceDecember 31, 2006
    
    (Note 3g.)
    
    
    premiums
    
    
    costs
    
    
    Other
    
    
    TotalAssets:Balances as of January 1, 2006
    
    $
    
    
    
    $
    172,050
    
    
    $
    680,130
    
    
    $
    202,288
    
    
    $
    1,054,468Net movement
    
    
    40,972
    
    
    
    (23,245
    )
    
    
    
    
    
    
    (1,865
    )
    
    
    15,862Balances as of December 31, 2006
    
    
    40,972
    
    
    
    148,805
    
    
    
    680,130
    
    
    
    200,423
    
    
    
    1,070,330Accumulated amortization:Balances as of January 1, 2006
    
    
    
    
    
    
    
    
    
    
    680,130
    
    
    
    103,406
    
    
    
    783,536Amortization for the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,486
    
    
    
    20,486Balances as of December 31, 2006
    
    
    
    
    
    
    
    
    
    
    680,130
    
    
    
    123,892
    
    
    
    804,022Net balances as of December 31, 2006
    
    $
    40,972
    
    
    $
    148,805
    
    
    $
    
    
    
    $
    76,531
    
    
    $
    266,308
 Intangibleasset related
    
    
    Debtto seniority
    
    
    issuanceDecember 31, 2005
    
    premiums
    
    
    costs
    
    
    Other
    
    
    TotalAssets:Balances as of January 1, 2005
    
    $
    203,882
    
    
    $
    680,130
    
    
    $
    231,635
    
    
    $
    1,115,647Net movement
    
    
    (31,832
    )
    
    
    
    
    
    
    (29,347
    )
    
    
    (61,179
    )Balances as of December 31, 2005
    
    
    172,050
    
    
    
    680,130
    
    
    
    202,288
    
    
    
    1,054,468Accumulated amortization:Balances as of January 1, 2005
    
    
    
    
    
    
    680,130
    
    
    
    70,488
    
    
    
    750,618Amortization for the period
    
    
    
    
    
    
    
    
    
    
    32,918
    
    
    
    32,918Balances as of December 31, 2005
    
    
    
    
    
    
    680,130
    
    
    
    103,406
    
    
    
    783,536Net balances as of December 31, 2005
    
    $
    172,050
    
    
    $
    
    
    
    $
    98,882
    
    
    $
    270,932
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##### Table of Contents



Intangibleasset related
    
    
    Debtto seniority
    
    
    issuanceDecember 31, 2004
    
    premiums
    
    
    costs
    
    
    Other
    
    
    TotalAssets:Balances as of January 1, 2004
    
    $
    114,295
    
    
    $
    681,684
    
    
    $
    187,167
    
    
    $
    983,146Net movement
    
    
    89,587
    
    
    
    (1,554
    )
    
    
    44,468
    
    
    
    132,501Balances as of December 31, 2004
    
    
    203,882
    
    
    
    680,130
    
    
    
    231,635
    
    
    
    1,115,647Accumulated amortization:Balances as of January 1, 2004
    
    
    
    
    
    
    333,096
    
    
    
    39,363
    
    
    
    372,459Amortization for the period
    
    
    
    
    
    
    347,034
    
    
    
    31,125
    
    
    
    378,159Balances as of December 31, 2004
    
    
    
    
    
    
    680,130
    
    
    
    70,488
    
    
    
    750,618Net balances as of December 31, 2004
    
    $
    203,882
    
    
    $
    
    
    
    $
    161,147
    
    
    $
    365,029
  NOTE 9  SHORT AND LONG-TERM DEBT
 a.
    
    Short-term and long-term debt not capitalized to equity, is as follows:
 December 31,2006
    
    
    2005Current portion of long-term debt
    
    $
    169,489
    
    
    $
    268,088Long-term debt
    
    
    5,624,457
    
    
    
    6,768,724$
    5,793,946
    
    
    $
    7,036,812
 b.
    
    Financial restructuringIn 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 Companys 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
Companys products into the Mexican market.
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##### Table of Contents



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 Mexicos Business Reorganization
Act with the First Federal District Court in Durango, Mexico. On May 20, 2004, the Companys
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 Companys behalf. None of the Companys subsidiaries filed for commercial
reorganization (concurso mercantil) or other bankruptcy protection.On May 25, 2004, following the Companys filing under Mexicos Business Reorganization Act, the
New York Stock Exchange announced that the trading of the Companys ADSs, 2006 notes and 2008
notes would be suspended immediately. On July 15, 2004, the Companys 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 Mexicos Business Reorganization Act. On November 17, 2004, the Mexican court
certified the list of recognized claims in the Companys Concurso Proceeding.On December 23, 2004, the conciliator appointed by the Mexican Federal Institute of Commercial
Reorganization Specialists in the Companys concursoproceeding 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
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reorganization provided that, in exchange for their debt, the Companys unsecured financial
creditors would receive new debt equal to approximately 85% of the outstanding principal amount
of the Companys 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 Companys 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 Companys 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
Companys 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 Companys 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
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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
    
    
    2005Senior Notes
    
    $
    4,614,539
    
    
    $
    4,799,879Bank loans
    
    
    1,027,050
    
    
    
    1,220,554Financial lease agreements
    
    
    4,815
    
    
    
    112,782Other long-term debt
    
    
    147,542
    
    
    
    903,597$
    5,793,946
    
    
    $
    7,036,812
 RESTRUCTURED DEBT
  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 Companys
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
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2006 Senior Notes
 2008 Senior Notes
 2009 Senior Notes
 Euro Commercial Paper
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Banamex Loan
 Banamex Note
 California Commerce Bank Loans +
 F-25




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##### Table of Contents



JPMorgan Chase Loan
 Bank of America, N.A. Loan
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First JPMorgan Letter of Credit
 Second JPMorgan Letter of Credit
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GE Capital Leasing Leases +
  Bancomext Loans +
  F-28




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Bank of Albuquerque Loan
 Commerzbank Loan
     
    
    incur additional indebtedness;
    
    incur liens;
    
    issue guarantees;
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
    
    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 2005TRANCHE 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
    
    
    20052007
    
    $
    
    
    
    $
    349,3732008
    
    
    235,331
    
    
    
    289,9452009
    
    
    187,729
    
    
    
    258,5862010
    
    
    172,964
    
    
    
    243,5882011
    
    
    251,776
    
    
    
    234,3082012
    
    
    4,775,965
    
    
    
    5,034,1872013 and thereafter
    
    
    692
    
    
    
    358,737$
    5,624,457
    
    
    $
    6,768,724
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e.
    
    The minimum rental commitments under financial leases are as follows:
 December 31,2006
    
    
    2005Total minimum lease obligations
    
    $
    4,815
    
    
    $
    117,052Unearned interest
    
    
    
    
    
    
    (4,720
    )Present value of lease obligations
    
    
    4,815
    
    
    
    112,782Current portion of lease obligations
    
    
    688
    
    
    
    23,086Long-term portion of lease obligations
    
    $
    4,127
    
    
    $
    89,696
  2007
    
    $
    6882008
    
    
    6872009
    
    
    6872010
    
    
    6872011
    
    
    6872012
    
    
    6872013
    
    
    692$
    4,815
 NOTE 10  FINANCIAL INSTRUMENTS
 a.
    
    Financial instruments  The estimated fair value amounts of the Companys 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 Companys 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 Companys long-term debt consists of
debt instruments that bear interest at fixed or variable rates.
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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 Companys 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
    December 31,2006
    
    
    2005Accumulated benefit obligation
    
    $
    205,165
    
    
    $
    210,785Projected benefit obligation
    
    $
    229,010
    
    
    $
    233,906Unrecognized items:Variances for assumptions and adjustments based on
experience
    
    
    20,133
    
    
    
    19,777Transition asset
    
    
    (108,723
    )
    
    
    (120,932
    )Net projected liability
    
    
    140,420
    
    
    
    132,751Additional minimum liability
    
    
    64,745
    
    
    
    78,034$
    205,165
    
    
    $
    210,785Intangible asset
    
    $
    63,262
    
    
    $
    77,290
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2006
    
    2005Discount rate
    
    
    5
    %
    
    
    5
    %Salary increases
    
    
    2
    %
    
    
    2
    %
  Remaining Years2006
    
    2005Transition asset
    
    
    16
    
    
    
    17Variances in assumptions and adjustments based on experience
    
    
    16
    
    
    
    17
 -
     December 31,2006
    
    
    2005Accumulated post-retirement benefit obligation
    
    $
    91,162
    
    
    $
    101,852
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December 31,2006
    
    
    2005Post-retirement other benefit obligation
    
    $
    95,035
    
    
    $
    105,361Variances 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
    
    
    $
    101,852Intangible asset
    
    $
    82,689
    
    
    $
    90,133
   December 31,2006
    
    
    2005Accumulated post-retirement benefit obligation
    
    $
    10,757
    
    
    $
    7,732Post-retirement other benefit obligation
    
    $
    20,263
    
    
    $
    17,409Variances 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
    
    
    
    3,105Additional minimum liability
    
    
    2,950
    
    
    
    4,627$
    10,757
    
    
    $
    7,732Intangible asset
    
    $
    2,854
    
    
    $
    4,627
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December 31,2006
    
    
    2005Seniority premiums and pensions
    
    $
    205,165
    
    
    $
    210,785Post-retirement obligations
    
    
    91,162
    
    
    
    101,852Retirement compensation
    
    
    10,757
    
    
    
    7,732$
    307,084
    
    
    $
    320,369
  December 31,2006
    
    
    2005Seniority premiums and pensions
    
    $
    63,262
    
    
    $
    77,290Post-retirement obligations
    
    
    82,689
    
    
    
    90,133Retirement compensation
    
    
    2,854
    
    
    
    4,627$
    148,805
    
    
    $
    172,050
  December 31,2006
    
    
    2005Service cost
    
    $
    12,047
    
    
    $
    10,800Amortization of transition asset, variances for
assumptions and adjustments based on experience
    
    
    17,564
    
    
    
    17,409Financial cost
    
    
    14,764
    
    
    
    15,137Net period cost
    
    $
    44,375
    
    
    $
    43,346
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NOTE 12  STOCKHOLDERS EQUITY
  2006InflationNumber of
    
    
    Par
    
    
    restatementshares
    
    
    value
    
    
    effect
    
    
    TotalFixed capital:Unique Series
    
    
    65,419,089
    
    
    $
    982,074
    
    
    $
    2,042,648
    
    
    $
    3,024,722Variable capital:Unique Series
    
    
    45,222,022
    
    
    
    678,873
    
    
    
    1,962,243
    
    
    
    2,641,116110,641,111
    
    
    $
    1,660,947
    
    
    $
    4,004,891
    
    
    $
    5,665,838
  2005InflationNumber of
    
    
    Par
    
    
    restatementshares
    
    
    value
    
    
    effect
    
    
    TotalFixed capital:Series A
    
    
    46,613,171
    
    
    $
    699,760
    
    
    $
    2,022,461
    
    
    $
    2,722,221Series B
    
    
    18,805,918
    
    
    
    282,314
    
    
    
    20,187
    
    
    
    302,501Variable capital:Series A
    
    
    45,222,022
    
    
    
    678,873
    
    
    
    1,962,243
    
    
    
    2,641,116110,641,111
    
    
    $
    1,660,947
    
    
    $
    4,004,891
    
    
    $
    5,665,838
 F-36




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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 companys 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
    
    
    2005Contributed capital account
    
    $
    3,876,816
    
    
    $
    3,925,146After tax profits account
    
    
    1,953,729
    
    
    
    1,876,295Reinvested after tax profits account
    
    
    985,927
    
    
    
    985,927Total
    
    $
    6,816,472
    
    
    $
    6,787,368
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NOTE 13  FOREIGN CURRENCY TRANSACTIONS AND BALANCES
  December 31,2006
    
    
    2005Thousands of U.S. dollars:Monetary assets
    
    US$
    40,308
    
    
    US$
    64,042Monetary 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
    )
  Balance inforeign
    
    Equivalentcurrency
    
    in MexicanCurrency
    
    (thousands)
    
    pesosInventories
    
    U.S. dollar
    
    
    31,099
    
    
    $
    336,229Machinery and industrial equipment:United States of America
    
    U.S. dollar
    
    
    392,883
    
    
    
    4,247,694Brazil
    
    Real
    
    
    190,092
    
    
    
    962,607Japan
    
    Yen
    
    
    3,534,443
    
    
    
    320,574Germany
    
    Euro
    
    
    24,239
    
    
    
    345,003Canada
    
    Canadian dollar
    
    
    40,769
    
    
    
    378,316Other
    
    Several
    
    
    
    
    
    
    370,116
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##### Table of Contents



c.
    
    The condensed financial information of the principal foreign countries in which the Company
operates before inter-company eliminations, is as follows:
 (In thousands ofU.S. dollars)2006
    
    2005
    
    2004United States of AmericaNet sales
    
    
    212,485
    
    
    
    213,216
    
    
    
    212,347Income from operations
    
    
    14,562
    
    
    
    2,337
    
    
    
    3,352Net income (loss)
    
    
    176
    
    
    
    (15,488
    )
    
    
    (1,867
    )Current assets
    
    
    133,819
    
    
    
    132,768
    
    
    
    206,049Total assets
    
    
    316,723
    
    
    
    317,285
    
    
    
    278,272Current liabilities
    
    
    61,918
    
    
    
    65,869
    
    
    
    71,118Total liabilities
    
    
    79,836
    
    
    
    87,207
    
    
    
    92,265
  (In thousands ofU.S. dollars)2006
    
    2005
    
    2004Export sales
    
    
    234,874
    
    
    
    189,563
    
    
    
    205,617Interest expense
    
    
    (50,792
    )
    
    
    (50,544
    )
    
    
    (90,306
    )Interest income
    
    
    573
    
    
    
    534
    
    
    
    68Import 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
    
    2007U.S. dollar
    
    $
    10.8116
    
    
    $
    10.6344
    
    
    $
    10.9200Euros
    
    
    14.2335
    
    
    
    12.5390
    
    
    
    14.8795
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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
    
    2004Interest income
    
    $
    
    
    
    $
    
    
    
    $
    14,525Sale of paper
    
    
    
    
    
    
    
    
    
    
    5,263Air transportation services
    
    
    
    
    
    
    
    
    
    
    37,687Other (expenses) income
    
    
    
    
    
    
    
    
    
    
    (1,053
    )
  2006
    
    
    2005Administradora 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 CODUSAs 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
Companys subsidiaries and third parties. See note 7.
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##### Table of Contents



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 Companys 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 Pipsamexs 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
    
    
    2004Loss 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)
    
    
    
    
    
    
    
    
    
    
    667,430Recovery 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
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Company in favor of HG Estate LLC and St. Marys 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)
      December 31,2006
    
    
    2005
    
    
    2004Current
    
    $
    (208,903
    )
    
    $
    (127,165
    )
    
    $
    (38,988
    )Deferred
    
    
    (408,107
    )
    
    
    (250,913
    )
    
    
    552,811Benefit from tax consolidation
    
    
    84,133
    
    
    
    61,754
    
    
    
    9,296$
    (532,877
    )
    
    $
    (316,324
    )
    
    $
    523,119
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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
    
    2004Statutory 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
    
    
    2005Deferred IT liability (asset):Property, machinery and equipment
    
    $
    2,469,127
    
    
    $
    2,533,261Inventories
    
    
    (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
    
    
    
    2,217,059Tax loss carryforwards
    
    
    (953,634
    )
    
    
    (1,045,992
    )Recoverable AT carryforwards
    
    
    (270,851
    )
    
    
    (343,208
    )956,394
    
    
    
    827,859Valuation allowance
    
    
    1,092,836
    
    
    
    839,104Net 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.
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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
    
    
    RecoverableExpiration
    
    carryforwards
    
    
    AT2007
    
    $
    13,550
    
    
    $
    29,5102008
    
    
    117,206
    
    
    
    28,6242009
    
    
    131,670
    
    
    
    22,3592010
    
    
    66,198
    
    
    
    26,9822011
    
    
    58,481
    
    
    
    25,1202012
    
    
    374,777
    
    
    
    66,7042013
    
    
    959,627
    
    
    
    62,5912014
    
    
    367,701
    
    
    
    6,6582015
    
    
    1,060,652
    
    
    
    1,1062016
    
    
    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
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December 31,2005
    
    
    2004Net sales
    
    $
    172,771
    
    
    $
    360,270Cost of sales
    
    
    146,827
    
    
    
    301,730Gross profit
    
    
    25,944
    
    
    
    58,540Operating expenses  Net
    
    
    22,842
    
    
    
    33,094Income from operations
    
    
    3,102
    
    
    
    25,446Net comprehensive financing income  Net
    
    
    79,341
    
    
    
    47,435Other (expenses) income  Net
    
    
    (20,692
    )
    
    
    331Income from discontinued operations
    
    
    61,751
    
    
    
    73,212Revenue 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
    
    
    
    36,603Net income from discontinued operations
    
    $
    113,208
    
    
    $
    109,815Depreciation 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:
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Year
    
    Amount2007
    
    $
    99,1252008
    
    
    102,3932009
    
    
    108,2372010
    
    
    123,5932011 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
    
    Amount2007
    
    $
    9,2112008
    
    
    8,1742009
    
    
    7,3522010
    
    
    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 courts ruling. The Companys
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




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##### Table of Contents



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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys as a result of tax
documentation review.
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##### Table of Contents



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 Companys paper and corrugated container facilities. Inmobiliaria Industrial
Tizayuca, S.A. de C.V. is the stockholder, as follows:
 OwnershipCompany
    
    percentage
    
    ActivitySecodusa, S. A. de C. V.
    
    
    100
    %
    
    Administrative servicesServicios Pipsamex, S. A. de C. V.
    
    
    100
    %
    
    Administrative servicesMexpape, S. A. de C. V.
    
    
    100
    %
    
    Administrative servicesFapatux, S. A. de C. V.
    
    
    100
    %
    
    Administrative servicesEctsa Industrial, S. A. de C. V.
    
    
    100
    %
    
    Administrative servicesEnosa Industrial, S. A. de C. V.
    
    
    100
    %
    
    Administrative servicesCartonpack Industrial, S. A. de C. V.
    
    
    100
    %
    
    Administrative servicesEyemsa Industrial, S. A. de C. V.
    
    
    100
    %
    
    Administrative servicesAdministración Industrial Centauro, S.
A. de C. V.
    
    
    100
    %
    
    Administrative servicesAdministradora Industrial Durango, S. A.
de C. V.
    
    
    100
    %
    
    Administrative servicesAtenmex, S. A. de C. V.
    
    
    100
    %
    
    Administrative servicesAtensa, 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




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##### Table of Contents



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
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2006Other
    
    
    Total
    
    
    
    
    
    
    TotalPaper
    
    
    Packaging
    
    
    segments
    
    
    segments
    
    
    Eliminations
    
    
    consolidatedSales to external customers
    
    $
    4,529,681
    
    
    $
    5,050,630
    
    
    $
    117,862
    
    
    $
    9,698,173
    
    
    $
    
    
    
    $
    9,698,173Intersegment 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
    )
    
    
    9,698,173Depreciation and amortization
    
    
    276,310
    
    
    
    121,421
    
    
    
    12,736
    
    
    
    410,467
    
    
    
    
    
    
    
    410,467Income (loss) from operations
    
    
    510,162
    
    
    
    329,661
    
    
    
    (6,428
    )
    
    
    833,395
    
    
    
    
    
    
    
    833,395Total assets
    
    
    20,312,241
    
    
    
    28,011,960
    
    
    
    1,127,027
    
    
    
    49,451,228
    
    
    
    (34,292,144
    )
    
    
    15,159,084Acquisition and sale of property,
plant and equipment
    
    
    225,192
    
    
    
    84,522
    
    
    
    (82,714
    )
    
    
    227,000
    
    
    
    
    
    
    
    227,000Impairment
    
    
    65,068
    
    
    
    
    
    
    
    (39,151
    )
    
    
    25,917
    
    
    
    
    
    
    
    25,917Interest income
    
    
    506,193
    
    
    
    1,636,977
    
    
    
    37,111
    
    
    
    2,180,281
    
    
    
    (2,149,110
    )
    
    
    31,171Interest 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
    )
 2005Other
    
    
    Total
    
    
    
    
    
    
    TotalPaper
    
    
    Packaging
    
    
    segments
    
    
    segments
    
    
    Eliminations
    
    
    consolidatedSales to external customers
    
    $
    3,633,168
    
    
    $
    4,738,207
    
    
    $
    104,482
    
    
    $
    8,475,857
    
    
    $
    
    
    
    $
    8,475,857Intersegment 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
    )
    
    
    8,475,857Depreciation and amortization
    
    
    287,917
    
    
    
    138,835
    
    
    
    12,053
    
    
    
    438,805
    
    
    
    
    
    
    
    438,805Income (loss) from operations
    
    
    127,544
    
    
    
    246,229
    
    
    
    10,493
    
    
    
    384,266
    
    
    
    
    
    
    
    384,266Total assets
    
    
    19,719,939
    
    
    
    28,826,593
    
    
    
    1,298,117
    
    
    
    49,844,649
    
    
    
    (34,411,347
    )
    
    
    15,433,302Acquisition and sale of property,
plant and equipment
    
    
    70,964
    
    
    
    (15,138
    )
    
    
    8,496
    
    
    
    64,322
    
    
    
    
    
    
    
    64,322Impairment
    
    
    118,412
    
    
    
    
    
    
    
    
    
    
    
    118,412
    
    
    
    
    
    
    
    118,412Interest income
    
    
    689,948
    
    
    
    3,187,922
    
    
    
    11,061
    
    
    
    3,888,931
    
    
    
    (3,844,647
    )
    
    
    44,284Interest 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
    )
 2004Other
    
    
    Total
    
    
    
    
    
    
    TotalPaper
    
    
    Packaging
    
    
    segments
    
    
    segments
    
    
    Eliminations
    
    
    consolidatedSales to external customers
    
    $
    3,700,712
    
    
    $
    4,552,641
    
    
    $
    115,019
    
    
    $
    8,368,372
    
    
    $
    
    
    
    $
    8,368,372Intersegment 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
    )
    
    
    8,368,372Depreciation and amortization
    
    
    305,032
    
    
    
    143,039
    
    
    
    8,058
    
    
    
    456,129
    
    
    
    
    
    
    
    456,129Income (loss) from operations
    
    
    57,852
    
    
    
    415,100
    
    
    
    1,250
    
    
    
    474,202
    
    
    
    
    
    
    
    474,202Total assets
    
    
    22,661,917
    
    
    
    32,635,149
    
    
    
    1,296,235
    
    
    
    56,593,301
    
    
    
    (40,334,646
    )
    
    
    16,258,655Acquisition and sale of property,
plant and equipment
    
    
    98,745
    
    
    
    59,574
    
    
    
    23,624
    
    
    
    181,943
    
    
    
    
    
    
    
    181,943Impairment
    
    
    (498,559
    )

    
    

    
    
    
    
    
    
    
    
    (498,559
    )
    
    
    
    
    
    
    (498,559
    )Interest income
    
    
    666,617
    
    
    
    2,010,286
    
    
    
    1,290
    
    
    
    2,678,193
    
    
    
    (2,635,006
    )
    
    
    43,187Interest 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




---



##### Table of Contents



Net revenues
    
    2006
    
    
    2005
    
    
    2004Packaging- 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
    
    
    
    115,019Consolidated total
    
    $
    9,698,173
    
    
    $
    8,475,857
    
    
    $
    8,368,372
  2006Acquisition and saleTotal
    
    
    of property, plantNet sales
    
    
    assets
    
    
    and equipmentMexico
    
    $
    12,345,130
    
    
    $
    46,026,950
    
    
    $
    222,089United States of America
    
    
    2,299,643
    
    
    
    3,424,278
    
    
    
    4,911Intersegment eliminations
    
    
    (4,946,600
    )
    
    
    (34,292,144
    )
    
    
    Consolidated total
    
    $
    9,698,173
    
    
    $
    15,159,084
    
    
    $
    227,000
 2005Acquisition and saleTotal
    
    
    of property, plantNet sales
    
    
    assets
    
    
    and equipmentMexico
    
    $
    10,974,771
    
    
    $
    46,327,161
    
    
    $
    54,700United States of America
    
    
    2,388,710
    
    
    
    3,517,488
    
    
    
    9,622Intersegment eliminations
    
    
    (4,887,624
    )
    
    
    (34,411,347
    )
    
    
    Consolidated total
    
    $
    8,475,857
    
    
    $
    15,433,302
    
    
    $
    64,322
 F-51




---



##### Table of Contents



2004Acquisition and saleTotal
    
    
    of property, plantNet sales
    
    
    assets
    
    
    and equipmentMexico
    
    $
    10,422,651
    
    
    $
    55,278,296
    
    
    $
    188,597United 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
    
    
    2004Packaging -Food and beverage
    
    $
    3,552,164
    
    
    $
    3,309,670
    
    
    $
    3,204,743Agribusiness
    
    
    487,516
    
    
    
    458,044
    
    
    
    493,252Agriculture
    
    
    436,442
    
    
    
    362,978
    
    
    
    328,835Maquila sector
    
    
    213,578
    
    
    
    259,270
    
    
    
    252,950Paper sacks -Cement
    
    
    281,754
    
    
    
    244,415
    
    
    
    224,355Lime and plaster
    
    
    53,818
    
    
    
    71,220
    
    
    
    72,979Paper -Editorial
    
    
    2,311,750
    
    
    
    1,962,449
    
    
    
    1,716,019Scholastic
    
    
    444,393
    
    
    
    406,353
    
    
    
    515,834ForestFurniture manufacturers
    
    
    117,862
    
    
    
    104,482
    
    
    
    115,014Other
    
    
    1,798,896
    
    
    
    1,296,976
    
    
    
    1,444,391Total
    
    $
    9,698,173
    
    
    $
    8,475,857
    
    
    $
    8,368,372
 F-52




---



##### Table of Contents



NOTE 22  NEW ACCOUNTING PRINCIPLES
      NOTE 23  RECONCILIATION BETWEEN MEXICAN AND U.S. GAAP
   F-53




---



##### Table of Contents



Reconciliation of consolidated statements of operations:
 Years ended December 31,2006
    
    
    2005
    
    
    2004Majority interest net (loss) gain as reported under Mexican GAAP
    
    
    
    $
    (71,710
    )
    
    $
    186,431
    
    
    $
    66,636Deferred income taxes
    
    i
    
    
    (77,235
    )
    
    
    966,437
    
    
    
    (161,532
    )Deferred employee profit sharing
    
    i
    
    
    (1,184
    )
    
    
    79,243
    
    
    
    124,134Purchase accounting adjustment  depreciation
    
    ii
    
    
    138,599
    
    
    
    138,032
    
    
    
    116,090Effect of fifth amendment to Statement B-10
    
    iii
    
    
    (57,328
    )
    
    
    (55,330
    )
    
    
    (58,844
    )Debt issuance costs and repurchase of bonds
    
    iv
    
    
    
    
    
    
    (257,125
    )
    
    
    322,141Capitalized financing costs
    
    v
    
    
    6,358
    
    
    
    (30,810
    )
    
    
    39,383Effect 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
    )
    
    
    340,418Adjustment for Tizayuca Transaction:
    
    viiiEmbedded derivative
    
    
    
    
    (43,127
    )
    
    
    
    
    
    
    Financing lease
    
    
    
    
    29,512
    
    
    
    
    
    
    
    Deferred start-up, research and development costs
    
    ix
    
    
    3,167
    
    
    
    4,433
    
    
    
    3,979Troubled 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
    
    
    2005Total stockholders equity corresponding to majority interest as
reported under Mexican GAAP
    
    
    
    $
    4,786,403
    
    
    $
    4,844,456Deferred income taxes
    
    i
    
    
    823,474
    
    
    
    924,173Deferred employee profit sharing
    
    i
    
    
    (718,779
    )
    
    
    (717,596
    )Purchase accounting adjustments:
    
    iiAccumulated negative goodwill
    
    
    
    
    (4,249,371
    )
    
    
    (4,249,371
    )Accumulated depreciation
    
    
    
    
    1,186,368
    
    
    
    1,047,768Effect of fifth amendment to Statement B-10:
    
    iiiFixed assets
    
    
    
    
    3,664,418
    
    
    
    3,401,624Accumulated depreciation
    
    
    
    
    (2,219,240
    )
    
    
    (1,934,391
    )Capitalized financing costs:
    
    vCapitalized Interes
    
    
    
    
    103,488
    
    
    
    95,493Acumulated 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
    
    
    
    955,183Adjustment for Tizayuca Transaction:
    
    viiiEmbedded derivative
    
    
    
    
    (43,127
    )Financing lease
    
    
    
    
    29,512Deferred 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
    
    
    
    9,818Total U.S. GAAP shareholders equity
    
    
    
    $
    1,950,582
    
    
    $
    1,750,180
 F-54




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##### Table of Contents



Years ended December 31,2006
    
    
    2005Balance at beginning of the year
    
    $
    1,750,180
    
    
    $
    502,329Net income under U.S. GAAP
    
    
    173,613
    
    
    
    1,399,418Gain (deficit) from restatement
    
    
    158,148
    
    
    
    (721,529
    )Cumulative translation adjustment
    
    
    (138,129
    )
    
    
    323,995Increase in capital stock and additional paid  in capital, net
    
    
    6,769
    
    
    
    245,967Balance at end of the year
    
    $
    1,950,581
    
    
    $
    1,750,180
 Comprehensive loss
  Accumulated Comprehensive loss
 Years ended December 31,2006
    
    
    2005
    
    
    2004Majority interest net (loss) income under Mexican GAAP
    
    $
    (71,710
    )
    
    $
    186,431
    
    
    $
    66,636Other 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
    )
  Accumulated
    
    
    Effects of
    
    
    (Loss) from
    
    
    Accumulatedeffect of
    
    
    translation
    
    
    holding
    
    
    otherdeferred
    
    
    of foreign
    
    
    non monetary
    
    
    comprehensiveincome tax
    
    
    subsidiaries
    
    
    assets(1)
    
    
    lossBalances 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
    
    
    
    6,888Balance 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




---



##### Table of Contents



Effects of the U.S. GAAP adjustments on discontinued operations
 Reconciliation of consolidated statements of operations:
 Years ended December 31,2005
    
    
    2004Income (loss) as reported under Mexican GAAP
    
    
    
    $
    113,208
    
    
    $
    109,815Deferred income taxes
    
    i
    
    
    (9,693
    )
    
    
    214Deferred employee profit sharing
    
    i
    
    
    22,247
    
    
    
    14,371Purchase accounting adjustments  depreciation
    
    ii
    
    
    
    
    
    
    12,127Effect of fifth amendment to Statement B-10
    
    iii
    
    
    
    
    
    
    74DPC 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
  Deferred income tax and employee profit sharing
   F-56




---



##### Table of Contents



Years ended December 31,2006
    
    
    2005
    
    
    2004Income and asset tax expense (benefit):Current:Domestic
    
    $
    124,770
    
    
    $
    65,419
    
    
    $
    30,224Deferred: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
    )
  Year ended December 31, 2006Tax effect onUS GAAPMexican GAAP
    
    
    adjustments
    
    
    US GAAPDeferred income tax liabilities (assets):Inventory
    
    $
    82,726
    
    
    $
    
    
    
    $
    82,726Inventory Rule 106
    
    
    (150,541
    )
    
    
    
    
    
    
    (150,541
    )Property, plant and equipment
    
    
    2,469,127
    
    
    
    (108,886
    )
    
    
    2,360,241Other assets
    
    
    (16,963
    )
    
    
    36,224
    
    
    
    19,261Allowance 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
    )
    
    
    39,901Asset 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
    )
    
    
    132,920Valuation allowance
    
    
    1,092,836
    
    
    
    
    
    
    
    1,092,836Total net deferred income tax liability
    
    $
    2,049,230
    
    
    $
    (823,474
    )
    
    $
    1,225,756
 F-57




---



##### Table of Contents



Year ended December 31, 2005Tax effect onUS GAAPMexican GAAP
    
    
    adjustments
    
    
    US GAAPDeferred income tax liabilities (assets):Inventory
    
    $
    85,071
    
    
    $
    
    
    
    $
    85,071Inventory Rule 106
    
    
    (210,999
    )
    
    
    
    
    
    
    (210,999
    )Property, plant and equipment
    
    
    2,533,261
    
    
    
    (193,198
    )
    
    
    2,340,063Other 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
    
    
    
    
    
    
    
    838,840Total net deferred income tax liability
    
    $
    1,666,963
    
    
    $
    (924,173
    )
    
    $
    742,790
 Years ended December 31,2006
    
    
    2005Deferred employee profit sharing liabilities (assets):Inventory
    
    $
    30,368
    
    
    $
    30,382Inventory Rule 106
    
    
    (53,765
    )
    
    
    (75,357
    )Property, plant and equipment
    
    
    826,310
    
    
    
    827,696Other assets
    
    
    8,321
    
    
    
    711Allowance for doubtful accounts
    
    
    (13,437
    )
    
    
    (16,097
    )Other
    
    
    (79,018
    )
    
    
    (49,739
    )Total net deferred employee profit sharing liability
    
    $
    718,779
    
    
    $
    717,596
  Mexican
    
    
    U.S.GAAP
    
    
    GAAP
    
    
    DifferenceDeferred income tax liability:At December 31, 2004
    
    $
    1,596,248
    
    
    $
    1,543,811
    
    
    $
    52,437At December 31, 2005
    
    
    1,666,963
    
    
    
    742,790
    
    
    
    924,173Net change
    
    $
    70,715
    
    
    $
    (801,021
    )
    
    $
    871,736Deferred income tax liability:At December 31, 2005
    
    $
    1,666,963
    
    
    $
    742,790
    
    
    $
    924,173At December 31, 2006
    
    
    2,049,230
    
    
    
    1,225,756
    
    
    
    823,474Net change
    
    $
    382,267
    
    
    $
    482,966
    
    
    $
    (100,699
    )
 F-58




---



##### Table of Contents



Mexican
    
    
    U.S.GAAP
    
    
    GAAP
    
    
    DifferenceReflected 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
    )
  Mexican
    
    
    U.S.GAAP
    
    
    GAAP
    
    
    DifferenceReflected in:Deferred tax gain line item
    
    $
    182,380
    
    
    $
    (801,021
    )
    
    $
    983,401Loss on monetary position
    
    
    (16,964
    )
    
    
    
    
    
    
    (16,964
    )Total income statement effect
    
    
    165,416
    
    
    
    (801,021
    )
    
    
    966,437Loss from holding non-monetary
assets(1)
    
    
    (94,701
    )
    
    
    
    
    
    
    (94,701
    )Total change in deferred tax
liability
    
    $
    70,715
    
    
    $
    (801,021
    )
    
    $
    871,736
 F-59




---



##### Table of Contents



Mexican
    
    
    U.S.GAAP
    
    
    GAAP
    
    
    DifferenceReflected in:Deferred tax gain line item
    
    $
    (589,413
    )
    
    $
    (406,752
    )
    
    $
    (182,661
    )Gain on monetary position
    
    
    21,129
    
    
    
    
    
    
    
    21,129Total 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 Companys 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. Purchase accounting adjustments
   Effect of fifth amendment to Statement B-10
  F-60




---



##### Table of Contents



Debt issuance costs and repurchase of bonds
   Capitalized financing costs
   Effect of Statement B-15 on restatement to constant currency
   F-61




---



##### Table of Contents



Years ended December 31,2005
    
    
    2004Consolidated statements of operations:As previously reported, indexed for effects of inflation in Mexico
    
    $
    186,433
    
    
    $
    65,361As 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
    
    
    $
    1,682,329As reported under Statement B-15
    
    
    4,844,456
    
    
    
    1,649,475$
    (1,320
    )
    
    $
    32,854
 Adjustment to impairment on long-lived assets
   Tizayuca Transaction:
  F-62




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##### Table of Contents



Adjusted netFair value of net assets on
    
    Negative Goodwill
    
    assets at fair valueMarch 31, 2006
    
    allocation
    
    on March 31, 2006Assets:Machinery
    
    
    2,342,103
    
    
    
    (1,960,800
    )
    
    
    381,303Land & Building
    
    
    108,935
    
    
    
    (94,237
    )
    
    
    14,698Other
    
    
    21,787
    
    
    
    (21,787
    )
    
    
    Inventory
    
    
    10,894
    
    
    
    
    
    
    
    10,894Deferred Taxes
    
    
    126,887
    
    
    
    
    
    
    
    126,8872,610,606
    
    
    
    (2,076,824
    )
    
    
    533,782Liabilities: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
    )
    
    
    
   F-63




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##### Table of Contents



Amount2006
    
    $
    35,0682007
    
    
    70,1372008
    
    
    75,9822009
    
    
    81,8252010
    
    
    99,3592011
    
    
    1167,8932012
    
    
    116,8932013
    
    
    116,893Total
    
    
    713,050Less: Amount
    
    
    (202,797
    )$
    420,253
  Deferred start-up research and development costs
   Troubled Debt Restructuring
  F-64




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##### Table of Contents



US GAAP
    
    MEX GAAP
    
    ADJUSTMENTTotal debt balance as of December 31, 2005
    
    
    8,625,658
    
    
    
    6,020,670
    
    
    
    2,604,987Plus: 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
 Minority interest
   Reversal of loss on sale of discontinued operations
   F-65




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##### Table of Contents



Severance payments
   SUPPLEMENTAL U.S. GAAP DISCLOSURES
 Condensed information
  F-66




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##### Table of Contents



CONDENSED CONSOLIDATED BALANCE SHEETS:
 Years ended December 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    466,603
    
    
    $
    728,775Accounts receivable, net
    
    
    1,924,745
    
    
    
    1,803,483Inventories, net
    
    
    1,212,675
    
    
    
    1,244,239Deferred income tax and employee profit sharing
    
    
    903,628
    
    
    
    849,853Other
    
    
    29,943
    
    
    
    28,570Total current assets
    
    
    4,537,594
    
    
    
    4,654,920Property, plant and equipment
    
    
    10,865,615
    
    
    
    10,665,092Other assets
    
    
    356,863
    
    
    
    266,235Total assets
    
    $
    15,760,072
    
    
    $
    15,586,247Liabilities and shareholders equityCurrent liabilities:Short-term debt, notes payable and current portion of long-term
debt
    
    $
    169,489
    
    
    $
    268,004Accrued liabilities and other payables
    
    
    1,714,405
    
    
    
    1,436,231Total current liabilities
    
    
    1,883,894
    
    
    
    1,704,235Long-term debt
    
    
    7,767,109
    
    
    
    9,373,584Seniority premiums
    
    
    316,590
    
    
    
    330,046Deferred income tax and employee profit sharing
    
    
    2,848,161
    
    
    
    2,311,015Other long-term debt
    
    
    584,583
    
    
    
    66,356Total long-term liabilities
    
    
    11,516,443
    
    
    
    12,081,001Total liabilities
    
    
    13,400,337
    
    
    
    13,785,236Minority interest
    
    
    409,153
    
    
    
    50,831Shareholders equity
    
    
    1,950,582
    
    
    
    1,750,180Total liabilities and shareholders equity
    
    $
    15,760,072
    
    
    $
    15,586,247
 F-67




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##### Table of Contents



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS:
 Years ended December 31,2006
    
    
    2005
    
    
    2004Net sales
    
    $
    9,698,173
    
    
    $
    8,473,104
    
    
    $
    8,442,917Cost of sales
    
    
    8,094,503
    
    
    
    7,379,275
    
    
    
    7,235,969Gross profit
    
    
    1,603,670
    
    
    
    1,093,829
    
    
    
    1,206,948Selling, general and administrative expenses
    
    
    607,840
    
    
    
    616,942
    
    
    
    714,753Operating income
    
    
    995,830
    
    
    
    476,887
    
    
    
    492,195Financing cost:Interest expense
    
    
    216,365
    
    
    
    295,485
    
    
    
    1,166,571Interest 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
    )
    
    
    551,319Other (expenses) income, net
    
    
    (187,929
    )
    
    
    (370,091
    )
    
    
    386,110Income before income tax provisions, equity in income of
associated companies, minority interest and discontinued
operations
    
    
    819,631
    
    
    
    589,899
    
    
    
    326,986Provision for:Income and asset tax (benefit) expense
    
    
    607,736
    
    
    
    (674,377
    )
    
    
    (340,072
    )Minority interest
    
    
    41,293
    
    
    
    (19,052
    )
    
    
    3,450Equity in income of associated companies
    
    
    (3,011
    )
    
    
    (1,977
    )
    
    
    (2,847
    )Net income from continuing operations
    
    
    173,613
    
    
    
    1,285,305
    
    
    
    666,455Discontinued operations, net
    
    
    
    
    
    
    114,113
    
    
    
    121,042Net income
    
    $
    173,613
    
    
    $
    1,399,418
    
    
    $
    787,497
 Cash flow information
   F-68




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##### Table of Contents



Years ended December 31,2006
    
    
    2005
    
    
    2004Operating activities:U.S. GAAP net income (loss) from continuing operations
    
    $
    173,613
    
    
    $
    1,285,305
    
    
    $
    666,455Adjustment to reconcile net income to net cash flows provided by
operating activities:Depreciation and amortization
    
    
    286,080
    
    
    
    300,659
    
    
    
    355,151Minority interest
    
    
    41,293
    
    
    
    (19,053
    )
    
    
    3,450Deferred 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
    
    
    
    50,775Inventory obsolescence allowance
    
    
    2,484
    
    
    
    5,018
    
    
    
    2,043Gain from monetary position
    
    
    (351,052
    )
    
    
    (278,927
    )
    
    
    (506,907
    )Loss (gain) on sale of non-strategic assets
    
    
    (102,569
    )
    
    
    (11,094
    )
    
    
    39,274Impairment on long-lived assets
    
    
    190,175
    
    
    
    38,649
    
    
    
    142,557Unrealized foreign exchange loss, net
    
    
    50,086
    
    
    
    (167,262
    )
    
    
    22,580Amortization of debt issuance costs and other financing costs
    
    
    
    
    
    
    
    
    
    
    25,951Other
    
    
    41,190
    
    
    
    (15,103
    )
    
    
    17,710832,567
    
    
    
    373,790
    
    
    
    338,966
 F-69




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##### Table of Contents



Years ended December 31,2006
    
    
    2005
    
    
    2004Changes in operating assets and liabilities:Accounts receivable, net
    
    $
    (387,026
    )
    
    $
    (99,167
    )
    
    $
    (97,462
    )Inventories, net
    
    
    159,787
    
    
    
    (98,657
    )
    
    
    74,111Prepaid expenses
    
    
    (1,800
    )
    
    
    (3,342
    )
    
    
    (5,264
    )Other liabilities
    
    
    1,012,788
    
    
    
    91,738
    
    
    
    396,123Cash flow (used in) provided by operating activities before
discontinued operations
    
    
    1,616,316
    
    
    
    264,362
    
    
    
    706,474Discontinued operations
    
    
    
    
    
    
    (320,260
    )
    
    
    122,138Cash flows (used in) provided by operating activities:
    
    
    1,616,316
    
    
    
    (55,898
    )
    
    
    828,612Financing activities:Bank loans
    
    
    (525,193
    )
    
    
    137,926
    
    
    
    538Payments of long-term debt
    
    
    (1,081,464
    )
    
    
    (177,453
    )
    
    
    (502,271
    )Increase in capital stock
    
    
    
    
    
    
    
    
    
    
    51Cash 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
    
    
    
    16,716Investments in subsidiaries
    
    
    
    
    
    
    (56,189
    )
    
    
    Restricted cash
    
    
    
    
    
    
    
    
    
    
    178,128Other 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
    )
    
    
    171,486Cash and cash equivalents at beginning of year
    
    
    728,775
    
    
    
    897,677
    
    
    
    726,191Cash and cash equivalents at end of year
    
    $
    466,603
    
    
    $
    728,775
    
    
    $
    897,677
 Supplemental cash flow disclosures:
 Years ended December 31,2006
    
    
    2005
    
    
    2004Cash paid during the year for:Interest, net of capitalized interest
    
    $
    582,170
    
    
    $
    602,556
    
    
    $
    37,943Income and asset tax
    
    
    2,924
    
    
    
    26,924
    
    
    
    114,429
 F-70




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##### Table of Contents



Non  cash transactions:
 2006Premium in issuance of shares
    
    $
    6,769Financing lease Agreement
    
    $
    533,782
 Supplemental balance sheet information
 
    
    Employee benefits
   December 31,2006
    
    
    2005Actual benefit obligation:
    
    $
    205,165
    
    
    $
    210,785Change in benefit obligation:Projected benefit obligation, beginning of year
    
    $
    233,906
    
    
    $
    248,910Service cost
    
    
    12,047
    
    
    
    10,800Interest cost
    
    
    14,764
    
    
    
    15,137Actuarial loss
    
    
    17,564
    
    
    
    17,409Benefits paid and variations in assumptions
    
    
    (49,271
    )
    
    
    (58,350
    )Projected benefit obligations, end of year
    
    $
    229,010
    
    
    $
    233,906
 F-71




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##### Table of Contents




    
    Post  retirement benefits
 December 31,2006
    
    
    2005Actual benefit obligation:
    
    $
    91,162
    
    
    $
    101,852Change in benefit obligation:Projected benefit obligation, beginning of year
    
    $
    105,361
    
    
    $
    108,237Service cost
    
    
    278
    
    
    
    416Interest cost
    
    
    4,880
    
    
    
    5,142Benefits paid
    
    
    (15,484
    )
    
    
    (8,434
    )Projected benefit obligation, end of year
    
    $
    95,035
    
    
    $
    105,361
  
    
    Postretirement obligations
   December 31,2006
    
    
    2005Actual benefit obligation:
    
    $
    10,757
    
    
    $
    7,732Change in benefit obligation:Projected benefit obligation, beginning of year
    
    $
    17,409
    
    
    $
    15,155Service cost
    
    
    779
    
    
    
    3,241Interest cost
    
    
    4,307
    
    
    
    1,255Benefits paid
    
    
    (2,232
    )
    
    
    (2,242
    )Projected benefit obligation, end of year
    
    $
    20,263
    
    
    $
    17,409
  Seniority premiums and pensions
    
    $
    205,165
    
    
    $
    210,785Postretirement obligations
    
    
    91,162
    
    
    
    101,852Severance payments
    
    
    20,263
    
    
    
    17,409$
    316,590
    
    
    $
    330,046
 F-72




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##### Table of Contents




    
    Valuation and qualifying accounts:
  Years ended December 31,2006
    
    
    2005
    
    
    2004Balance at the beginning of the period
    
    $
    (160,971
    )
    
    $
    (182,814
    )
    
    $
    (162,808
    )Effects of inflation
    
    
    6,266
    
    
    
    4,881
    
    
    
    7,676Increase in the allowance
    
    
    (17,118
    )
    
    
    (33,809
    )
    
    
    (50,776
    )Write-offs
    
    
    30,770
    
    
    
    50,771
    
    
    
    23,094Balance at the end of the period
    
    $
    (141,053
    )
    
    $
    (160,971
    )
    
    $
    (182,814
    )
  Years ended December 31,2006
    
    
    2005
    
    
    2004Balance at the beginning of the period
    
    $
    (34,105
    )
    
    $
    (32,091
    )
    
    $
    (32,056
    )Effects of inflation
    
    
    1,327
    
    
    
    1,034
    
    
    
    1,582Increase in the allowance
    
    
    (2,484
    )
    
    
    (5,018
    )
    
    
    (2,043
    )Write-offs
    
    
    1,322
    
    
    
    1,970
    
    
    
    426Balance at the end of the period
    
    $
    (33,940
    )
    
    $
    (34,105
    )
    
    $
    (32,091
    )
 New Accounting pronouncements
   F-73




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##### Table of Contents



F-74




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##### Table of Contents



F-75